In the past several years the insurance industry has seen an increasing number of lawsuits alleging that certain deferred annuity products offering a "bonus interest" feature are unsuitable and/or that the bonus itself is illusory. A number of these cases have been certified as class actions. In a notable decision last week, however, a federal district court in Pennsylvania rejected efforts to certify either national or state-only classes of purchasers of such a product.

In that case, the plaintiff alleged the insurer sold fixed annuities by promising the purchasers would receive a first-year bonus interest rate, which was supposedly illusory because the product allegedly was designed to allow the bonus to be "recaptured" in subsequent years through the setting of renewal rates lower than they otherwise would have been, negating any actual benefit to the purchaser. While the complaint had sought compensatory and punitive damages for nine causes of action, two days before issuing the class certification ruling the district court dismissed seven of the claims, agreeing with the insurer's summary judgment arguments that, among other things, the theory of liability did not support a claim that the insurer had breached any provision of the annuity contract.

Refusing to certify the remaining claims - common law fraud and violation of Pennsylvania's consumer protection statute, the court rejected class certification on Rule 23(a), (b)(2), and (b)(3) grounds. First, the district court judge agreed with the insurer that the plaintiff's purchase of two fixed deferred annuities with a first-year bonus interest rate from another insurer just two months after she purchased the defendant's annuity subjected her to unique defenses, rendering her both an inadequate and atypical class representative. Also, finding that the relief sought by the plaintiff related exclusively or predominately to money damages, the court easily rejected a Rule 23(b)(2) class. Moreover, plaintiff, with an eye toward establishing commonality and predominance, had made the centerpiece of her class certification effort a request for a nationwide class of the breach of contract claim, which claim was dismissed in the summary judgment ruling. The court recognized that the remaining fraud-based claims were poor candidates for even a statewide class, despite the plaintiff's effort to characterize the nature of the allegedly fraudulent omissions and misrepresentations as uniform. Common questions did not predominate over those issues affecting only individual class members because the element of reliance, key to the remaining claims, could not be presumed. That plaintiff had alleged omissions in addition to misrepresentations as the basis for the common law and statutory fraud claims did not warrant a different result.

This decision reinforces an important point: despite the efforts of the plaintiffs' class action bar to focus on purportedly uniform product features rather than point-of-sale representations and omissions, the need to establish reliance remains a formidable obstacle to class certification. Moreover, the case illustrates the potential benefits of pursuing dispositive motions prior to a court's assessment of class certification so that, at a minimum, the number of claims under consideration for class certification might be narrowed and sharpened.