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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.

On April 25, 2011, California Insurance Commissioner Dave Jones and California State Controller John Chiang announced that they are investigating Metropolitan Life Insurance Company (“MetLife”) for a failure to pay out life insurance benefits after learning of an insured’s death.  It appears that while MetLife learned of its insured’s deaths through a database prepared by the Social Security Administration called “Death Master,” which lists all Americans who die, MetLife failed to use this information to pay legitimate claims.

As noted in the California Department of Insurance’s Press Release:

The Commissioner and the Controller are responding to preliminary findings from an audit the Controller launched in 2008, indicating that for two decades, MetLife failed to pay life insurance policy benefits to named beneficiaries or the State even after learning that an insured had died. The company has a huge number of so-called Industrial Policies, valued at an estimated $1.2 billion, which were primarily sold in the 1940s and 1950s to working-class people. The payments, which were collected weekly, typically were higher than the final death benefit. The Controller’s unclaimed property audit indicates that MetLife did not take steps to determine whether policy owners of dormant accounts are still alive, and if not, pay the beneficiaries, or the State if they cannot be located.

In addition, the preliminary findings revealed that MetLife may have similarly failed to contact the owners of annuity contracts:

Simultaneously, the preliminary findings show, when MetLife knew that an owner of an annuity contract – which generates income for the policy owner at the time the annuity matures – had died, or the annuity had matured, the company did not contact the policy holder or beneficiary, even though it subscribed to the “Death Master” database. Furthermore, MetLife continued making premium payments from the policy holder’s account until the cash reserves were used up, and then cancelled the contract.

While Monday’s press release was limited to the State’s investigation of MetLife, both the “Commissioner and Controller believe that these practices are not isolated, but are systemic in the insurance industry.”

If you believe you have a life insurance policy or annuity issued by MetLife, or any other insurer, for which you have failed to properly receive life insurance benefits, contact McKennon Law Group PC for a free consultation.

Stranger Originated Life Insurance, also known as a “STOLI,” is a life insurance policy financed or held by a person who has no relationship to the person insured under the policy.  In the typical STOLI transaction, an investor encourages an elderly person to purchase a life insurance policy and name the investor, who pays the premiums, as the policy beneficiary.  Normally, the elderly insured is also paid a sum of money to entice them to enter into the transaction.

In late 2010, the Central District of California issued two rulings, a few weeks apart that help explain the propriety of STOLI transactions in California.  They were:  SEC v. Private Equity Mgmt. Group, LLC, 2010 U.S. Dist. LEXIS 126337 (C.D. Cal. Nov. 18, 2010) and Ohio Nat’l Life Assur. Corp. v. Davis, 2010 U.S. Dist. LEXIS 130510 (C.D. Cal. Dec. 1, 2010).

In Private Equity Management Group, the SEC, after the appointment of a permanent receiver, obtained an August 2009 preliminary injunction preventing any suit against PEM without leave from the court.  In September 2010, Principal Life Insurance Company (“Principal Life”) sought leave to file an action against the receiver of PEM in order to challenge “the validity of an insurance policy issued on the life of Barbara Doricott … which was among PEM’s investment life insurance policies.”  Principal Life sought to void the policy on the grounds of fraud and “a lack of insurable interest.”

In determining whether or not to lift the stay, the court applied a three-factor test from SEC v. Wencke, 622 F.2d 1363 (9th Cir. 1980):  “(1) Whether refusing to lift the stay genuinely preserves the status quo or whether the moving party will suffer substantial injury if not permitted to proceed; (2) the time in the course of the receivership at which the motion for relief from the stay is made; and (3) the merit of the moving party’s underlying claim.”

In applying the last of the Wencke factors, the court found that Principal Life had a “colorable claim” justifying a lifting of the stay.  The court placed credence in Principal Life’s contention that the life insurance policy was void because it lacked an insurable interest:

Likewise, although it is unclear whether the Policy would ultimately be deemed void for lack of an insurable interest, the Court finds that Principal Life has alleged a colorable claim to that effect.  In opposing Principal Life’s motion, the Receiver relies on Lincoln Nat. Life Ins. Co. v. Gordon R.A. Fishman Irrevocable Life Trust, in which the court held that life insurance policies were not void for having been procured by STOLI practices where the trust, its settlor, and its beneficiaries had insurable interests in settlor’s life at time of inception.  638 F. Supp. 2d 1170, 1177 (C. D. Cal., 2009) (“an interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs.”).

