Babiarz v. Stearns
57 N.E.3d 639
Ill. App. Ct.2016Background
- Plaintiff Darlene Babiarz purchased three Allianz Endurance 15 fixed indexed annuities (FIAs) in March–April 2009 on the recommendation of Timothy Stearns, a registered investment advisor, broker, and appointed Allianz insurance agent.
- Babiarz signed Product Suitability Forms (PSFs), Statements of Understanding, and received policy folders for each annuity; those documents disclosed that the products were insurance, contained surrender-charge schedules, and explained possible tax penalties and a free-look cancellation period.
- Beginning in June 2010 Babiarz made multiple withdrawals, later surrendered two contracts, and incurred surrender charges and IRS penalties; Allianz paid Stearns commissions totaling about $54,000.
- Babiarz sued (breach of fiduciary duty, negligent misrepresentation, Consumer Fraud Act, Illinois Securities Law, common-law fraud, contract claims, negligent suitability review). Defendants moved for summary judgment; the trial court granted most claims and later entered directed verdict/jury verdict(s) in defendants’ favor.
- The appellate court considered whether the FIAs are securities or insurance (affecting applicable law, fiduciary-duty limits, and the statute of limitations) and whether the discovery rule/fiduciary exceptions tolled limitations. The court affirmed the judgments below.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether FIAs at issue are "securities" under Illinois Securities Law | Babiarz: FIAs are investment contracts/securities governed by Illinois Securities Law, not insurance | Defendants: FIAs are insurance products regulated by Illinois Insurance Code and exempt from Illinois Securities Law | Held: FIAs are insurance products exempt from the Illinois Securities Law under 815 ILCS 5/3(M) and registered with the Illinois Dept. of Insurance |
| Whether claims were time-barred under the two-year statute for actions against insurance producers (735 ILCS 5/13-214.4) | Babiarz: Discovery rule tolled accrual until March 2011 (accountant told her about tax penalties); fiduciary relationship excused her failure to read documents | Defendants: Accrual occurred when she received and signed contracts/PSFs in April 2009; claims filed after two-year limit | Held: Accrual began in April 2009 when she received the disclosed documents; claims were untimely (filed too late) |
| Whether Stearns owed a fiduciary duty that would excuse Babiarz from reading documents | Babiarz: High trust and advisor relationship created fiduciary duty; so she need not have read documents | Defendants: Stearns acted as Allianz-appointed insurance agent (not broker); agents do not owe fiduciary duty to insureds | Held: Stearns acted as an insurance agent (paid commissions by Allianz); no fiduciary duty existed, so plaintiff not excused from reading documents |
| Admissibility of plaintiff's expert and other remedies | Babiarz: Expert could testify on investment-advisor standard and damages | Defendants: Expert testimony irrelevant if fiduciary/related claims dismissed | Held: Trial court did not abuse discretion in limiting expert testimony to subjects relevant to claims that survived; excluded investment-advisor standard and damages testimony |
Key Cases Cited
- Reves v. Ernst & Young, 494 U.S. 56 (discussion of broad definition of "security") (U.S. Supreme Court)
- American Equity Investment Life Ins. Co. v. SEC, 613 F.3d 166 (D.C. Cir.) (analyzing hybrid character of fixed indexed annuities)
- In re Nitz, 317 Ill. App. 3d 119 (Ill. App. Ct.) (annuity treated as insurance product)
- Henderson v. Roadway Express, 308 Ill. App. 3d 546 (Ill. App. Ct.) (annuity characterized as insurance policy)
- Skaperdas v. Country Casualty Ins. Co., 2015 IL 117021 (Ill.) (distinction between insurance agent and broker; agents do not owe fiduciary duties)