United States District Court, S.D. California
ERNEST O. ABBIT, on behalf of himself and on behalf of all persons similarly situated, Plaintiff,
ING USA ANNUITY AND LIFE INSURANCE COMPANY, and ING U.S., INC., Defendants.
ORDER GRANTING DEFENDANTS' MOTION FOR SUMMARY
JUDGMENT ON PLAINTIFF'S REMAINING CLAIMS [ECF NO.
Gonzalo P. Curiel United States District Judge
the Court is Defendants ING USA Annuity and Life Insurance
Company and ING U.S., Inc.'s (collectively,
“Defendants” or “ING”) Motion for
Summary Judgment on the Remaining Claims. (Dkt. No.
130.) Plaintiff Ernest O. Abbit
(“Plaintiff” or “Abbit”) opposed the
motion, (Dkt. No. 141), and Defendants filed a reply, (Dkt.
motion hearing was conducted on April 6, 2017. (Dkt. No.
163.) Andrew Hutton and Timothy Tatro appeared on behalf of
Plaintiff. (Id.) Clark Johnson, Michael Leigh, and
David Noonan appeared on behalf of Defendants. (Id.)
the hearing, the Court granted Plaintiff leave to file
supplemental evidence, consisting of the deposition testimony
of William Bainbridge and an additional expert report by Dr.
McCann, and a supplemental brief explaining the relevance of
the evidence to the instant motion. (Dkt. No. 164.) The Court
also granted Defendants leave to respond to Plaintiffs
supplemental briefing. (Id.) Plaintiff filed the
supplemental briefing and evidence, and Defendants responded.
(Dkt. Nos. 171, 174, 176, 178.)
consideration of the moving papers, supplemental briefing,
oral argument, and the applicable law, the Court
GRANTS Defendants' motion for summary
judgment on Plaintiffs individual claims.
previously recited the facts of this case at length, the
Court declines to repeat them here. (See, e.g., Dkt.
Nos. 59, 117.) While the operative facts are few, the
parties' presentations of the facts are substantively
enmeshed with their legal theories. A brief review of
relevant background suffices.
annuity is a contract between an insured individual and an
insurance company in which the insured pays premiums to the
insurance company in exchange for the insurance company's
promise to return the deposit via periodic payments. (Dkt.
No. 59 at 2.) Annuity contracts typically undergo two primary
periods: the “full accumulation period, ” during
which the investor deposits funds with the insurance company,
and the “annuitization period, ” during which the
investor withdraws funds in the form of periodic payments.
(Id.) Fixed index annuities (“FIAs”) are
annuities that generally earn interest linked to or
derivative of the price movements of an equity index or other
index, such as the S&P 500® Index. (Id.)
Indexed annuities can also guarantee interest. (Id.)
The policy parameters (such as “caps, ”
“participation rates, ” and
“spreads”) are periodically declared by the
insurance company. (Id.)
designed the Secure Index Opportunities Plus FIA and
submitted the annuity product, Form IU-IA-3050(CA)
(“Form 3050”), to the California Department of
Insurance (“CDI”) for review and approval in
2007. (Dkt. No. 144-1, Plaintiff's Separate Statement of
Undisputed Facts (“Pl.'s SSUF”) ¶¶
2-3.) In its submission to the CDI, Defendants represented
that the FIA provides for equity-indexed benefits, and that
“[t]he Cap, Participation Rate, and Spread will be set
such that the annualized option cost for this strategy will
be at least 100 bps.” (Declaration of Andrew W. Hutton
in Support of Plaintiff's Opposition to Defendants'
Motion for Summary Judgment (“Hutton Decl.”) Ex.
B at Oppo. 0075, 0103, Dkt. No. 144-3 at 38, 66.) The CDI
approved Defendants' application to sell Form 3050 to
California consumers. (Pl.'s SSUF ¶ 9.)
a retired senior citizen, purchased an ING “Secure
Index Opportunities Plus” FIA with a $1, 000, 000
premium payment on September 28, 2010. (Dkt. No. 117 at 2.)
Defendants contributed a 5% bonus of $50, 000 to
Plaintiff's contract. (Dkt. No. 144-1, Plaintiff's
Response to Defendants' Statement of Undisputed Material
Facts (“Pl.'s Resp. to Defs.' SSUF”)
¶ 1.) Plaintiff currently still holds his contract.
