Opinion
A128280
09-01-2011
WILLIAM FRANCIS FLAHAVAN, Plaintiff and Appellant, v. STATE COMPENSATION INSURANCE FUND, Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(City and County of San Francisco Super. Ct. No. CGC-05-446016)
William Francis Flahavan filed an action on behalf of himself, individually, and on behalf of all persons similarly situated against the State Compensation Insurance Fund (the State Fund). Flahavan challenged the State Fund's practice of not paying interest on a "deposit premium" that it charges when a party obtains a policy for workers' compensation insurance from it. After the policy ends, if some deposit premium remains on the account, the State Fund refunds the excess but retains the interest earned on the revenue.
The trial court granted summary judgment in favor of the State Fund. It determined that the State Fund had no obligation to pay policyholders interest. Flahavan appeals from the judgment and claims that the language of the policy and the common law rule that interest follows principal created an obligation to pay interest on the "deposit premium." We conclude that the lower court correctly ruled that the State Fund had no obligation to pay interest, and affirm the judgment.
BACKGROUND
The State Fund and it Procedures regarding the "Deposit Premium"
The State Fund, a state agency and public enterprise fund created by the California Constitution and the Legislature, provides workers' compensation insurance to California employers. (Cal. Const. Art. XIV, § 4; Lab. Code, § 56.) The State Fund was created to guarantee that California employers would have a source for workers' compensation insurance. (Courtesy Ambulance Service v. Superior Court (1992) 8 Cal.App.4th 1504, 1511.) The State Fund cannot refuse to insure any workers' compensation risk, except under narrow circumstances. (Ins. Code, § 11784, subd. (c).)
The State Fund receives no money from the state, and is required to support itself. (Ins. Code, §§ 11771 & 11775.) Any surplus in excess of required reserves is returned to policyholders. If there is "an excess of assets over liabilities, necessary reserves, and a reasonable surplus for the catastrophe hazard, then a cash dividend may be declared to, or a credit allowed on the renewal premium of, each employer who has been insured with the [State Fund]." (Ins. Code, § 11776.)
When a policyholder obtains workers' compensation insurance, the State Fund requires the policyholder to pay as "deposit premium" a percentage of the estimated annual premium for the policy year. The estimated annual premium is generally determined by the State Fund using expected payroll and job classification information provided by the policyholder. These estimates, along with other information, are used to arrive at an "interim rate." The interim rate is the estimated rate for each class code, and includes a premium discount modifier that is based upon the amount of premium. The premium discount modifier is estimated when a policyholder begins a policy year, and then is adjusted at the end of the policy year, when the actual premium is known.
The percentage of the estimated annual premium that must be paid as "deposit premium" to obtain insurance depends upon the frequency of payment. Thus, if the policyholder is to pay premium on a monthly basis, the policyholder pays 10 percent of the estimated annual premium to incept coverage. If the policyholder is to pay premium on an annual basis, then the policyholder pays 100 percent of the estimated annual premium to commence coverage.
The State Fund sends report forms to its policyholders for each payroll reporting period. After the payroll period ends, the policyholder enters the payroll paid for each job classification, multiplies each by the rate, totals the premium for all job classifications, and submits the report and payment for that period to the State Fund. At the end of the policy period, the final payroll report is completed for the last reporting period of the policy.
At the end of every policy year, the State Fund audits certain accounts and determines whether this policyholder reported accurate payroll information and paid the correct amount of premium. Subsequently, the audit is assigned to an audit analyst who prepares a final bill. After the audit is completed, the audit analyst determines the actual rates to be used. There is nothing in this record to suggest that any audit was performed as to the policy at issue on this appeal.
The Policy at Issue on this Appeal
Flahavan's mother, Madelyn Flahavan (mother), needed continuous care. Marylynne Thompson was a co-trustee of the trust of mother and Thompson (the Trust). In 2003, Thompson, Flahavan's predecessor trustee, hired two employees to care for mother. The State Fund provided the Trust with a contract of worker's compensation insurance (the policy) for the period of March 6, 2003, through March 6, 2004 (the 2003 policy year). The policy was to provide coverage for the persons caring for mother.
The Trust initially paid a $935 monthly "deposit premium" to obtain the insurance policy. Subsequently, the State Fund determined that the Trust could pay a smaller premium if the job classification of the employees was changed from homemaker services to private residence employee. This latter classification required the premium to be paid annually; the Trust paid an additional $3,531 toward the "deposit premium" for an annually reported policy to obtain the lower rate. The Trust paid a total "deposit premium" for the 2003 policy year of $4,310.
The policy renewed automatically for the period of March 6, 2004, to March 6, 2005 (the 2004 policy year). The 2003 "deposit premium" of $4,310 was transferred to the 2004 policy year.
At the end of the 2003 policy year, the State Fund asked the Trust to report its payroll. Thompson signed a payroll report dated March 13, 2004, but did not correctly calculate the premiums owed. The premium due for 2004 was $4,232.51. The Trust sent a premium payment of $2,010.50 to the State Fund on March 18, 2004. The Trust still owed $2,222.01 for the "deposit premium."
On July 15, 2004, Thompson notified the State Fund that mother had died on July 1, 2004, and that the Trust policy should be cancelled. The State Fund cancelled the policy effective July 2, 2004.
The State Fund requested payroll information from the Trust for the period of March 6, 2004, to July 2, 2004. On August 11, 2004, the State Fund received a payroll report signed by Thompson, but she did not include any premium due. The State Fund sent her a bill for $857.71; it received payment for this amount on August 25, 2004.
On October 4, 2004, after receiving additional information from the Trust's accountant, the State Fund recalculated the premium due and issued a final bill of $950.94 for the 2004 policy period. Since the Trust had paid $857.71, the amount due was $93.23.
