The plaintiffs’ bar recently filed a class action attacking indexed annuities in Illinois federal court. The lawsuit, brought on behalf of all purchasers of indexed annuities from North American Company of Life and Health Insurance, contains many recycled allegations, including assertions that the insurer’s fraudulent scheme works by a) incentivizing sales agents with large undisclosed commissions, b) offering ‘bonuses’ that are recouped through surrender charges or by increased pricing spreads, and c) applying a charge in the market value adjustment formula that takes an additional percentage of the amount withdrawn regardless of the interest rate environment.  

However, the complaint also contains the more novel allegation that the insurer developed a scheme to bypass the “prospective test” under Standard Nonforfeiture Law for Individual Deferred Annuities (SNFLIDA), which prohibits certain surrender penalties for deferred annuities that have “optional” maturity dates. According to plaintiffs, the insurer sold “fixed” maturity date contracts that did not permit annuitization until, in some cases, the annuitant turned 115 years old. Plaintiffs then assert that the company attempted to “skirt” the SNFLIDA “prospective test” requirement by relying on a company practice that permits annuitization at much younger ages thereby creating “optional” maturity date contracts, and conclude that if the insurer’s “practice were reflected in the contractual language…,” the contracts “would not pass the SNFLIDA prospective test.” In short, plaintiffs allege that the insurer’s alleged conduct harms “policyholders because it directly leads to lower credited rates to persisting policyholders, insufficient nonforfeiture guarantees for surrendering policyholders, longer periods of time during which [the insurer] extracts its steep product spreads, and less liquidity.” Given the potential for any adverse decision or settlement to have a ripple effect, Jorden Burt will continue to monitor this case.