(Dkt. No. 130-2, Defendants' Statement of Undisputed
Material Facts in Support of Defendants' Motion for
Summary Judgment on the Remaining Claims (“Defs.'
SSUF”) ¶ 2; Pl.'s Resp. to Defs.' SSUF
¶ 2.) At the time of his purchase, and on each of his
six contract anniversaries, Plaintiff has elected one or more
of the interest-crediting strategies offered pursuant to his
FIA. (Declaration of Michael T. Leigh (“Leigh
Decl.”) Ex. 1 at § 6, Dkt. No. 130-4 at 16-20;
Leigh Decl. Exs. 5-11, Dkt. Nos. 130-8-130-14.)
Plaintiff's FIA has been credited with $84, 863.86 in
interest. (Defs.' SSUF ¶ 6; Pl.'s Resp. to
Defs.' SSUF ¶ 6.)
5.8 of Plaintiff's FIA contract guarantees that
“[t]he reserves and guaranteed values will at no time
be less than the minimum required by the laws of the state in
which this Contract is issued.” (Leigh Decl. Ex. 1,
Dkt. No. 130-4 at 16.) Section 6.5 provides definitions
applicable to the Monthly Cap Index Strategy, specifies that
the “Index Credit” amount “is based on the
performance of the applicable Index as measured over the
Contract Year, ” and provides the formula with which
index credits under the Monthly Cap strategy are calculated.
(Leigh Decl. Ex. 1, Dkt. No. 130-4 at 20.) The contract
confers upon Defendants discretion to add interest-crediting
strategies as approved by the CDI, and to change the terms
and conditions governing the interest-crediting strategies
within contract parameters and state law. (Leigh Decl. Ex. 1
§ 6, Dkt. No. 130-4 at 16.)
applying for his FIA, Plaintiff acknowledged that
“[a]ny values shown, other than guaranteed minimum
values, are not guarantees, promises or warranties.”
(Hutton Decl. Ex. E at Oppo. 0210, Dkt. No. 144-6 at 9.)
Hypothetical interest credit illustrations provided in
Plaintiffs FIA application show the possibility of him
earning 0% in index credits. (Hutton Decl. Ex. E at Oppo.
0215-18, Dkt. No. 144-6 at 14-17.) Plaintiff also
acknowledged the following statement: “You should
discuss your retirement planning objectives, anticipated
financial needs and risk tolerance with your agent to make
sure this annuity meets your current financial needs and
objectives.” (Hutton Decl. Ex. E at Oppo. 0214, Dkt.
No. 144-6 at 13.)
USA sales brochure stated: “Neither your premium, the
5% bonus, nor any previously credited interest can be
diminished due to movements in the S&P 500 Index.”
(Leigh Decl. Ex. 2, Dkt. No. 130-5 at 4.) It also stated:
“Since the interest credit is related, in part, to
movements in the S&P 500 Index, the amount of interest
your annuity will be credited at the end of the contract year
cannot be known or predicted prior to the end of the contract
year.” (Id.) It further stated that
“[t]he contract does not directly participate in any
stock or equity products.” (Leigh Decl. Ex. 2, Dkt. No.
130-5 at 13.) Finally, the brochure provided illustrations
showing that a contract holder might not earn any interest in
a contract year, (Leigh Decl. Ex. 2, Dkt. No. 130-5 at 5-10),
and stated that ING USA promised no specific rate of return,
that ING USA could change the pricing parameters of the
strategies each contract year, and that the bonus might be
recouped over time with, inter alia, lower credited
interest rates, participation rates, index caps, and monthly
caps, (Leigh Decl. Ex. 2, Dkt. No. 130-5 at 3, 13).
did not communicate with Defendants before or after
purchasing his contract. (Leigh Decl. Ex. 3, Abbit Depo. at
43:17-46:7, 65:21-22, Dkt. No. 130-6 at 13-14, 18.)
Defendants used independent, third-party marketing
organizations to distribute their insurance-based products
and annuities; Defendants do not have “company-owned
field wholesalers.” (Leigh Decl. Ex. 4, Tope Depo.
