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In Re Insurance Installment Fee Cases.

December 13, 2012

IN RE INSURANCE INSTALLMENT FEE CASES.


APPEALS from a judgment and a postjudgment order of the Superior Court of San Diego County, Ronald L. Styn, Judge. (Super. Ct. No. JCCP 4493)

The opinion of the court was delivered by: O'rourke, J.

CERTIFIED FOR PUBLICATION

Judgment affirmed; postjudgment order reversed and remanded with directions.

Plaintiffs in a tentatively certified class action*fn1 against defendant State Farm Mutual Automobile Insurance Company (State Farm) appeal from a judgment of dismissal entered after the trial court sustained State Farm's demurrer to plaintiffs' fourth amended complaint (the complaint) without leave to amend. The members of the putative plaintiff class are insureds of State Farm who pay the premiums on their automobile insurance policies in monthly installments. The complaint includes causes of action for breach of contract, violation of the Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.) (UCL), and related causes of action based on allegations that State Farm unlawfully charges the class members a service charge (also referred to herein as an installment fee) to cover its installment billing and collection costs without specifying the service charge as additional premium on its policies as required by Insurance Code sections*fn2 381 and 383.5, and without obtaining prior approval from the Insurance Commissioner for that additional premium as required by section 1861.01 et seq.*fn3 Plaintiffs contend the complaint sufficiently pleads causes of action for breach of contract and violation of the UCL.

State Farm appeals from a postjudgment order granting plaintiffs' motion to tax costs of $713,463.72 that State Farm sought to shift to plaintiffs. State Farm incurred the costs in providing notice to putative class members that plaintiffs sought discovery of their contact information and installment fee payment information.*fn4 We affirm the judgment and reverse the postjudgment order.

FACTUAL AND PROCEDURAL BACKGROUND

On appeal of a judgment of dismissal entered after the sustaining of a demurrer without leave to amend, we accept as true all the material allegations of the complaint, reasonable inferences that can be drawn from those allegations, and facts that may properly be judicially noticed. (Crowley

v.

Katleman (1994) 8 Cal.4th 666, 672; Saks v. Damon Raike & Co. (1992) 7 Cal.App.4th 419, 422.) However, we do not accept as true contentions, deductions, or conclusions of fact or law. (Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125.)*fn5

The relevant facts alleged in the complaint are few and largely undisputed.*fn6 The representative plaintiffs and other State Farm policyholders who pay for their insurance in monthly installments are billed a service charge that is not included in the contract price specified in the policy. The installment fee is $3.00 per month for class members who receive a paper bill and do not return payment by automatic deduction from a bank account, $2.00 per month for class members who receive a paper bill but pay by automatic deduction from a bank account, and $1.00 per month for class members who receive no paper billing and pay by automatic deduction from a bank account. The installment fee is intended to cover State Farm's installment billing and collection costs. However, plaintiffs allege that State Farm also includes those costs in the prices it charges for its policies, but does not disclose that fact to its customers. As a result, plaintiffs and the class members allegedly are charged twice for the installment billing and collection costs.

The premium for a State Farm policy is specified in the policy declarations page as the "Total Premium" due for the policy period. Plaintiffs allege the policy contemplates that the policyholder may pay the "Total Premium" in installments as long as the "Total Premium" is paid before the end of the current policy period. The installment fee at issue is not specified in the declarations page or anywhere else in the policy. Plaintiffs allege the installment fee is "additional premium" that State Farm misrepresents as being a mandatory service charge. They also allege the State Farm Payment Plan (SFPP) agreement, which insureds enter into to pay in monthly installments, is an illegal contract that cannot be used to modify the insurance contract.*fn7 Plaintiffs characterize State Farm's charging the installment fee as a misrepresentation "that the installment 'service charges' were due and owing, even though they were not."

The complaint includes the following six causes of action based on the allegedly unlawful installment fee: first cause of action for breach of contract, second cause of action for violation of the UCL, third cause of action for unjust enrichment, fourth cause of action for fraud and deceit, fifth cause of action for negligent misrepresentation, and sixth cause of action for declaratory relief. On appeal, plaintiffs challenge only the sustaining of State Farm's demurrer without leave to amend as to the first cause of action for breach of contract and second cause of action for violation of the UCL.

