PETER FISCHL v. PACIFIC LIFE INSURANCE COMAPNY
B320820
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION TWO
Filed 8/3/23
CERTIFIED FOR PUBLICATION; (Los Angeles County Super. Ct. No. KC068602)
Gordon W. Renneisen and Benjamin Blakeman for Plaintiff and Appellant.
Finlayson Toffer Roosevelt & Lilly and Matthew E. Lilly for Defendant and Respondent.
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FACTS AND PROCEDURAL BACKGROUND
I. Facts
Peter Fischl (plaintiff) is a thoracic surgeon. After the stock market crash now known as the “Great Recession” of 2008, plaintiff asked his sister to recommend a good financial planner. She recommended Gregory Acosta (Acosta).
Acosta held a license to sell life insurance and a license to sell variable products. In 2008, he conducted these sales as part of his financial planning business through two companies—namely, Gregory R. Acosta, Inc. and Diamond Bar Executive Benefit Programs & Insurance Services, Inc. (the Acosta entities). He was also a broker of variable products under the outside firms of Kestra Investment Services, LLC (Kestra) and Securities America, Inc. (Securities America) at different times. Between 30 and 40 insurance companies appointed Acosta to offer his clients the various companies’ investment and life insurance products to aid in his clients’ retirement planning.
One of the various products Acosta offered was a variable life insurance policy. Variable life insurance is a hybrid of a life insurance policy and an investment vehicle: It resembles a life insurance policy insofar as the policy holder pays annual premiums and the policy pays out a death benefit in the event of the holder‘s death; it resembles an investment vehicle insofar as the premiums are placed in a holder-specific account and invested in the market as retirement funds (with the attendant tax benefit), and may be withdrawn from the account upon retirement—although doing so reduces the amount of the death
In 2008, the Acosta entities and Securities America had contracts with Pacific Life Insurance Company (Pacific Life) that authorized them to act as a broker (or “producer“) for Pacific Life, and thus to offer their clients one of several variable life insurance policies from Pacific Life. At that time, Pacific Life had adopted—and in its contracts with its brokers, obligated those brokers to “strict[ly]” adhere to—“suitability standards” that required the brokers to (1) investigate a potential applicant‘s financial condition and investment goals, and (2) assess whether any Pacific Life variable life insurance policy the broker was recommending was suitable as an investment vehicle for that applicant (that is, whether those policies were consistent with the “customer‘s needs“).2 Consistent with his contractual obligations and longstanding practice, Acosta gathered information about plaintiff‘s finances and investment goals by asking plaintiff questions and sending a “fact-finder” to obtain pertinent documentation, and then assessed whether any of Pacific Life‘s variable life insurance policies were suitable for plaintiff. Acosta memorialized this information—including plaintiff‘s income and net worth, investment knowledge and experience, and risk tolerance. During the inquiry into suitability, plaintiff spoke only with Acosta and his employees; plaintiff at no point interacted with Pacific Life. On the basis of his suitability analysis, Acosta recommended two Pacific Life insurance policies that he felt would be “best” for plaintiff. To avoid duplicative coverage, Acosta also recommended that plaintiff replace the two non-
On the basis of Acosta‘s recommendation, plaintiff filed applications to Pacific Life for a variable life insurance policy—the Select Exec III policy—and a second policy, the Versa-Flex NLG policy. In the applications, plaintiff also acknowledged that he had “considered [his] liquidity needs, risk tolerance and investment time horizon in selecting” the policies. Along with those applications, Acosta certified that he had conducted a suitability analysis. Consistent with its longstanding practice, Pacific Life did not independently examine whether either policy was “suitable” for plaintiff‘s financial condition and goals. In determining whether to grant the applications, however, Pacific Life‘s underwriters did examine whether these policies presented an “unacceptable risk” to Pacific Life. The underwriters determined that they did not, and issued the two policies to plaintiff.3
The Select Exec III policy:
- Required plaintiff to make an initial premium payment of $130,000, and then to make annual premium payments of $54,950 for each of the next six years;
- Anticipated that plaintiff would withdraw $75,374 per year as part of his retirement earnings starting in year 16 of the policy (that is, when plaintiff turned 75 years old); and
- Paid out a death benefit of $2,058,424 if plaintiff passed away during the first seven years, but then dropped the
The Versa-Flex NLG policy required plaintiff to make a $54,000 initial premium payment, no payment in the second year, and a $17,654 premium payment for each year thereafter; the death benefit was fixed at $1 million.