17:1-18, Dkt. No. 130-7 at 7.) Matthew Copley, who sold
Plaintiff his FIA contract, was an “independent”
agent. (Dkt. No. 152 at 5.) Copley testified that in the 2009
and 2010 time frame, he sold annuity products from
“around ten” different companies. (Leigh Decl.
Ex. 14, Copley Depo. 11:6-9, Dkt. No. 130-17 at 5.) While
Defendants required Copley to adhere to ING's Business
Guidelines and General Advertising Rules, (see,
e.g., Hutton Decl. Ex. P at Oppo. 0929-34, Dkt. No.
144-15 at 50-55), Defendants were free to accept or reject
Plaintiffs FIA application after Copley submitted it, (Dkt.
No. 130-1 at 31 (citing Leigh Decl. Ex. 15, Dkt. No.
filed a First Amended Complaint (“FAC”) on March
27, 2014. (Dkt. No. 20.) On November 16, 2015, the Court
granted in part and denied in part Plaintiffs motion for
class certification. (Dkt. No. 59 at 26.) Specifically, the
Court certified the following five claims: (1) a breach of
contract claim based on “ING setting the prices of the
undisclosed derivatives structure so low that the true values
of the contracts were below the minimum values guaranteed,
” (id. at 15); (2) a UCL claim, flowing from
the breach of contract claim, based on “Plaintiffs
theory under the Insurance Code . . . that ING failed to
maintain guaranteed values of the Secure Index FIAs as
required by Cal. Ins. Code § 10168.25, ”
(id. at 20); (3) a financial elder abuse claim, also
flowing from the breach of contract claim, based on
“Plaintiffs theory regarding the failure to maintain
guaranteed values of the Secure Index FIAs, ”
(id. at 22); and (4) two securities law claims under
California law, based on Plaintiffs “novel theory which
would extend the reach of securities law to FIAs” on
the basis that “FIAs are securities because ING's
internal execution of the ‘derivatives' and
‘options' transfers market risks from ING to
Plaintiff and the California Subclass, ” (id.
at 23). The Court declined to certify Plaintiffs remaining
claims, including, inter alia, claims for breach of
the implied covenant of good faith and fair dealing, breach
of fiduciary duty, fraud, false advertising under Cal. Bus.
& Prof. Code §§ 17500, et seq., and
failure to supervise. (Dkt. Nos. 20, 59.) The remaining
claims are at issue in the instant motion.
February 1, 2016, Defendants filed a motion for summary
judgment on the certified class claims. (Dkt. No. 70.) The
Court directed dissemination of the class notice on April 26,
2016. (Dkt. No. 91.) On June 24, 2016, the Court held a
hearing on Defendants' motion for summary judgment. (Dkt.
No. 111.) The class opt-out period expired on July 20, 2016.
(Dkt. No. 91 at 1.) On August 30, 2016, the Court granted
Defendants' motion for summary judgment on all certified
class claims. (Dkt. No. 117.)
filed a motion for reconsideration of the Court's August
30, 2016 Order granting Defendants' motion for summary
judgment on all certified class claims. (Dkt. No. 121.) The
Court denied Plaintiffs motion for reconsideration on
December 12, 2016. (Dkt. No. 129.) On December 23, 2016,
Plaintiff filed a motion for certification of partial final
judgment of the class claims under Federal Rule of Civil
Procedure 54(b). (Dkt. No. 134.) The Court denied Plaintiffs
motion for partial final judgment on February 2, 2017. (Dkt.
December 15, 2016, Defendants filed a motion for summary
judgment on Plaintiffs remaining individual claims. (Dkt. No.
130.) The motion has been fully briefed, (Dkt. Nos. 141,
149), complete with supplemental briefing and evidence, (Dkt.
Nos. 171, 174, 176, 178).
Rule of Civil Procedure 56 empowers the Court to enter
summary judgment on factually unsupported claims or defenses,
and thereby “secure the just, speedy and inexpensive
determination of every action.” Celotex Corp. v.
Catrett, 477 U.S. 317, 325, 327 (1986). Summary judgment
is appropriate if the “pleadings, depositions, answers
to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to
judgment as a matter of law.” Fed.R.Civ.P. 56(c). A
fact is material when it affects the outcome of the case.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
moving party bears the initial burden of demonstrating the
absence of any genuine issues of material fact. Celotex,
477 U.S. at 323. The moving party can satisfy this
burden by demonstrating that the nonmoving party failed to
make a showing sufficient to establish an element of his or
her claim on which that party will bear the burden of proof
at trial. Id. at 322-23. If the moving party fails
to bear the initial burden, summary judgment must be denied
and the court need not consider the nonmoving party's
evidence. Adickes v. S.H. Kress & Co., 398 U.S.
