Opinion
A161301
04-04-2022
PETER K. RENSTROM, Plaintiff and Appellant, v. NORTH AMERICAN COMPANY FOR LIFE AND HEALTH INSURANCE, Defendant and Respondent.
NOT TO BE PUBLISHED
(San Francisco County Super. Ct. No. CGC-18565418)
MAYFIELD, J. [*]
In 1996, defendant North American Company for Life and Health Insurance (North American) issued a universal life insurance policy that insured the life of Bernard Hagan to a family trust designated by Hagan as the owner and beneficiary of the policy. Before Hagan died, North American sent notice that the policy had lapsed. The successor trustee subsequently sued North American, alleging it had failed to provide prior notice under Insurance Code section 10113.7, subdivision (a) (10113.7(a)), which requires 20-day notice for an "increase of premium on an individual life insurance policy that provides for premium changes by the insurer."
All further statutory references are to the Insurance Code unless otherwise indicated.
The trial court granted North American's summary judgment motion, concluding that (1) section 10113.7 did not apply because a universal life insurance policy allows the policyholder, not the insurer, to determine the premium; and (2) the policy had lapsed because the trustee failed to make a payment sufficient to cover the cost of insurance, not because North American had increased the premium.
Plaintiff and successor trustee Peter Renstrom (successor trustee) now appeals the judgment, arguing the trial court erred in its interpretation of section 10113.7. We affirm.
BACKGROUND
Universal Life Insurance
Before turning to the specific policy at issue here, we begin with some basic background regarding various types of life insurance. "The simplest type of life insurance is term insurance. Term insurance provides a level death benefit, for a set term of years, in exchange for the payment of a fixed premium." (Fairbanks v. Farmers New World Life Ins. Co. (2011) 197 Cal.App.4th 544, 547 (Fairbanks).) "As a general rule, the annual cost of insurance (also known as the risk rate) increases as a person ages. Thus, if a person were to buy a series of annual life insurance policies, that person could anticipate paying a higher premium each year. Term insurance allows the payment of equal premiums over the set term; the policyholder 'overpays' for insurance in the earlier years and 'underpays' in later years. Both the overpayments and the interest the insurer earns on the overpayments offset the subsequent underpayments." (Id. at pp. 547-548.)
"An alternative to term insurance is whole life insurance. As the name suggests, whole life insurance is not limited to a specific term, but provides coverage for the policyholder's lifetime-with a cash value payout (generally equal to the death benefit) when the policy matures at a late age. As with term insurance, whole life insurance provides a set death benefit in exchange for the payment of a fixed premium." (Fairbanks, supra, 197 Cal.App.4th at p. 548, fn. 3.)
This case involves an insurance product known as universal life insurance. As with whole life insurance, universal life insurance permits the death benefit to be funded in later years by building up cash value through the payment of a premium in early years that exceeds the risk of death. (See Fairbanks, supra, 197 Cal.App.4th at p. 548.) Unlike whole and term life insurance, however, universal life insurance allows for flexible premiums: policyholders may choose the amount and frequency of their premium payments which are paid into the policyholder's accumulation account. The amount of money accumulated in that account is a function of three primary variables: (1) the premium paid into the account by the policyholder; (2) the interest credited to the account by the insurer; and (3) the amounts deducted by the insurer for the cost of the death benefit. (See ibid.) The cost of the death benefit tends to increase, sometimes substantially, as the insured ages. (Id. at pp. 548-549.) Accordingly, if there are not enough funds in the accumulation account to cover the rising cost of insurance, the policyholder may have to pay a significantly higher premium or the policy will lapse.
The Policy
In 1996, when Hagan was 67 years old, North American issued a $1,000,000 universal life insurance policy insuring Hagan's life. The owner and beneficiary of the policy was the I Trust, a trust established by Hagan in 1991 for the benefit of four of his children. Hagan's sister served as the trustee until August 2016, and was then succeeded by Hagan's daughter. Renstrom was appointed as successor trustee in June 2020.
