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Broberg v. Guardian Life Insurance Co. of America

March 2, 2009


APPEAL from a judgment of the Superior Court of Los Angeles County, William Highberger, Judge. Reversed. (Los Angeles County Super. Ct. No. BC354901).

The opinion of the court was delivered by: Perluss, P. J.


The Guardian Life Insurance Company of America (Guardian Life) allegedly sold Dr. David C. Powell a whole life insurance policy in 1993 by falsely promising through its agent John A. Davidson that earnings from the policy would be sufficient to pay the premium costs after the 11th year and by providing misleading marketing materials that similarly represented out-of-pocket premium costs would be eliminated in the 12th year of the policy's life --- sometimes referred to as a "vanishing premium" policy. In a complaint for fraud, negligent misrepresentation and related statutory violations, Dr. Powell and Kirk Broberg as trustees of the Powell Irrevocable Trust (Powell) alleged they did not discover they had been deceived until Guardian Life billed them for additional out-of-pocket premium payments in September 2004. Notwithstanding these allegations, the trial court sustained without leave to amend Guardian Life and Davidson's demurrers to the first amended complaint, concluding the claims accrued when Powell purchased the policy in 1993 and were time-barred. The court also found, as a matter of law, Powell would be unable to establish justifiable reliance on the alleged misrepresentations because of inconsistent language in the policy itself and in footnote disclosures to the marketing materials. We reverse.


1. The Vanishing Premium, Whole Life Policy

Powell purchased a $500,000 whole life insurance policy from Guardian Life on August 27, 1993.*fn1 The policy was described to Powell by Davidson as a vanishing life policy -- that is, one where, after a certain number of out-of-pocket premium payments had been made, the policy itself would generate sufficient sums through its dividend and interest income to pay future premiums for the balance of the insured's life.

As part of his effort to sell the Guardian Life policy, Davidson provided Powell a three-page illustration (entitled "Guardian/GIAC Lifeplan Illustrations") that depicted the elimination of out-of-pocket premium in the 12th year of the policy's life. The first page of the illustration indicates it was prepared for Powell and was not a preprinted, generic form. Handwritten on the top of the first page are the notations "standard option" and "11 year." The printed portion of the first page includes the term "vanishing premium" and contains a 30-year schedule that reflects an annual premium of $11,736 to be paid in each of the first 11 years and no "annual outlay" after the 11th year. There are no disclaimers, cautionary language or footnotes anywhere on the first page of the illustration; and, in particular, nothing suggesting the "annual outlay" column or the series of 0's after year 11 in that column is contingent on Guardian Life's future dividend scale.

Powell's first amended complaint alleges Guardian Life knew at the time the policy was sold this portion of the illustration in its marketing materials was false and deceptive: "It knew that its term 'vanishing premium' indicated to the reasonable consumer that out of pocket premiums would cease after which all premiums would be paid from the policy's internal values, when this was not the case. . . . Guardian knew that the dividend scale upon which the illustration was based was not likely to continue, making it highly likely -- contrary to the guarantees noted in the illustration and made by its agent Davidson -- that additional out of pocket premium payments, beyond the illustrated 11 years, would become necessary."

The second page of the three-page illustration continues the schedule from the first page for an additional five years. No "annual outlay" is shown in any of those years. The second page does include the general statement, "Please see attached sheets with important footnotes," but once again there is no cautionary language directed to the "annual outlay" column. The third page of the document contains a single, lengthy endnote -- 39 single-spaced lines, all capitalized -- with various conditions, qualifications and limitations about the life insurance product being offered. In the middle of the page, not set apart in any way from the surrounding text by contrasting type, font, color, border or spacing, the following disclaimer appears: "Figures depending on dividends are neither estimated nor guaranteed, but are based on the 1993 dividend scale. Actual future dividends may be higher or lower than those illustrated depending on the company's actual future experience." Following another dozen lines of explanation -- all in the same type face -- a further caution is provided: "The number of years of required cash outlays depends upon age at issue, policy class, face amount, and continuation of The Guardian's current dividend scale, and assumes no policy loans."