144, 159-60 (1970).
the moving party has satisfied this burden, the nonmoving
party cannot rest on the mere allegations or denials of his
pleading, but must “go beyond the pleadings and by her
own affidavits, or by the ‘depositions, answers to
interrogatories, and admissions on file' designate
‘specific facts showing that there is a genuine issue
for trial.'” Celotex, 477 U.S. at 324. If
the non-moving party fails to make a sufficient showing of an
element of its case, the moving party is entitled to judgment
as a matter of law. Id. at 325. “Where the
record taken as a whole could not lead a rational trier of
fact to find for the nonmoving party, there is no
‘genuine issue for trial.'” Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
587 (1986) (quoting First National Bank of Arizona v.
Cities Service Co., 391 U.S. 253, 289 (1968)). In making
this determination, the court must “view the evidence
in the light most favorable to the nonmoving party.”
Fontana v. Haskin, 262 F.3d 871, 876 (9th Cir.
2001). The Court does not engage in credibility
determinations, weighing of evidence, or drawing of
legitimate inferences from the facts; these functions are for
the trier of fact. Anderson, 477 U.S. at 255.
move for summary judgment on Plaintiffs remaining individual
claims for breach of contract, breach of the implied covenant
of good faith and fair dealing, breach of fiduciary duty,
fraud, violations of the California Unfair Competition Law
(“UCL”) and False Advertising Law
(“FAL”), and failure to supervise. (Dkt. No.
130-1 at 7.) The Court examines each of Plaintiff s remaining
claims in turn.
Breach of Contract
elements of a breach of contract claim are: (1) the existence
of a valid contract, (2) plaintiffs performance or excuse for
nonperformance, (3) defendant's breach, and (4) the
resulting damages to plaintiff. Reichert v. Gen. Ins. Co.
of Am., 68 Cal. 2d 822, 830 (Cal. 1968).
first argue that Plaintiffs three breach of contract claims
fail for lack of a breach and for lack of
damages. (Dkt. No. 130-1 at 12-14.) In his FAC,
Plaintiff asserts three theories for his breach of contract
claims: (1) Defendants failed to credit and compound interest
daily; (2) Defendants charged expenses and/or reduced
interest credits; and (3) Defendants issued false and
misleading periodic statements to Plaintiff. (Dkt. No. 20,
FAC ¶¶ 113-22.)
did not respond directly to Defendants' motion for
summary judgment on the remaining breach of contract claims,
and he abandoned the “interest compounded daily”
theory. (Dkt. No. 149 at 5; Dkt. No. 141 at 28 n.11.)
Defendants are entitled to summary judgment on Plaintiffs
remaining breach of contract claims on this basis alone.
See Shakur v. Schriro, 514 F.3d 878, 892 (9th Cir.
2008) (holding that a plaintiff abandons claims by not
raising them in opposition to a defendant's motion for
summary judgment); Vasserman v. Henry Mayo New hall Mem
'l Hosp., 65 F.Supp.3d 932, 963
(CD. Cal. 2014) (citing Resolution Trust Corp. v. Dunmar
Corp., 43 F.3d 587, 599 (11th Cir. 1995) (“There
is no burden upon the district court to distill every
potential argument that could be made based upon the
materials before it on summary judgment. Rather, the onus is
on the Parties to formulate arguments; grounds alleged in the
complaint but not relied upon in summary judgment are deemed
abandoned.”)); Ramirez v. City of Buena
Park, 560 F.3d 1012, 1026 (9th Cir. 2009) (“It
is a general rule that a party cannot revisit theories that
it raises but abandons at summary judgment. A party abandons
an issue when it has a full and fair opportunity to ventilate
its views with respect to an issue and instead chooses a
position that removes the issue from the case.”
(internal citations and quotation marks omitted)).
First Breach of Contract Claim
event, Plaintiff fails to show that Defendants breached the
contract under any of the three theories enumerated above.