North American also issued a separate $500,000 universal life insurance policy. This policy was paid upon Hagan's death and is not at issue here.
The "Premium Provisions" section of the policy states: "Premium may be in any amount subject to the Premium Limitations provision of this section." The policy defines "Planned Premium" as "the premium which you wish to pay at the frequency elected." It allows the policyholder to "request, in writing, that the Planned Premium be increased or decreased." It also allows the policyholder "to request, in writing, that the premium frequency be changed to annual, semi-annual, quarterly or monthly."
The "Nonforfeiture Provisions" section of the policy states: "Monthly Cost of Insurance Rates are decided by us and are based on how we view the future." It also states that the cost of insurance rates "will not be greater than the Table of Guaranteed Maximum Insurance Rates shown in the Schedule." The table of guaranteed maximum insurance rates indicated that the maximum rate would start to increase in year 8 and increase by more than ten-fold in year 21.
The policy states that it "will lapse on any monthly anniversary that the Surrender Value is not sufficient to cover the Monthly Deduction due," but contains an exception that the parties describe as a no-lapse guarantee. The policy provides that from 1996 to 2016, as long as monthly premium payments of at least $1,405.33 were made, the coverage was guaranteed to remain in force. The policy is explicit that, assuming such premium payments are made during that period, "this policy will lapse on FEBRUARY 17, 2016."
From 1996 to 2016, quarterly premium payments of $4,215.99 were made on the policy, the minimum to keep it in force pursuant to the no-lapse guarantee. During this period, North American provided the trustee with annual policy reports showing that the charges on the policy were higher than the premium payments being made. For example, the annual report for the policy year ending February 17, 2015, while stating that the value of the accumulation account was "0.00," informed the trustee: "THIS POLICY CONTAINS A FRONT END LOAD WHICH HAS RESULTED IN A NEGATIVE ACCUMULATION VALUE. ZEROS ARE DISPLAYED FOR BOTH INTEREST AND ACCUMULATION VALUE IN THESE MONTHS WHERE NEGATIVE VALUES REALLY EXIST."
Prior to February 17, 2016, North American also provided the trustee and the insured with in-force illustrations that showed the premium payments necessary to keep the policy in force beyond the 20-year no-lapse period, when Hagan would be 87 years old. An illustration from 2015 assumed a premium outlay that was drastically higher than what had been paid during the no-lapse period.
In February 2016, after the no-lapse period had ended, North American sent a notice indicating that payment of $15,146.65 was required to maintain coverage on the policy. According to North American, that amount was the "cumulative shortfall" of monthly cost of insurance coverage over the 20 years that had not been covered by the accumulation account value, plus the next monthly deduction. The trustee made the $15,146.65 payment on March 29, 2016.
On March 29, 2016, North American sent the trustee a notice indicating that a payment of $3,285.67 (the next monthly deduction) was required by May 17, 2016, to maintain coverage. A few days before that deadline, Hagan exchanged e-mails with an insurance advisor. The advisor stated: "I think we need to have a serious discussion to determine if it is wise to keep the policy as each year the cost will go up based on your older age. This will be dramatic." Shortly thereafter, the advisor sent a follow up e-mail to Hagan and his sister: "It was agree [sic] today by Bernard Hagan that he will let the above policy lapse due to higher premium cost going forward with increases each year."
On May 23, 2016, North American sent a notice that "all coverage provided under this insurance policy . . . terminated following the end of the grace period that began on 03-17-16, and all benefits are forfeited and void." Hagan died in November 2016. The successor trustee subsequently submitted a claim for the death benefit under the policy. North American responded that the policy had lapsed.
Complaint
In April 2018, the successor trustee filed a lawsuit against North American, as well as the trustee's insurance advisors. The operative complaint asserted causes of action against North American for (1) breach of insurance contract; (2) unfair competition; and (3) breach of covenant of good faith and fair dealing. Each cause of action against North American was premised on the allegation that it had failed to provide proper notice of any premium increase under section 10113.7.
