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Pauline Fairbanks et al v. Farmers New World Life Insurance Co.

July 13, 2011

PAULINE FAIRBANKS ET AL., PLAINTIFFS AND APPELLANTS,
v.
FARMERS NEW WORLD LIFE INSURANCE CO., ET AL., DEFENDANTS AND RESPONDENTS.



APPEAL from an order of the Superior Court of Los Angeles County, Anthony J. Mohr, Judge. (Los Angeles County Super. Ct. No. BC305603)

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

CERTIFIED FOR PUBLICATION

Order is affirmed and remanded for further proceedings.

Plaintiffs and appellants Pauline Fairbanks and Michael Cobb appeal from an order denying their motion for class certification in their action against Farmers New World Life Insurance Company and Farmers Group, Inc. (collectively, Farmers). Plaintiffs' action alleges violations of the Unfair Competition Law (Bus. & Prof. Code, § 17200, henceforth UCL)*fn1 in connection with Farmers' marketing and sale of universal life insurance policies. The trial court denied the motion for class certification on the basis that common issues did not prevail, specifically concluding that Farmers did not use a common marketing strategy with respect to the policies. As such, the trial court concluded that whether any proposed class member actually heard any alleged misrepresentation was an issue incapable of common proof, requiring denial of the class certification motion.

As substantial evidence supports the trial court's factual finding, we affirm. On appeal, plaintiffs argue that the order denying class certification can be reversed on bases other than those argued to the trial court below. Specifically, although they argued before the trial court that a class action should be certified on the basis of the common marketing of the policies in combination with certain other allegedly improper practices of Farmers, plaintiffs now argue that the other allegedly improper practices standing alone support class certification. As this argument was not made before the trial court, we need not reach or consider it.*fn2

FACTUAL AND PROCEDURAL BACKGROUND

As we will discuss, the theory on which plaintiffs ultimately sought class certification is key to our resolution of this appeal. Plaintiffs took a very broad brush approach in their complaint, alleging innumerable wrongdoings of Farmers in connection with the universal life insurance policies at issue in this case. Similarly, the evidence submitted by plaintiffs in support of their class certification motion suggested a myriad of improprieties. However, plaintiffs' briefing in support of the class certification motion narrowed plaintiffs' theory of the case to a manageable handful of arguments. Having failed in obtaining certification on the narrow theory on which certification was actually sought, plaintiffs, on appeal, attempt to broadly redefine their theory of the case, relying again on the allegations of their complaint and the evidence submitted, even when those allegations and supporting evidence were not presented to the trial court as a basis for class certification. This circumstance presents a problem on appeal. Plaintiffs cannot argue now that the trial court erred in failing to rule on a theory plaintiffs failed to pursue before that court.

1. Farmers' Universal Life Insurance

Before we discuss the particular policies at issue, a brief introduction to the topic of life insurance is helpful. The simplest type of life insurance is term insurance. Term insurance provides a level death benefit, for a set term of years, in exchange for the payment of a fixed premium. If the policyholder outlives the term of the policy, there is no payout. As a general rule, the annual cost of insurance (also known as the risk rate) increases as a person ages. Thus, if a person were to buy a series of annual life insurance policies, that person could anticipate paying a higher premium each year. Term insurance allows the payment of equal premiums over the set term; the policyholder "overpays" for insurance in the earlier years and "underpays" in later years. Both the overpayments and the interest the insurer earns on the overpayments offset the subsequent underpayments.*fn3

We are concerned in this case with an insurance product known as universal life insurance. With universal life, the policyholder's premium payments are paid into the policyholder's accumulation account. The insurance company credits the accumulation account with interest on its balance, and deducts from the accumulation account the annual cost of insurance. The purported advantages of universal life, over term insurance, include: (a) premium payments may be skipped, as long there is a sufficient balance in the accumulation account to cover the cost of insurance; (b) the death benefit can be increased or decreased without writing a new policy; (c) the money in the accumulation account can be withdrawn as needed; (d) interest accrues on the accumulation account on a tax-deferred basis; and (e) if desired, the policyholder can keep the policy to maturity (age 95 or 100), and receive its cash value at that time.

