Bezich v. Lincoln Nat. Life Ins. Co., 2010 WL 1382346 (N.D. Ind. Mar 29, 2010) (No. 1:09-CV-200-JVB).

A federal District Court in Indiana remanded an action to state court holding that the ‘single flexible premium variable life insurance policy’ registered with the SEC was a security for the purposes of CAFA. Thus, the claim fell within CAFA’s securities exception.

The plaintiff brought a class action in state court for a single claim for breach of contract alleging that the defendant, Lincoln National Life Insurance Company, deducted monthly Cost of Insurance (COI) charges in breach of the terms of his ‘single flexible premium variable life insurance policy’ (policy).  

The policy purchased by the plaintiff had been registered with the SEC under the Securities Act of 1933 and under the Investment Company Act of 1940. The initial amount of the policy was $200,000.  The policy provided that premium payments, interest, and investment earnings are credited every month to the policy’s accumulated value. The policy provided for a monthly COI deduction from premiums or the accumulated value of the policy in part determined by expected mortality. 

The opinion contains some complicated and pretty boring stuff about the various components of the policy. Feel free to read the opinion if you are interested. We weren’t, so we decided to leave that part out of this post. 

The defendant removed the case to the federal court under CAFA. Naturally, the plaintiff moved to remand alleging that his claim was excluded from the federal court’s jurisdiction under the securities exception of CAFA, 28 U.S.C. §1332(d)(9)(C).

The District Court noted that Pew v. Cardarelli, 527 F.3d 25, 31 (2nd Cir. 2008) stated that under §1332(d)(9)(C), CAFA removal does not apply to any class action involving a claim that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security. (Editors’ Note: See the CAFA Law Blog analysis of Pew posted on August 20, 2008). Although this exception does not cover “any and all claims that relate to any security,” Katz v. Gerardi, 552 F.3d 558, 563 (7th Cir. 2009) stated that the exception applies to suits asserting that the promises made in securities have not been honored. (Editors’ Note: See the CAFA Law Blog analysis of Katz posted on February 2, 2009).

First, the Court found that policy at issue was a security for the purposes of CAFA, and found that the policy could not be split into two parts—insurance and security—for the purpose of analysis under CAFA’s exception, given the facts set forth by the plaintiff.  The Court noted that the plaintiff alleged that he was issued a single policy registered with the SEC, and his COI charges were taken in proportion from the premiums allocated to the different accounts.  

Second, the defendant argued that the plaintiff’s claim did not solely relate to a security because the claim concerned a traditional life insurance deduction. The plaintiff stated that setting the amount of a monthly deduction was analogous to the dicta in Pew that interest rate claims would be grounded in the terms of a security.  While the COI is not an interest that accrues to the insured, it is a deduction that takes away potential investment earnings from the insured.  

In response, the defendant distinguished the two, arguing that an interest rate goes to ‘the heart of a security’ and the plaintiff’s claim did not involve the security. 

The Court stated that the defendant’s position was too narrow because the plaintiff’s claim was that promises made in a security have not been honored.

Finally, the Court observed that although federalism requires that CAFA be interpreted to grant federal jurisdiction over cases with national impact, national impact is not CAFA’s only consideration.  The Court thus concluded that if Congress had intended that disputes with national impact should trump the securities exception, it would have said so.