Great American Life settles class action lawsuit over interest rates and extra fees
Great American Life Insurance Co. has reached a settlement with attorneys over a nationwide class action lawsuit that claimed it did not pay a guaranteed interest rate on annuity contracts and tacked on unnecessary surrender fees when customers tried to activate their annuity's payout phase early and transfer their funds to another contract.
|"We recognized that defending this type of action would require us to devote significant resources."|
The settlement reached with the Cincinnati-based insurer still needs approval from the Court of Common Pleas in Hamilton County, Ohio, says Richard Wayne of Strauss & Troy, a Cincinnati law firm representing the plaintiffs. Wayne estimates the settlement will receive preliminary approval from Judge Richard Niehaus by August, and policyholders will receive notification by early fall. Great American Life estimates that the settlement will cost it between $22 million and $25 million.
The suit, filed in February 1999, alleges that Great American did not pay a rate of interest it had promised on a two-tier fixed annuity sold by the company. A two-tier fixed annuity is a contract that pays two rates of interest. If you never surrender the annuity, you will earn a bonus rate of interest (that's the second tier) when you begin annuitizing. However, if you surrender the contract early, you will have earned an interest rate that is lower than the rate earned on a typical annuity.
In addition, some plaintiffs allege that when they tried to get out of their contract by annuitizing early and sending their monthly payments to another insurer to be put in a different annuity, Great American unfairly charged them surrender fees.
Mark Muething, executive vice president of Great American Life, maintains that the insurer's annuity contracts do not allow annuity payments to be sent anywhere but to the annuityholder, so the company considered the annuityholders' request to be a transfer of funds, and thus subject to a surrender fee.
Although the insurer admits no wrongdoing, "we recognized that defending this type of action would require us to devote significant resources," says S. Craig Linder, Great American's president and CEO.
Muething estimates that about 250,000 policyholders are eligible for the settlement. Class members consist of anyone who bought a two-tier fixed annuity from Great American Life after Jan. 1, 1990. Under the proposed settlement, former and current annuityholders will be eligible for three kinds of compensation, which will be awarded based on damages:
- Current and former annuityholders will receive a "lump sum" payment that represents the interest rate they should have received on the policy. In order to receive this compensation, annuityholders most hold their contracts for one year after the settlement receives final approval
- Former annuityholders who annuitized early in order to buy another annuity will receive a payment that will reimburse them for the surrender fees
- Current annuityholders will be able to transfer their two-tier fixed annuity to a single-tier annuity contract from Great American.