There are also two different death benefits possible with a universal life policy. One, like term insurance, is a level death benefit. The other, which is another purported advantage of universal life, is an increasing death benefit. Consider a hypothetical policy value of $500,000. When a universal life policyholder chooses an increasing death benefit, the amount paid the beneficiary at the policyholder's death is the set policy value ($500,000) plus the amount then in the policyholder's accumulation account. In contrast, when a universal life policyholder with a level death benefit dies, the accumulation account partially offsets the policy value, and the insurer is therefore required to pay only the difference between the accumulation account and the policy value ($500,000). Put another way, the total policy benefit would be $500,000, including the amount in the accumulation account.

This distinction between death benefits is important when considering the costs of insurance deducted annually from the policyholder's accumulation account. As discussed above, the cost of insurance generally increases as a policyholder ages. Thus, with an increasing death benefit, the cost of insurance deducted from the account will increase each year; that is, the cost to provide the policyholder with a hypothetical $500,000 in coverage goes up as the policyholder ages. With a level death benefit, however, as long as the balance in the accumulation account continues to increase (with premium payments and accrued interest), the amount of insurance which needs to be purchased each year decreases ($500,000 less the balance of the accumulation account). Thus, the increase in insurance costs that comes with age is at least partially offset by a decrease in the amount of insurance which needs to be purchased.*fn4

We are concerned in this case with two types of universal life insurance sold by Farmers, both of which permitted the policyholder to choose between level and increasing death benefits. These are Farmers' Universal Life policy (FUL) and Farmers' Flexible Universal Life policy (FFUL). The bulk of the evidence in this case pertained to the FFUL, which contained another purported advantage over term insurance: the premium was set by the policyholder, and could be changed at any time. Within broad limits, the policyholder could pay as much, or as little, as the policyholder wanted.*fn5 The policy would remain in effect regardless of the amount of premium paid as long as there was a sufficient balance in the accumulation account to pay the cost of insurance. In contrast, the premium for the FUL was set by Farmers, and could be changed by Farmers every five years. With both the FUL and FFUL, Farmers set the interest rate to be credited to the accumulation account, with a guaranteed minimum that the rate would not sink below. Farmers also set the risk rate for both policies, determining the insurance charges that would be withdrawn, with a guaranteed maximum set of risk rates the rates would not increase above. With respect to the FFUL, the maximum premium that could be paid was the amount of premium necessary to guarantee the selected death benefit at the guaranteed minimum interest and maximum risk rates.*fn6

The FFUL provided that it would mature when the policyholder reached age 95; the FUL would mature at age 100. However, a universal life policy remains in effect only as long as there is sufficient money in the accumulation account to pay the costs of insurance. As discussed above, the cost of insurance is generally lower when one is young and increases when one ages. Plaintiffs therefore reason that, in order for a universal life policy to remain in effect in the later years of one's life, it is generally necessary to either: (a) build up the accumulation account with large premium payments in the early policy years; or (b) pay substantially increased premiums when one is older.*fn7 Moreover, the actual premium amounts that will keep the universal life policy in effect cannot be determined when the policy is purchased, as interest and risk rates are not predictable (other than that they will be within the extreme limits set by the policy). The fact that a universal life policy requires high premium payments in early years to remain in effect in later years, particularly when interest rates are low, is at the heart of plaintiffs' case. Plaintiffs allege that Farmers designed and marketed its FUL and FFUL policies in such a way that the premiums paid would be inadequate to keep the policies in effect until maturity, resulting in the underfunding of the policies, and their eventual lapse.

When marketing FUL or FFUL policies to prospective purchasers, Farmers agents often used computer-generated illustrations, which would - for any death benefit and premium*fn8 input - set forth the annual balance in the accumulation account at several different interest rates. The illustrations would always include the results for the worst-case scenario - that is, the lowest guaranteed interest rate and the highest risk rate - but would also include rates that showed a more favorable result for the policyholder. Plaintiffs believe these illustrations were misleading in a number of ways. Perhaps most significantly, plaintiffs allege that, in many cases, the illustrations were not printed all the way to the policy's maturity. In these illustrations, the printout would stop at an age where there would be a high balance in the accumulation account, and would not show that, in subsequent years, as the costs of insurance increased, the balance in the accumulation account would be quickly reduced to zero and the policy would lapse.

Policyholders were sent annual statements from Farmers, which set forth the balance in their accumulation account, and the then-applicable interest rate and risk charges. Although there was language in the annual statements indicating how long the policy would remain in force under current rates, plaintiffs believe the annual statements did not properly warn policyholders of underfunding and the risk of lapse.