Summary Judgment
The parties filed cross-motions for summary judgment. The successor trustee argued that North American failed to provide 20 days written notice pursuant to section 10113.7 that the premiums would dramatically increase at the conclusion of the 20-year no lapse period. North American argued, among other things, that section 10113.7 only governs "premium increases imposed upon policyowners by the insurer, and does not apply to flexible premium policies like the one in this case that grant the policyholder exclusive authority to decide how much to pay in premiums, how frequently to pay those premiums, and whether to increase or decrease those premium payments."
The trial court granted North American's motion. It agreed that section 10113.7 did not apply because North American "did not change the premium." The court explained that for universal life insurance, "the insured controls the amount of the premium" and thus "a mere increase in the cost of insurance may or may not require the insured to pay a larger premium depending upon what the insured paid in the past." Here, the policy had lapsed because there was insufficient accumulated value in the policy to cover the cost of insurance charges. It concluded: "In sum, it was plaintiff's failure to make a payment sufficient to cover the cost of insurance that caused the policy to lapse, not defendant's increase in a premium payment."
The trial court also cited section 10113.70-enacted in 2018, and requiring notice of cost of insurance increases in flexible premium life insurance policies-as instructive. (Stats. 2018, ch. 545, § 1.) The court found the legislative history to confirm that prior to section 10113.70's enactment, "there was no requirement for insurers to provide flexible premium life policyowners advance notice of increases in cost of insurance rates and charges."
Upon granting North American's motion, the trial court determined that the successor trustee's pending motion for summary judgment was moot. Judgment was entered for North American on the causes of action against it.
DISCUSSION
This appeal presents a narrow question: whether the notice requirement of section 10113.7(a) governs the cost of insurance increase on the universal life insurance policy at issue here. We review the trial court's grant of summary judgment de novo, as the parties have stipulated to the relevant facts and the issue before us is a question of statutory interpretation and application. (MacIsaac v. Waste Management Collection & Recycling, Inc. (2005) 134 Cal.App.4th 1076, 1082 (MacIsaac).) In answering this question," 'our primary task is to determine the lawmakers' intent'" (ibid.) and we must"' "construe a statute to promote its purpose, render it reasonable, and avoid absurd consequences." '" (Quintano v. Mercury Casualty Co. (1995) 11 Cal.4th 1049, 1055.) "The process of interpreting the statute to ascertain that intent may involve up to three steps." (MacIsaac, at p. 1082.) "We have explained this three-step sequence as follows: 'we first look to the plain meaning of the statutory language, then to its legislative history and finally to the reasonableness of a proposed construction.'" (Ibid.) With these principles in mind, we turn to section 10113.7.
Section 10113.7(a) requires an insurer to send written notice of "[a]n increase of premium on an individual life insurance policy that provides for premium changes by the insurer" at least 20 days prior to the effective date of the increase. Based on this plain language, we conclude that section 10113.7(a) does not apply to the universal life insurance policy at issue here or North American's cost of insurance increase on the policy.
First, section 10113.7(a) limits its application to a life insurance policy "that provides for premium changes by the insurer." (Italics added.) The policy here, like other universal life insurance policies, makes it clear that the policyholder determines the premium. The policy defines the premium as what "you wish to pay at the frequency elected." It allows the policyholder to make changes to the premium by increasing the amount, decreasing the amount, increasing the frequency of payments, or decreasing the frequency of payments. Accordingly, the trustee, not North American, had the right to change the premium on the policy.
Second, contrary to the successor trustee's arguments, an increase in cost of insurance is not the same as an "increase in premium" that triggers section 10113.7(a). Even with an increase in cost of insurance, premium payments on a universal life insurance policy may still continue at the same level or be skipped without causing the policy to lapse, as long as the accumulation account contains sufficient funds to cover the cost of insurance. (See Fairbanks, supra, 197 Cal.App.4th at p. 548.) In other words, a change to the cost of insurance does not necessarily result in a change to the premium. (Ibid.)