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Ms. Dorricott’s daughter allegedly sold 1% of the interest in the policy less than three weeks after the policy was issued.  Thus, while further factual development is necessary to establish whether the Policy is actually void for lack of insurable interest, based on the forgoing, the Court finds that Principal Life’s claim has sufficient potential merit to satisfy the third Wencke factor.

In Davis, supra, the defendant, an attorney, allegedly obtained two life insurance policies (“the Policies”) for two insureds (Smith and Griffin) with each life insurance policy providing a death benefit of $1,000,000.00.  Davis also set up two irrevocable life insurance trusts (collectively, “the Trusts”).  The owners were the Trusts, Davis was the trustee, and the insureds’ wives were the beneficiaries.  Ohio National filed a Motion for Preliminary Injunction, seeking an order to enjoin any policy changes.  The Court, in ruling on the preliminary injunction, had to consider the “likelihood of success on the merits.”

In evaluating whether Ohio National met this test, the court first noted that under California law (specifically California Insurance Code section 280), “no life insurance contract is valid unless the insured has an ‘insurable interest.’”  The court explained that the critical question was whether the Trusts had an insurable interest in the insureds because it was the Trusts that obtained the life insurance policies.  The court determined that the Trusts used to apply for the Policies presumably had insurable interests in the lives of the Insureds because the beneficiaries of the Trusts were the insureds’ wives.  See Cal. Ins. Code § 10110.1(a).  However, the court aptly explained that under California Insurance Code section 10110.1(e) “[a]ny device, scheme, or artifice designed to give the appearance of any insurable interest where there is no legitimate insurable interest violates the insurable interest laws.”  Specifically, any arrangement by which a life insurance policy is initiated for the benefit of a “third party investor” who has no insurable interest in the insured’s life at the time the policy is issued is deemed a STOLI, which is a prohibited “fraudulent life settlement act.”  See Cal. Ins. Code §§ 10113.1(w), 10113.2, 10113.3(s). The Court further explained:

Ohio National presents allegations that strongly support inferences that the Policies were indeed STOLIs.

To begin, Ohio National alleges that Davis solicited and induced Griffin and Smith to apply for life insurance policies promising no premium payment obligations yet receiving payments for their participation.  In the process, Griffin and Smith were convinced to sign irrevocable trusts naming Davis as the trustee and the Trusts as owners of the Policies.  Morady seemingly rubber stamped the life insurance applications without ever seeing the proposed Insureds or examining their financial records.  In addition, Davis, as trustee, was given unfettered discretion to purchase life insurance policies and to borrow money for the same.  Further, Davis was given the power to assign the Policies and the proceeds of the Policies to any lender.  Accordingly, it seems highly likely that Ohio National would succeed in establishing that the procurement of the Policies were STOLI transactions.  Specifically, Ohio National has demonstrated that Davis and Morady did not have insurable interests in the lives of the Insureds yet the Policies were initiated for their benefit.  Therefore, based on the unopposed papers and other submissions, Ohio National has established a likelihood of success on the merits.

The court therefore granted Ohio National’s motion for a preliminary injunction.

The State of California’s requirement that a life insurance policy is invalid without an insurable interest at the time of the policy issuance is a very basic and fundamental requirement that is not to be overlooked or underestimated when dealing with STOLI or STOLI-like transactions.

Stranger-Owned Annuities allow investors to purchase an interest in the life of an elderly or terminally ill person, inducing the insured to purchase the policy largely for the benefit of unrelated and sometimes unknown beneficiaries. The NAIC will examine whether greater regulation of the Stranger-Owned Annuity market is warranted and whether consumers are adequately protected.

In recent history, as discussed in the firm’s California Insurance Litigation Blog, the insurance industry has focused on Stranger-Originated Life Insurance Policies and many states, including California, have now regulated them. Numerous states such as California have outlawed them.

Stranger-Owned Annuities are less well known, but equally concerning to the industry. The investors have no insurable interest in the owner of the annuity, and generally purchase the annuity to receive an enhanced death benefit or some other advantage. Other than scattered lawsuits challenging the validity of Stranger-Owned Annuities, the market is largely unregulated. Many states have strict laws regarding insurance interests in life insurance policies, but have little or no regulation regarding annuities.