In the first cause of action, plaintiffs allege that State Farm breaches the express terms of the insurance contract, as well as statutes that are made part of the contract under California law, by demanding more premium in the form of the installment fee than the total premium specified on the declarations page of the insurance contract. State Farm also allegedly breaches the insurance contract by double charging for its billing and collection costs through both the total premium and the installment fee.

In sustaining the demurrer without leave to amend as to the breach of contract cause of action, the court rejected plaintiffs' argument that the language of State Farm's policy itself (apart from the SFPP) allows for the payment of the premium in installments and ruled that the SFPP is not an illegal premium, but rather "pays for the convenience of paying monthly and covers a separate payment plan apart from the issuance of insurance coverage." The court further ruled that "the allegations do not support a cause of action under the UCL, [or causes of action for] fraud or negligent misrepresentation. A fraud claim must be based on alleged misrepresentation or omission of fact. [Citation.] The misrepresentations alleged are opinions and legal conclusions, not facts." The court also found that the alleged misrepresentations were true and that the representative plaintiffs failed to sufficiently plead reliance because they alleged that they paid their premiums "in installments because their finances required them to do so."

DISCUSSION

PLAINTIFFS' APPEAL

I. Cause of Action for Breach of Contract

Plaintiffs contend the complaint sufficiently pleads that State Farm breaches its insurance contract (policy) by requiring its policyholders who pay monthly installments to enter into the SFPP agreement and pay an installment fee. Plaintiffs argue that requiring the installment fee is a breach of contract because, as alleged in the complaint, (1) the installment fee is additional premium that is not specified on the policy's declaration page as required by sections 381 and 383.5;*fn8 (2) the policy already allows for installment payments without a separate agreement; (3) regardless of whether the installment fee is premium, the policy does not permit State Farm to impose the installment fee without amending the policy by endorsement to include that additional charge; and (4) policyholders who pay in installments are double charged for State Farm's cost of billing and collecting installment payments.

A. The installment fee is not premium

As this court has noted, "[i]t is commonly understood that a premium is the amount paid for certain insurance for a certain period of coverage." (Insurance Exchange of the Automobile Club v. Superior Court (2007) 148 Cal.App.4th 1218, 1230, fn. omitted (Auto Club); Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1324 (Troyk).) In both Auto Club and Troyk, this court, in considering whether the insurance installment fees at issue in those cases were premium within the meaning of section 381, subdivision (f), applied the rule that when the language of a statute is clear and unambiguous, there is no need for construction.

In Auto Club, the insurer, Interinsurance Exchange of Automobile Club (Exchange) gave policyholders the option of paying premiums for automobile insurance in nine monthly installments, subject to additional charges for interest at a rate of about 18 percent per year. (Auto Club, supra, 148 Cal.App.4th at p. 1222.) The Auto Club court concluded that "the fee Exchange charges for making payments of the annual premium in installments is interest for the time value of money and the plain and ordinary meaning of the term 'premium,' as used in section 381, subdivision (f), does not include interest charged for the time value of money." (Id. at p. 1230.) The court explained: "It is commonly understood that a premium is the amount paid for certain insurance for a certain period of coverage. For example, in this case Exchange charged [the plaintiff] an annual premium of $986 for renewal of her automobile insurance coverage for the period from January 2004 through January 2005. As section 480 confirms, a premium is to be paid on commencement of the period of insurance coverage. Section 480 provides: 'An insurer is entitled to payment of the premium as soon as the subject matter insured is exposed to the peril insured against.' Therefore, in the case of an annual period of renewal of insurance coverage, an insurer is entitled to payment of the annual premium in one lump sum at the beginning of the policy period. (§ 480.) To the extent an insurer provides an insured with the option of paying that one lump sum in installments of partial premium payments together with interest on the unpaid premium balance, the interest charged for the time value of money for the option of making payments of premium over time is not considered part of the premium paid for insurance coverage." (Auto Club, supra, 148 Cal.App.4th at pp. 1230-1231, fns. omitted.) Accordingly, the Auto Club court concluded that the interest charged by Exchange for the use of its installment payment option was not required to be disclosed in the declarations page or elsewhere in its insurance policy. (Id. at p. 1231.)

