Bally v. State Farm Life Insurance Company

• Court: District Court, N.D. California
• Decided: February 24, 2022
• Docket: 3:18-cv-04954
• Status: Unknown

Opinion

1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7 8 ELIZABETH A. BALLY, Case No. 18-cv-04954-CRB 9 Plaintiff, ORDER GRANTING BALLY 10 v. SUMMARY JUDGMENT ON COUNT II AND COUNT IV 11 STATE FARM LIFE INSURANCE COMPANY, Re: Dkt. No. 237 12 Defendant. 13 14 In August 2018, Elizabeth Bally filed suit against State Farm Life Insurance 15 Company (“State Farm”) on behalf of a class of policyholders. See Complaint (dkt. 1). 16 Bally alleged that State Farm breached various provisions of its Form 94030 life insurance 17 policy (the “policy”). Id. The complaint set forth four counts for relief. Id. The Court has 18 already ruled on two rounds of summary judgment briefing, and it has granted State Farm 19 summary judgment on Bally’s Count I and Count III claims. See Order on Cross-Motions 20 for Summary Judgment (“MSJ Order II”) (dkt. 222). Count II is the primary remaining 21 claim.1 22 In its most recent summary judgment order, the Court denied State Farm’s motion 23 for summary judgment on Count II. MSJ Order II at 20. Bally did not move for summary 24 judgment on Count II, and per the Court’s direction, the parties negotiated a schedule for 25 Bally to move for summary judgment on Count II and to provide in support of the motion 26 27 1 a supplemental damages model supporting recovery for the class under Bally’s Count II 2 theory of liability. See generally Order Setting Schedule for Briefing Motion for Summary 3 Judgment and Supplemental Expert Disclosures (dkt. 235). Bally’s motion for summary 4 judgment on Counts II and IV is now before the Court. Motion for Partial Summary 5 Judgment on Counts II and IV (“MSJ”) (dkt. 237). For the reasons discussed below, the 6 Court grants the motion. 7 I. BACKGROUND 8 The issues in this case have been significantly narrowed and now center on the 9 expense charges included in the policy’s monthly deductions. See generally MSJ Order II. 10 The main remaining issue is whether a reasonable policyholder would understand the 11 policy as promising that the expenses charges included in the monthly deduction are no 12 more than five dollars per month. See id. 13 Under the policy, policyholders pay premiums that are deposited into an interest- 14 bearing account (“Account Value”). MSJ Order II at 2. On a monthly basis, State Farm 15 makes a deduction from the Account Value (the “monthly deduction”). See Policy (dkt. 16 237–4) at 9. The text of the policy explains that the monthly deduction consists of three 17 components: (1) the cost of insurance, (2) the monthly charges for any riders, and (3) the 18 monthly expense charge. See id. The policy states that “[t]he monthly expense charge is 19 $5.00.” Policy at 3. Bally argues that this provision amounts to a promise that as part of 20 the monthly deduction, State Farm will deduct no more than five dollars to cover expenses 21 related to offering the policy. See MSJ Order II at 16. Bally contends that State Farm 22 breached this promise because it also included charges related to expense recovery in the 23 cost of insurance rates. Id. 24 The cost of insurance rate is a separate component of the monthly deduction. See 25 Policy at 9. The policy explains that the cost of insurance consists of rates for each policy 26 year that are “based on the Insured’s age on the policy anniversary, sex, and applicable rate 27 class.” Id. at 10. In connection with the prior motion for summary judgment, State Farm 1 policy was offered to consumers. MSJ Order II at 11, n. 7. Among other factors included 2 in the applicable rate classes are charges related to expense recovery. In other words, in 3 addition to assessing a five-dollar charge as part of the monthly deduction, State Farm also 4 recovered for expenses through the cost of insurance charge. 5 II. LEGAL STANDARD 6 Summary judgment is appropriate “if the movant shows that there is no genuine 7 dispute as to any material fact and the movant is entitled to judgment as a matter of law.” 8 Fed. R. Civ. P. 56(a); see also Celotex Corp. v. Cattrett, 477 U.S. 317, 323 (1986). A 9 genuine issue of fact is one that could reasonably be resolved in favor of either party. See 10 Celotex, 477 U.S. at 322–23. A dispute is “material” only if it could affect the outcome of 11 the suit under the governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–49 12 (1986). 