Speakman v. Allmerica Financial Life Ins., Civil Action No. 04-40077-FDS.
| Citation | 367 F.Supp.2d 122 |
| Decision Date | 21 April 2005 |
| Docket Number | Civil Action No. 04-40077-FDS. |
| Parties | Donald P. SPEAKMAN, Stephen H. Wedel, and Mark L. Robare, individually and on behalf of all others similarly situated, Plaintiffs, v. ALLMERICA FINANCIAL LIFE INS. & Annuity Co., First Allmerica Financial Life Ins. Co., and Allmerica Financial Corp., Defendants. |
| Court | U.S. District Court — District of Massachusetts |
Nancy F. Gans, Moulton & Gans, PC, Boston, MA, Robert W. Biederman, Stephen Hubbard, Hubbard & Biederman LLP, Dallas, TX, for Plaintiffs.
Andrea J. Robinson, Brett R. Budzinski, Jonathan A. Shapiro, Eric D. Levin, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, MA, for Defendants.
MEMORANDUM AND ORDER ON MOTION TO DISMISS
This is a claim for breach of the implied covenant of good faith and fair dealing and for unfair and deceptive trade practices in violation of Mass. Gen. Laws. ch. 93A. Plaintiffs are insurance agents who sold variable annuities on behalf of defendant Allmerica Financial Life Insurance & Annuity Company ("AFLIAC"). According to the complaint, plaintiffs contractually agreed to repay past commissions to AFLIAC on certain variable annuities in return for a stream of future, potentially higher, "trail" commissions on those annuities. Plaintiffs financed their repayment obligation by signing ten-year notes for substantial sums payable to AFLIAC. Under the agreement, the "trail" commissions would be used to offset the loan payments, and the agents would keep the excess.
Less than two years later, in late 2002, AFLIAC stopped accepting applications for new variable annuity business and severely curtailed its services to existing annuity accounts. That action caused much of the annuity business to disappear, as existing customers moved to other companies, which in turn caused trail commissions to plummet.
Plaintiffs contend that AFLIAC thus destroyed most of the potential value of their trail commissions, making it virtually impossible to earn enough to offset the loan obligations — which AFLIAC has refused to cancel. AFLIAC contends that under the Trail Agreement it had no obligation to remain in the annuity business or to provide any minimum level of service, and that it was not required to cancel the loan obligations or reimburse the agents for their losses.
Plaintiffs have brought suit, individually and on behalf of a putative class, against defendant AFLIAC for breach of the implied covenant of good faith and fair dealing,1 and against all defendants for violation of Mass. Gen. Laws ch. 93A. Jurisdiction in this Court is based on diversity of citizenship.
Defendants have moved to dismiss under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. For the reasons set forth below, the motion will be denied.
The following facts are as alleged in the complaint.2
Defendant AFLIAC is a Massachusetts-domiciled insurance company with a principal place of business in Worcester, Massachusetts. Defendant Allmerica Financial Corporation ("AFC") is its publicly-traded parent company. Defendant First Allmerica Financial Life Insurance Company ("AFLI"), during much of the relevant time, was the immediate parent of AFLIAC; it is now its subsidiary.3
As of the fall of 2000, AFLIAC marketed and sold life insurance and annuity products. Other subsidiaries of AFC sold property and casualty policies. AFLIAC concentrated its business in the sale of variable annuities and was one of the largest sellers of such products in the country.
Plaintiffs Donald P. Speakman, Stephen H. Wedel, and Mark L. Robare are three former insurance agents who sold life insurance and variable annuities issued by AFLIAC until it ceased to offer those products in the fall of 2002. Plaintiffs were among the approximately 700 career agents who sold AFLIAC life insurance and annuity products, including variable annuities. The parties dispute whether plaintiffs were independent contractors or employees; the complaint alleges that plaintiffs were "career agents" of AFLIAC, and that the company provided them with "office space and certain staff."
The variable annuities sold by AFLIAC allowed the purchaser to direct the money deposited into the annuity into separate investment accounts similar to mutual funds. An annuity owner's account value fluctuated according to the performance of funds. AFLIAC guaranteed purchasers a minimum death benefit ("GMDB"), regardless of the actual performance of the annuity's investments.
