California Courts Deal Another Blow To Plaintiffs’ Efforts To Bring Class Actions Based on Insurer and Agents Misrepresentations

The California Court of Appeals for the Second District has upheld a trial court finding that may effectively limit and discourage attorneys from filing class actions based on misrepresentations in the sale of insurance policies through agents.  In Fairbanks et al. v. Farmers New World Life Ins. Co. et al., __ Cal. App. 3d __ (2011), the court of appeal affirmed the trial court’s denial of class certification on the basis that common issues did not prevail, and that the issue was incapable of common proof.  The case involved Farmers’ marketing and sale of universal life insurance policies.  It was alleged that Farmers created a common marketing strategy with respect to the marketing and sale of such policies, and that Farmers instructed its agents to implement such strategy by using Farmers’ marketing materials in the agents’ sales pitch to prospective customers.  After a lengthy discussion of the types of life insurance policies at issue, the appellate court focused on the actual narrow bases on which Plaintiffs sought relief, which was based on a single unified theory relating to fraudulent misrepresentations and concealments made by agents during the marketing of the policies to the individual prospective customers.  The court determined that the bases for class certification “were not four separate bases for class relief, but part of one overarching allegedly fraudulent scheme.”  The court noted, “Plaintiffs argued that proof of this fraudulent scheme could be established by common, rather than individual, proof, based on a combination of common policy language, common language in annual policyholder statements, and a common marketing scheme.”  Plaintiffs sought to certify a class based on very broad conduct involving myriad misrepresentations made in written marketing materials as well as alleged misrepresentations by Farmers’ agents.  Farmers argued that plaintiffs’ broad theory could not sustain a certifiable class in that it would require independent proof as to each policyholder.  Specifically, it would require proof as to the individual representations made to each policyholder, and the materiality of such representations as to each policyholder.

The trial court agreed with Farmers and denied Plaintiffs’ motion for class certification, and the Court of Appeals affirmed the ruling.  The appellate court, citing a string of recent Court of Appeals rulings, held:

Nonetheless, a class action cannot proceed for a fraudulent business practice under the UCL when it cannot be established that the defendant engaged in uniform conduct likely to mislead the entire class.  (Knapp v. AT&T Wireless Services, Inc. (2011) 195 Cal.App.4th 932, 942-943 petn. for review filed June 1, 2011; Kaldenbach, supra, 178 Cal.App.4th at p. 850.)  Specifically, when the class action is based on alleged misrepresentations, a class certification denial will be upheld when individual evidence will be required to determine whether the representations at issue were actually made to each member of the class.  (Knapp v. AT&T Wireless Services, Inc., supra, 195 Cal.App.4th at p. 944-945, Kaldenbach, supra, 178 Cal.App.4th at p. 850; see also Pfizer Inc. v. Superior Court, supra, 182 Cal.App.4th at p. 632.)  “ ‘[W]e do not understand the UCL to authorize an award for injunctive relief and/or restitution on behalf of a consumer who was never exposed in any way to an allegedly wrongful business practice.’ ”  (Knapp v. AT&T Wireless Services, Inc., supra, 195 Cal.App.4th at p. 945; see also Pfizer Inc. v. Superior Court, supra, 182 Cal.App.4th at p. 632.)

The court discussed at length Kaldenbach v. Mutual of Omaha Life Ins. Co., 178 Cal. App. 4th 830, 848 (2009), which was a case in which it was alleged, as in Fairbanks, that the insurer had utilized uniform marketing materials in the sale of insurance policies, and directed its agents to use those materials in their sales pitch to prospective customers.  The court in Kaldenbach found, based on evidence provided by the insurer, that there was no evidence that the sales presentations were actually common.  The Fairbanks court followed the lead of the Kaldenbach court and found similarly that there was no evidence that the sales presentations, and therefore the alleged misrepresentations made by Defendants’ agents were common to all policyholders and prospective class members.  The court held that “In the absence of a common marketing scheme, the class action fails.”  In essence, the court held that the broad scope of the alleged misrepresentations made it impossible to certify a common class based on common proof.  The Court here distinguished Massachusetts Life Insurance Company v. Superior Court, 97 Cal. App. 4th 1282, 848 (2002) on the basis that Massachusetts Mutual “involved identical misrepresentations and/or nondisclosures by the defendants to the entire class.”

In an effort to overturn the trial court’s ruling, Plaintiffs argued in the alternative on appeal that a class could be certified based solely on the misrepresentations made in the policies themselves.  However, in dicta, the court also rejected this argument, stating, “[I]t is still impossible to consider the language of the policies without considering the information conveyed by the Farmers agents in the process of selling them. “ (citation omitted.)  The court therefore indicated that alleged misrepresentations in the policies could not be evaluated independent from the sales presentations made by the agents when evaluating whether the allegations could be established by common proof.  Such a statement brings into question the potential for certification of any class based on representations in an insurer’s marketing materials and/or policy.

The court also noted that the issue of materiality of the representations was not subject to common proof.  The court noted that under the circumstances of this case, the possible reasons for which an individual policyholder purchased the type of insurance at issue were many, and therefore must be a matter of individual proof.  The Court left it to the trial court to determine on remand whether plaintiffs could successfully establish any other basis for class certification.

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