Between 2008 and 2014, plaintiff made the premium payments on the two Pacific Life policies. Because plaintiff‘s annual income during that period was $180,000, plaintiff did not pay the premiums entirely out of his income and instead resorted to liquidating portions of his other assets.
In 2015, plaintiff met with the investment advisor he had used prior to 2008. That advisor told him that the two Pacific Life policies were not “suitable” for plaintiff‘s financial condition and investment goals; on the basis of that advice, plaintiff surrendered the Select Exec III policy and let the Versa-Flex NLG policy lapse, both at a loss.
II. Procedural Background
A. Plaintiff sues
On July 19, 2016, plaintiff sued Acosta, the Acosta entities, Kestra, Securities America, and Pacific Life. In that original complaint, plaintiff asserted claims for fraud, negligent misrepresentation, breach of fiduciary duty, negligence, financial elder abuse, and violation of California‘s Unfair Competition Law (UCL) (
Plaintiff‘s claims against Acosta, the Acosta entities, Kestra, and Securities America proceeded to arbitration. That arbitration resulted in a January 2019 settlement agreement. Acosta, the Acosta entities, Kestra, and Securities America agreed to pay plaintiff a total of $400,000. In exchange, plaintiff entered into two releases. He “release[d] and forever discharge[d]” the settling parties “from any and all claims.” Plaintiff also “release[d] and forever discharge[d]” Pacific Life “from all claims that result from any of Acosta‘s acts or omissions . . . that are negligent . . . or that result from Acosta‘s . . . violation of, or refusal or failure to comply with: (1) the terms of Pac[ific] Life‘s Producer‘s Contract with Acosta;” or “(2) any federal or state law, rule or regulation . . . except to the extent that Pac[ific] Life . . . caused, contributed to, or compounded such.” The release against Pacific Life carved out claims “for its direct conduct including, but not limited to, underwriting and marketing of its life insurance policies.”
C. Pacific Life moves for summary judgment
After the trial court sustained successive demurrers to each of plaintiff‘s first, second, and third amended complaints with leave to amend, plaintiff filed the operative fourth amended complaint. This complaint named Pacific Life as the sole defendant, and asserted four claims: (1) intentional misrepresentation, (2) negligent misrepresentation, (3) negligence, and (4) violation of the UCL. This complaint quadrupled the original prayer for damages, and thus sought damages of “no less than” $1,992,000.
Although the court rejected Pacific Life‘s arguments that plaintiff‘s claims were untimely, the court found that Pacific Life had no duty to conduct an independent suitability analysis that survived the release. With regard to the last point, the court ruled that (1)
D. Plaintiff appeals
After the court entered judgment for Pacific Life, plaintiff filed this timely appeal.
Plaintiff argues that the trial court inappropriately entered summary judgment for Pacific Life on his negligence and UCL claims because Pacific Life remains liable to plaintiff—notwithstanding plaintiff‘s release absolving Pacific Life of liability for claims “result[ing] from” Acosta‘s “negligent” “acts or omissions“—because (1)
Summary judgment is appropriate, and the moving party (typically, the defendant) is entitled to judgment as a matter of law, where (1) the defendant carries its initial burden of showing either the nonexistence of one or more elements of the plaintiff‘s claim or the existence of an affirmative defense, and (2) the plaintiff thereafter fails to show the “existence of a triable issue of material fact” as to those elements or affirmative defense. (Pereda v. Atos Jiu Jitsu LLC (2022) 85 Cal.App.5th 759, 767 (Pereda);
We now turn to the two questions presented by our review of Pacific Life‘s summary judgment motion.
I. Does an Insurance Company Have a Duty to Conduct Its Own, Independent Suitability Analysis of a Variable Life Insurance Product?