The contract belies Plaintiff's allegation that
Defendants were required to credit and compound interest
daily. (Leigh Decl. Ex. 1, Dkt. No. 130-4 at 10.) The
contract specifies that the Minimum Guaranteed Strategy Value
of each Strategy is the sum of: “(a) 87.5% of the
portion of the Single Premium elected to the Strategy, less
Premium Taxes; adjusted for (b) Any Re-elections or
Surrenders of Accumulation Value; plus (c) Interest
credited daily at the applicable Minimum Guaranteed
Strategy Value Rate.” (Id. (emphasis added).)
The contract does not require Defendants to credit and
compound interest daily.
Second Breach of Contract Claim
has not identified any expenses that Defendants have charged
him or any interest credits that have been reduced in
violation of any express contract term. (See Leigh
Decl. Ex. 1 § 6, Dkt. No. 130-4 at 16-20.) Rather,
Defendants have proffered evidence showing that
Plaintiff's contract was credited with the interest
credits prescribed under contract terms. (See Dkt.
No. 130-1 (citing Leigh Decl. Exs. 5-11, Dkt. Nos.
Plaintiff does not respond directly to Defendants' motion
for summary judgment on his breach of contract claims,
Plaintiff nonetheless maintains throughout his opposition
brief that Defendants have imposed “extra-contractual
charges” on Plaintiff's investment by failing to
ensure “substantive participation” in the
equity-indexed benefits. (See Dkt. No. 141-2 at 3-4,
Pl.'s Resp. to Defs.' SSUF ¶ 3; see
also Dkt. No. 141 at 8, 11, 13, 21, 25.) Plaintiff
identifies two relevant contract terms: § 5.8 and §
6.5. (Dkt. No. 141 at 9.) Section 5.8 guarantees that
“[t]he reserves and guaranteed values will at no time
be less than the minimum required by the laws of the state in
which this Contract is issued.” (Hutton Decl. Ex. G,
Dkt. No. 141-11 at 17.) Section 6.5 provides definitions
applicable to the Monthly Cap Index Strategy, and specifies
that the “Index Credit” amount “is based on
the performance of the applicable Index as measured over the
Contract Year.” (Id. at 21.)
has not shown a genuine dispute of material fact regarding
whether Defendants have breached § 5.8. Plaintiff's
“substantive participation” argument fails for
the reasons articulated below, infra Part II.B. The
Court determined in a prior Order that there was no genuine
dispute of material fact as to whether Defendants ever
breached the Minimum Guaranteed Strategy Value terms of the
contract by failing to guarantee the minimum nonforfeiture
amounts prescribed by California's nonforfeiture law.
(Dkt. No. 117 at 5-9.) Nor has Plaintiff shown a breach of
§ 6.5. Plaintiff's “based on” argument
fails for the reasons articulated below, infra Part
Third Breach of Contract Claim
has not identified any falsity in his periodic statements.
The contract requires Defendants to provide an “Annual
Statement of Values” showing “the following
values as of the statement Dated: (a) the amount of Single
Premium paid; (b) the amount and dates of any partial
Surrenders; (c) the Accumulation Value; and (d) the Cash
Surrender Value.” (Leigh Decl. Ex. 1 § 8.4, Dkt.
No. 130-4 at 23.) Defendants provided Plaintiff with
statements annually, as required by the contract.
(See Leigh Decl. Exs. 5-11, Dkt. Nos. 130-8-130-14.)
While Plaintiff does not respond directly to Defendants'
motion for summary judgment on his breach of contract claims,
Plaintiff reiterates his “substantive
participation” argument. (Pl.'s Resp. to Defs.'
SSUF ¶¶ 15-16.) Plaintiffs “substantive
participation” argument fails for the reasons explained
below, infra Part II.B. Plaintiff has not proffered
any evidence showing a breach of the contract term governing
Defendants' obligations to provide periodic statements.
Court GRANTS Defendants' motion for summary judgment on
Plaintiffs three breach of contract claims.
Breach of the Implied Covenant of Good Faith and Fair
breach of the implied covenant of good faith and fair dealing
does not require a breach of a specific provision of a
contract. See Carma Developers (Cal), Inc. v. Marathon
Dev. California, Inc., 2 Cal.4th 342, 373 (Cal. 1992).