This distinction between premium and cost of insurance was recognized in the unpublished federal decision Johansen v. American General Life Insurance Company (C.D.Cal. Oct. 3, 2012, No. CV-11-06668) 2012 U.S.Dist. Lexis 194015, which we find persuasive. (Nungaray v. Litton Loan Servicing, LP (2011) 200 Cal.App.4th 1499, 1501, fn. 2 ["California Rules of Court do not prohibit citation to unpublished federal cases, which may be properly cited as persuasive authority"].) In Johansen, the decedent purchased a life insurance policy that provided "it 'will not lapse so long as [the] cash surrender value [for the policy] is large enough to cover the monthly deduction when due.'" (Johansen, at *2-*3.) The policy built up cash value so that when the decedent later stopped making premium payments, the policy was kept in force for some time through monthly deductions on that value. (Id. at *3, *6.) The policy eventually lapsed when there was no longer enough value to pay the deductions. (Id. at *15.) Prior to the lapse, the insurer sent notice of the amount needed to keep the policy in force. (Id. at *15, *21.) The plaintiff argued that the insurer had violated section 10113.7 by failing to provide prior notice of a premium increase. Johansen concluded that section 10113.7(a) did not apply. (Id. at *8.) It explained that the policy lapse was based on the failure to pay the monthly deduction, not an increased premium. (Ibid.) So too here. As the trial court described, it was the trustee's failure to make a payment sufficient to cover the cost of insurance that caused the policy to lapse, not any increase in premium by North American. Accordingly, the notice requirement of section 10113.7(a) does not apply.
The legislative history of section 10113.7 further supports our conclusion. Contrary to the successor trustee's argument that the statute should be broadly construed, section 10113.7 was described as "modest protection" for consumers to receive notice of premium increases "in those cases where the life insurer has discretion over premium changes." (Mem. to Sen. Hershel Rosenthal, sponsor of Sen. Bill No. 306, Sen. Com. on Insurance bill file.) "10113.7 was aimed at a fairly narrow range of policies where there is discretion with the insurer to determine the premium." (Chief Consultant Mark Rakich, letter to Assemblyman Mark Leonard, July 6, 1995, Sen. Com. on Insurance bill file.) As described above, the policy at issue here does not fall in that category. It afforded the policyholder, not the insurer, with the discretion to determine the premium.
Nor are we persuaded by the successor trustee's argument that our interpretation of section 10113.7 contradicts the definition of "premium" used in cases unrelated to this statute or the unique structure of universal life insurance. In State Farm Mutual Automobile Insurance Company v. Carpenter (1939) 31 Cal.App.2d 178, we explained that" '[t]here can be no question that in ordinary usage "the word 'premium' in the law of insurance . . . means the amount paid to the company as consideration for insurance." '" (Id. at pp. 179-180.) Groves v. City of Los Angeles (1953) 40 Cal.2d 751 cited this "basic theory" in determining that the full amount paid by a bail bond applicant constituted the "gross premium" subject to taxation under the city's ordinance. (Id. at pp. 761-762.)
In Allstate Insurance Company v. State Board of Equalization (1959) 169 Cal.App.2d 165 (Allstate), the insurer gave policyholders the option to pay their premium in installments, which included a fee for doing so. (Id. at p. 166.) Allstate again relied on the principle that" '[p]remium' in the law of insurance means the amount paid to the company for insurance." (Id. at p. 168.) As the policyholders were required to pay the fee along with the premium, Allstate concluded that this fee was part of the "gross premiums" within the meaning of article XIII of the California Constitution. (Id. at pp. 173-174.) Troyk v. Farmers Group, Incorporated (2009) 171 Cal.App.4th 1305 (Troyk) and Mercury Insurance Company v. Lara (2019) 35 Cal.App.5th 82 (Mercury) similarly determined service charges and fees that policyholders were required to pay in addition to the stated premium constituted the "premium" on automobile insurance policies. (Troyk, at pp. 1324, 1327; Mercury, at p. 97.)