The State Fund applied the "deposit premium" of $4,310 to the outstanding premium due for the 2003 policy year of $2,222.01, and then to the amount of $93.23 due for the 2004 policy period. It also applied statutory for the policy in 2003 and 2004. For the excess amount of "deposit premium," the State Fund issued checks in the amounts of $9.10 and $2,036.75 to the Trust on October 4, 2004, and October 7, 2004, respectively.
The Terms of the Trust's Insurance Policy
The State Fund issued the Trust a policy with various endorsements. The beginning of the policy includes the following: "This policy includes the Declarations and all endorsements and schedules issued by us to be part of this policy and constitutes the entire contract of insurance. It is a contract of insurance between you and us. It is non-transferable. The only agreements relating to this insurance are stated in this policy. [¶] The terms of this policy may not be changed or waived except by endorsement issued by us to be part of this policy. You are responsible for telling us at once when the information contained in this policy is no longer accurate for your operations. [¶] No condition, provision, agreement or understanding not stated in this policy contract will affect any rights, duties or privileges in connection with this policy contract."
The policy sets forth the following regarding "Final Premium": "The premium shown on the Declarations, schedules and endorsements is an estimate. The final premium will be determined after this policy ends by using the actual premium basis and the proper classifications, rates and rating plans that lawfully apply to the business and work covered by this policy. If you do not provide us with the information necessary to determine the actual premium basis, the estimated premium will be used. If the final premium is more than the premium you paid to us, you must pay us the balance. If it is less, we will refund the balance to you. The final premium will not be less than the minimum premium for this policy. [¶] If this policy is cancelled, final premium will be determined in the following way unless our manuals provide otherwise: [¶] 1. If we cancel, final premium will be calculated pro rata based on the time this policy was in force. Final premium will not be less than the minimum premium if we cancel because you fail to comply with the terms and conditions of this policy in regard to payroll records or premium payments. [¶] 2. If you cancel, final premium will be more than pro rata: it will be based on the time this policy was in force, and increased by any short rate cancellation table and procedure in our manuals."
Under the heading "Long Term Policy," the policy states the following: "If this policy is written for a period longer than one year, all the provisions of this policy shall apply separately to each consecutive twelve month period. If the first or last consecutive period is less than twelve months, the provisions of this policy shall apply as if a separate policy had been written for each consecutive period. Until your policy terminates, your deposit premium will be transferred to each consecutive policy period to act as a deposit as if a separate policy had been written."
The Proceedings in the Trial Court and the Filing of the Notice of Appeal
Flahavan filed a lawsuit asserting that the policyholder is entitled to interest on the amount of deposit premium returned to the policyholder after policy cancellation. He sued the State Fund for breach of contract, breach of trust, and violation of the Unfair Competition Law (UCL). The State Fund demurred to the complaint. On February 16, 2006, Flahavan filed a first amended class action complaint for breach of contract, breach of trust, and a violation of the UCL (Bus. & Prof. Code, § 17200 et seq.).
The State Fund filed a motion for summary judgment and/or summary adjudication against Flahavan's first amended complaint. Judge A. James Robertson II held a hearing. On March 13, 2007, Judge Robertson denied the motion. The State Fund petitioned for a writ of mandate seeking review of the denial of its summary judgment motion, and we denied the petition on May 3, 2007.
On August 20, 2007, the State Fund filed a motion for judgment on the pleadings. Flahavan moved for class certification. On September 12, 2007, Judge Kevin M. McCarthy held a hearing. He denied the State Fund's motion for judgment on the pleadings. He granted Flahavan's motion to certify the class. The State Fund filed another petition for writ of mandate, and we denied that petition on February 19, 2008.
Flahavan filed a motion for summary adjudication and the State Fund filed a second motion for summary judgment and/or summary adjudication. Judge Harold E. Kahn held a hearing on November 3, 2008, and a further hearing on December 5, 2008. Judge Kahn entered an order on January 15, 2009, denying both motions.
On February 10, 2009, the court issued an order granting its sua sponte motion to reconsider the March 13, 2007 order. Judge Kahn found: "In reconsidering Judge Robertson's March 13, 2007 order, the court finds that the State Fund has established that it has no obligation to pay interest to its insureds on the deposit premiums held by the State Fund from the date the insureds paid the deposit premiums. Accordingly, the court now GRANTS summary adjudication to the State Fund on the issue of whether it has an obligation to pay interest to its insureds on the deposit premiums held by the State Fund from the date the insureds paid the deposit premiums."
In its order of February 10, 2009, the trial court also found various undisputed facts, including the following: "There is no dispute as to what documents constitute the insurance policy contract (the 'Policy'). . . ." Thompson purchased the policy and had "no recollection of speaking to anyone at the State Fund about interest or expecting interest to be paid by the State Fund on the deposit premium. . . . Flahavan admits that the Trust was required to pay deposit premium to obtain the coverage. . . . Ms. Thompson, as the co-trustee, signed the Terms of Insurance letter which stated that insurance would be effective the day following receipt by the State Fund of the deposit premium. . . ."
The court concluded as follows: "There is no triable issue as to whether there is an obligation for the State Fund to pay interest on any or all of a deposit premium from the date of the payment of the deposit premiums. The language of the policy contract does not create an obligation to pay interest to the policyholders from the date the State Fund receives the deposit premium. [¶] . . . Flahavan has not shown that any California law requires the State Fund to pay interest to its insureds on the deposit premiums from the date the insureds pay the deposit premiums."
On November 3, 2009, the trial court permitted Flahavan to certify three subclasses based on three new dates from which interest allegedly could accrue. The three subclasses were: "(1) insureds whose deposits rolled over after the first renewal of their policies after the initial deposit was made and later received all or a portion of their deposit back after their policies were cancelled; [¶] (2) insureds whose polices were cancelled and all or any portion of their deposits were returned to them; and [¶] (3) insureds whose policies were cancelled and who submitted final payroll reports and subsequently received any portion of their deposits from [the] State Fund."
