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Escalante v. Minnesota Life Insurance Co.

July 22, 2010


The opinion of the court was delivered by: M. James Lorenz United States District Court Judge


In this insurance breach of contract and bad faith action Defendants each filed a motion to dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). Plaintiff opposed the motions and Defendants replied. For the reasons which follow, the motion field by Defendant Minnesota Life Insurance Company ("Minnesota") is GRANTED IN PART AND DENIED IN PART. The motion filed by Defendants Irwin Mortgage Corporation and Irwin Financial Corporation (collectively "Irwin")*fn1 is GRANTED. Plaintiff is granted LEAVE TO AMEND.

Plaintiff alleges she is a beneficiary under a mortgage accidental death insurance policy issued by Minnesota, which insured the lives of Plaintiff and her husband Kenneth Escalante. Mr. Escalante agreed to purchase the policy upon Minnesota's telephone solicitation on June 14, 2004. Premiums for the policy were added to the Escalantes' mortgage payment with their lender Irwin, which was authorized by Minnesota to bill and collect them. The Escalantes paid the premiums until the spring of 2006, when they refinanced their mortgage. The refinance transaction closed on or about March 31, 2006. As a part of the mortgage payoff amount, Irwin billed them and collected two premium payments for April and May. On April 30, 2006 the Escalates were involved in an automobile accident. Mr. Escalante died the same day and Plaintiff was hospitalized for her injuries.

On or about May 8, 2006, Irwin notified Minnesota that the Escalantes' loan had been paid. The next day, Minnesota sent to the Escalantes a letter stating, among other things, that they could continue the coverage by making premium payments directly to Minnesota. On June 28, 2006, after it had received no response, Minnesota sent a Premium Reminder Notice, stating that the policy would terminate unless payment due was received by July 2, 2006. On or about August 7, 2006, Minnesota was notified of Mr. Escalante's death. On August 9, 2006 it sent the Escalantes another Reminder Premium Notice which was essentially the same as the June 28 reminder. On August 10, 2006 Minnesota sent a Termination Insurance Notice, stating that coverage was cancelled effective May 31, 2010 due to non-payment of premium. On or about August 23, 2006, Minnesota denied Plaintiff's claim on the grounds that the policy terminated on March 31, 2006 when the loan with Irwin was refinanced.

Plaintiff filed a complaint in state court against Minnesota and Irwin for breach of contract, breach of the implied covenant of good faith and fair dealing, negligence and declaratory relief. Defendants removed the action to this court based on diversity jurisdiction and moved to dismiss pursuant to Rule 12(b)(6).

A Rule 12(b)(6) motion tests the sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotation marks, brackets and citations omitted). In reviewing a motion to dismiss under Rule 12(b)(6), the court must assume the truth of all factual allegations and must construe them in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins., 80 F.3d 336, 337-38 (9th Cir. 1996). Legal conclusions need not be taken as true merely because they are cast in the form of factual allegations. Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987); W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). Similarly, "conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss." Pareto v. Fed. Deposit Ins. Corp., 139 F.3d 696, 699 (9th Cir. 1998).

Minnesota argues that the first cause of action for breach of contract should be dismissed because coverage terminated on March 31, 2006 under the terms of the insurance policy. Plaintiff contends that the coverage was extended because premiums were paid and accepted through the end of May 2006.