AFLIAC offered purchasers a variety of accounts and investment managers from which to choose, and paid an experienced investment consultant to assist them in the selection of managers and to monitor the performance of managers and funds.4 AFLIAC touted the number and choices of investments and investment managers and the experience of the consultant. The company received high ratings from agencies such as Standard & Poor's, Moody's, and A.M. Best. Because of the strong market competition, high ratings from these agencies are essential to the acquisition and retention of market share in the sale of life insurance and annuities.
A purchaser who terminated, or partially terminated, a variable annuity during its initial years (usually the first nine years) was required to pay surrender charges. The charges varied, depending on the time of termination; charges were highest for new annuities and decreased substantially over time.
AFLIAC received ongoing fees on the annuity accounts, which it treated as income. It also incurred both commission and underwriting expenses at the time of sale. Prior to January 1, 2001, plaintiffs were paid a one-time, lump-sum commission on sales of variable annuities in the first year, and did not receive any additional commissions during the period that those annuities remained in force. In accordance with generally accepted accounting principles, AFLIAC did not immediately recognize these expenses, but treated them as an "asset" and amortized them over time. Those "assets" were referred to as deferred acquisition costs ("DAC").
In late 2000, AFLIAC became concerned about certain of its older variable annuity policies. Those annuities generally had little or no remaining surrender charges, but DAC from their sale was still being amortized. AFLIAC was concerned that their customers might surrender those policies in substantial numbers and take their business to competitors. On top of the loss of business, AFLIAC would have to realize as an expense the remaining unamortized DAC, with no offsetting surrender charges.5
Accordingly, AFLIAC approached its agents with a proposal to reduce its financial exposure. In exchange for a promise by the agents to return fixed one-time commissions on certain older accounts, AFLIAC would pay them future fixed or variable trail commissions. This would permit, among other things, AFLIAC to extend the time to amortize the remaining DAC.
Agents could elect to have their repayment obligation take the form of a note payable to the company. The commissions paid were designed to offset the note obligation, with any excess paid to the agents. If, however, there were substantial surrenders of annuities, or the account values of the annuities were to fall, the commissions would not be adequate to repay the notes. Although the complaint does not state what financial incentives were given to the agents to give back income that had already been earned, presumably they exchanged the certainty of fixed, up-front commissions for the risk, but potentially greater reward, of future trail commissions.
On January 1, 2001, AFLIAC formally launched the Agent In-Force Trail Commission Program ("Trail Program"). The Trail Program was voluntary and available to all agents who agreed to enter into an Agent-In-Force Annuity Trail Commission Agreement ("Trail Agreement").6 The Trail Agreement obligated AFLIAC to pay ongoing "trail commissions" on certain in-force annuity contracts sold by plaintiffs, consisting principally of annuities issued prior to 1996 and replacements for those accounts (the "Eligible Annuity Contracts").7
Agents who executed the Trail Agreement could elect to receive fixed or variable trail commissions over an extended period of time.8 Under the Fixed Commission Option, commissions were calculated based upon a fixed annual percentage (0.70%) of the value of the annuities. Under the Variable Commission Option, commissions were calculated at a variable annual rate (0.55% to 1.00%) based upon the agent's "Persistency Rate" and certain "Production Requirements." The Persistency Rate measured the net increase or decrease in total account values of Eligible Annuity Contracts issued by the agent. A higher rate of surrender of, or withdrawal from, annuity accounts resulted in a lower Persistency Rate and a lower commission, and vice versa. An agent's Production Requirements were based on future sales of AFLIAC variable annuities and other products.9 Commissions would be increased for agents who maintained an average or above average Persistency Rate and sold enough products to meet yearly Production Requirements.10
Trail commissions were payable for any calendar quarter for which an agent had satisfied the eligibility requirements for the Trail Program.11 Trail commissions were also payable to agents who retired or left the company or to their beneficiaries if they died.12
In exchange for the trail commissions, the Trail Agreement obligated participating agents to repay "the unamortized DAC allocated to the Eligible Annuity Contracts." Trail Agreement at 2. The Trail Agreement gave each agent the option to finance the repayment obligation with a 10-year loan from AFLIAC ("DAC Note"), payable on a quarterly basis. The Agreement also provided that "[t]o the extent permitted...
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