A U.S. appeals court in California has ruled in favor of EquiTrust, which was alleged to have violated federal and state laws in the sale of an index annuity, after the court found the carrier and the annuity had delivered on the contract’s promise.
In the case, Harrington v. EquiTrust Life Insurance Co., the plaintiffs Mary Helen Eller and Paul Harrington sued Equitrust on the grounds that marketing material used in the sale of the EquiTrust MarketPower Bonus Index Annuity amounted to mail and wire fraud.
Harrington argued that premium bonus promises, the annuity’s market value adjustment and the circumvention of state nonforfeiture contained in marketing documents and the annuity contract was a violation of the federal Racketeer Influenced and Corrupt Organizations Act (RICO) and Arizona state laws.
But the three-judge panel of the U.S. Court of Appeals for the 9th Circuit, based in San Francisco, sided with the lower court which found no breach of duty on the part of the carrier.
Harrington claimed the annuity’s 10 percent premium bonus clause was fraudulent because the carrier never disclosed that it does not invest any additional money in the market when crediting the bonus to the account.
The appeals court, however, found that “a seller generally has no duty to disclose internal pricing policies or its method of valuing what it sells.”
“Of course, even absent a duty to disclose, a seller can be liable for affirmatively misrepresenting its product,” U.S. Circuit Judge Andrew D. Hurwitz wrote. “Thus, if an annuity company promises a bonus, but does not deliver as advertised, there can be actionable misrepresentation.”
“But it is uncontested here that EquiTrust delivered precisely what it promised,” the judge wrote in his 13-page decision. “The 10 percent bonus was accurately described in the annuity material and properly credited to Harrington’s account.”
Harrington also argued that the carrier had committed fraud with regard to the annuity’s market value adjustment, the mechanism of which is not disclosed in marketing brochure, but the court rejected that argument too, saying the company “meticulously explains” market value adjustments.
Lastly, the court rejected Harrington’s argument that the annuity violates Arizona’s nonforfeiture laws for individual deferred annuities.
Harrington’s annuity maturity date was fixed.
Yet, Harrington argued that EquiTrust’s internal policy to consider annuitants relief from fixed-date terms upon request “mutates the annuity into one with an optional maturity date,” in violation of Arizona law.
“More significantly, Harrington has no conceivable injury from the internal policy, as the potential of relief from the annuity’s fixed maturity date can only add value to his annuity,” Hurwitz wrote.
The appeals court also ordered the lower court to either award court costs to EquiTrust or explain why costs were denied when the insurance carrier prevailed at the district court level.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].