Upon applying for insurance over the phone, Mr. Escalante received a Certificate of Insurance which summarized the principal terms of the underlying Group Insurance Policy. (See Compl. Ex. A ("Certificate of Insurance") at 2. According to the Certificate of Insurance, in exchange for monthly premium payments, Minnesota promised to pay the accidental death benefit upon receipt of written proof that the insured died as a result of accidental death. (Id. at 2, 3.) Plaintiff alleges that Mr. Escalante's death was accidental and that she was the beneficiary under the policy. The mortgage loan eligible for insurance is defined as "A secured or unsecured loan on a dwelling or mobile home which is owed to or serviced by a lender and which is repayable over a period of at least five years but not more than forty years." (Id. at 2.) Based on the allegations in the complaint, the loan taken out by the Escalantes meets these criteria, whether before or after the refinance. The Certificate of Insurance provides that the amount of the death benefit "will be equal to the of the unpaid balance of the eligible loan on the date of your death," which in turn is determined "according to the amortization schedule for your eligible loan in effect on the effective date of your coverage under this certificate." (Id. at 3.) The termination provision of the certificate provides in pertinent part that "The insurance on your life will terminate on the earliest of: [¶] (1) the date your eligible loan is paid in full;....".)

Minnesota argues that the refinance caused the loan to be paid in full and terminated coverage on March 31, 2006. It maintains that coverage could not be extended pursuant to California Insurance Code Section 10383. Plaintiff argues that section 10383 extends coverage beyond the refinance.

Section 10383 applies to disability policies. According to Plaintiff, the policy at issue is a disability policy. See Cal. Ins. Code § 106(a); Merlo v. Standard Life and Accident Ins. Co. of, 59 Cal. App. 3d 5 (1976) (insurance policy to secure mortgage payments in the event of disability). Minnesota does not dispute this. Accordingly, without deciding, the court proceeds on the assumption that the policy at issue is a disability policy. Section 10383, located in the article addressing policy interpretation, provides as follows:

If any disability policy contains a provision establishing, as an age limit or otherwise, a date after which the coverage provided by the policy will not be effective, and if such date falls within a period for which premium is accepted by the insurer or if the insurer accepts a premium after such date, the coverage provided by the policy will continue in force subject to any right of cancellation until the end of the period for which premium has been accepted. In the event the age of the insured has been misstated and if, according to the correct age of the insured, the coverage provided by the policy would not have become effective, or would have ceased prior to the acceptance of such premium or premiums, then the liability of the insurer shall be limited to the refund, upon request, of all premiums paid for the period not covered by the policy.

As Plaintiff points out, the provision does not apply only to policies where an age limit establishes a date after which coverage is no longer effective, but also where such date is established otherwise. In this case, the date is set by the policy when, among other things, the loan is paid in full. The statute provides for coverage to continue when the insurer has accepted payment of premium for a period after coverage is no longer effective. Under these circumstances, coverage is extended until the end of the period for which premium was accepted. Plaintiff alleges that during the refinance, Irwin charged her and she paid premiums for two extra months after March 2006. (Compl. at 3 & Ex. C, D.) It can reasonably be inferred from the allegations that the two extra months ended at the end of May 2006 and after the date of Mr. Escalante's death. Minnesota argues that this fact is disputed.*fn2 However, this argument is irrelevant on a motion to dismiss under Rule 12(b)(6), which merely tests the sufficiency of the allegations in the complaint. See Navarro, 250 F.3d at 732.

Minnesota also argues that under the second sentence of the statute, consistent with the policy, the remedy is a refund of premiums, not an extension of coverage. The court disagrees. Unlike the first sentence, which refers to the time when the coverage is not effective based on an age limit or otherwise, the second sentence refers to the circumstance when the insured's age is misstated and the coverage would not have commenced had the age been stated accurately. See Cal. Ins. Code § 10383. The second sentence therefore does not apply to the facts of this case.

Minnesota next argues that it does not make sense for section 10383 to apply to the policy at issue in this case. It argues that in policies such as this, which are intended to insure ability to pay a particular debt, there is no longer a benefit to be paid in the case of an insured's death after the loan is paid off. However, this is the case only if the termination provision of the policy is interpreted in the refinance context the same as when a loan is simply paid off rather than refinanced. Minnesota urges the policy does not work if the provision is not interpreted in its favor. The court disagrees. Contrary to Minnesota's argument, if the loan is refinanced and the amount of the loan changes, this does not change the death benefit under the policy, because its amount is determined "according to the amortization schedule for your eligible loan ...

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