Situated v. Reliastar Life Ins. Co.

615 F.3d 1023

Jacqueline AVRITT and Alan Avritt, on behalf of themselves and all others similarly situated, Appellants,

v.RELIASTAR LIFE INSURANCE COMPANY, Appellee.

No. 09-2843.

United States Court of Appeals,Eighth Circuit.

Submitted: May 11, 2010.

Filed: Aug. 12, 2010.

Rehearing and Rehearing En Banc Denied Oct. 5, 2010.

COPYRIGHT MATERIAL OMITTED.

John R. Harrington, argued, Concord, NH (Michael M. Lonergan, Fred L. Potter, on the brief, Concord, NH, Karl L. Cambronne, Jeffrey D. Bores, on the brief, Minneapolis, MN, Glen De Valerio, Christopher T. Heffelfinger, on the brief, San Francisco, CA, Christopher W. Tompkins, on the brief, Seattle, WA), for appellant.

Clark C. Johnson, argued, Louisville, KY (Marjorie A. Farris, Joseph Lee Hamilton, on the brief, Louisville, KY, Timothy D. Kelly, Tracey L. Baubie, on the brief, Minneapolis, MN), for appellee.

Before WOLLMAN, SMITH, and BENTON, Circuit Judges.

WOLLMAN, Circuit Judge.

Jacqueline and Alan Avritt appeal from the district court's ¹ order denying class certification for a group of California residents who purchased fixed deferred retirement annuities from Northern Life Insurance Company (Northern) ² between 1992 and 2002. The Avritts maintain that Northern engaged in unfair and deceptive interest-crediting practices by systematically crediting higher interest to the most recent deposits in its customers' annuity accounts and crediting lower interest to older deposits. The district court determined that class certification was not appropriate because the plaintiffs' claims involved a number of individual issues that could not be resolved on a class-wide basis, including whether Northern misled the plaintiffs about its interest-crediting practices and whether the plaintiffs relied upon any such misrepresentations. Because we conclude that the district court did not abuse its discretion in refusing to certify the class, we affirm.

I. Factual Background

Fixed deferred annuities are investment products that allow individuals to make deposits into an account for a given period of time, earn interest on the accruing balance, and later receive regular payments based on the money that has accumulated in the account. The policies are structured so that the annuitant receives a guaranteed minimum interest rate and the company issuing the policy retains discretion to credit interest above that rate. The annuities present a tax advantage in that the money invested is not taxed as income until it is withdrawn. Because of the tax advantage and relative safety of the investment, some individuals use fixed deferred annuities to augment their retirement savings.

The Avritts are California residents who purchased fixed deferred annuities from Northern. The gravamen of their complaint is that Northern engaged in a misleading rate-setting practice, wherein the interest that it credited on recent deposits was consistently higher than that which it credited on older deposits. They essentially allege a bait-and-switch scheme which encouraged individuals to purchase Northern's annuities based on the false assumption that the initial, favorable interest rate would be maintained over time. They also argue that Northern breached its contract by failing to credit interest in the manner indicated in its policies.

A. Northern's Interest-Crediting Method

The relevant language in the annuity policies at issue here read as follows:

We guarantee an effective yearly interest rate of three percent (3%).

From time to time, interest greater than the guaranteed rate may be credited in a way set by our Board of Directors. There may be more than one interest rate in effect at any time.

The contracts also included two hypothetical illustrations that assume the annuitant will receive only the minimum three percent interest.

Northern obtained its profit by maintaining a spread between the interest that it earned on the money invested in its annuities and the interest, above the guaranteed minimum, that it paid to its policyholders. Northern's method of establishing the spread involved distinguishing between recent deposits and older deposits. For newer deposits, the spread between what Northern made on its investments and what it paid to a policyholder was typically 1% to 1.25% narrower-in other words, Northern made less profit.