Rather, “[t]he covenant of good faith and fair dealing,
implied by law in every contract, exists merely to prevent
one contracting party from unfairly frustrating the other
party's right to receive the benefits of the
agreement actually made.” Guz v. Bechtel Nat.
Inc., 24 Cal.4th 317, 349-50 (Cal. 2000) (emphasis in
original). The implied covenant of good faith and fair
dealing “cannot impose substantive duties or limits on
the contracting parties beyond those incorporated in the
specific terms of their agreement.” Id. It
does not exist “‘to protect some general public
policy interest not directly tied to the contract's
purposes.'” Carma Developers, 2 Cal. 4th
at 373 (quoting Foley v. Interactive Data Corp., 47
Cal.3d 654, 690 (Cal. 1988)). To impose an implied covenant
of good faith and fair dealing, the following requirements
must be satisfied:
(1) The implication must arise from the language used or it
must be indispensible to effectuate the intention of the
parties; (2) it must appear from the language used that it
was so clearly within the contemplation of the parties that
they deemed it unnecessary to express it; (3) implied
covenants can only be justified on the grounds of legal
necessity; (4) a promise can be implied only where it can be
rightfully assumed that it would have been made if attention
had been called to it; (5) there can be no implied covenant
where the subject is completely covered by the contract.
Lippman v. Sears Roebuck & Co., 44 Cal. 2d 136,
142 (Cal. 1955) (internal citation and quotation marks
covenant of good faith finds particular application in
situations where one party is invested with a discretionary
power affecting the rights of another. Such power must be
exercised in good faith.” Carma Developers, 2
Cal.4th at 372. Here, Section 6 of the FIA contract provides:
You select the Strategy(ies) to which any portion of the
Single Premium and Re-elections are elected, subject to the
terms of this Contract. We reserve the right to add
Strategies as approved by the Insurance Department of the
state in which the Contract is issued. We may cease to offer
a specific Strategy or cease to accept Re-elections to a
specific Strategy at any time. Any new Re-elections accepted
are subject to the terms and conditions in existence for any
Strategy(ies) available at that time, including the then
existing rates, caps, spreads, and credits, which may differ
from the rates, caps, spreads, and credits applicable to
previous elections or Re-elections.
(Leigh Decl. Ex. 1 § 6, Dkt. No. 130-4 at 16.) This is
not an express grant of “unfettered discretion.”
Wolf v. Walt Disney Pictures & Television, 162
Cal.App.4th 1107, 1121 (Cal.Ct.App. 2008), as modified on
denial of reh 'g (June 4, 2008); see also
Baymiller v. Guarantee Mut. Life Co., No. SA CV 99-1566
DOC AN, 2000 WL 1026565, at *2 (CD. Cal. May 3, 2000)
(holding that the covenant of good faith and fair dealing did
not apply to defendants' discretionary authority where
“nothing in the express language of Defendants'
life insurance policies requires the use of a specific
formula to calculate interest rates and cost of insurance
charges”). Rather, the contract affords Defendants
discretion within bounds. Defendants reserve the right to add
interest-crediting strategies, as approved by the CDI, and to
change the terms and conditions governing the
interest-crediting strategies, within contract parameters and
state law. Defendants must accordingly exercise their
discretionary authority in good faith.
The Parties' Positions
argue that Plaintiffs claim fails primarily on two grounds.
(Dkt. No. 130-1 at 15-16.) First, Defendants argue that
Plaintiff seeks to impose substantive duties beyond the
express terms of the agreement he made with Defendants.
(Id.) Second, Defendants argue that Plaintiff has
not shown how Defendants have failed to exercise their
discretion to adjust certain features of the
interest-crediting strategies in good faith. (Id.)
response is threefold. First, Plaintiff cites Defendants'
January 4, 2007 submission to the CDI, in which Defendants
represented that the FIA provides for equity-indexed
benefits, and that “[t]he Cap, Participation Rate, and
Spread will be set such that the annualized option cost for
this strategy will be at least 100 bps.” (Hutton Decl.
Ex. B at Oppo. 0075, 0103, Dkt. No. 144-3 at 38, 66.)