Flahavan filed two motions for summary adjudication and the State Fund filed a motion for summary judgment. On January 21, 2010, the trial court filed its order granting the State Fund's motion for summary judgment and denying Flahavan's motion for summary adjudication. The court explained that in its prior decision it ruled that the State Fund "had no obligation to pay interest on a deposit premium from the date the deposit was paid because the policy contract did not create such an obligation and none of the provisions of California law cited by Flahavan imposed such an obligation on [the] State Fund."
The court elaborated: "Where, as here, there is a contract that governs the parties' rights and obligations and that contract is silent regarding the payment of interest, absent a statute requiring the payment of interest, there is no duty to pay interest at least until all of the contract terms have been fully executed." (Underline omitted.) The court determined that "[t]he common law rule of 'interest follows principal' does not apply to [the] State Fund's failure to pay interest on all or any portion of the deposit refund on or before its review of a final payroll report." (Underline omitted.) The court found that the State Fund did not owe a duty to pay interest under express or constructive trust theories. It concluded that the State Fund did not violate the UCL.
The trial court entered judgment in favor of the State Fund on February 22, 2010. Flahavan filed a timely notice of appeal.
DISCUSSION
I. Standard of Review
We review a trial court's grant of summary judgment de novo. (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 388-389.) "In performing our de novo review, we must view the evidence in a light favorable to [the] plaintiff as the losing party [citation], liberally construing [the plaintiff's] evidentiary submission while strictly scrutinizing [the] defendant['s] own showing, and resolving any evidentiary doubts or ambiguities in [the] plaintiff's favor." (Saelzler v. Advanced Group 400 (2001) 25 Cal.4th 763, 768-769.)
The trial court shall grant the defendant's motion for summary judgment "if all the papers submitted show that there is no triable issue as to any material fact and that [defendant] is entitled to a judgment as a matter of law." (Code Civ. Proc., § 437c, subd. (c).) A defendant moving for summary judgment meets his or her burden of showing that there is no merit to a cause of action by showing that one or more elements of the cause of action cannot be established or that there is a complete defense to that cause of action. (Code Civ. Proc., § 437c, subd. (p)(2).) Once the defendant has made the required showing, the burden shifts back to the plaintiff to show that a triable issue of one or more material facts exists as to that cause of action or defense. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 849, 853.) California law requires that "a defendant moving for summary judgment . . . present evidence, and not simply point out that the plaintiff does not possess, and cannot reasonably obtain, needed evidence." (Id. at p. 854, fn. omitted.)
The present case involves the interpretation of an insurance policy. Absent a factual issue concerning the meaning of policy language, the interpretation of an insurance contract is a question of law subject to our independent or de novo review. (Gin v. Pennsylvania Life Ins. Co. (2005) 134 Cal.App.4th 939, 943.) The overarching aim of contract interpretation is to give effect to the parties' mutual intentions at the time of contracting. (Civ. Code, § 1636.) When policy language is clear and explicit and does not lead to an absurd end, we ascertain this intent from the written provisions and do not proceed further. (Civ. Code, §§ 1638, 1639; AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822.) We will understand the words of a policy in their ordinary and popular sense unless the parties use them in a technical sense or "a special meaning is given to them by usage." (Civ. Code, § 1644.)
A policy provision is ambiguous if it is susceptible to more than one reasonable construction. (Helfand v. National Union Fire Ins. Co. (1992) 10 Cal.App.4th 869, 880.) However, we will not strain the language to create an ambiguity, or label a provision ambiguous simply by isolating phrases and regarding them in the abstract. (Ibid.) Rather, courts will construe the provision in relation to the whole of the instrument, and may explain the policy by reference to the circumstances of its making, and the matter to which it pertains. (Civ. Code, §§ 1641, 1647; E.M.M.I., Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465, 470.) We resolve any ambiguity by interpreting the policy provision in question in the sense in which the insurer believed the insured understood it at the time of formation. (Civ. Code, § 1649.) If resort to this rule does not eliminate the uncertainty, then we construe the pertinent language against the insurer, the drafter who created the uncertain language in the first place, thereby protecting the insureds' reasonable expectations. (Civ. Code, § 1654; E.M.M.I., Inc. supra, at pp. 470-471.)
II. The Trial Court's Determination that the Policyholders Are Not Entitled to Interest
A. Introduction
The trial court determined that the policyholders were not entitled to interest on the funds they submitted to the State Fund for the "deposit premium." There is no contention that a statute requires the State Fund to pay interest to the policyholder for the "deposit premium." Thus, the pivotal question is whether, under the terms of the policy and the law on the subject of interest, the lower court correctly rejected Flahavan's argument that the State Fund had to pay interest on the "deposit premium" to the policyholders. B. The Policy Is an Integrated Contract
The Workers' Compensation Insurance Rating Bureau (WCIRB), pursuant to Insurance Code section 11658, approved the policy at issue. The WCIRB and the California Department of Insurance regulations require the contract to state that it, with its endorsements and declarations, constitutes the "entire contract of insurance," and that no condition, provision, agreement or understanding not set forth that affects the rights, duties, or privileges, arising under the policy. (Cal. Code Regs., tit. 10, § 2318.6.) This language is contained in the "General Section" portion of the policy as the policy states that "[t]he only agreements relating to this insurance are stated in this policy." It further provides that "[n]o condition, provision, agreement or understanding not stated in this policy contract will affect any rights, duties or privileges in connection with this policy contract."
The policy was an integrated contract and the parol evidence rule, as codified in Code of Civil Procedure section 1856, subdivision (a), applies. This statute provides: "Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement." (Code Civ. Proc., § 1856, subd. (a).) Thus, "[w]hen the parties to a written contract have agreed to it as an 'integration'—a complete and final embodiment of the terms of an agreement— parol evidence cannot be used to add to or vary its terms." (Masterson v. Sine (1968) 68 Cal.2d 222, 225.) Accordingly, neither Flahavan nor the State Fund can rely on parol evidence to add to or vary the express language in the policy. C. The Policy's Provisions Regarding Interest Owed and Ownership of the "Deposit Premium"
It is undisputed that the policy does not mention interest. Flahavan, however, argues that the plain meaning of the language in the policy establishes that the policyholder retains a property interest in the "deposit premium."