Plaintiff‘s first argument to overcome the release, and thereby hold Pacific Life liable for negligence and unlawful business practices under the UCL, hinges on whether an insurance company has a duty—imposed by
The existence of a duty is a predicate for a negligence claim (Hoffmann v. Young (2022) 13 Cal.5th 1257, 1268), and a duty can be derived from (1) a statute (Issakhani v. Shadow Glen Homeowners Assn., Inc. (2021) 63 Cal.App.5th 917, 925, 929 (Issakhani), citing Vesely v. Sager (1971) 5 Cal.3d 153, 164); or (2) a regulation, but only if our Legislature has properly delegated
The regulation at issue here is
“Every insurer seeking approval to enter into the variable life insurance business in this State shall adopt by formal action of its Board of Directors and file with the Commissioner a written statement specifying the Standards of Suitability to be used by the insurer, and applicable to its officers, directors, employees, affiliates, and agents with respect to the suitability of variable life insurance for the applicant. Such Standards of Suitability shall be binding on the insurer and those to whom it refers, and shall specify that no recommendation shall be made to an applicant to purchase a variable life insurance policy and that no variable life insurance policy shall be issued in the absence of reasonable grounds to believe that the purchase of such policy is not unsuitable for such applicant on the basis of information furnished
after reasonable inquiry of such applicant concerning the applicant‘s insurance and investment objectives, financial situation and needs, and any other information known to the insurer or to the agent making the recommendation.
Lapse rates for variable life insurance within the first two policy years, which are significantly higher than both those encountered by the insurer . . . for corresponding fixed benefit life insurance policies and lapse rates of other insurers issuing variable life insurance policies shall be considered in determining whether the guidelines adopted by the insurer are reasonable and also whether the insurer and its agents are engaging, as a general business practice, in the sale of variable life insurance to persons for whom it is unsuitable. . . .” (
§ 2534.2, subd. (c) .)
In examining this regulation, we must answer two distinct but interrelated questions: (1) Does the regulation require someone to conduct a suitability analysis before a variable life insurance policy may issue, and (2) Does the regulation require the insurance company to independently conduct such an analysis, even if someone else (usually, the broker) has already done so?
In answering these questions, we interpret regulations the same way we interpret statutes. (Hoitt v. Department of Rehabilitation (2012) 207 Cal.App.4th 513, 523 (Hoitt).) This means our “‘fundamental task‘” is to “‘effectuate the law‘s purpose.‘” (City of San Jose v. Superior Court (2017) 2 Cal.5th 608, 616-617.) Because the best indicator of the legislature‘s—or, in this case, agency‘s—intent is found in the words of the regulation itself, we start with the text. (Ibid.) If the text is
A. Does section 2534.2(c) require someone to conduct a suitability analysis?
The answer to this question is “yes.”
By its plain text,
The law and the undisputed evidence in this case indicate that it is the broker who typically conducts this suitability analysis. Variable life insurance policies are a “variable product,” and a different Insurance Commissioner regulation requires “brokers and agents selling variable products [to] comply with suitability standards.” (
In most situations, this division of labor will have no effect on an insurance company‘s liability for a defective suitability analysis. If an insurance company itself conducts a suitability analysis that is later determined to be negligent, the company
B. Does section 2534.2(c) obligate an insurance company to conduct its own, independent suitability analysis, regardless of whether the broker has also conducted one?
1. Analysis
The answer to this question is “no,” and chiefly for two reasons.
