Suitability scrutiny: a Minnesota lawsuit may influence how insurers sell deferred annuity products to senior citizens.

Barely a week after her swearing in, Minnesota Attorney General Lori Swanson filed a significant enforcement action against one of the world's largest insurers, Minnesota-based Allianz Life Insurance Company of North America. Swanson's intention was clear: She would use not only the state consumer fraud laws commonly enforced by state AGs, but also state insurance regulatory laws including Minnesota's bellwether "suitability" requirement. The insurance industry--agents and companies alike--will want to keep an eye on this lawsuit. It may yield the first clear indication of how far companies and agents must go to satisfy suitability requirements that can otherwise be vague and open to interpretation.

Suitability is the core concept at issue in Minnesota v. Allianz. The introductory sentence of the 22-page complaint filed in early January accuses Allianz of encouraging and supporting the "unlawful offer and sale of deferred annuity products to Minnesota senior citizens without regard for the suitability of the annuity to the seniors." The complaint cites policy maturity dates that sometimes exceed the senior's expected life span, high surrender charges up to 15%, and allegedly misleading "immediate bonuses" as evidence of violations. It also cites numerous hardship instances in which elderly individuals or couples with limited means were sold annuities without the ability to withdraw funds to support ongoing living expenses.

Significantly, the complaint alleges Allianz "failed to properly supervise the offer and sales of these annuities, including the assessment by its agents of whether the annuities are suitable for individual senior citizens." The complaint asserts that Allianz failed to exercise due diligence to ensure its agents applied suitability guidelines and disclosed material information about Allianz products. The complaint also asserts Allianz used sales tactics not conducive to consumers making fully informed decisions, including discouraging third parties such as relatives or friends from being involved in sales presentations.

The lawsuit describes 12 specific instances--using consumer initials to protect identities--to build a case against the company and its agents. Relief sought includes declaring that Allianz's acts constitute violations of law, enjoining Allianz and its agents from selling deferred annuities to seniors without first determining suitability based on the purchaser's life expectancy and other relevant circumstances, imposing civil penalties and requiring restitution for all persons injured by Allianz. Whether these cases evidence a pattern of widespread wrongdoing or just isolated instances of misunderstanding may be the ultimate question for the trier of fact. However, what is clear is that the attorney general already has succeeded in pushing Minnesota's insurance suitability laws to center stage, and the sale of insurance products may never be the same within Minnesota borders.

A Closer Look

Minnesota's suitability law applies broadly to sales of any life, annuity or health insurance product. Unlike insurance suitability laws in other jurisdictions, Minnesota's law is not limited to certain classes of customers such as senior citizens, nor is it limited to certain types of products such as annuities or long-term-care insurance. The law applies to any recommendation of life, endowment, individual accident and sickness, long-term-care, annuity, life-endowment or Medicare supplement insurance product. It applies to fixed as well as variable products, and there are no exceptions as can be found in the newly promulgated National Association of Insurance Commissioners' model annuity suitability regulation. (The model exempts direct response sales, certain group products, prepaid funeral insurance and structured settlement annuities.)

Minnesota insurance suitability requirements consist of two provisions: one found in the Insurance Producer licensing act, and the other in corresponding verbiage found in Minnesota's version of the insurance Regulation of Trade Practices act. Both state the agent or company must have "reasonable grounds for believing that the recommendation is suitable for the customer." As with securities laws, the term "suitable" is left undefined.

The Insurance Producer licensing act, found in chapter 60K of the Minnesota statutes, imposes upon agents the duty to "make reasonable inquiries to determine suitability." It says suitability of a recommendation will be "determined by reference to the totality of the particular customer's circumstances, including but not limited to, the customer's income, the customer's need for insurance, and the values, benefits, and costs of the customer's existing insurance program, if any, when compared to the values, benefits, and costs of the recommended policy or policies." For whatever reason, these clarifications are found only in the insurance producer version of suitability requirements and not in the corresponding Regulation of Trade Practices act provision, leaving one to wonder whether there is a difference in the standards that apply to companies versus agents seeking to comply with suitability requirements.

Potential for National Impact

Given the brevity of Minnesota's suitability requirements, the law is susceptible to interpretation in terms of exactly what inquiries must be made by an agent, how specific an agent must be in establishing that a product is suitable for a consumer, what documentation is necessary for proving suitability, who bears the burden of proof when there is uncertainty, what responsibilities if any are borne by customers, whether or not suitability imposes some kind of heightened duty on agents, and what responsibilities and accountabilities lie with the insurance company. While the law's vague contours may render allegations easy to make, at the same time such fuzziness could make it difficult to prove violations of any concrete requirements of law. The Allianz case may very well test the efficacy of the suitability laws as an enforcement tool for regulators in dealing with consumer protection.

The impact of the Allianz case is likely to extend beyond Minnesota. Traditionally, absent special circumstances, an agent's loyalty was to the insurance company, and an agent's obligation vis-a-vis consumers was to provide full and fair disclosure of product features. Suitability laws create a standard of conduct for companies and agents that has been around for a while in Minnesota but has gone largely untested until now.

In some respects, Minnesota has been ahead of the curve compared to most other states by having enacted a suitability law for insurance sales many years ago. However since then, suitability has crept into the insurance industry through adoption of the NAIC model suitability law for sales of annuities to seniors and through continuous melding of the insurance and securities industries. As those trends continue, and the concept of suitability further infiltrates marketing standards for insurance agents, Minnesota may be at the forefront of a movement that will change the duties and expectations of both agents and companies in the sale of insurance products.

Key Points

* A pending Minnesota lawsuit may indicate how far companies and agents must go to satisfy suitability requirements.

* The impact of the Allianz case is likely to extend beyond Minnesota.

* Minnesota was one of the first states to borrow the concept of suitability from the securities industry.

Minnesota's Suitability Insurance Law

Minnesota was one of the first states to borrow the concept of suitability from the securities industry and incorporate such market conduct requirements into insurance laws.

Why it Was Adopted: The suitability standard has been part of Minnesota insurance law since 1984, when it was adopted as an administrative rule in a set of reforms intended to address widespread abusive sales practices directed at senior citizens. These abuses included selling multiple, overlapping Medicare Supplement policies and selling life insurance policies with premiums larger than expected death benefits.

How It Changed: In 1989, the Minnesota Legislature repealed the administrative rule but imported it directly into the insurance-agent licensing statute. The Commerce Department, which regulates insurance, promoted replacing the rule with a statute to enhance its enforceability. The department had historically taken the position that companies, as well as their agents, were responsible for complying with suitability requirements. In 1995, to counter some companies' arguments that suitability did not apply to them, the department secured passage of a corresponding suitability provision as an amendment to the insurance Regulation of Trade Practices act, which unmistakably applies to insurers as well as agents. Today there is little doubt that companies and agents are subject to suitability requirements under Minnesota law.

Contributors Robert Elconin and Thomas Pursell are partners in the law firm of Lindquist & Vennum, PLLP. Robert Elconin can be reached at relconin@ lindquist.com. Thomas Pursell can be reached at [e-mail].