Flahavan focuses on the following provision in the policy: "If this policy is written for a period longer than one year, all the provisions of this policy shall apply separately to each consecutive twelve month period. If the first or last consecutive period is less than twelve months, the provisions of this policy shall apply as if a separate policy had been written for each consecutive period. Until your policy terminates, your deposit premium will be transferred to each consecutive policy period to act as a deposit as if a separate policy had been written." He claims that the use of the words your deposit premium indicates that the "deposit premium" belongs to the policyholder, not to the State Fund. He argues that the policy does not specify that the State Fund may take this deposit and use the earnings and therefore the deposit belongs to the policyholder and is held for safekeeping by the State Fund. Furthermore, he asserts that the language providing for annual transfer of the "deposit premium" to "act as a deposit" shows that it is not a payment for insurance coverage.
Flahavan maintains that the State Fund's assertion that the deposit is unearned premium is inconsistent with the structure of the State Fund's own contract. He claims counsel for the State Fund admitted this inconsistency at the class certification hearing. At this hearing, counsel for the State Fund stated: "And the declarations also show that these so-called deposits, which I have referred to as unearned premium, because that's in fact what they are. It's just premium that is paid in advance, like any other insurance company gets it. And then it is adjusted, . . . , after it becomes clear what the payroll is and what the categories of work are. [¶] Those amounts vary. Not just from policyholder to policyholder, but the policyholder's amount varies, as it did in this case." The court then interjected: "If it's simply an unearned premium, why is the term deposit ever had?" Counsel for the State Fund responded: "I don't know, to be candid with you. . . . And the label really doesn't change the economic substance of the situation. In my view, it doesn't change the legal substance of the situation, which is that the company, the insurer, every insurer is entitled to premium from day one, the inception of the acceptance of the risk. [¶] And so in my view, the State Fund is entitled to every dollar of that deposit from day one when it accepts the risk. And there is no legal right on their part to that money or to anything that flows from that money."
Counsel for the State Fund merely acknowledged that he did not know why the money deposited, which was unearned premium, had the label of "deposit premium." This is not an admission that the words "deposit premium" are inconsistent with unearned premium.
Flahavan emphasizes the words "your deposit premium" in the policy. However, nothing in this sentence relates to the subject of interest or suggests that the policyholder will earn interest. We also disagree with Flahavan's argument that these words establish that the policyholder retains a property interest in the "deposit premium." Insurance policies frequently use the word "your" when referring to a party's payment of or deposit on premium; this language does not imply or indicate that the policyholder is entitled to interest. (See, e.g., Dominguez v. Financial Indemnity Co. (2010) 183 Cal.App.4th 388, 393-394, italics added [automobile liability policy provides: " 'We agree with you in return for your premium payment, to insure you subject to all the terms of this policy"].)
The word "deposit," when used as a noun, can mean "a sum of money paid into a bank or building society account"; "a sum payable as a first installment on the purchase of something or as a pledge for a contract"; "a returnable sum payable on the hire or rental of something"; or "a layer or mass of accumulated matter[.]" (Oxford English Dict. Online (2011) <http://www.oed.com> [as of Sep. 1, 2011].) Thus, unless the phrase includes a reference to interest, deposit does not necessarily indicate that the party making the deposit is entitled to interest. Indeed, even deposits into bank accounts do not necessarily earn interest for the person depositing the money; the account must specify that it is an interest-bearing account.
The words, "Until your policy terminates, your deposit premium will be transferred to each consecutive policy period to act as a deposit as if a separate policy had been written," also do not indicate that the "deposit premium" is the property of the policyholder. Rather, this language simply points out that any balance remaining at the end of the policy year will be transferred as a deposit for the premium estimated for the next year.
Flahavan contends that any ambiguity in the policy must be interpreted against the State Fund, since the State Fund wrote the terms of this adhesion contract. Here, however, the uncontradicted evidence submitted in support of the summary judgment motion supported an interpretation that there was no expectation of interest and that the "deposit premium" was a payment of unearned premium, not a deposit give to the State Fund for safekeeping. Thompson purchased the policy and had no recollection of speaking to anyone at the State Fund about interest or expecting interest to be paid by the State Fund on the "deposit premium." The State Fund receives the "deposit premium," a percentage of the estimated annual premium for the policy year, in order to permit it to begin providing workers' compensation insurance to the policyholder. Thus, the uncontradicted evidence shows that the policyholders' interest in the "deposit premium" ceases once the money is paid to the State Fund.
We conclude that the language in the policy does not indicate that the policyholder retains a property interest in the "deposit premium," and the policy is silent on the subject of interest on the "deposit premium." D. The Maxim of Interest Follows Principal Has No Application to this Policy
1. Contentions
The common law rule is that " 'interest follows principal.' " (Phillips v. Washington Legal Foundation (1998) 524 U.S. 156, 165 (Phillips).)Flahavan contends that the lower court erred because it did not follow this common law rule. He cites various federal and out-of-state cases, as well as California cases, in support of his contention that the State Fund must pay the policyholders interest on the "deposit premium." For the reasons discussed below, we reject Flahavan's argument.
2. Federal and Out-of-State Cases
In both the lower court and in his briefs on appeal, Flahavan relies heavily on the United States Supreme Court decisions of Phillips and Webb's Fabulous Pharmacies, Inc. v. Beckwith (1980) 449 U.S. 155 (Webb's Pharmacies). We agree with the trial court that these cases are distinguishable.
