In Fairbanks et al. v. Farmers New World Life Ins. Co. et al., No. B216742 (July 13, 2011), the California Court of Appeal (Second District) upheld a lower court decision denying class certification to a group of plaintiffs alleging fraudulent and misleading marketing of universal life insurance policies.
Facts & Holding
Plaintiffs sought class certification regarding what they alleged to be improper marketing of universal life policies issued by Farmers New World Life Insurance Co. and its related subsidiaries (“Farmers”). Universal life policies are structured so that a policyholder pays a premium into an “accumulation account”, from which the fees and charges to maintain the policy are deducted. Any money remaining in the accumulation account are added on top of the value of the policy when it vests, but if the accumulation account does not contain sufficient funds to pay the charges, the policy is cancelled.
Plaintiffs argued that Farmers provided misleading projections to potential policyholders in its marketing materials. Plaintiffs alleged that these materials downplayed the danger that the accumulation accounts would not contain sufficient funds to pay the fees during the lifetime of the policy, thus leading to policy cancellation. In addition, as some of the policies allowed the policyholder to set the level of premium to be paid, plaintiffs allege that Farmers’ materials failed to alert a potential buyer that certain premium levels would likely trigger cancellation further along during the life of the policy, and structured the compensation scheme for insurance agents to encourage them to steer policyholders toward low premiums.
While Plaintiffs alleged a number of violations of the Unfair Competition Law in their complaint, they sought class certification on only the fraudulent concealment of the facts about the structure of the policies. Plaintiffs contended that these acts of concealment were directed at potential customers generally, and thus were subject to some proof. By contrast, Farmers argued that the marketing of policies to specific individuals with specific financial circumstances, by specific insurance agents, destroyed any commonality between the proposed class. The trial court agreed with Farmers and denied class certification for lack of common issues.
On appeal, plaintiffs attempted to expand the bounds of the class to be certified by including other theories beyond fraudulent concealment. The Court of Appeal held that the plaintiffs were limited to the theories advanced at the trial court level, and declined to consider the new arguments. On the issues that were argued in the lower court, the Court of Appeal agreed with the trial court and held there was no commonality between the proposed class members. Class certification is only possible where the same alleged misrepresentations were made to each potential class member, the Court held. Here, as each potential policyholder received an individualized proposal and sales pitch, the plaintiffs could not show the needed commonality. The Court pointed to the recent case of Kaldenbach v. Mutual Omaha Life Ins. Co. (2009) 178 Cal.App.4th 830, which reached the same conclusion on similar facts.
This ruling, along with the previous Kaldenbach ruling, seems to be a good result for insurers that sell directly to individual citizens, particularly in the life insurance context. To the extent that insurers sell insurance products that are tailored to the needs of the specific client being sold, the insurer has less of a chance of being subject to class actions alleging that the products are misleading or fraudulent in some way.
Download a copy of decision