Court Revives Contract Suit Against Pacific Life

(CN) - Federal pre-emption cannot block a class action alleging that Pacific Life Insurance Company charges excessive fees, the 9th Circuit ruled Wednesday.

A group of investors that purchased variable universal life insurance policies from Pacific Life filed a class action in California claiming that the company's "cost of insurance" fee is out of step with industry standards.

Variable universal life insurance is connected to investments and allows the policyholder to borrow against gains. Both the 11th and 7th Circuits have previously ruled that such policies are securities under federal law.

The Securities Litigation Uniform Standards Act of 1998 (SLUSA) bars state-level claims for "misrepresentations or fraudulent omission in connection with the purchase or sale of covered securities."

U.S. District Judge David Carter dismissed the investors' case in Santa Ana, finding that the SLUSA precluded the claims for breach of contract, bad faith and unfair competition under California law.

Even after giving the plaintiffs two chances to amend the complaint, Judge Carter found that it still contained references to "hidden loads and concealment," and thus was precluded by the federal law.

But a unanimous federal appeals panel entered a partial reversal Wednesday.

"The class claims for breach of contract and breach of the duty of good faith and fair dealing are not precluded by SLUSA, even if such claims relate to the purchase or sale of a covered security," Chief Judge Alex Kozinski wrote for panel in Pasadena.

"Plaintiffs allege that their insurer promised one thing and delivered another," he added. "That's a straightforward contract claim that doesn't rest on misrepresentation or fraudulent omission."

The panel revived the contract claims "on the condition that plaintiffs amend their complaint to remove any reference to deliberate concealment or fraudulent omission."

The state-level unfair competition claims remain lost. "To succeed on this claim, plaintiffs need not show that Pacific misrepresented the cost of insurance or omitted critical details," Kozinski wrote. "They need only persuade the court that theirs is the better reading of the contract term."

"Just as plaintiffs cannot avoid SLUSA through crafty pleading, defendants may not recast contract claims as fraud claims by arguing that they 'really' involve deception or misrepresentation," he added.

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