Both Webb's Pharmacies, supra, 449 U.S. 155 and Phillips, supra, 524 U.S. 156 involved the takings clause of the Fifth Amendment, which requires the payment of just compensation when private property is taken for public use. In Webb's Pharmacies, the court held that the government appropriation of interest on an interpleader fund was a taking of the private property of the owner of the principal. (Webb's Pharmacies, at p. 162.) In Phillips, the court held that interest earned on client funds held in a lawyer's trust fund account "is 'private property' " of the client "for purposes of the Takings Clause of the Fifth Amendment." (Phillips, at p. 160.)
Furthermore, both Webb's Pharmacies and Phillips involved money that was held in trust for the owner, pursuant to a law that required the owners to place their property into a particular fund. In Webb's Pharmacies, the court held that a Florida statute allowing a county to retain interest earned on an interpleader fund deposited with the court was unconstitutional. The court explained that the "earnings of a fund are incidents of ownership of the fund itself and are property just as the fund is property." (Webb's Pharmacies, supra, 449 U.S. at p. 164.) Similarly, in Phillips, supra, 524 U.S. 156, the court concluded that interest earned on a client's money in a lawyer's trust fund account was the private property of the owner of the principal. (Id. at p. 165.) The money deposited in Phillips was held in trust for the owner pursuant to a law that required the owner to place the property into a particular fund. In contrast to the situations in both Webb's Pharmacies and Phillips, here, the money is not held in trust but is a deposit on the premium; the premium is money owed to the State Fund by the policyholder. Thus, the present case is clearly distinguishable from Webb's Pharmacies and Phillips.
Flahavan contends that it was immaterial that the foregoing cases involved a statute or the Takings Clause of the Fifth Amendment because the determination of the existence of a property right was not a constitutional issue, but a matter of state law. It is true that Webb's Pharmacies and Phillips affirm the common rule that when a party deposits funds into an interest-bearing account and that party retains a property interest in that fund, the depositor is entitled to the interest on the fund. However, in order for this rule to apply, the policyholder must retain a property interest in the principal. As already discussed, we reject Flahavan's claim that the words in the policy stating "your deposit premium" establishes that a policyholder has property interest in the deposit.
Flahavan also cites three out-of-state cases to argue that the common law rule that interest follows principal applies beyond interpleader cases. (Vidal Realtors v. Harry Bennett & Associates (1984) 1 Conn.App. 291, 297 ; Burnett v. Brito (Fla. App. 1985) 478 So.2d 845, 849 [interest earned on interpleaded and deposited funds runs from the time the broker unreasonably delayed in making a court-ordered deposit into an interest-bearing account]; B & M Coal Corp. v. United Mine Workers (Ind. 1986) 501 N.E.2d 401, 404-405 [interest earned on appeal bond deposited into the circuit court "must follow the principal and be distributed to the ultimate owner of the fund"].) In all of these cases, the courts were attempting to determine ownership of the interest earned during a time period where the ownership of the principal itself was beyond dispute. Thus, for example, in Vidal Realtors, a number of brokers laid claim to a commission for a real estate sale, and because of the conflicting claims, the seller refused to pay the commission although it was admittedly due, and instead placed the amount in an escrow account. (Vidal Realtors, supra, 471 A.2d at pp. 659-660) Upon resolution of the underlying dispute, the seller refused to turn over the commission unless it could retain the accrued interest for itself. (Id. at p. 660.) The court determined that the defendant's role as a garnishee was similar to that of a trustee, and the defendant was not entitled to retain the accrued interest. (Id. at p. 662.) In contrast to these out-of-state cases cited by Flahavan, here, the party holding the funds, the State Fund, had a property interest in the funds and, as already stressed, the policyholders did not have an indisputable property interest in the "deposit premium."
3. California Cases
In asserting that the policyholders have a property interest in the "deposit premium," Flahavan also relies on the following state cases: Metropolitan Water Dist. v. Adams (1948) 32 Cal.2d 620 (Metropolitan Water), Pomona City School Dist. v. Payne (1935) 9 Cal.App.2d 510 (Pomona), and Ingram v. Pantages (1927) 86 Cal.App. 41 (Ingram).He maintains that these cases establish that the ownership of deposited funds remains with the depositor unless or until events or conditions allow the ownership of deposited funds to be transferred to another party.
In Metropolitan Water, the water district, at the beginning of proceedings in eminent domain, paid funds into the court as security in order to obtain immediate possession of the subject properties. (Metropolitan Water, supra, 32 Cal.2d at p. 622.) The county treasurer received the money from the court clerk and placed these funds into interest-bearing bank accounts. (Ibid.)The water district filed an application for " 'return' to it of the interest . . . ." (Ibid.)
When concluding that the county was not entitled to the interest, our Supreme Court in Metropolitan Water noted that "[g]enerally, mere deposit in court does not give rise to the right to receive interest. In the absence of a statute which, in effect, accretes sums to amounts deposited, it is conceded by plaintiff water district that no claim would arise for return of other than the original deposit." (Metropolitan Water, supra, 32 Cal.2d at p. 628.) The Depository Act, now Government Code section 53647, pursuant to which the deposits were made, provided for the payment of interest on the deposit. (See Metropolitan Water, at p. 628.) The Supreme Court concluded that the county treasurer represented the court when investing the funds paid into the court. (Id. at pp. 629-630.) The Supreme Court held that the accretions of interest belonged to the superior court, but only as "custodian" for the water district, which owned the fund when the interest was earned. (Id. at p. 630.) "To the county treasurer the court gave only actual custody, bare possession; it had no power to give the treasurer or the county the beneficial title to the money and such money still belongs to the water district." (Id. at p. 627.)
