The Ninth Circuit recently ruled that an alleged violation of California's illustration statutes could serve as a predicate for liability under the California Unfair Competition Law ("UCL"). Walker v. Life Ins. Co. of the SW, No. 15-55809, 2017 WL 836592 (9th Cir. Mar. 3, 2017). The ruling reversed in part a decision by the United States District Court for the Central District of California in a certified class action of indexed universal life policyholders residing in California. The state's illustration statutes, Cal. Ins. Code § 10509.950 et seq., are substantially similar to NAIC Model 582, and apply to all individual life insurance policies sold in California, with a few exceptions. Id. § 10509.952. The statutes mandate the inclusion of certain information, and prohibit various practices, including a requirement that insurers and producers may not "represent the policy as anything other than a life insurance policy [or] use or describe nonguaranteed elements in a manner that is misleading or has the capacity or tendency to mislead," among other things. Id. § 10509.955.
Plaintiff alleged that the insurer violated California's statutes because it touted the policies as retirement or investment vehicles, "misrepresent[ed]" the costs, risks, safety and security of the policies, treated policy lapse "in a misleading matter," "deceptively present[ed] the guarantee values, fail[ed] to define key terms, and impl[ied] that nonguaranteed elements are annual guarantees." The district court dismissed those claims early in the case. Subsequently, the California Supreme Court issued two opinions seemingly giving the UCL's unlawful prong a broader interpretation. Rose v. Bank of Am., 57 Cal. 4th 390 (2013); Zhang v. Cal. Capital Ins. Co., 57 Cal. 4th 364 (2013). However, the district court denied reconsideration of its earlier orders.
In 2014, after the statewide class was certified, the case ultimately went to trial, resulting in a jury verdict for the insurer on the fraudulent concealment claim. The district court, nearly a year later, found for the insurer on the remaining UCL claims, which required resolution by a judge. The opinion was a beacon of hope for insurers and brokers doing business in California who often face disappointing early rulings and frequently settle. This insurer's tenacity in the face of negative early rulings and class certification paid off. Some of the highlights of the Court's order include holdings that:
- the sales process was not uniform because each agent remained free to decide how to sell the products;
- the insurer had no duty to disclose that returns projected on an illustration might be more or less volatile, where the illustrations complied with state regulation;
- plaintiffs were not likely to be misled where there were significant disclosures on the illustrations regarding the numerical examples;
- plaintiffs suffered no actionable injury for a failure to receive returns above the guaranteed values; and
- plaintiffs could have avoided injury by reading their policies and returning them within the free look period.
On appeal the California Department of Insurance filed a brief supporting the plaintiff's position, and the appellate judges devoted a fair amount of time at the oral argument questioning all counsel about the statutory issue. The Ninth Circuit ultimately affirmed the district court in all respects, except for the narrow issue of whether UCL liability could be predicated on a violation of the illustration statutes. With respect to that issue, the Ninth Circuit found that even though the illustration statutes lack an express private cause of action, "private UCL claims are barred only when the underlying statute either actually bars private rights of action or provides a 'safe harbor' that renders the alleged conduct lawful." Walker, 2017 WL 836592, at *1 (citing Rose, 57 Cal. 4th at 186).
What that means now for the Walker case is unclear: the Ninth Circuit specifically affirmed the district court's finding "that the illustrations of the policy charges and interest rates were not unfair or deceptive." Id. Assuming there were technical violations of the statute, rendering the insurer's conduct "unlawful," California courts take varying positions as to whether a mere violation is sufficient to pass muster under the UCL, or whether the plaintiff must prove that the violations caused her and the class damage. Compare Davis v. Riversource Life Ins. Co., No. 16-2801, slip op. at *8 (N.D. Cal. Feb. 21, 2017) (dismissing solely unlawful prong UCL violations because plaintiff failed "to allege that his economic injuries were the 'result of' Defendants' alleged violations of" the statute), with Goertzen v. Great Am. Live Ins. Co., 2017 WL 2378047, at *4 (N.D. Cal. June 1, 2017) (denying summary judgment for insurer in involving allegations nearly identical to Davis because "a plaintiff need not prove reliance in order to establish a claim for violation of the UCL's unlawful prong if the predicate legal violation does not involve fraud or deception").
The ruling suggests, though, that insurers and producers selling individual life insurance policies in California may expect to see more lawsuits – individual and putative class actions – alleging violations of technical insurance statutes. For example, there has already been at least one complaint filed after the Walker opinion claiming that the insurer committed a UCL violation when it failed to strictly comply with the California statutes governing the information that must be included in grace and lapse notices. And, as the Goertzen case illustrates, a mere violation may be enough to get in front of a jury.
How can an insurer or producer seek to avoid such liability? First and foremost, ensure that you are in compliance with state and federal statutes and regulations. Statues and regulations are often changing, so conducting a thorough and periodic audit of your materials and forms to ensure compliance is critical, as is keeping abreast of proposed revisions. Second, ensure that you give the potential customer full information and document the reason for purchase. This can help negate the element of causation: even if there is some technical violation, the purchaser cannot complain that they were damaged by that infraction. Finally, though litigation is sometimes an inevitable cost of doing business (especially in California), the Walker case is a reminder that perseverance sometimes pays off.
Article first appeared in the July 2017 issue of California Broker magazine.
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