Lincoln Nat. Life Ins. Co. v. Bezich, No. 10-8013, 2010 WL 2541203 (7th Cir. (Ind.) Jun 25, 2010).
The Seventh Circuit affirmed the order of remand to the state court holding that the plaintiff’s challenge to variable life insurance policy related to rights, duties and obligations concerning a security qualifying under the “securities exception” to CAFA. (Editors’ Note: See the CAFA Law Blog analysis of the District Court decision in Bezich posted on August 11, 2010).
Peter Bezich brought a class action in the state court asserting that Lincoln National Life Insurance Company breached the terms of certain variable life insurance policies by deducting cost-of-insurance charges from the accounts of its policyholders not basing on expected mortality, as promised by the policy.
Lincoln attempted to remove the suit to federal court under CAFA, but the District Court held that the policy was “security” as defined under §2(a)(1) of the Securities Act of 1933, and it remanded the suit based on CAFA’s securities exception under U.S.C. 28 §1332(d)(9)(C). The Seventh Circuit agreed with the District Court, and it dismissed Lincoln’s leave to appeal.
Challenging the District Court’s conclusion that the policy was a “security”, Lincoln relied on Roth v. American Family Mutual Ins. Co., 567 F.3d 884, 886 (7th Cir. 2009), which explained that variable life insurance policies were both securities and insurance contracts. The Seventh Circuit remarked that it determined so in Roth on a different context, as the question in Roth was whether an insurance company was entitled to terminate the contracts of two of its agents.
Lincoln next requested the Court to generalize Roth’s willingness to separate the two aspects of the variable policy into its component parts, and relied on SEC v. United Benefit Life Ins. Co., 387 U.S. 202, 207-09 (1967), which held that because the plan included two entirely distinct promises and their operation was separated at a fixed point in time, the proper method was to divide the annuity plan into its component parts and examine the risk allocation in each part.
The Seventh Circuit disagreed with Lincoln, and observed that for CAFA purposes, it looks to the definition of a “security” in §2(a)(1), which includes an interest in something that gives the holder the right to purchase a security. The Seventh Circuit stated that every holder of Lincoln’s variable life policies enjoyed such a right. The policy holders were at liberty to shift the funds between the General Account and the Separate Account, and most of the class members had at least some of their money in the Separate Account, holding a “security” for CAFA purposes.
The Seventh Circuit maintained that its analysis was consistent with the opinion in Herndon v. Equitable Variable Life Ins. Co., 325 F.3d 1252 (11th Cir. 2003), which concluded that a variable life insurance policy is a “covered security” under the Securities Litigation Uniform Standards Act of 1998. The Seventh Circuit stated that this case was more like Herndon,because the claims of the members of the class concerned a single promise–that the cost-of-insurance charge would be determined in part by expected mortality–and that promise applied to both the funds they had presently placed in the Separate Account and those that they had the right to move to the Separate Account. The policy’s provision that the charge was taken from both the General Account and the Separate Account in proportion to the premiums allocated to each did not alter this. Thus, the Seventh Circuit found that the Lincoln policy was a “security” for CAFA purposes and could not be viewed as two separate contracts, one within the statute and the other outside its coverage.
Accordingly, the Seventh Circuit concluded that Bezich’s claim related to the rights, duties, and obligations concerning to or created by or pursuant to a security, as defined in the Securities Act, and thus it had no jurisdiction to entertain the petition for review of the District Court’s order remanding the case to state court.