Pomona, supra, 9 Cal.App.2d 510 also involved a public agency's placing funds belonging to another party into an interest bearing bank account pursuant to the Depositary Act. In Pomona, the school district maintained its school funds on deposit in the treasury of the county and the county treasurer, acting pursuant to the Depositary Act, deposited the funds with other county money into interest bearing bank accounts. (Pomona, at p. 511.) At issue was whether the interest on school district funds on deposit in the county treasury belonged to the county or the school district. (Ibid.)The court concluded that "[i]t cannot be questioned that school funds as such remain the property of the school district, are not subject to the control of the county and that the county has no interest whatever therein. . . . The reasonable and equitable rule is that the county is simply the agent of the school district, the bailee or trustee of the funds deposited in its care, and as such bailee and trustee it cannot allocate to itself, nor enrich its own coffers with, the interest increments upon the money placed in its custody by its bailor and trustor." (Id. at p. 516.)
Here, in contrast to the situations in Metropolitan Water and Pomona, no statute provides for the payment of interest on the deposit. Furthermore, the court and county treasurer in Metropolitan Water and the county in Pomona had no property interest in the funds deposited in the bank accounts and they had no valid claim to the interest. Flahavan's assertion that these cases hold that the ownership of the deposit remains with the depositor unless or until the funds are transferred to another party is incorrect. The court and county treasurer in Metropolitan Water and the school district in Pomona acknowledged that they had no interest in the funds that they deposited into the bank accounts. In contrast, here, the State Fund submitted uncontradicted evidence that the "deposit premium" is the only money it receives to begin providing workers' compensation insurance to the policyholder and that this fund is a percentage of the estimated annual premium for the policy year. Thus, the State Fund has a property interest in the "deposit premium."
The State Fund does not make a profit on this interest. Any surplus in excess of required reserves is returned to policyholders. If there exists "an excess of assets over liabilities, necessary reserves, and a reasonable surplus for the catastrophe hazard, then a cash dividend may be declared to, or a credit allowed on the renewal premium of, each employer who has been insured with the State Fund." (Ins. Code, § 11776.) The State Fund's goal is to provide long term, stable, low cost insurance for every California employer that cannot obtain insurance in the private market. (State Comp. Ins. Fund v. McConnell (1956) 46 Cal.2d 330, 345-346.)
The third case cited by Flahavan, Ingram, supra, 86 Cal.App. 41, also does not benefit him. In Ingram, a lessee never paid a $12,000 deposit he was to pay pursuant to the contract, and the landowners sued to recover the interest they claimed they would have earned had he made the deposit. (Id. at p. 43.) The court concluded that no provision in the agreement provided that the lessors were to use or acquire any benefit from the $12,000 during the time it was on deposit with them. (Id. at p. 44.) In concluding that the landowners were not entitled to interest, the court examined the language of the lease, which stated that the deposit was to be returned to the lessee "immediately upon his beginning construction of the building at any time within the four-year period, and further provided that said sum was to be returned to [lessee] if he exercised the option to purchase at any time before January 1, 1924, and provided that if the said building was not begun within the said four-year period of said lease, and said option was not exercised to purchase, then and in that event this $12,000 was to belong to the [landlords]." (Ibid.) The court stated that "the lease provided that the title to said deposit of $12,000 should not pass from [lessee] to [landlords] until [lessee] had failed to do two things . . . ." (Id. at p. 44.) The court concluded that the landlords were not entitled to any interest because, "under the plain provisions of the lease, [they] would not have been entitled to use, or employ, or invest said sum of $12,000, or any part thereof, or to receive or retain the earnings therefrom, if it had been deposited." (Id. at p. 45.)
Contrary to Flahavan's assertion, Ingram does not suggest that "ownership of a deposit remains with the depositor until conditions precedent to its forfeiture or transfer occur." Rather, the court in Ingram concluded that a property interest in the deposit remained with the lessee under the particular terms of the contract between the lessee and the landlords. As already discussed, the words "your deposit premium" do not indicate that the deposit is to remain with the depositor and Flahavan fails to identify any provision indicating that the State Fund is merely holding the deposit on behalf of the policyholder or that the policyholder is entitled to the funds during the period that the State Fund is holding the "deposit premium."
Accordingly, we conclude that the common law rule of interest following principal does not apply because Flahavan has failed to establish that the policyholders held a property interest in the "deposit premium" once the money was submitted to the State Fund. E. Case Law on the Entitlement to Interest when the Deposit is Pursuant to a Contract
The trial court found that an additional reason for not requiring the State Fund to pay policyholders interest on their "deposit premiums" is that the common law rule that interest follows principal does not apply when the deposit is made pursuant to a contract, not a statute, and the contract is silent on the issue of payment of interest. (See Korens v. R.W. Zukin Corp. (1989) 212 Cal.App.3d 1054, 1058-1059 (Korens);see also Overland v. Superior Court (2005) 126 Cal.App.4th 131, 138 (Overland).)Flahavan asserts that the lower court incorrectly interpreted Overland and Korens.
The trial court noted, "It is the generally well settled rule that where a contract makes no provision for the payment of interest no interest can be charged or collected prior to the time that payment falls due." (Upton v. Gould (1944) 64 Cal.App.2d 814, 817; see also Cain v. Hunter (1958) 161 Cal.App.2d 808, 812; Young v. Canfield (1917) 33 Cal.App. 343, 344-345.) However, in our own independent research, we have discovered that this rule has been applied only to real property transactions. We decline to apply this general rule to the present context where one party wrote the terms of the agreement and the other party could not negotiate any of the terms of the policy.
In Overland, supra, 126 Cal.App.4th 131, the court considered whether bail depositors could receive interest on the deposited cash bail to free criminal defendants. It concluded that "[a] bail transaction is a contract." (Id. at p. 141.) The court noted that the statutes did not require the payment of interest on cash bail deposits and the contracts involved also did not include a provision that interest would be paid on cash bail deposits. (Ibid.) The court held that the depositors were not entitled to interest and explained: "The contracts did not include a provision that petitioners would earn interest on the cash bail deposits. Now, after the bail was exonerated, petitioners would have the contracts rewritten to award them additional consideration in the form of interest on the bail between the date of deposit and the date of exoneration. Such a modification has no basis in contract law and must be rejected." (Id. at p. 142.)