One way to understand this practice is to consider that each new deposit is initially credited at an introductory rate and earns higher interest. Over time, however, the introductory rate is eliminated so that the interest paid on the deposit reflects the average spread differential targeted by Northern. The underlying practice at issue here-that of paying a higher introductory rate on more recent deposits-is common throughout the industry, and annuity buyers' guides caution against purchasing an annuity based solely on its introductory rate. The plaintiffs' own expert testified that there are plenty of companies that initially credit higher interest on deposits than they can afford long-term, and “[i]f the policyholder knows that going in, that's fine.” Rather, as the plaintiffs' expert sees it, the problem is whether there is “full disclosure.” The record suggests that Northern had some concern about its obligation to disclose its interest-crediting method to its customers, noting in a 1995 internal memo that “[o]ur current approach of saying nothing is not acceptable in the long run.”

Northern's annuities were marketed by a sales force that included thousands of independent insurance agents who were aware of the various interest rates that Northern credited on deposits. These agents were not required to follow any particular sales script when they sold Northern's annuities and were free to answer any questions that customers had about the product. Although the 1995 internal memo suggests that the sales agents initially may not have known that the different interest rates reflected Northern's practice of offering higher rates on more recent deposits, Northern's Vice President of Sales, Steve Barron, testified that the practice was disclosed in sales meetings at some point. Barron also testified that the sales agents were told that they might want to consider discussing Northern's interest-crediting methods with customers. Brad Corbin, who began as an independent agent with Northern in 1992 and eventually became head of the company's sales department, testified that in discussions with customers, sales agents would sometimes compare Northern's approach of subsidizing new money rates to another company's use of an explicit first year bonus. According to Corbin, prospective customers would frequently ask about bonuses, and sales agents would explain that Northern's implicit bonus was advantageous because it was eliminated over a longer period of time.

There is some evidence that Northern's interest-crediting practice was inadequately disclosed in the mandatory filings that the company was required to submit to regulatory agencies. Northern was obligated to inform state regulators of the method through which it determined the non-guaranteed interest payable to its policyholders. According to the plaintiffs' experts, Northern inaccurately characterized its interest-crediting method as being entirely dependent on the performance of the underlying investments, omitting the fact that it lowered interest rates on old funds to recoup its initial subsidy of newer deposits. In 2005, state regulators began an investigation of Northern's interest-crediting practices, but no final determination has yet been made about the legality of the company's conduct.

B. The Avritts' Annuity Purchases

Alan Avritt purchased his annuity in 1992 with the help of a financial advisor. He did not receive any sales materials from Northern and he did not compare Northern's interest rates with those of other annuity providers or the market in general. The financial advisor who spoke with Alan Avritt told him that Northern was a good company and that the annuity would provide a good rate of return. Alan Avritt did not undertake any independent investigation before making the decision to purchase the product. After his purchase, he made monthly deposits into the annuity for the next fourteen years.

The interest that Northern paid on Alan Avritt's deposits varied over the life of the policy but was at all times greater than three percent, often ranging between five and six percent. From 1992 until 1997, Alan Avritt received account statements indicating the interest that was being credited to his account. The statements showed that he was receiving different interest rates on recent deposits than he was on older deposits, with deposits made during the current year generally credited a higher rate than those made in previous years. The reason for the difference, however, was not explained. Beginning in 1997, Northern changed the format of its account statements so that the different rates were not apparent to policyholders.

Jacqueline Avritt periodically reviewed Alan Avritt's account statements to see how the investment was performing. In 1999, she purchased her own fixed deferred annuity from Northern through a financial advisor. She did not receive any brochures or sales materials and did not compare Northern's interest rates with those of other annuity providers. Jacqueline Avritt could not remember the interest rate quoted to her at the time of her purchase but remembered thinking that it was good, and she believed her financial advisor's advice that Northern would pay a good rate. Following her purchase of the annuity, Jacqueline Avritt made monthly deposits for a number of years. The interest credited to her deposits varied but was at all times greater than the guaranteed minimum of three percent.

C. Procedural History

The Avritts sued Reliastar in 2006, alleging, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust...