Opinion
D072178
10-16-2018
HELEN RODE et al., Plaintiffs and Appellants, v. ALLIANZ LIFE INSURANCE COMPANY et al., Defendants and Respondents.
Law Office of Timothy C. Karen and Timothy C. Karen for Plaintiffs and Appellants. Murphy, Pearson, Bradley & Feeney, Michael P. Bradley and Jeff C. Hsu for Defendant and Respondent Allianz Life Insurance Company of North America. Manning & Kass, Ellrod, Ramirez, Trester, Al M. De La Cruz and Ladell Hulet Muhlestein for Defendant and Respondent Equitrust Life Insurance Company. Freeman Mathis & Gary, Chad Weaver and Margot Parker for Defendant and Respondent Fidelity & Guaranty Life Insurance Company. McDowell Hetherington, Thomas F.A. Hetherington, Andrew R. Kasner and Jodi Swick for Defendant and Respondent PHL Variable Insurance Company.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 37-2015-0004046-CU-FR-CTL) APPEAL from a judgment of the Superior Court of San Diego County, Katherine Bacal, Judge. Affirmed. Law Office of Timothy C. Karen and Timothy C. Karen for Plaintiffs and Appellants. Murphy, Pearson, Bradley & Feeney, Michael P. Bradley and Jeff C. Hsu for Defendant and Respondent Allianz Life Insurance Company of North America. Manning & Kass, Ellrod, Ramirez, Trester, Al M. De La Cruz and Ladell Hulet Muhlestein for Defendant and Respondent Equitrust Life Insurance Company. Freeman Mathis & Gary, Chad Weaver and Margot Parker for Defendant and Respondent Fidelity & Guaranty Life Insurance Company. McDowell Hetherington, Thomas F.A. Hetherington, Andrew R. Kasner and Jodi Swick for Defendant and Respondent PHL Variable Insurance Company.
This is an appeal from a judgment of dismissal after the trial court sustained defendant insurance companies' demurrers to a third amended complaint (complaint) without leave to amend. The defendant insurance companies sold their insurance products using an insurance agent who engaged in a fraudulent scheme—through two companies that were unrelated to defendants—and the scheme caused plaintiffs to collectively lose millions of dollars. Plaintiffs contend defendants are vicariously liable for the insurance agent's fraud based on various theories, all of which we reject. We affirm the judgment on the grounds that the insurance agent was acting outside the scope of his agency, the defendant insurance companies owed no duty to plaintiffs under the circumstances presented, plaintiffs have failed to establish any legal basis to hold the insurance companies liable here, and plaintiffs fail to state any valid claim against defendants.
FACTUAL AND PROCEDURAL BACKGROUND
Given the procedural posture, we derive the facts from the complaint. Plaintiffs retained the fee-based financial advisory services of Sunil Sharma, who owned and operated his own financial advisory business in Rancho Bernardo, purported to be a registered investment advisor, and offered a variety of financial services, including the purchase and sale of securities and insurance products. Sharma was a financial advisor since the late 1990s or early 2000s and had a long-term relationship with plaintiffs. At various times prior to 2015, Sharma advised plaintiffs to invest in companies that he formed, Gold Coast Holdings, LLC and/or Safeharbor Tax Lien Acquisitions, LLC (hereinafter, Gold Coast), asserting it was a safe and secure investment for plaintiffs.
The complaint alleges that Sharma worked in concert with his wife, Sandhya Sharma, and that various acts of fraud were perpetrated by Sandhya. For simplicity, we refer only to "Sharma" throughout this opinion as the direct perpetrator of fraud.
At the same time Sharma was providing investment advice to plaintiffs, he was an insurance agent for multiple insurance companies—defendants Allianz Life Insurance Company of North America (Allianz), Equitrust Life Insurance Company (Equitrust), Fidelity & Guaranty Life Insurance Company (Fidelity), and PHL Variable Insurance Company (PHL) (collectively, insurance companies or insurers). Sharma advised plaintiffs to purchase annuity policies from these insurance companies, for which he served as the insurance agent. Some of the plaintiffs, at Sharma's urging, subsequently surrendered their policies and invested the proceeds in Gold Coast, while other plaintiffs invested in Gold Coast without surrendering their policies, as follows:
An annuity policy is an "insurance policy providing for monthly or periodic payments to the insured to begin at a fixed date and continue through the insured's life." (Black's Law Dict. (10th ed. 2014) p. 110, col. 1; see generally Grenall v. United of Omaha Life Ins. Co. (2008) 165 Cal.App.4th 188, 194-196 [explaining how annuity contracts operate].)
• In 2004, Joseph and Barbara McMenamin purchased Allianz annuity policies. They did not surrender the policies. Beginning in 2010, they made several investments in Gold Coast.
The McMenamins have since passed away and their claims are being pursued by a representative of their estate.
• In 2005, Mahmoud Hadjiagha purchased a Fidelity annuity policy, which he surrendered in 2009, incurring a penalty. He invested the annuity proceeds and other funds in Gold Coast over several years.
• In 2006, Michael and Akiko Gardner purchased Fidelity annuity policies, which they did not surrender. In 2011 and 2013, the Gardners made investments in Gold Coast.
• In 2006, Helen Rode purchased an Equitrust single premium fixed annuity policy, which she subsequently surrendered. In 2012 and 2014, she invested the proceeds, along with other funds, in Gold Coast.
• In 2007, Dolores Ellis purchased an Equitrust single premium fixed annuity policy, which she surrendered in 2009 and invested the proceeds in Gold Coast. Between 2008 and 2014, she made multiple investments in Gold Coast using annuity proceeds and other funds.
• In 2009, Franco Moller purchased an Allianz annuity policy. In 2011, Moller and his wife, Patricia, purchased a Fidelity annuity policy, which they surrendered in 2014 and invested the proceeds in Gold Coast. Also in 2011, the Mollers purchased a PHL single premium annuity policy, which they surrendered in 2013, incurring a surrender charge, and invested the proceeds in Gold Coast. In 2014, the Mollers purchased another Allianz annuity policy. Until and throughout 2014, the Mollers made numerous periodic investments in Gold Coast, using Fidelity and PHL annuity proceeds as well as other funds. The Mollers did not surrender their Allianz policies until March 2015.
• In 2011, George Loustalet purchased an Allianz annuity policy, which he surrendered in 2013 to invest in Gold Coast, along with other funds. Loustalet incurred a surrender penalty, which Sharma offered to offset with a bonus in Gold Coast.
All plaintiffs except George Loustalet were elderly, or at least 65 years old, when they purchased their annuity policies. They were all elderly by 2015.
The annuity policies performed as expected. For any surrender charges, the complaint does not allege the charges were improper, undisclosed, or excessive under the policies. Rather, the complaint alleges that Sharma improperly advised plaintiffs to invest the proceeds of the surrendered policies in Gold Coast. To induce plaintiffs to invest in Gold Coast, Sharma told each plaintiff numerous and different lies about the purported investments and/or failed to disclose material facts. For example, Sharma did not disclose that he had ceased being a registered investment advisor by 2006. Also unknown to plaintiffs, Gold Coast had no legitimate business purpose, and Sharma was using it to perpetuate a Ponzi scheme. When the scheme essentially collapsed by January 2015, Sharma reported himself to law enforcement authorities. Plaintiffs collectively lost millions of dollars they had invested in Gold Coast.
A Ponzi scheme is a fraudulent investment scheme where "money from the new investors is used directly to repay or pay interest to earlier investors, [usually] without any operation or revenue-producing activity other than the continual raising of new funds. This scheme takes its name from Charles Ponzi, who in the late 1920s was convicted for fraudulent schemes he conducted in Boston." (Black's Law Dict. (10th ed. 2014) p. 1348, col. 1.)
Sharma pleaded guilty to one count of wire fraud and was sentenced to 33 months in federal prison and three years of supervised release. He was ordered to pay over $6.2 million in restitution to the victims, including plaintiffs.
In February 2015, plaintiff Rode filed a complaint against Sharma and Gold Coast. In October 2015, Rode and additional plaintiffs filed a first amended complaint, adding certain insurance companies as defendants. Prior to a hearing on Equitrust's demurrer to the first amended complaint, plaintiffs stipulated to filing a second amended complaint, which was done in May 2016. The insurance company defendants demurred to the second amended complaint, which was sustained by the court with leave to amend. At the hearing on the demurrer, plaintiffs' counsel requested leave to amend "so that we can have the best possible pleading on file when the Court makes its final determination as to whether or not we have pleaded a cause of action." The court agreed, stating, "we will have a very clean pleading and there will be no claim that every fact that could be alleged hasn't been alleged."
The court did not rule on PHL's demurrer to the second amended complaint because it was calendared later, but PHL's demurrer was brought on the same grounds as the other insurance company defendants.
In January 2017, plaintiffs filed the third amended complaint. The complaint alleged nine causes of action against the insurance companies: (1) breach of fiduciary duty, (2) tort of another claim for attorney's fees, (3) elder abuse (Welf. & Inst. Code, § 15610 et seq.), (4) negligence of financial advisor, (5) constructive fraud and deception, (6) actual fraud, (7) securities fraud (Corp. Code, §§ 25401, 25501, 25504, 25504.1, & 25504.2), (8) sale of unregistered securities (Corp. Code, §§ 25110 & 25503), and (9) sale of securities by an unlicensed salesperson (Corp. Code, § 25501.5). Each plaintiff sought relief from the insurer or insurers who sold him or her an annuity policy—for losses arising from his or her investment in Gold Coast, not for any losses arising from the annuity policy. The complaint alleges the insurance companies had a "duty to supervise . . . Sharma . . . to protect the public, including [p]laintiffs, from fraud and deceit . . . ." Thus, as alleged, the claims for relief against the insurers are primarily premised on their vicarious liability for Sharma's fraudulent acts.
The insurers demurred on the ground that the complaint failed to state a cause of action against them. The court sustained the demurrers without leave to amend. Plaintiffs did not assert at the hearing on the demurrers that the complaint could be materially amended to state a cause of action against the insurance companies. The court entered a judgment of dismissal in favor of the insurers. This appeal followed.
On appeal, appellants filed a motion to strike portions of respondents' briefs for including unsupported factual assertions in the briefs. The motion to strike is denied. To the extent the briefs contain any unsupported statements of fact, we disregard those statements.
DISCUSSION
I. Standard of Review on Demurrer
"In determining whether plaintiffs properly stated a claim for relief, our standard of review is clear: ' "We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed." [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff.' " (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126, quoting Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
II. The Insurance Company Defendants Are Not Liable for Sharma's Acts Committed Outside the Scope of His Agency
A. Vicarious Liability and Agency Principles
Plaintiffs allege both respondeat superior and agency theories of liability. "Under the common law doctrine of respondeat superior, a principal or employer is vicariously liable for the acts of an agent or employee committed in the course of employment." (Lathrop v. HealthCare Partners Medical Group (2004) 114 Cal.App.4th 1412, 1421; Kaplan v. Coldwell Banker Residential Affiliates, Inc. (1997) 59 Cal.App.4th 741, 745-746 (Kaplan).)
"Civil Code section 2338, which has been termed a codification of the respondeat superior doctrine [citation], is not limited to employer and employee but speaks more broadly of agent and principal; it makes the principal liable for negligent and 'wrongful' acts committed by the agent 'in and as a part of the transaction of such [agency] business.' " (Lisa M. v. Henry Mayo Newhall Memorial Hospital (1995) 12 Cal.4th 291, 296, fn. 2 (Lisa M.).)
Based on an agency theory, a principal can also be charged with the acts of its agent, acting with either actual or ostensible authority. (See Alhino v. Starr (1980) 112 Cal.App.3d 158, 174 ["As Witkin notes, the cases do not always distinguish between the agency theories of actual or ostensible authority and the tort doctrine of respondeat superior [citation]."].) An actual agency exists "when the agent is really employed by the principal." (Civ. Code, § 2299; Kaplan, supra, 59 Cal.App.4th at pp. 746-747 [for a true agency relationship, the principal has control over the activities of the agent].) "An agency is ostensible when the principal intentionally, or by want of ordinary care, causes a third person to believe another to be his agent who is not really employed by him." (Civ. Code, § 2300.) "Ostensible agency cannot be established by the representations or conduct of the purported agent; the statements or acts of the principal must be such as to cause the third party to believe the agency exists." (Hartong v. Partake, Inc. (1968) 266 Cal.App.2d 942, 960, italics added.) " 'Liability of the principal for the acts of an ostensible agent rests on the doctrine of "estoppel," the essential elements of which are representations made by the principal, justifiable reliance by a third party, and a change of position from such reliance resulting in injury. [Citation.]' [Citation.]" (Kaplan, at p. 747.)