The same panel of this court considered a different type of insurance installment fee in Troyk, a certified class action. The insurer in Troyk, Farmers Group, Inc. and related entities (collectively Farmers), offered automobile insurance with terms of either six months or one month. The premium for a six-month term was payable in either one lump sum or two installments, but if the insured chose a one-month term, Farmers converted "its six-month policy into a one-month policy by issuing an endorsement called the 'Monthly Payment Agreement' . . . ." (Troyk, supra, 171 Cal.App.4th at pp. 1315-1316.) To obtain the one-month policy, the insured was required to enter into an agreement with Prematic Service Corporation (Prematic), a subsidiary of Farmers, under which Prematic would send a monthly premium bill to the insured and, on receipt of the premium payment plus a five dollar service charge, forward the payment less the service charge to Farmers. (Id. at p. 1316.)

The Troyk court concluded that "the clear and unambiguous meaning of the term 'premium,' as used in section 381, subdivision (f), includes a service charge imposed for payment in full of the stated insurance premium for a one-month term policy." (Troyk, supra, 171 Cal.App.4th at pp. 1323-1324.) The court reasoned that "[b]ecause section 381 'presumably is a consumer protection statute' [citation], the meaning of 'premium,' as used in section 381, subdivision (f), is interpreted from the perspective of the consumer (i.e., the insured). In the circumstances of this case, Troyk and the other class members were required to pay a service charge in addition to the stated premium to obtain and pay for a one-month term of insurance coverage. They could not obtain or pay for that one-month term policy by paying only the premium stated on the declarations page or elsewhere in the policy. Therefore, from the insureds' perspective in this case, 'premium,' for purposes of section 381, subdivision (f), is the total amount the insureds were required to pay to obtain insurance coverage for a one-month term (i.e., the stated premium plus the service charge imposed for payment in full of that stated premium)." (Troyk, supra, at p. 1324.)

The Troyk court further explained: "The service charges [Farmers] required Troyk and the other class members to pay were not imposed for the privilege of paying the premium for a six-month term policy in monthly installments or otherwise over time. Rather, as shown by the Monthly Payment Agreement endorsement . . . , the policy issued to the class members was for a one-month term, not a six-month term. . . . The fact the Monthly Payment Agreement provided that class members had the right to extend the term of the one-month policy 'for successive monthly periods if the premium is paid when due' supports, rather than weighs against, our conclusion. That language shows 'the premium' is payable for the policy's one-month term. That agreement also provided: 'The premium is due no later than on the expiration date of the then current monthly period.' (Italics added.) That language likewise shows 'the premium' is payable for the policy's one-month term. Furthermore, we note the Monthly Payment Agreement does not use the term 'installment' or any other language that would suggest an insured will be paying each month only part of a greater premium for a period of coverage longer than one month (e.g., six months)." (Troyk, supra, 171 Cal.App.4th at p. 1326.) The court concluded that "the policy documents are reasonably susceptible of only one interpretation--that each class member had a policy for a one-month, and not a six-month, term." (Id. at p. 1327.)

State Farm's installment fee at issue in the present case differs from the one at issue in Troyk in a key respect: State Farm's fee is charged for making a true installment payment on the total premium owed for a six-month term of insurance coverage, whereas the installment fee at issue in Troyk was part of the total payment due for a one-month term of coverage. The installment fee here is paid under a separate agreement (the SFPP) between the insured and State Farm for the benefit of being able to pay the total amount owed for a six-month period of insurance in monthly installments instead of in a single lump sum; it is not part of the amount paid for the six-month term of insurance coverage, as shown by the fact that a policyholder who pays the six-month premium in one lump sum does not pay the installment fee. Because the installment fee is consideration for a benefit separate from the insurance rather than an " 'amount paid for certain insurance for a certain period of coverage' " (Troyk, supra, 171 Cal.App.4th at p. 1324), it is not premium.*fn9

