Ohio National Life Insurance has suffered a series of legal setbacks as it fights lawsuits and arbitration demands in the wake of last year’s decision to stop paying certain commissions to thousands of financial professionals selling variable annuities.
A new lawsuit was filed against Ohio National in Texas last month by the parent company of broker-dealer Kestra Financial. The insurance company is resisting arbitration demands in Ohio, and its lawyers are asking a Massachusetts judge to reverse a ruling routing a case into the Financial Industry Regulatory Authority’s arbitration process.
In the company’s home state of Ohio, the insurer suffered a key setback after Magistrate Judge Stephanie Bowman issued a recommendation June 28 that found there was sufficient evidence to allow the claims for breach of contract and unjust enrichment to proceed. Ohio National unsuccessfully argued that the plaintiff — a representative for a broker-dealer marketing the annuities — lacked standing as a third party to the selling agreement.
“That was a very significant development that allows the case to move forward on behalf of the representatives selling the product,” said an attorney in that case, Dennis Concilla of Columbus, Ohio’s Carlile Patchen & Murphy. “Ohio National had asked the court to rule that they were not a party to the contract, and therefore had no right to sue.”
Ohio National is now arguing that if Bowman’s recommendation stands, it will “open the floodgates to litigation initiated by corporate employees/agents on all sorts of corporate contracts.”
Judge Susan Dlott, who is overseeing that case and two others consolidated before her, has not yet ruled on whether she’ll accept Bowman’s assessment.
Concilla’s complaint does not seek to have the dispute sent to a FINRA arbitration panel, which Ohio National has been fighting tooth and nail, but Concilla said he understands why the insurer and its co-defendant affiliates may want to stay in federal court.
“This is just speculation, but a FINRA arbitration is a court of equity, and I suspect they feel that they could lose in that kind of setting,” Concilla said. “A court responds to law and fact; an arbitration panel rarely rules on a motion to dismiss, for example.”
Ohio National’s lead counsel is Marion Little and Christopher Hogan of Columbus’ Zeiger, Tigges & Little. They did not respond to a request for comment, and an Ohio National spokeswoman said the company will not comment on the pending litigation.
The Legal Context
The litigation centers on Ohio National’s decision last year to get out of the annuities business altogether to focus on its life and disability insurance products. Among the annuities it discontinued were those with a provision called the Guaranteed Minimum Income Benefit Rider, which guaranteed a certain level of income to the purchaser regardless of underlying performance of the investments.
According to court filings, Ohio National and its subsidiaries sold more than $10 billion in variable annuities between 2012 and 2018, paying commissions to some 50,000 to 75,000 advisors affiliated with independent broker-dealers who opted to receive smaller up-front commissions in favor of larger trail commissions, or ongoing commissions paid for the products they sell.
The insurer sent termination letters to broker-dealers selling the GMIB annuities, saying in September that it was canceling their contracts and would no longer pay trail commissions.
Lawsuits accused Ohio National and its subsidiaries of breaching their selling agreements, which said the commissions would be paid until the annuities were surrendered or paid out.
The complaints said individual brokers and representatives stood to lose tens of thousands of dollars annually from the canceled commissions, and some named additional defendants including Ohio National Life Assurance Corp., Ohio National Equities Inc. and Ohio National Financial Services.
Ohio National’s responses all revolve around the argument that its contracts allowed termination with a 60 day prior notice, and that the commissions were only guaranteed to be paid while the contracts were valid.
The insurer is fighting to keep the disputes out of arbitration, arguing it is not a FINRA member and cannot be compelled to arbitrate without its consent.
Ohio National has sued several broker-dealers who are also seeking FINRA arbitration in Ohio.
And earlier this month, Kestra filed a new complaint — the second in that state — joining other federal litigation including actions pending in California, Illinois, Minnesota and Alabama.
In its own Ohio lawsuit against several broker-dealers in California, Florida and Delaware, Ohio National said it received complaints filed with “multiple state departments of insurance” by customers saying their GMIB annuities were being terminated, that the insurer had “fired” their advisors, that the advisors will no longer have access to the customers’ financial information, and will no longer provide “financial advisory services that the customer paid for and will continue to pay for” in annual fees.