The California Court of Appeal recently affirmed a denial of class certification in Fairbanks v. Farmers New World Life Insurance Company. The plaintiffs alleged that Farmers violated the California Unfair Competition Law in connection with its marketing and sales of universal life and flexible universal life policies. The central claim was that Farmers designed and sold the policies in such a manner that insureds would not pay enough premiums to keep the policies in force to maturity (age 95 or 100), so the policies would lapse. Plaintiffs claimed essentially that Farmers was selling what amounted to expensive term insurance but calling it “permanent” insurance when it typically would not perform that function. The trial court denied certification because individual issues concerning what each putative class member was told by their agent and what they cared about in purchasing their policy would predominate over common issues. The appellate court affirmed. The result here is not surprising. Most courts have denied certification in similar cases involving life insurance sales practices, including vanishing premium cases. There are a few things in this decision, however, that are notable:
- The court made what some might consider a “merits” determination: There was conflicting evidence on whether Farmers had a common marketing strategy. The trial court found Farmers’ evidence that it did not have such a strategy more persuasive on this point, and the court of appeal affirmed because there was substantial evidence supporting the trial court’s factual finding. Some might call this a “merits” ruling, although I think it’s more appropriately labeled as a factual issue where class certification requirements (commonality and predominance) overlapped with the merits of the plaintiffs’ theory. This is a good case to cite for the proposition that state appellate courts, in addition to federal courts, allow these kinds of “merits” determinations at class certification, even in states like California, which are not unfriendly to class actions.
- A survey of putative class members was important to the outcome: The plaintiffs actually had this survey done, but the results supported Farmers’ position, and Farmers was able to use the results effectively. The key question asked was whether the policyholders would have bought the policies if they knew that the premiums were not guaranteed to keep the policies in force to maturity. The answer was that about half of the people would have bought it and half would not. Using this type of survey can be an effective strategy in insurance class actions. You can’t really predict the outcome before doing the survey, but it’s unlikely that you will not see a significant amount of disagreement among policyholders on an issue like this. People buy life insurance with different considerations in mind and use it for different purposes. It is a bit surprising that the plaintiffs would have commissioned this survey.
- Depositions of sales agents also were important: Farmers deposed a sample of agents regarding how they would sell these policies, and was able to illustrate how they used different approaches — some would tell policyholders that the premiums may not be sufficient to keep the policy in force to maturity, and others would recommend switching to a level death benefit in later years. Defendants often don’t take much offensive discovery in class actions. This is one example of where they should.
- Plaintiffs improperly tried to change their theory of certification on appeal: The court of appeal rejected some of the plaintiffs’ arguments because, although there was ample evidence in the record, the theory being proffered was not the theory argued below. This is not an uncommon tactic by the plaintiffs’ bar — introduce a massive record in the trial court and then keep shifting your theory around trying to find something that works. Here, for example, the plaintiffs argued on appeal that the language of the policies was a common misrepresentation on which a class should be certified. The court of appeal found that was not properly raised below because, although there was reference to the policy language in the trial court briefing, the plaintiffs never argued for certification on that basis alone, but rather argued that the policy language was part of a common marketing scheme.