For a copy of the NAIC’s press release, click here: http://www.naic.org/Releases/2010_docs/stranger_owned_annuities.htm

Life settlements, also known in the industry as “stranger-originated life insurance” (“STOLI”) transactions have existed for several years but most states have not regulated them, at least until recently. The life insurance industry has for years attempted to eliminate such transactions as they typically are not in the insurer’s best financial interest. However, in recent years the industry has increased their support for efforts to differentiate between legitimate life settlements and STOLI. Both sides agree to the following general definition: A life settlement is the legitimate liquidation of a life insurance policy by an owner who has outlived the insurable interest upon which the policy was originally purchased. On the other hand, a STOLI transaction is initiated by a third party who offers monetary inducements to entice someone to purchase a life insurance policy with no legitimate insurable interest. The intended recipient of the policy’s value is the third party actually paying the premiums.

Legislative activity in the various states has substantially increased over the years as states have passed laws designed to stop, or at least regulate, STOLI transactions. This occurred recently in California. In October 2009, the California legislature enacted, and the governor signed, Senate Bill 1543 that regulates life settlement and STOLI transactions. The new law is known as the Life Settlements Act (“Act”) and it becomes effective on July 1, 2010. It is noteworthy that this bill provides that, with certain exceptions, it does not apply to any life settlement contract entered into on or before July 1, 2010. This bill would provide that it would apply to any transaction involving any life insurance policy in effect, or entered into, on or after the operative date of the bill.

 

The Act defines STOLI transactions as “an act, practice, or arrangement to initiate the issuance of a life insurance policy in this state for the benefit of a third-party investor who, at the time of policy origination, has no insurable interest, under the laws of this state, in the life of the insured.” The new law proscribes STOLI transactions as fraudulent. However, certain life settlement transactions are legal under the Act. It also restricts most transactions within the first two years of a policy. Finally, the new law mandates specific disclosures to consumers, including alternatives to life settlements, and requires the licensing of professionals who transact life settlement contracts. The law – California’s first STOLI legislation – makes California one of 26 states to enact laws regulating STOLI.

The Act further provides that:

STOLI practices include, but are not limited to, cases in which life insurance is purchased with resources or guarantees from or through a person or entity, that, at the time of policy inception, could not lawfully initiate the policy himself, herself, or itself, and where, at the time of inception, there is an arrangement or agreement, to directly or indirectly transfer the ownership of the policy or the policy benefits to a third party. Trusts that are created to give the appearance of insurable interest and that are used to initiate policies for investors violate insurable interest laws and the prohibition against wagering on life.

The Act explains that STOLI arrangements do not include lawful life settlement contracts as permitted by the Act. The Act defines a “Life settlement contract” as:

(k) “Life settlement contract” means a written agreement solicited, negotiated, or entered into in this state between a provider and an owner, establishing the terms under which compensation or anything of value will be paid, which compensation or thing of value is less than the expected death benefit of the insurance policy or certificate, in return for the owner’s assignment, transfer, sale, devise, or bequest of the death benefit or any portion of an insurance policy or certificate of insurance for compensation, provided, however, that the minimum value for a life settlementcontract shall be greater than a cash surrender value or accelerated death benefit available at the time of an application for a life settlement contract. “Life settlement contract” also includes the transfer for compensation or value of ownership or beneficial interest in a trust or other entity that owns such policy if the trust or other entity was formed or availed of for the principal purpose of acquiring one or more life insurance contracts, which life insurance contract is owned by a person residing in this state.

As noted above, the Act precludes a life settlement transaction within the first two years of the policy. The Act states:

(m) No person at any time prior to, or at the time of, the application for, or issuance of, a policy, or during a two-year period commencing with the date of issuance of the policy, shall enter into a life settlement regardless of the date the compensation is to be provided and regardless of the date the assignment, transfer, sale, devise, bequest, or surrender of the policy is to occur.

There still may be time to enter into a life settlement transaction before this law goes into effect. Even as to those transactions that predate the effect date of the Act, it would be a good idea to read it carefully and follow the requirements of the Act.

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