13 “A moving party without the ultimate burden of persuasion at trial—usually, but not 14 always, a defendant—has both the initial burden of production and the ultimate burden of 15 persuasion on a motion for summary judgment.” Nissan Fire & Marine Ins. Co. v. Fritz 16 Cos., 210 F.3d 1099, 1102 (9th Cir. 2000) (citing 10A Charles Alan Wright, Arthur R. 17 Miller and Mary Kay Kane, Federal Practice and Procedure § 2727 (3d ed. 1998)). “In 18 order to carry its burden of production, the moving party must either produce evidence 19 negating an essential element of the nonmoving party’s claim or defense or show that the 20 nonmoving party does not have enough evidence of an essential element to carry its 21 ultimate burden of persuasion at trial.” Id. (citing High Tech Gays v. Defense Indus. Sec. 22 Clearance Office, 895 F.2d 563, 574 (9th Cir.1990). “If a moving party fails to carry its 23 initial burden of production, the nonmoving party has no obligation to produce anything.” 24 Id. at 1103 (internal citation omitted). If, however, a moving party carries its burden of 25 production, the nonmoving party must produce evidence to support its claim or defense. 26 See id. If the nonmoving party fails to produce enough evidence to create a genuine issue 27 of material fact, the moving party wins the motion for summary judgment. See id. But if 1 the nonmoving party produces enough evidence to create a genuine issue of material fact, 2 the nonmoving party defeats the motion. See id. 3 III. DISCUSSION 4 The Court previously denied State Farm summary judgment on Count II. MSJ 5 Order II at 15–20. In that ruling, the Court analyzed both the text of the policy and 6 extrinsic evidence. Id. With respect to the text, the Court found that nothing in the text of 7 the policy clarifies whether the term “monthly expense charge” refers to “a cap on all 8 monthly expenses” or “merely a demarcated charge for some expenses.” Id. at 16–17. 9 Analyzing the provision in the context of the policy, the Court found that a reasonable 10 policyholder could conclude that “[t]he monthly expense charge is $5.00” means “that 11 policyholders will not be charged any more than five dollars a month in expenses.” Id. at 12 18. Indeed, the Court found that this interpretation was not only “entirely reasonable,” but 13 “possibly the only reasonable reading.” Id. 14 For the sake of argument, the Court assumed that the policy was ambiguous and 15 next considered the extrinsic evidence offered by State Farm. Id. at 18–20. The Court 16 found that the extrinsic evidence did not resolve the ambiguity in State Farm’s favor for 17 several reasons, including that it showed that many consumers were not informed of the 18 nature of the expense charge, that it was limited to certain regions of the state, and that it 19 went to the subjective understanding of certain consumers rather than the objective 20 understanding of a reasonable policyholder. Id. Accordingly, the Court found that the 21 term was “at best” ambiguous and that ambiguous terms in insurance contracts must be 22 construed against the insurer. Id. at 20 (citing California Pac. Homes, Inc., 70 Cal. App. 23 4th at 1192). 24 Against this backdrop, Bally now moves for summary judgment on Count II and 25 State Farm opposes the motion.2 The Court applies the same interpretative rules set forth 26 2 Bally argues that State Farm waived its right to make many (if not all) of the arguments that it 27 makes in its opposition to Bally’s motion for summary judgment by not making the arguments in 1 its prior order. See MSJ Order II at 10–11. 2 A. Count II Claims 3 The policy states “[t]he monthly expense charge is $5.00,” and Bally alleges that a 4 reasonable policyholder would thus understand the policy to mean that, in connection with 5 the monthly deduction, State Farm would only deduct five dollars per month from the 6 Account Values for purposes of covering expenses. MSJ at 6–9. Bally alleges that State 7 Farm breached the policy by charging policyholders for additional expenses in connection 8 with the cost of insurance rate. Id. State Farm contends that both the text of the policy and 9 extrinsic evidence make clear that it is not reasonable to read the “monthly expense 10 charge” provision as prohibiting the inclusion of expenses in other charges. Opp. at 12– 11 24. 12 Interpretation begins with the text. See MSJ Order II at 10–11. The Court 13 previously found that the policy text was at best ambiguous, see id. at 18, and Bally’s 14 motion for summary judgment largely regurgitates the Court’s prior analysis of the policy. 