ANNUITIES AND APPLICATION OF THE SUITABILITY RULE TO INSURANCE COMPANIES

The “suitability rule” is commonly used in the securities industry but less so in the insurance industry. The “suitability rule” is pretty simple: an agent should not sell investment products to an investor that are not appropriate for the investor’s age and financial needs. A necessary corollary of the rule is that the agent must use reasonable diligence in deciding that a financial product is suitable for the investor.

Until 2007, the government in Minnesota frequently applied the “suitability rule” to brokers and insurance agents but had never applied the rule to an insurance company which issued annuities. The problem with this was that individual insurance agents had less incentive than an insurer to comply with the rule and to give restitution by the time they were caught.

Swanson observed that because securities brokers knew they were liable for violations of the suitability rule, they were quite motivated to train their agents to comply with the law. In contrast, insurance companies were not being held liable for the suitability violations of their agents, who were “independent contractors.”

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The senior citizen population is large, growing, and by some estimates, holds two-thirds of the individual wealth in the United States. By 2050, the number of seniors is projected to be nearly twice as large as it was in 2012. Seniors, with a retirement, nest egg, are sometimes targeted by fraud.

In 2007, Swanson’s office received complaints from seniors who needed cash from long term annuities that were sold to them. The agents never mentioned that access to cash in an annuity was accompanied with a large “surrender fee” or penalty. It was not uncommon to find a 75-year-old senior who invested $50,000, all of her next egg, in an annuity that by its terms carried a huge penalty if she accessed it before the 15+-year maturity date.

While agents could be held liable for the sale of an unsuitable product, the Minnesota Department of Commerce (which regulated the insurance industry) had not previously held insurers accountable for the sale by their agents.

After being sworn in as Attorney General, Swanson filed a series of lawsuits against life insurance companies that sold unsuitable annuities to senior citizens. She argued that the insurance companies were responsible for agents who sold long-term annuities with high surrender charge to the elderly. In 2007 and 2008, she sued several insurers, including Allianz Life Insurance Company, American Equity Life Insurance Company, Midland National Life Insurance company, AmeriUs Life Insurance Company and American Investors Life Insurance. The lawsuits were vigorously litigated, but ultimately resulted in recoveries that provided for hundreds of millions of dollars in refund offers to senior citizens. Swanson testified in the U.S. Senate Committee on Aging about the need for insurance companies to ensure the suitability of the products sold to senior citizens by their agents.

These lawsuits were unprecedented at the time because the courts had not previously held the insurer to be liable for such sales.

After these cases were resolved, the insurance industry lobbied and successfully enacted legislation designed to weaken the “suitability rule” applicable to insurers.

The cases were all litigated in the state district court. The following identify the file numbers of each case:

Swanson v. American Equity Investment Company (2007)

Consent Judgment: See Attached

Swanson v. Allianz Life Insurance Company (2007)

Swanson v. Aviva Life and Annuity Company (2008)

Swanson v. Midland National Life

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