Plaintiff also cites an internal memorandum in which
Defendants observed that “[w]hile it may be possible to
credit less on FIA Products, there are [a] number of risks in
doing so. The first may be a reputation risk, as we do not
wish to be unfair to customers.” (Hutton Decl. Ex. I at
Oppo. 0375, Dkt. No. 144-9 at 12.)
Plaintiff contends that Defendants deprived Plaintiff of
equity-indexed benefits by setting caps and rates “so
low that their values do not substantively participate in the
S&P 500 Index, and are not based on the performance of
the Index, ” in violation of Cal. Ins. Code §
10168.25(e). (Dkt. No. 141 at 24.) Plaintiff cites to Dr.
Craig J. McCann's calculation of what Dr. McCann calls
the “equivalent value of S&P 500 Index call
options” for Plaintiffs Monthly Cap Index
Strategy. (Declaration of Craig J. McCann
(“McCann Decl.”) Ex. 1 at Oppo. 0606; Dkt. No.
144-12 at 6.) According to Dr. McCann, the “equivalent
bps value” for Plaintiffs Monthly Cap Strategy was less
than 100 bps on the investment date and on each subsequent
contract anniversary. (Id.)
Plaintiff contends that the contract does not confer upon
Defendants unfettered discretion, but rather requires
Defendants to calculate equity-indexed benefits “based
on” the performance of the S&P 500. (Dkt. No. 141
at 23-24.) Plaintiff maintains that “based on”
can have but one meaning: “based only on.”
(Id. at 24.)
response, Defendants proffer a table from their verified
discovery responses showing that the annualized option cost
associated with each strategy in which Plaintiff allocated
funds exceeded 100 bps each year. (Leigh Decl. Ex. 16, Dkt.
No. 149-2 at 5.) Defendants maintain that unlike Dr.
McCann's numbers, their figures are not hypothetical
measurements of “equivalent value, ” but rather
are measurements of the annualized option cost associated
with each interest-crediting strategy. (Dkt. No. 149 at 7.)
Plaintiffs “Substantive Participation”
implied covenant of good faith and fair dealing “exists
merely to prevent one contracting party from unfairly
frustrating the other party's right to receive the
benefits of the agreement actually made.”
Guz, 24 Cal.4th at 349-50. Here, Plaintiffs
“substantive participation” argument has a basis
in the agreement actually made. In their 2007 submission to
the CDI, Defendants represented that “[t]he Cap,
Participation Rate, and Spread will be set such that the
annualized option cost for this strategy will be at least 100
bps.” Section 6 of Plaintiff s contract provides a
nexus between the contract and Defendants' 2007
submission to the CDI. (Leigh Decl. Ex. 1 § 6, Dkt. No.
130-4 at 16 (“We reserve the right to add Strategies as
approved by the Insurance Department of the state in which
the Contract is issued.”).) Furthermore, William
Bainbridge, the Head of Annuity Product Development for
Defendants, testified that “[o]ur contracts, through
the actuarial memorandums file, indicated we would spend 100
basis points on an annualized basis” for contracts
purchased before January 3, 2011, including Plaintiff's
contract. (Dkt. No. 174-1 at 10, Bainbridge Depo.
151:18-152:08.) Given the above, the Court concludes that the
implied covenant of good faith and fair dealing requires
Defendants to maintain an annualized option cost of at least
100 bps for each of Plaintiff's interest- crediting
The Statutory and Regulatory Framework Regarding
to Plaintiff's argument, Cal. Ins. Code §
10168.25(e) and its implementing regulations do not support
Plaintiff's implied covenant of good faith and fair
dealing claim. Defendants' 2007 submission to the CDI,
rather than Cal. Ins. Code § 10168.25(e) or its
implementing regulations, comprises the sole basis for
Plaintiff's argument that Defendants were required to
spend 100 bps on options on an annualized basis. Cal. Ins.
Code § 10168.25(e) and 10 C.C.R. § 2523.5(b)(2) do
not define “substantive participation” as
requiring an annualized option cost exceeding 100 bps.
hearing, the Court asked Plaintiff to point out specific
language in the statute that requires the annualized option
cost for the equity-indexed benefit to total or exceed 100
bps. Plaintiff did not and cannot do so, as nothing in Cal.