Similarly, here, the policyholders voluntarily paid money for insurance and voluntarily renewed the insurance by agreeing that the first year's "deposit premium" would be applied to the second year's insurance. Moreover, like the situation in Overland, the policy does not mention interest on the "deposit premium." Consequently, under the holding of Overland, the policyholders are not entitled to interest.
Flahavan maintains that Overland, supra, 126 Cal.App.4th 131, does not apply to the present case because it was a criminal, not a civil, case. He argues that Fresno Fire Fighters v. Jernagan (1986) 177 Cal.App.3d 403 (Fresno) makes it clear that criminal cases involving the payment of interest are clearly distinguishable from civil cases concerning interest on a deposit.
In Fresno, the court considered interest on deposits. (Fresno, supra, 177 Cal.App.3d 403.) The court held that interest earned on a deposit was due to the depositor, the owner of the money, when the statute required such a deposit in order to obtain a civil injunction. (Id. at p. 409.) The Fresno court held further, however, that the county's retention of interest accrued on cash bail deposits in criminal proceedings was not an unconstitutional taking of private property because the bail money was deposited for a public purpose. (Id. at p. 413.)
The Overland court in its analysis considered the holding and reasoning of the Fresno court. The Overland court agreed that interest was not owed on cash bail deposits, but it disagreed that the reason was because the money was deposited for a public purpose. (Overland, supra, 126 Cal.App.4th at p. 142.) It reasoned that interest was not due "because the bail deposit is made in accordance with the terms of a particular contract and the terms of that contract do not include a provision for pre-exoneration interest." (Ibid., fn. omitted.) The Overland court observed that, in contrast, cash deposits in civil proceedings, "are not contractual in nature and therefore are not governed by contract law principles." (Ibid., fn. 9.)
We need not settle the question whether deposits in criminal proceedings are distinguishable from deposits in civil proceedings. There is no question that when criminal matters involve contracts, the contract is interpreted in accordance with the precepts of contract law. (See, e.g., People v. Nguyen (1993) 13 Cal.App.4th 114, 120 ["Courts have traditionally viewed [plea agreements] using the paradigm of contract law"].) Thus, the issue for us is whether Overland correctly applied the principles of contract law; it did.
Flahavan maintains that an out-of-state case, Turnipseed v. Brown (2009) 391 Ill.App.3d 88 (Turnipseed), supports his assertion that Overland has a limited scope and is inapplicable to the present case. In Turnipseed, the court reversed the orders granting class certification and denying defendants' motion to dismiss because it determined that the plaintiffs had not stated a valid claim for interest on bail money. (Id. at p. 547.) The defendants claimed that the plaintiffs had no claim for interest because the bail bond agreement did not provide plaintiffs with a contractual right to interest. (Id. at p. 552.) The plaintiffs argued that, "since ownership of the principal never changed hands, the interest belonged to the depositors and [the defendant's] retention of that interest constituted a taking, for constitutional purposes." (Ibid.) In determining the plaintiffs had no valid claim, the court noted that "[t]here is no statute or contract which gave plaintiffs a right to the interest." (Ibid.)
Flahavan points to the fact that the court in Turnipseed, supra, 908 N.E.2d 546, distinguished criminal cases from "a line of cases where citizens disputed the State's right to take certain property, and the property was deposited with the State for safekeeping pending a determination of property rights; and where the State earned interest on the property and then was ordered to return the interest with the property." (Id. at p. 554.) He stresses that the court observed that the bail case was not a property dispute, but a criminal action.
Although Flahavan focuses exclusively on the distinction that the bail case was criminal while the cases cited by the Turnipseed plaintiffs were civil matters, the Turnipseed court stressed several distinguishing factors. (Turnipseed, supra, 908 N.E.2d 546.) The Turnipseed court pointed out that the bail deposit, unlike the deposits in the cases cited by the plaintiffs, was not given to the state "for the purpose of safekeeping, but for the purpose of obtaining release." (Id. at p. 555.) Additionally, in the bail situation, contrary to the cases relied upon by the plaintiffs, there was no challenge to the state's right to take the property. (Ibid.) The court also noted that in the cases cited by the plaintiffs, interest was owed when "the depositors expected to be restored to their full ownership rights, at the conclusion of the dispute." (Ibid.)In contrast, depositors in the bail cases often did not receive all of their bail money. (Ibid.)Finally, the court stressed that no statute or contract provided the plaintiffs in Turnipseed with the right to interest.
In the present case, the "deposit premium" is more akin to bail cases than to the civil cases cited by the plaintiffs in Turnipseed. The policyholders voluntarily gave the State Fund their "deposit premiums" for the particular purpose of receiving insurance coverage and there is no allegation that the State Fund was not entitled to this money. Furthermore, there is no evidence to suggest that the policyholders expected the return of the entire sum paid for their "deposit premium" and no contract or statute gave them the right to interest. Thus, Turnipseed does not persuade us that the lower court erred when it concluded that Overland should be applied to the present case.
The trial court did not just cite Overland, but also based its ruling on the holding in Korens, supra, 212 Cal.App.3d 1054. Korens, unlike Overland, is a civil matter. In Korens, the court affirmed a summary judgment for the defendant landlords in a class action suit by tenants. The tenants sought to recover interest on their security deposits paid to the landlord. The court determined that there was no statutory obligation to pay interest on security deposits; it also rejected the tenants' contention that a trust relationship had been created. (Korens, supra, at pp. 1059-1061.) The court noted that the Legislature would have expressly required payment of interest on security deposits if that had been its intent. (Id. at pp. 1058-1059.) The court also considered the argument that the written contract obligated the landlord to pay interest on the deposit. (Id. at p. 1061.) It concluded that interest was not due under this theory because the contract did not have a provision indicating a promise to pay interest, and the question of interest was never discussed during the contract's creation. (Ibid.)
