Class Certification for Challenging Life Insurer’s Termination of Policies Overturned
The Ninth Circuit overturned the district court's certification of a class challenging a life insurance company's closing of policies without notice for failure to pay premiums. Small v. Allianz Life Ins. Co. of N. Am., 2024 U.S. App. LEXIS 31231 (9th Cir. Dec. 10, 2024).
Provisions in California's Insurance Code prevented "people who hold insurance policies from inadvertently losing them due to non-payment of premiums." Plaintiff LaWanda Small was a beneficiary and additional insured of her deceased husband's $75,000 universal life insurance policy. The Smalls paid the premiums due under the policy for 26 years until they missed a payment in August 2016 and the policy was thereafter terminated. Small sought reinstatement but was denied.
It was undisputed that Allianz did not notify Small or her late husband of the right to designate a third party to receive notices of unpaid premiums or impending termination as the California statutes required. Small sued Allianz for declaratory relief and breach of contract, alleging that Allianz failed to comply with the statutes' notice requirements. Small moved to certify a class of approximately 1,800 members consisting of "owners or beneficiaries of life insurance policies that were terminated for nonpayment of premiums without receiving an opportunity to designate one or more persons to receive notices of unpaid premiums."
The district court granted class certification and divided the class into two subclasses. The first was defined as "owners of policies with currently living insureds" seeking "to have their policies reinstated" ("Living Insured Subclass"). The second was defined as "beneficiaries of policies with deceased insureds," seeking "breach of contract money damages in the amount of the death benefit" ("Beneficiary Subclass"). The district court found that both Subclasses satisfied the numerosity, commonality, adequacy and typicality requirements for Fed. R. Civ. P. 23 (a). Allianz appealed the district court's order certifying the class.
The issue was whether to make out a claim a plaintiff had to only show the statutes were violated, or, whether a plaintiff had to also show that the violation caused them harm. In the life insurance industry, policyholders frequently cancelled their policies by letting the unwanted policies lapse and not paying premiums rather than informing insurers of their intent to cancel. Therefore, how could a class recover for procedural violations of the statutes meant to prevent unintentional lapse when the insureds intended for their policies to lapse?
Courts used one of two theories of recovery for closed life insurance policies. Under the "violation-only" theory, an insurer's noncompliance with the statutes kept the policy in perpetual force even after nonpayment of premiums if no notice of closure was given. Under the "causation" theory, the plaintiff not only alleged a violation of the statutes, but also showed that the violation caused harm.
The district court adopted the "violation-only" theory. The Ninth Circuit was critical of this theory. If policies never lapsed and remained perpetually enforced even after non-payment simply because the insurer did not send required notices, policies could accrue for years even if an insured intended to cancel the policy in the first place by declining to pay higher premiums. The court did not think the statutes were designed to protect this class of insureds.
The Ninth Circuit predicted that the California Supreme Court would adopt the "causation" ehtory and reject the "violation-only" theory. There were no California Supreme Court of Court of Appeal cases adopting the "violation-only" theory for the statutes.
Next the Ninth Circuit determined that Small was an inadequate representative and her claim was atypical of both Subclasses. Further, the class could not survive because, under the causation theory, neither Subclass satisfied Rule 23 (b). Rule 23 (b) (3) would require the Beneficiary Subclass to have common questions that "predominate over any questions affecting only individual members." Establishing that Allianz's alleged conduct caused each class member an injury required 'presenting evidence that varied from member to member. Plaintiffs had to not only establish a violation but that the violation caused them harm. Therefore, common questions did not predominate because causation could not be determined on a class-wide basis. The record was clear that determining whether policyholders knowingly let their policies lapse due to nonpayment was an individualized inquiry. Therefore, under the "causation" theory, individual questions predominated over common ones. The predominance requirement therefore was not satisfied, and the Beneficiary Subclass could not be certified.
The district court also erred when it certified the Living Insured Subclass by holding that it was entitled to class-wide equitable relief as provided in Rule 23 (b) (2). The provision applied when "the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole." The Living Insured Subclass did not meet the standard for class-wide equitable relief under Rule 23 (b) (2). Injunctive relief of reinstating policies was not "appropriate" under Rule 23 (b) (2). Because members of a class certified under Rule 23 (b) (2) could not opt-out, forced reinstatement of policies meant reinstating policies for insureds who intentionally cancelled and who could not show that the inadvertent policy lapse caused harm.
Therefore, the district court erred in granting class certification because Small did not show that either Subclass met the requirement of Rule 23 (a) and (b).