15 See MSJ at 6–9. State Farm, on the other hand, makes several text-based arguments about 16 why Bally’s reading of the clause is unreasonable and why the policy is, at the very least, 17 ambiguous. Opp. at 12–24. State Farm’s arguments fail to persuade. 18 State Farm argues that the cost of insurance rates were developed before the policy 19 was offered to consumers and that nothing in the policy prohibits State Farm from 20 including expense loads in developing the cost of insurance rates. See Opp. at 13–14 & 21 16–17. These arguments miss the mark. As the Court previously explained, the monthly 22 expense clause could be reasonably understood as conveying that the only part of the 23 monthly deduction that went to covering State Farm’s expenses was the five-dollar 24 monthly expense charge. See MSJ Order II at 16–18. While nothing “prohibits” State 25 Farm from also including loads for expenses in the cost of insurance charge, the text of the 26 policy does not make clear that expenses were among the factors used to develop the cost 27 1 of insurance rates. In other words, the argument does not relate to how a reasonable 2 policyholder would read the policy. 3 State Farm also argues that “cost” is synonymous with “expense” such that the 4 “cost of insurance” charge should be understood as including expenses. Opp. at 2 & 15– 5 17. Although “cost” and “expense” may in some contexts be used interchangeably, a 6 reasonable policyholder could interpret the use of two different words here to mean that 7 the terms, in the context of the policy, have two different meanings. Indeed, the policy 8 states that “the cost of insurance charge” is “based on the Insured’s age on the policy 9 anniversary, sex, and applicable rate class.” See Policy at 10. No part of this list of 10 components of the cost of insurance charge suggests that it includes expenses among the 11 factors used to determine the applicable rate classes. Accordingly, State Farm fails to 12 establish that, based on the text of the policy, it is reasonable to treat the words “cost” and 13 “expense” as synonymous. See MSJ Order II at 17 (“Words matter, and State Farm is the 14 party that chose the words.”). 15 State Farm also points out that in some places, the policy uses explicit limiting 16 language to identify a floor or ceiling being placed on part of the policy. See Opp. at 13– 17 14 & 15–16. And it argues that the explicit caps placed on certain aspects of the policy 18 make it unreasonable to read a provision like the monthly expense charge, which does not 19 have an explicit cap, as imposing a cap. Id. But the limiting caps that State Farm points to 20 involve variable rates, charges, or account values, and the policy is setting floors or 21 ceilings for those rates, charges, and account values. See Policy at 4 (setting forth a table 22 of the “Maximum Monthly Cost of Insurance Rates”); id. at 10 (“[a]n interest rate of at 23 least 4% a year will be applied to the account value”); id. at 3 (“the Basic Amount cannot 24 be less than $50,000”). In contrast to those variable components of the policy, the policy 25 states that the “monthly expense charge is $5.00.” Id. at 3. In the context of the policy, the 26 only reasonable interpretation of this provision is as setting a fixed amount for monthly 27 expenses—that is, that the monthly deduction imposes a flat charge of five dollars a month 1 to account for expenses related to offering the policy. 3 This flat amount meaningfully 2 differs from the variable charge and rates set forth in other parts of the policy. 3 Finally, State Farms cites several out-of-circuit cases to support its interpretation of 4 the contract. Opp. at 17–18. The cases are not persuasive as to how the policy should be 5 interpreted. None of the cases are binding authority, none apply California law, and none 6 involve the same policy at issue here. See Norem v. Lincoln Ben. Life Co., 737 F.3d 1145, 7 1148 (7th Cir. 2013) (applying Illinois law to “[t]he sole issue on appeal [which] is 8 whether the policy allows Lincoln Benefit to include factors beyond an insured’s sex, issue 9 age, policy year, and payment class when it calculates COI rates”); Mai Nhia Thao v. 10 Midland Nat. Life Ins. Co., No. 09-C-1158, 2013 WL 119871, at *2 (E.D. Wis. Jan. 9, 11 2013) (applying Wisconsin law to a policy offered by Midland National with materially 12 different terms); Maxon v. Sentry Life Ins. Co., No. 18-CV-254-JDP, 2019 WL 4540057, at 13 *1 (W.D. Wis. Sept. 19, 2019) (applying Wisconsin law to a policy offered by Sentry Life 14 Insurance Co. with materially different terms); Nichols v. John Hancock Life Ins. Co., No. 15 2:09-CV-00840-LSC, 2009 