Flahavan argues that the Korens court did not even mention the common law rule that interest follows principal, and therefore this decision has limited applicability. Additionally, he claims that the plaintiffs in Korens wished to impose "a blanket duty to pay interest, regardless of factual circumstances . . . ." In contrast, here, the situation concerns a single governmental entity that operates as a private insurer and the legal decision in this case, according to Flahavan, turns on the construction of a single insurance policy form, not thousands of individual leases and contracts.
Flahavan's attempt to distinguish Korens from the present case on the basis that the present case involves the interpretation of only one policy has little merit. The Korens court considered the construction of one written contract. The Korens court explained, "The evidence before the trial court on the issue of an alleged implied contract to pay interest consisted of the written contract, which does not provide for the payment of such interest; and Korens's deposition testimony, in which she admitted that there was never any discussion of whether the security deposit would earn interest." (Korens, supra, 212 Cal.App.3d at p. 1061, italics added.)
With regard to Flahavan's assertion that the Korens court did not mention the common law rule that interest follows principal, this assertion is true. However, the court did mention Ingram, supra, 86 Cal.App. 41, a case relied on by Flahavan. The fact that the court did not discuss this common law rule does not mean that its application of contract theory to the facts before it was incorrect.
Flahavan also claims that, if there is uncertainty as to whether the policyholders or the State Fund own the deposit, Overland and Korens should not be interpreted to mean that the State Fund should be able to take the interest for itself. Flahavan contends that, even if the policyholder does not retain ownership at the beginning of the policy period, the policyholder owns the deposit at the time of cancellation and, at that time, the State Fund must pay interest. He maintains that the State Fund has an obligation to pay interest on unused "deposit premium" upon cancellation.
In support of this argument, Flahavan primarily relies on Ennis-Brown Co. v. Richvale L. Co. (1920) 47 Cal.App. 508 (Ennis-Brown). The plaintiff in Ennis-Brown sent a sum to the defendant and directed the defendant to use the deposit to make a specific purchase. (Id. at p. 510.) The defendant accepted the payment for the directed use and the court considered the defendant's obligation regarding the balance remaining that was not needed to make the specific purchase. (Id. at pp. 510-511.) The court concluded that the express agreement between the parties created a trust. (Id. at p. 511.) The court explained that title did not pass to the defendant because it was a special, not a general, deposit. (Ibid.) The court concluded that interest was due from the date the specific deposit was paid by the defendant to the third party, as this is when the conversion occurred. (Id. at pp. 509, 511-512.)
Ennis-Brown has no bearing on the present case. A policyholder does not submit the "deposit premium" to the State Fund to hold the money for the explicit purpose of paying a third party. Rather, the money was to be used by the State Fund to provide the policyholder with insurance coverage. Thus, the policyholder was entitled to a balance only at the point in time the audit indicated that the final premium exceeded the premium paid. Unlike the situation in Ennis Brown, here, the State Fund never held the money in trust or converted funds owned by the policyholder. As already stressed, the "deposit premium" does not belong to the policyholder. "To establish a conversion, plaintiff must establish an actual interference with his ownership or right of possession. [Citation.] Where plaintiff neither has title to the property alleged to have been converted, nor possession thereof, he cannot maintain an action for conversion." (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 610-611, italics added.)
Flahavan's citation to Webb's Pharmacies, supra, 449 U.S. 155 and Phillips, supra, 524 U.S. 156 are similarly unavailing. As already noted, both of these cases involved the takings clause of the Fifth Amendment. Moreover, both Webb's Pharmacies and Phillips involved money that was held in trust for the owner, pursuant to a law that required the owners to place their property into a particular fund.
Overland and Korens made clear that, when the deposit is pursuant to a contract, not a statute, the contract must specify that the depositor is entitled to the interest; otherwise, the depositor is not entitled to any interest. Such holdings are consistent with the law on contract construction. " 'The law refuses to read into contracts anything by way of implication except upon grounds of obvious necessity.' [Citation.] [Parties are] free to accept or reject the bargain offered and cannot look to the courts to amend the terms that prove unsatisfactory." (Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798, 809.) F. Conclusion
In this decision, we need not consider whether a contract must always state that the depositor earns the interest for the depositor to earn interest pursuant to the contract. Here, the policyholder cannot establish a property interest in the deposit; the policyholder voluntarily provided the funds to the State Fund; and the policyholder had no reasonable expectation that the entire deposit would be returned to the policyholder. In such a context, where the contract is completely silent on the subject of interest on the "deposit premium," the depositor is not entitled to any interest on the deposit and can derive no benefit from the maxim that interest follows principal.
We need not address the State Fund's arguments that summary judgment was proper on the additional grounds that requiring a payment of interest would render the contract illegal, requiring payment of interest would interfere with the Legislature's setting of economic policy, and an obligation to pay interest cannot be implied against the State Fund.
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III. The UCL
Flahavan does not mention the UCL claim in his opening brief in this court. In his reply brief, he responds to the State Fund's argument that the UCL does not apply to it. To raise an issue for the first time in a reply brief is to waive the issue on appeal. (Campos v. Anderson (1997) 57 Cal.App.4th 784, 794, fn. 3.) Accordingly, Flahavan has waived mounting any challenge to the lower court's ruling on his UCL claim.
Furthermore, Flahavan's UCL claim fails on its merits. Under the UCL, "unfair competition" is defined to "mean and include any unlawful, unfair or fraudulent business act or practice . . . ." (Bus. & Prof. Code, § 17200.) Since we have concluded that the State Fund had no duty under contract or statute to pay interest to the policyholder, the State Fund's failure to pay interest on the "deposit premium" or the portion of the "deposit premium" refunded to the policyholder was not unlawful, unfair, or a fraudulent business act and did not violate the UCL. (See Korens, supra, 212 Cal.App.3d at p. 1058.)
DISPOSITION
The judgment is affirmed. Flahavan is to pay the costs of appeal.
Lambden, J. We concur: Kline, P.J. Haerle, J.