The court of appeals affirmed a district court judgment in part, reversed in part, and remanded the action for further proceedings. The court held that the Securities Litigation Uniform Standards Act of 1998 did not preclude class claims alleging breach of contract where the claims hinged on interpretation of a key contract term rather than any alleged misrepresentation or omission by the issuer of a variable universal life insurance policy. The court held further that SLUSA did preclude class claims alleging fraud or misrepresentation based on the insurer’s deduction of excessive “cost of insurance” fees from funds which otherwise would have been invested in securities on the behalf of policyholders.
Freeman Investments, L.P. and others (Freeman) purchased variable universal life insurance policies from Pacific Life Insurance Company. Under its policies, Pacific guaranteed customers a minimum insurance benefit. In addition, policyholders allocated a portion of their premiums to a separate account whose value fluctuated. Policyholders could choose from investment options within the separate account, and Pacific would invest the assets accordingly. Because policyholders bore the risk associated with the investments, courts in other jurisdictions had concluded that the variable universal policy qualified as a security regulated by federal law.
Freeman brought a federal class action against Pacific to challenge the company’s monthly assessment of a “cost of insurance” charge, which the company collected by redeeming units of the separate account. Freeman maintained that the assessments were excessive and not based on industry-standard calculations for “cost of insurance” fees.
Pacific moved to dismiss on the ground that the action was precluded by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which bars class actions brought under state law that claim misrepresentation or omission in connection with certain securities transactions. The district court granted the motion to dismiss.
The court of appeals reversed in part, holding that SLUSA did not preclude the class contract claims.
SLUSA bars private plaintiffs from bringing (1) a covered class action (2) based on state law claims (3) alleging that the defendant made a misrepresentation or omission or employed any manipulative or deceptive device (4) in connection with the purchase or sale of (5) a covered security. Here, the parties disputed two of those elements, namely whether the state law claims, no matter how labeled, in substance alleged misrepresentation or omission in connection with the purchase or sale of securities.
The gist of Freeman’s complaint alleged that Pacific charged too much for life insurance and thereby reduced the value of the plaintiffs’ investments. Freeman characterized “cost of insurance” as an industry term of art, so that the plaintiffs had expected Pacific to calculate the charge based on industry accepted actuarial determinations rather than imposing its own, inflated charges.
The court concluded that resolution of that issue boiled down to interpretation of a key contract term. To prevail, Freeman simply had to persuade the court that the plaintiffs had the better reading of the contractual language, not that Pacific misrepresented the cost of insurance or omitted critical details.
Nor, the court said, did the plaintiffs allege any fraudulent omission in connection with their argument for tolling of limitations, which they asserted in hopes of recovering costs of insurance charges for the entire periods in which they held their policies. The court suggested, however, that on remand Freeman omit its existing, unnecessary references to deliberate concealment or fraudulent omission in the pertinent portions of the complaint.
Ultimately, then, Freeman’s breach of contract claim survived SLUSA, as did the class claim for breach of the duty of good faith and fair dealing, which was itself grounded in contract law.
The court next considered whether there was alleged misrepresentation in connection with the purchase or sale of a covered security. To the extent variable life insurance policies are “hybrids” that have characteristics of both insurance products and investment securities, other plaintiffs have avoided the specter of SLUSA by targeting only the insurance feature of their policies.
That was not the case here, the court wrote. Pacific Life’s prospectus made it plain that the monthly charge in dispute was deducted from the investment options that made up the accumulated value of customers’ policies. As a result, to the extent plaintiffs alleged that Pacific engaged in fraud or misrepresentation that drained their investments, SLUSA barred their claim.
The plaintiffs essentially claimed that Pacific fraudulently debited funds that otherwise would have been invested in securities. That alleged conduct met the standard of SLUSA, the court concluded.
The court remanded the action so that the plaintiffs might file an amended complaint, with the opportunity to assert individual claims (not subject to SLUSA) if they so chose.