Ins. Code § 10168.25(e) mandates 100 bps in annualized
option cost as the minimum floor for “substantive
nonforfeiture statute provides, in pertinent part, that
“[d]uring the period or term that a contract provides
substantive participation in an equity indexed benefit, it
may increase the reduction described in paragraph (1) of
subdivision (d) by up to an additional 100 basis points to
reflect the value of the equity index benefit.” Cal.
Ins. Code § 10168.25(e). Subparagraph (1) of subdivision
(d) in turn specifies the calculation to determine
“[t]he interest rate used in determining minimum
nonforfeiture amounts.” Cal. Ins. Code §
10168.25(d)(1). Defendants take the additional reduction
permitted in Cal. Ins. Code § 10168.25(e) with respect
to Plaintiff's FIA and accordingly have to provide
“substantive participation.” (C.f. Dkt.
No. 174-1 at 12, Bainbridge Depo. 157:01-05.) However, the
statute does not define “substantive
participation.” All Cal. Ins. Code § 10168.25(e)
provides for is this: if the contract provides substantive
participation in an equity-indexed benefit during a period or
term, Defendants are permitted to increase the reduction
described in Cal. Ins. Code § 10168.25(d)(1) by a
maximum of an additional 100 bps to reflect the value of the
C.C.R. § 2523.5, Cal. Ins. Code § 10168.25(e)'s
implementing regulation, defines “substantive
participation” as requiring an annualized option cost
of at least 25 bps, not 100 bps. The regulation provides that
“[i]f a company chooses to take the additional
reduction for an equity-indexed benefit as provided under
Subsection 10168.25(e) of the Insurance Code, the company
shall prepare a demonstration showing compliance with the
requirements in Subsection 10168.25(e).” Cal. Code
Regs. tit. 10, § 2523.5(a). 10 C.C.R. §
2523.5(b)(2) then outlines one of the steps used to
demonstrate compliance with Cal. Ins. Code §
If the annualized option cost for the equity-indexed benefit
is twenty-five . . . basis points or more, then the
equity-indexed benefit provides substantive participation
under Subsection 10168.25(e) of the Insurance Code and the
company may take a reduction equal to the lesser of 100 basis
points and the annual cost basis value.
Cal. Code Regs. tit. 10, § 2523.5(b)(2) (emphasis
added). California law uses an annualized option cost of 25
bps, not 100 bps, as the benchmark for substantive
Plaintiff pointed out at the hearing, 10 C.C.R. § 2523.5
did not take effect until December 19, 2012, well after
Plaintiff's contract was issued in 2010. It thus appears
that when Plaintiff purchased his FIA contract, the statute
and implementing regulations did not specify any
minimum annualized option cost for substantive participation.
Defendants' commitment to maintaining an annualized
option cost of 100 bps for Plaintiff's contract was not
based upon a statutory or regulatory minimum, but upon
Defendants' statements in its 2007 submission to the CDI.
also cites to Defendants' internal statements which
reference the Indexed Standard Nonforfeiture Law
(“SNFL”). (Hutton Decl. Ex. A at Oppo. 0005, Dkt.
No. 144-2 at 5 (“SNFL allows for an additional
reduction in the nonforfeiture rate of up to 1% . . . for
strategies which provide for substantial participation in an
equity index. Substantial participation is defined as
providing for a market value of benefit (i.e. 1% option cost)
to justify reduction.”); Hutton Decl. Ex. C at Oppo.
0124; Dkt. No. 144-3 at 12 (“The initial option budget
is from stat pricing model. After the initial guaranteed
period, the renewal option budget is set to the greater of
the one year risk free rate less the pricing spread or a 1%
option budget (required by the Indexed Standard Nonforfeiture
Law).”).) The National Association of Insurance
Commissioners (“NAIC”) SNFL is a model
regulation. It appears that California has not adopted the
SNFL's definition of substantive participation, as
neither Cal. Ins. Code §10168.25(e) nor 10 C.C.R. §
2523.5(b)(2) requires the annualized option cost to exceed
100 bps. What these internal statements show is that
Defendants designed Plaintiff's contract to contain a
guaranteed annualized option cost of 100 bps for each
interest-crediting strategy, even though state law did not
specify a minimum threshold of 100 bps.
Plaintiff's “100 bps” theory for his implied
covenant of good faith and fair dealing claim rests upon
Defendants' 2007 submission to the CDI, rather than Cal.