In Fairbanks v. Farmers New World Life Ins. Co. (July 13, 2011) __ Cal.App.4th __, the California Court of Appeal for the Second Appellate District recently affirmed a trial court's order denying class certification where plaintiffs failed to present common proof of an alleged marketing scheme related to the sale of life insurance by Farmers. The Court of Appeal held that whether any putative class member actually heard any misrepresentation in connection with the sale of the life insurance policy was an issue incapable of uniform, class-wide proof.
Plaintiffs filed a putative class action on behalf of herself and all California residents who purchased life insurance policies from Farmers Group, Inc. and Farmers New World Life Insurance Company (collectively "Farmers"). Plaintiffs alleged Farmers engaged in various deceptive and unfair business practices in the marketing and administration of its life insurance policies in violation of California's Unfair Competition Law (Bus. & Prof. Code § 17200 et seq.)
The trial court denied plaintiff's motion for class certification on the basis that common issues did not prevail. On review, the Court of Appeal affirmed, holding that the trial court's factual findings were supported by substantial evidence.
After summarizing the various features of the life insurance policies at issue, the Court of Appeal explained that at the heart of plaintiffs' case was their claim that a universal life insurance policy requires high premium payments in early years to remain in effect in later years, particularly when interest rates are low. According to plaintiffs, Farmers designed its policies so that premiums paid by insureds would be inadequate to keep the policies in effect until maturity. This would result in the underfunding, and eventual lapse, of an insured's policy.
In connection with their underfunding claim, plaintiffs alleged, among other things, the policies were deceptively marketed because Farmers' agents would not explain to potential purchasers that as the costs of insurance increased, the accumulated balance would be quickly reduced to zero leading to the lapse of the policy. Thus, the "common" marketing scheme was designed to conceal from the policyholders both the underfunding of the policy and the accompanying risk of lapse.
In opposition to class certification, Farmers attacked plaintiffs' theory by asserting that individual, as opposed to uniform, proof would be required to establish a violation of the UCL for each putative class member. Farmers presented expert testimony that many, if not most, owners of life policies do not expect the policies to stay in force until maturity. This testimony was buttressed by a survey of 500 policyholders showing that roughly half of the policyholders would have bought the policy even if they had been told it was not "permanent" insurance.
Farmers also argued that as a practical matter it was impossible to know, without considering each policyholder on an individual basis, how long each class member intended to keep the policy, how much the policyholder could afford to pay, whether the policyholder expected to pay increased premiums in the future, and whether the policyholder intended to cash out the policy at retirement.
After reviewing the evidence presented to the trial court, the Court of Appeal concluded that plaintiffs did not establish that their claims related to Farmers' sales and marketing of life insurance policies were subject to uniform proof. The Court noted that virtually all of the class members purchased policies from agents, none of whom used sale scripts; each policy was sold as the result of an individual sales presentation to the prospective insured; and the policies were not marketed on television, in print, or by some other means aimed at the public at large. Relying on these facts, among others, the Court of Appeal determined that any misrepresentation (and its materiality) was not subject to common proof and affirmed the trial court's denial of class certification.
Although Fairbanks does not necessarily break any new ground on California class certification law, it is nevertheless helpful to class action defendants -- particularly to those engaged in selling insurance and annuities. The decision makes clear that plaintiffs must provide substantial proof of uniformity in marketing practices where the sales at issue are conducted by an agent on a one-on-one, individual basis with a prospective purchaser. It appears that after Fairbanks, mere evidence of uniform language in policy documents and/or the use of marketing brochures, standing alone, will be insufficient to meet the quantum of common proof needed for class certification in cases in which the plaintiff's claim is based on the overall marketing of the product.