The common understanding from each of these cases is that" 'a premium is the amount paid for certain insurance for a certain period of coverage.'" (Troyk, supra, 171 Cal.App.4th at p. 1324, italics added; see also Groves v. City of Los Angeles, supra, 40 Cal.2d at p. 761 [premium is what is "actually given" for insurance].) Our interpretation of section 10113.7 is entirely consistent with that understanding. Here, the amount paid by the trustee as the premium was not tethered to either North American's discretion or an increase in the cost of insurance.
II. Section 10113.70
In addition to the plain language and legislative history of section 10113.7, we also look to its neighboring statute: section 10113.70." 'A court must, where reasonably possible, harmonize statutes, reconcile seeming inconsistencies in them, and construe them to give force and effect to all of their provisions.'" (Pacific Palisades Bowl Mobile Estates, LLC v. City of Los Angeles (2012) 55 Cal.4th 783, 805.)
Section 10113.70, subdivision (a)(1) requires an insurer to provide at least 90 days' notice "[w]henever a flexible premium life insurance policy is subject to an adverse change in the current scale of nonguaranteed elements." Section 10113.70, subdivision (d)(2) incorporates the definition of "nonguaranteed elements" from section 10509.953, subdivision (m), which includes "charges under a policy of life insurance that are not guaranteed or not determined at issue." The parties agree that section 10113.70 is now applicable to cost of insurance increases on universal life insurance policies. (See also Bill Requires Notice of Increased Cost and Charges to Owner of Variable Premium Life Insurance Policy (2018) vol. 30, No. 8, Cal. Ins. L. & Reg. Rptr. NL 24 [announcing Governor's approval of bill "to require an insurer to notify the owner of a variable premium life insurance policy of an increase in the cost of insurance or administrative charge"].) Similarly, there is no dispute that section 10113.70 is inapplicable in this case because the statute became effective in 2019, three years after the policy lapsed. (Stats. 2018, ch. 545, § 1.)
North American argues that the enactment of section 10113.70 demonstrates that section 10113.7 does not apply to universal life cost of insurance increases. The successor trustee, on the other hand, argues that the 20-day notice under section 10113.7 was required for universal life cost of insurance increases and now, after the enactment of section 10113.7, 90-day notice is required.
The legislative history supports North American's argument. As a preliminary matter, there is no mention of any intent to increase a notice requirement from 20 days to 90 days. The successor trustee points only to summaries of "existing law" that reference the section 10113.7(a) requirement for "any change in premium." (Assem. Com. on Insurance, Analysis of Assem. Bill No. 2634 (2017-2018 Reg. Sess.) Apr. 30, 2018, p. 1.) The legislative history makes clear, however, that section 10113.70 was not an increase to an existing requirement but instead modeled after a regulation adopted by the New York Department of Financial Services to respond to dramatic increases in cost of insurance that had occurred on some flexible premium life policies. (Sen. Com. on Insurance, Analysis of Assem. Bill No. 2634 (2017-2018 Reg. Sess.) as amended June 18, 2008, p. 4.) While insurers were required to send annual reports to flexible premium life policyholders, those reports did not provide notice of impending cost of insurance increases and thus policyholders were "unable to make informed decisions about their policies, which often require substantial payments to keep them from lapsing." (Id. at p. 2.) Accordingly, the purpose of section 10113.70 was to provide notice that "will better inform policy owners about the impact of these charges so that they can choose the best among a range of difficult options in response to the increase." (Assem. Com. on Insurance, Analysis of Assem. Bill No. 2634 (2017-2018 Reg. Sess.) Apr. 30, 2018, p. 1.) The legislative history of section 10113.70 thus makes clear that section 10113.7's notice requirement does not apply to cost of insurance increases on flexible premium life insurance policies like the one at issue here.
In sum, we conclude that the trial court did not err in granting North American's motion for summary judgment. Given this conclusion, we need not address the parties' arguments regarding North American's alternative bases for summary judgment. We also reject the successor trustee's request for direction to grant its summary judgment motion.
DISPOSITION
The judgment is affirmed. Costs on appeal are awarded to North American.
We concur: Richman, Acting P.J., Stewart, J.
[*] Judge of the Mendocino County Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.