First, the text of
Second, the canons of statutory construction reinforce our conclusion that
The second pertinent canon counsels us to avoid construing a statute (or, as pertinent here, a regulation) in a way that would lead to absurd results. (Tuolumne Jobs & Small Business Alliance v. Superior Court (2014) 59 Cal.4th 1029, 1037; see also, Hoitt, supra, 207 Cal.App.4th at p. 523 [regulations must be construed to “make [them] reasonable and workable“].) Construing
For these reasons, we construe
Plaintiff offers what boils down to six arguments for why
First, plaintiff offers an alternative textual analysis of the regulation. Specifically, he asserts that section 2434.2(c) “unambiguous[ly]” imposes a duty on the insurance company to perform its own analysis; as explained above, we have come to a contrary conclusion. Relatedly, he attacks our analysis to the extent it relies on the regulation‘s language that a suitability analysis may look to “any other information known to the insurer or to the agent making the recommendation.” Specifically, plaintiff argues that this language does not support our “no duty” conclusion because the “any other information” prong is just one of two sources of information that feeds into a proper suitability analysis. We are unpersuaded. What makes this language supportive of our conclusion is not that it is an appropriate source of information; instead, what makes it supportive is that the information may be known either to the company or to the broker, which suggests that either may conduct the suitability analysis with this additional information. Plaintiff‘s broader attack that our reading of this clause somehow impermissibly substitutes “or” for “and” is unhelpful hyperbole that itself rests on a misreading of the statute. What is more, our analysis of the plain text of
Third, plaintiff emphasizes that
Fourth, plaintiff urges that public policy demands that
Fifth, plaintiff cites his expert witness‘s declaration in which the witness opines that
Sixth and lastly, plaintiff suggests that insurance companies have a duty to conduct their own, independent analysis because that is the custom in the industry. We reject this suggestion because the undisputed facts in this case are diametrically to the contrary. What is more, industry custom or practice cannot create a legal duty. (See Sheward v. Virtue (1942) 20 Cal.2d 410, 414 [“the doctrine of customary usage does not apply to the question of legal duty under the law of negligence“]; Robinet v. Hawks (1927) 200 Cal. 265, 274 [same]; Silberg v. Cal. Life Ins. Co. (1974) 11 Cal.3d 452, 462 [same]; Van de Kamp v. Bank of America (1988) 204 Cal.App.3d 819, 835 [“Custom cannot overcome positive provisions of statutes“].)
Plaintiff‘s second argument to overcome the release, and thereby to hold Pacific Life liable under his negligence and UCL claims, has three steps: (1) Pacific Life‘s issuance of the two policies and acceptance of plaintiff‘s premium payments constitutes a “ratification” of Acosta‘s negligent suitability analysis, (2) a principal that “ratifies” an agent‘s conduct becomes “directly” liable for that conduct (rather than “vicariously” liable), and (3) the release only absolves Pacific Life of vicarious liability for Acosta‘s actions, leaving its direct liability actionable.
We will assume that plaintiff has established the first two steps of his argument, even though the law with regard to whether ratification necessarily amounts to direct or vicarious liability is admittedly murky. A principal may implicitly “ratify” the conduct of an agent—and thereby become liable for that conduct under the law—by accepting the benefits of that conduct with “knowledge of the material facts.” (Rakestraw, supra, 8 Cal.3d at pp. 73-74; Reusche, supra, 231 Cal.App.2d at p. 737; Alvarado Community Hospital v. Superior Court (1985) 173 Cal.App.3d 476, 481 [“a principal will be held to have ratified the agent‘s actions where he voluntarily accepts the benefits of the unauthorized transaction“]; Allied Mutual Ins. Co. v. Webb (2001) 91 Cal.App.4th 1190, 1194 [“an agent‘s originally unauthorized act may be ratified by implication where the only reasonable interpretation of the principal‘s conduct is consistent with approval or adoption“];
But plaintiff‘s argument fails on the third step. Contrary to what plaintiff suggests, the release does not turn on the distinction between “direct” liability and “vicarious” liability; indeed, the release does not use that distinction at all. Instead, the plain text of the release draws a different distinction: Pacific Life is released from any liability based on “claims that result from any of Acosta‘s” “negligent” “acts or omissions” or that “result from Acosta‘s” “failure to comply” with the terms of his contract with Pacific Life or any “state . . . regulation,” but is not released from liability for its own conduct that “caused, contributed to, or compounded” Acosta‘s shortcomings or for “its direct conduct including . . . underwriting and marketing of its life insurance policies.” Here, plaintiff‘s negligence and UCL claims—as he has narrowed them by the time of this appeal—seek to hold Pacific Life liable for Acosta‘s negligent conduct in performing the suitability analysis, which simultaneously breaches Acosta‘s contracts and
* * *
In light of our analysis, we have no occasion to reach the parties’ alternative arguments regarding whether plaintiff‘s claims are barred by the statute of limitations.
DISPOSITION
The judgment is affirmed. Pacific Life is entitled to its costs on appeal.
CERTIFIED FOR PUBLICATION.
______________________, J.
HOFFSTADT
We concur:
______________________, P. J.
LUI
______________________, J.
ASHMANN-GERST