In Nakashima v. State Farm Mutual Automobile Insurance Company (N.M. 2007) 153 P.3d 664 (Nakashima) a New Mexico appellate court deciding the same issue (whether the installment fee paid under State Farm's SFPP is additional premium) similarly concluded that the installment fee is not premium but rather is consideration for a benefit separate from the insurance coverage provided in exchange for premium payment. The Nakashima court stated: "The payment plan agreement, or second contract, constituted a separate agreement between the parties with respect to an alternative way to pay the policy premium. In terms of consideration, [State Farm] gave up its right to obtain the payment of premium in a lump sum, whereas Plaintiff obtained the right to pay her premium in installments in exchange for a fee. We therefore conclude that the payment plan agreement was a second contract between the parties supported by adequate consideration." (Id. at p. 669.) Accordingly, the Nakashima court concluded that "the installment fees are not consideration for a contract of insurance but, instead, cover the expense of allowing policyholders to pay their premiums in installments. . . . [¶] . . . Because individuals are in no way obligated to pay the installment fees, aside from their own financial and/or personal preference, the installment fees cannot be considered consideration for the procurement of insurance and are therefore not premium." (Ibid.) The Nakashima court further reasoned that installment fees were not premium under the language of State Farm's policy because "insurance rates are associated with the transfer of risk. . . . Installment fees, on the other hand, are not associated with any sort of transfer of risk but, instead, cover the costs associated with a payment plan." (Nakashima, supra, 153 P.3d at p. 670.)

We agree with the Nakashima court's reasoning and likewise conclude that the installment fee paid under the SFPP is consideration for a benefit separate from the insurance and is paid under an agreement separate from the policy. Therefore, the installment fee is not an insurance premium or rate that must be stated on the declarations page or elsewhere in the policy under sections 381 and 383.5, or approved by the Insurance Commissioner under section 1861.01 et seq.*fn10

B. The policy itself does not allow for installment payments.

Plaintiffs contend that State Farm's charging policyholders the installment fee under the SFPP is a breach of the insurance contract because the policy already allows for installment payments without a separate agreement under the section entitled "When And Where Coverage Applies," which states: "The coverages you chose apply to accidents and losses that take place during the policy period. [¶] The policy period is shown under 'Policy Period' on the declarations page and is for successive periods of six months each for which you pay the renewal premium. Payments must be made on or before the end of the current policy period. The policy period begins and ends and 12:01 A.M. Standard Time at the address shown on the declarations page."

Plaintiffs argue that the sentence "Payments must be made on or before the end of the current policy period," means that an insured is not required to pay the total premium in advance in one lump sum, but is covered as long as the premium for the current policy period is paid before the end of the current policy period. Consequently, plaintiffs argue, requiring insureds to enter into a separate agreement to pay in installments and imposing additional service charges for that option violates the policy's terms.

"[I]nterpretation of an insurance policy is a question of law. [Citation.] The rules governing policy interpretation require us to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it." (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18.) "The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the 'mutual intention' of the parties. 'Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. [Citation.] Such intent is to be inferred, if possible, solely from the written provisions of the contract. [Citation.] The "clear and explicit" meaning of these provisions, interpreted in their "ordinary and popular sense," unless "used by the parties in a technical sense or a special meaning is given to them by usage" [citation], controls judicial interpretation. [Citation.]' [Citations.] A policy provision will be considered ambiguous when it is capable of two or more constructions, both of which are reasonable. [Citation.] But language in a contract must be interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract. [Citation.] Courts will not strain to create an ambiguity where none exists." (Id. at pp. 18-19.) Further, "[a]n agreement is not ambiguous merely because the parties (or judges) disagree about its meaning. Taken in context, words still matter." (Abers v. Rounsavell (2010) 189 Cal.App.4th 348, 356; Fire Ins. Exchange v. Superior Court (2004) 116 Cal.App.4th 446, 454 [insurance policy must be interpreted as a whole and in context, and an ambiguity is not necessarily found in the fact a word or phrase isolated from its context is susceptible of more than one meaning].)

Ambiguity in an insurance policy is resolved by construing the ambiguous provisions in the sense the insurer believed the insured understood them at the time the contract was formed. (E.M.M.I. Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465, 470; Civ. Code, § 1649.) This rule protects both the subjective beliefs of the insurer and the objectively reasonable expectations of the insured, and only if its application does not resolve the ambiguity do we construe the ambiguous language against the insurer. (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264-1265.)

Bearing in mind that language in a contract must be interpreted as a whole and in context and cannot be found to be ambiguous in the abstract, we conclude that the "When And Where Coverage Applies" section unambiguously does not allow an insured to pay the premium for a current policy period in installments. Read in isolation, the sentence "Payments must be made on or before the end of the current policy period," could be interpreted as referring to premium payments for the current policy period. However, because the preceding sentence informs the insured that the policy period is shown "on the declarations page and is for successive periods of six months each for which you pay the renewal premium," (bolding and underlining added), ...


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