2. Allegations of the Complaint

The operative complaint is the fourth amended complaint.*fn9 In it, plaintiffs allege causes of action for violation of the UCL, negligent misrepresentation, and fraudulent inducement. They seek to allege their causes of action on behalf of everyone in the United States who purchased an FFUL or FUL policy over a twelve-year period.

The complaint set forth a litany of alleged facts misrepresented or concealed from policyholders, including, but not limited to, the following: (a) Farmers marketed the policies as permanent insurance, but the policies would actually lapse before maturity; (b) computer printout sales illustrations used by Farmers' agents were ambiguous and contained inadequate disclaimers and definitions; (c) the illustrations hid relevant information and were based on unrealistic assumptions; (d) Farmers encouraged setting the premium for FFUL policies no higher than a "target" rate, by its commission structure; however, policies would lapse when only the target premium was paid; (e) certain terms in the sales materials or insurance policies were not defined; (f) Farmers failed to disclose that all FFUL policies where anything less than the maximum premium was paid would self-destruct; (g) allowing the policyholder to set the FFUL premium after the first year made the policies likely to self-destruct; (h) Farmers failed to disclose that it set its interest rates based on the rates its competitors were using; (i) Farmers failed to disclose that it lowered interest rates paid existing policyholders while it increased "teaser" interest rates for new customers; (j) Farmers solicited customers on a fraudulent sales pitch which stated that, at some point, the policyholders' obligation to pay premiums would vanish; (k) Farmers knew or should have known that interest rates would be less than those it projected; (l) Farmers failed to disclose the nature and extent of the commissions it paid its agents; (m) Farmers failed to disclose that much of the premium payments made would pay for the insurance, commissions, and administrative charges, and would therefore not remain in the accumulation account earning interest; and (n) Farmers failed to disclose that it could change rates for its own benefit.

Additionally, plaintiffs alleged that many practices of Farmers constituted unfair business practices. These included, but were not limited to: (o) The FUL policies were "inherently defective" as their premiums were set on the premise of an 11.5% interest rate, while Farmers did not have a good faith belief that rate would continue to be paid; (p) Farmers encouraged the replacement of existing policies with new policies, which encouragement did not consider whether replacement was in the policyholders' best interests; (q) universal life insurance is, in truth, simply term insurance, but is much more expensive for the policyholder and contains much higher profit margins for Farmers; (r) the policies were "inherently fraudulent by allowing [Farmers] to commit actions behind closed doors, which materially affected the policies"; and (s) the policies were designed to pay Farmers a profit before any interest was paid to the policyholders.

3. Class Certification Motion

When plaintiffs moved for class certification, they considerably narrowed the bases on which they sought relief. That is, they argued that common issues of fact existed only with respect to several issues related to a single unified theory.

Preliminarily, we note that plaintiffs' motion for class certification sought relief for fraudulent misrepresentations and concealments. Thus, to the extent the motion for class certification addressed the UCL, it was based on allegations of fraudulent business practices, not unfair ones. On appeal, however, plaintiffs now assert that the trial court erred in failing to consider its arguments that a class should be certified with respect to the "unfair" business practices prong of the UCL. Farmers correctly responds that this argument was waived, as plaintiffs failed to pursue unfair business practices in its motion for class certification.*fn10

In their motion for class certification, plaintiffs pursued the following arguments: (a) both the FFUL and FUL were marketed as "permanent" insurance, when they were not permanent; (b) the FFUL policies were systematically underfunded; agents were encouraged to set inadequate premiums by the commission structure and computerized premium-suggesting tools; (c) the FUL policies were also systematically underfunded; premiums were set by Farmers based on unrealistically high projections for interest rates; and (d) both policies were deceptively marketed in several respects -- they were marketed as permanent, the illustrations were misleading, policyholders were falsely told interest rates would be set to be competitive, some policies were falsely marketed with vanishing premiums, and some were marketed as replacements which were not in the policyholders' best interests. We note that these were not four separate bases for class relief, but part of one overarching allegedly fraudulent scheme. As plaintiffs explained, "[L]iability depends, not on the particular facts underlying each insured's claim, but on the combination of illustration, policy design, annual statements[,] ...


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