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Otto v. Variable Annuity Life Insurance Co.

United States Court of Appeals for the Seventh Circuit
814 F.2d 1127 (7th Cir. 1986)


Facts

Variable Annuity Life Insurance Company (VALIC) (defendant) sold fixed annuities with an interest rate of 4 percent per year for 10 years followed by a rate of 3.5 percent after 10 years. The funds were held in a separate account to be invested in mortgages and bonds. Any excess interest was to be paid at VALIC’s discretion. Beverly Otto (plaintiff) purchased a fixed annuity from VALIC in 1975 and initiated a class action in 1982 due to VALIC’s failure to disclose how excess interest would be calculated. In particular, VALIC did not disclose whether excess interest was calculated using the banding method or the new-money method. Otto also claimed that VALIC failed to disclose the method used to maximize the rate of return. The district court granted summary judgment in favor of VALIC, and Otto appealed. The court of appeals affirmed but subsequently granted Otto’s petition for a rehearing. At rehearing, VALIC asserted that it had the right to freely alter past interest bonds.

Rule of Law

Issue

Holding and Reasoning (Cudahy, J.)

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