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Freeman Investments L.P. v. Pacific Life Insurance Co.: SLUSA Precludes Class Actions for Breach of a Variable Universal Life Insurance Contract

In Freeman Inv. L.P. v. Pacific Life Ins. Co., No. 09-55513, 2013 WL 11884 (9th Cir. Jan. 2, 2013), the Ninth Circuit Court of Appeals affirmed in part, reversed in part, and remanded the district court's grant of Pacific Life Insurance Co.'s ("Pacific") motion to dismiss. The Ninth Circuit reversed the dismissal of Freeman Investments, L.P.'s ("Freeman") class action claim alleging breach of contract and the duty of good faith and fair dealing. Freeman's claims against Pacific for breach of its variable universal life insurance contract pursuant to California unfair competition laws, however, did not survive the Securities Litigation Uniform  Standards Act of 1998 ("SLUSA"), and the court affirmed the dismissal of this claim.

Variable universal life insurance contracts differ from term life insurance because they exist for the duration of the policyholder's life, and they permit policyholders to share in the gains or losses resulting from invested premiums by allowing them to borrow against or cash out the accumulated value of the policy. The life insurance contracts place the risk of the investments on the policyholder. For this reason, some circuits have held that variable universal policies qualify as securities.

Pacific allocated a portion of the premiums into a separate account and then invested the amount in accordance with the choices made by policyholders. Each month Pacific charged a "cost of insurance" fee, and deducted the fee from Freeman's account.  Freeman asserted in his complaint that "cost of insurance" was excessive.  Specifically, he alleged that "cost of insurance" was an industry term of art and that the amount of the deduction should have been computed in conformity with these industry standards.  As a result, he brought an action for breach of contract, breach of the duty of good faith and fair dealing and unfair competition.

Pacific sought dismissal under SLUSA. SLUSA precludes state law class actions alleging that the defendant made a misrepresentation in connection with the sale of securities.

SLUSA applies irrespective of the type of claim.

The court concluded that Freeman's claim for breach of contract involved a dispute about the interpretation of a term and was not dependent upon a misrepresentation. See Id. (“To succeed on this claim, plaintiffs need not show that Pacific misrepresented the cost of insurance or omitted critical details. They need only persuade the court that theirs is the better reading of the contract term.”).

Freeman's claim of unfair competition, however, was based upon misrepresentation. See Id. (“But California business & Professions Code § 17200, on which plaintiffs base a separate claim, defines unfair competition as ‘any unlawful, unfair or fraudulent business act or practice.’").

Moreover, the court found that the claim did meet the "in connection with" test. The court explained that the mere presence of a security was not sufficient, that the misrepresentation at issue had to relate to the nature of the security—something more than a tangential relationship. Further, the court pointed out that the allegation of an inflated cost of insurance directly reduced the amount invested in securities. Because of the insurance and security hybrid nature of universal life insurance, a claim could survive SLUSA if it only discussed the insurance aspects of the policy; however, here the court explained that the cost of insurance fee far exceeded a tangential relationship by directly depleting the value of the security investment.

The court concluded that Freeman's breach of variable universal life insurance contract claim was precluded by SLUSA.    

The primary materials for this case may be found on the DU Corporate Governance website.

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