The U.S. Court of Appeals for the Ninth Circuit has affirmed summary judgment for the insurer in a putative RICO class action relating to a bonus indexed annuity. Rejecting the plaintiff’s claims, the court held that the insurer had adequately disclosed and accurately described certain features of the annuity. Harrington v. EquiTrust Life Insurance Co., No. 12-17119 (9th Cir. Feb. 24, 2015).

In 2007, the plaintiff purchased a “MarketPower Bonus Index Annuity,” which included a “10% premium bonus” under which the insurer added 10% of the first year’s premium to the accumulation value. Withdrawals of greater than 10% of the annuity’s accumulation value would be subject to a surrender charge until the fourteenth year and were also subject to a market value adjustment (MVA). The MVA increased or decreased the accumulation value based on market interest rates according to a formula disclosed in a brochure.

The plaintiff filed a putative class action in the U.S. District Court for the District of Arizona in 2009. He alleged that the insurer violated the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(c), based on alleged misrepresentations in the annuity contract and marketing materials relating to (1) the annuity’s 10% premium bonus; (2) its market value adjustment provisions; and (3) the relationship between its maturity date provisions and the state nonforfeiture law. The district court granted the insurer’s motion for summary judgment and denied as moot the plaintiff’s motion for class certification, and the plaintiff appealed.

The plaintiff argued that the promise of a 10% premium bonus was fraudulent because the insurer did not disclose that it would allegedly “recoup” the bonus by crediting lower interest rates on the annuity. He also claimed the bonus was illusory because the resulting increase in accumulation value might be less than increases that would come from an annuity with higher interest rates but no bonus. The court held that there was no statutory requirement or fiduciary relationship that imposed on the insurer a duty to disclose how the annuity compared with alternative products. The court also noted that the bonus did, in fact, increase the plaintiff’s accumulation value without requiring him to pay extra premiums, and it was not clear that he would have been better off in an annuity without such a bonus feature. The court held that there was no affirmative misrepresentation on which the plaintiff could rely, because “it is uncontested here that EquiTrust delivered precisely what it promised.”

The plaintiff also argued that the MVA in his annuity contained a “bias” that produced lower upward adjustments and higher downward adjustments and alleged that the failure to explain the effect of this “bias” was a fraudulent omission in that it contradicted the “stated purpose” of the MVA. The court held that the so-called bias did not affect the purpose of the MVA, because even with the “bias,” the MVA would increase the accumulation value when interest rates were low and decrease it when they rose. The court also pointed out that the insurer’s brochure disclosed the precise formula used to calculate the MVA, explained the formula’s variables, and offered examples of how it would apply.   Finally, the plaintiff argued that although the annuity had a fixed maturity date, it also had a de facto optional maturity date—because the insurer would consider providing relief from the fixed-date terms on a case-by-case basis upon request from an annuitant—rendering it subject to Arizona nonforfeiture law for individual deferred annuities with optional maturity dates. The court rejected this claim because the plaintiff had not provided any authority that the insurer’s internal policy violated the nonforfeiture law and the plaintiff had suffered “no conceivable injury” from the internal policy, which could only add value to his annuity.

The court of appeals affirmed summary judgment for the insurer, but remanded the case on the issue of costs, which the district court had denied to the insurer without any explanation. The district court was directed either to award costs or to state reasons for denying them.