2. Powell's Complaint for Fraud, Negligent Misrepresentation and Statutory Violations

For 11 years Powell paid the annual premiums. In September 2004 Guardian Life informed Powell, because dividends had steadily declined, he would be required to continue making out-of-pocket premium payments, extending beyond the 11th year of the policy, for the policy to remain in effect. Believing the demand for further out-of-pocket premiums breached Guardian Life's sales promises, on June 30, 2006 Powell filed a complaint for fraud, negligent misrepresentation, unfair competition and false advertising (Bus. & Prof., §§ 17200 et seq., 17500 et seq.) and violation of the Consumers Legal Remedies Act (Civ. Code, § 1750 et seq.) (CLRA) against Guardian Life and Davidson arising out of the marketing, promotion and sale of the vanishing premium policy.

3. Guardian Life's Demurrers and the Trial Court's Orders Guardian

Life demurred to the complaint, contending that Powell's misrepresentation claims accrued when he purchased the vanishing premium policy in 1993 and thus were time-barred and that Powell could not establish justifiable reliance on the alleged misrepresentations as a matter of law. In addition, Guardian Life asserted the unfair competition was time-barred and the CLRA does not apply to transactions involving insurance.

More specifically, Guardian Life argued neither the policy nor the marketing illustration, both of which were attached to Powell's complaint, offered any guarantees or made any promises concerning the income that would be earned by the policy over its life. To the contrary, according to Guardian Life, the illustration contains clear language explicitly disclaiming any such guarantee and cautions that "the number of years of required cash outlays depends on . . . continuation of the Guardian's current dividend scale . . . ." Moreover, the actual policy delivered to Powell a few weeks after the marketing materials stated premiums are "payable" "for life."

The trial court sustained the demurrer in part. In its tentative ruling, essentially adopted without change as its ruling after oral argument at the hearing, the court explained the disclaimer in the marketing illustration and the policy language itself were sufficient to give Powell at least inquiry notice, if not actual notice, as of August 1993 that earnings from the policy were not "guaranteed." Thus, the fraud and negligent misrepresentation claims, filed nearly 13 years later, were barred by the governing statue of limitations. The court also concluded the disclaimers, as a matter of law, precluded proof of justifiable reliance on any contrary promises by Davidson and Guardian Life. Finally, the court decided the cause of action under the CLRA was not viable because a contract for life insurance is not included within the statutory definition of "goods and services," based on the Supreme Court's decision in Civil Service Employees Ins. Co. v. Superior Court (1978) 22 Cal.3d 362, 376 ["insurance is technically neither a 'good' nor a 'service'" within the meaning of the CLRA].)

The court overruled Guardian Life's demurrer as to Powell's unfair competition cause of action, however, concluding, although the allegations in the complaint could not support relief under the "vanishing premium" theory, they were sufficient to state a claim that Guardian Life's actions amounted to an unfair and unlawful sales tactic. The court also granted Powell leave to amend to attempt to plead a different, albeit related, fraud theory -- "a claim for . . . knowing non-disclosure of a[n] established plan by defendant to reduce dividends in future years which was known, but not disclosed, when the Illustration was prepared and provided to plaintiffs."

Powell filed an amended complaint on November 29, 2006, alleging the marketing of "fraudulent vanishing premiums" was perpetuated by the practice of "substitution" or "pegging" and asserting, at the time the policy was sold, Guardian Life knew additional out-of-pocket premiums would be required if dividend rates dropped. Powell further alleged in 1993 Guardian Life was already engaged in a plan to gradually "ratchet down" its dividend scale from the artificially high levels it had paid in the early to mid-1980s to generate whole life insurance sales and, in an effort to prevent detection of the deceptive marketing scheme, failed to disclose the actual, annual reductions in its dividend scales effective January 1994, 1995 and 1996. Rather, Powell alleged, the annual statements for those years reported Guardian Life was providing the very dividends depicted at the time of sale as set forth in the policy illustration, thereby further deceiving Powell into believing the dividend scale used in the 1993 illustration was still effective.

Guardian Life demurred to the amended complaint on January 5, 2007; Davidson joined. At the conclusion of the hearing on February 9, 2007, the trial court concluded the allegations concerning Guardian Life's "pegging" and "substitution" scheme did not save Powell's claim from being time-barred, explaining Powell's 1997 annual statement showed a total cash value less than that displayed for the corresponding year on the policy illustration (the illustration had a value of $23,642; the 1997 annual benefit statement showed $23,362 -- a difference of $280). Thus, as early as 1997, Powell was on inquiry notice with ...

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