District Court Properly Remanded Class Action to State Court on Ground that Variable Life Insurance Policy Constituted a “Security” Within the Meaning of Exception to Federal Court Jurisdiction under CAFA (Class Action Fairness Act) Seventh Circuit Holds
Plaintiff filed a putative class action against the issuer of his life insurance policy, Lincoln National Life Insurance, alleging that it breached the terms of certain of its variable life insurance policies. Lincoln Nat’l Life Ins. Co. v. Bezich, ___ F.3d ___ (7th Cir. June 25, 2010) [Slip Opn., at 1]. According to the allegations underlying the class action complaint, “Each month, Lincoln deducts cost-of-insurance charges from the accounts of its policyholders…[that] are not determined based on expected mortality, as promised by the policy.” Id., at 1-2. Defense attorneys removed the class action to federal court, asserting jurisdiction under the Class Action Fairness Act (CAFA), id., at 2. However, the district court remanded the class action to state court on the ground that CAFA provides an exception for class actions “that solely involves a claim . . . that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security (as defined under section 2(a)(1) of the Securities Act of 1933 (15 U.S.C. 77b(a)(1)) and the regulations issued thereunder).” Id. (citing § 1332(d)(9)(C)). Defendant filed a petition with the Seventh Circuit seeking permission to appeal the district court’s remand order. Id., at 1-2. Lincoln National Life argued “that its petition raises a ‘novel and important issue’ under CAFA: ‘whether contract claims grounded in the traditional insurance features of variable life insurance policies, as opposed to those related to their security features, qualify under the securities exception to CAFA.’” Id., at 2. Because the Seventh Circuit agreed with the district court’s conclusion that § 1332(d)(9)(C) required remand, it dismissed the appeal for lack of jurisdiction. Id.
The Circuit Court explained that Lincoln allowed the holders of single variable life insurance policies to “allocate money between a General Account, which accumulates value from premium payments, and a Separate Account, an investment account whose value varies depending on the performance of the investments selected.” Bezich, at 2-3. The policyholder may place 100% of his or her funds in either the General or Separate Account, or may split the funds between the accounts in any percentage they desire. Id., at 3. “The Separate Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940,” id. (citation omitted). The class action challenges the insurance charges deducted from both the General and Separate Account based on the percentage of funds in each account. Id. Defense attorneys argued that the appeal should be accepted because “no court of appeals has ever considered the application of CAFA to this type of variable life insurance policy.” Id.
As a preliminary matter, the Seventh Circuit considered whether it had jurisdiction to hear the appeal. Bezich, at 3. Under the facts of this case, the issue of appellate jurisdiction turned on whether the district court properly remanded the class action to state court. Id. Specifically, “The central question is whether the variable life policy is a ‘security’ as defined by section 2(a)(1) of the Securities Act of 1933, 15 U.S.C. § 77b(a)(1).” Id., at 4. Because under Seventh Circuit authority “variable life insurance policies ‘are both securities and insurance contracts,’” id., at 4-5 (citation omitted), the Court held that the variable life insurance policies implicated by the present class action were “securities” within the meaning of the CAFA exception, id., at 5-7. Accordingly, the Circuit Court lacked jurisdiction to consider the appeal, id., at 8.