WL 3019785, at *3 (N.D. Ala. Sept. 22, 2009) (applying 16 Tennessee law in the context of a motion to dismiss a contract with materially different 17 terms). Given the extensive focus on the specific language at issue in this policy, out-of- 18 circuit cases involving different insurance policies are of little help to State Farm. 19 The Court thus finds that Bally’s interpretation of the monthly expense charge is the 20 only reasonable reading of the policy text.4 Accordingly, a reasonable policyholder would 21 understand the policy as promising that expenses included in the monthly deduction are 22 five dollars per month, and State Farm breached this promise by including additional 23

24 3 For this reason, State Farm’s arguments that Bally is attempting to force an “implied promise” on the contract or that the promise is too vague fail. Opp. at 14–15. In contrast to the cases that State 25 Farm cites, Bally is not attempting to read a term into the contract that does not appear in the contract’s text. To the contrary, the reasonable interpretation of “[t]he monthly expense charge is 26 $5.00” is that the monthly charge for expenses is five dollars. 4 Even assuming that the text of the policy was ambiguous, the extrinsic evidence that State Farm 27 offers does not help it. See Opp. 19–21. The best that the extrinsic evidence could establish is 1 expense loads in the cost of insurance rate. 2 B. Count II Damages Model 3 In connection with the Count II summary judgment motion, the Court ordered Bally 4 to submit an accompanying damages model for Bally’s Count II theory of liability. MSJ 5 Order II at 27. In compliance with this order, Bally submitted the supplemental report of 6 her damages expert Scott Witt, which offers two theories of damages recovery. See Witt 7 Expert Report II (dkt. 263–3). The first damages model treats as damages any loads in the 8 cost of insurance rate in excess of the portion attributable mortality factors. Bally may not 9 offer this damages model at trial. The Count II theory of breach centers on charges in the 10 monthly deduction that relate to expenses, and there are loads for other charges unrelated 11 to mortality factors and expenses included in the cost of insurance rate. The first damages 12 model would treat these charges as damages, even though they do not relate to expense 13 recovery. Given the disconnect between Bally’s theory of liability and the damages that 14 would be recovered under this model, Bally may not present this damages model to the 15 jury. See Comcast Corp. v. Behrend, 569 U.S. 27, 35 (2013) (“a plaintiff’s damages case 16 must be consistent with its liability case”) (citation and internal quotation omitted). 17 The second damages model is appropriately tailored to the Count II theory of 18 liability. In the second damages model, Witt offers a methodology for identifying the 19 portions of the cost of insurance rate attributable to expense recovery. This model is 20 appropriately tailored to Count II, and it may be offered at trial.5 21 State Farm’s remaining challenges to Bally’s Count II damages model fail. See 22 Opp. at 24–25. State Farm argues that if the revenue generated by the five-dollar monthly 23 expense charge and the 5% premium expense charge are considered together, then Bally 24 has no damages because the two charges “covered all of State Farm’s assumed expenses 25

26 5 State Farm argues that Bally has not come forward with a “definite, supportable theory of what is or is not an expense covered by the fixed monthly expense charge.” See Opp. at 22–23. To the 27 contrary, Bally has articulated a theory of breach under Count II and provided a model for 1 considered in the ratemaking process.” Id. at 24. The argument appears to misunderstand 2 Bally’s theory of the case. The Count II theory focuses on the monthly deduction, and the 3 5% premium expense charge is not part of the monthly deduction. The injury that 4 policyholders suffered under the Count II theory stems from the additional expense loads 5 included in the cost of insurance rates. State Farm also challenges certain aspects of Witt’s 6 methodology, see id. at 25, but these arguments are more properly raised in a Daubert 7 motion and provide no basis for denying Bally summary judgment. 8 IV. CONCLUSION 9 For the foregoing reasons, the Court grants Bally’s motion for summary judgment 10 on Counts II and IV. The question of damages is to be resolved by trial. 11 IT IS SO ORDERED. 12 Dated: February _2_4_, 2022 13 CHARLES R. BREYER 14 United States District Judge 15 16 17 18 19 20 21 22 23 24 25 26 27