Even when a principal does not authorize an agent's tortious or fraudulent conduct, liability may arise where the principal ratifies such conduct. (Shultz Steel Co. v. Hartford Accident & Indemnity Co. (1986) 187 Cal.App.3d 513, 519, 523 [" 'A ratification can be made . . . by accepting or retaining the benefit of the act, with notice thereof.' (Civ. Code, § 2310.)"]; Desai v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1118-1119 ["An insurer, as a principal, may be vicariously liable for the torts of its agent if the insurer directed or authorized the agent to perform the tortious acts, or if it ratifies acts it did not originally authorize."].)
Although the existence of an agency relationship, and the scope of an agent's authority, are usually questions of fact, they become questions of law when the facts can be viewed in only one way. (J.L. v. Children's Institute, Inc. (2009) 177 Cal.App.4th 388, 403; Myers v. Trendwest Resorts, Inc. (2007) 148 Cal.App.4th 1403, 1428 (Myers).)
B. Sharma Was Not Acting Within the Scope of His Agency for the Insurance Companies When He Defrauded Plaintiffs
A principal is vicariously liable for its agent's torts only if the agent's misconduct arises from the conduct of the principal's enterprise. (Kephart v. Genuity, Inc. (2006) 136 Cal.App.4th 280, 292 (Kephart); Civ. Code, § 2338.) Although it is not necessary that an agent or employee act to benefit his principal for purposes of respondeat superior liability (Myers, supra, 148 Cal.App.4th at p. 1429), "[a]n act serving only the employee's personal interest is less likely to arise from or be engendered by the employment than an act that, even if misguided, was intended to serve the employer in some way." (Lisa M., supra, 12 Cal.4th at p. 298.)
Plaintiffs claim that Sharma was acting on behalf of the insurers when he defrauded plaintiffs. Plaintiffs expressly allege that Sharma was acting as the insurers' "actual and ostensible authorized agent" when Sharma recommended that plaintiffs purchase annuity policies from the insurers, and then advised the plaintiffs to surrender their annuity policies and invest in Gold Coast. Accepting as true that Sharma was an agent of the insurers in transacting their insurance business (Ins. Code, § 32; Loehr v. Great Republic Ins. Co. (1990) 226 Cal.App.3d 727, 734 (Loehr)), the complaint fails to allege sufficient facts demonstrating that Sharma was acting within the scope of his agency when he advised plaintiffs to surrender their annuities and invest in Gold Coast.
For example, plaintiffs allege, on information and belief, "that Defendants SUNIL SHARMA and SANDY SHARMA, one or both of them, were authorized agents of the Insurance Defendants, advised Plaintiffs to liquidate or surrender insurance products issued by the Insurance Defendants in order to fund fraudulent investments in GOLD COAST and SAFEHARBOR. These recommendations were unsuitable, fraudulent and inappropriate. The Insurance Defendants knew, or should have known, of these unsuitable and fraudulent recommendations."
The ruling in Asplund v. Selected Invs. in Fin. Equities (2000) 86 Cal.App.4th 26 is instructive. In Asplund, plaintiffs purchased promissory notes from a registered representative of defendant, who was a securities broker-dealer. When the investment turned out to be a Ponzi scheme, plaintiffs sought to impose vicarious liability on the defendant broker-dealer. The defendant moved for summary judgment, arguing it was not vicariously liable because selling the notes was outside the scope of the representative's agency relationship with the broker-dealer. (Id. at pp. 29-30.) Defendant presented evidence showing its "only purpose [was] to act as a management company for a mutual fund" the representative sold on its behalf; the promissory notes plaintiffs purchased had no connection to that mutual fund. (Id. at pp. 29, 32.) The Court of Appeal affirmed the trial court's decision that the defendant had no liability to the plaintiffs as a matter of law. (Id. at pp. 45-49.)
Here, Sharma was an independent agent capable of binding the various different insurers on contractual matters. (Loehr, supra, 226 Cal.App.3d at pp. 733-734; see Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2018) ¶ 2:5.5 ["Independent agents . . . sell and service policies written by many insurance companies and can place insurance with any company that has filed a notice of appointment for the agent . . . . An independent agent may thus solicit business on behalf of a variety of different insurance companies and still technically be an agent of each of those companies."].) However, Sharma's actual and ostensible agency was limited to transacting insurance for the insurance companies. " 'Transact' as applied to insurance includes any of the following: [¶] (a) Solicitation. [¶] (b) Negotiations preliminary to execution. [¶] (c) Execution of a contract of insurance. [¶] (d) Transaction of matters subsequent to execution of the contract and arising out of it." (Ins. Code, § 35; Loehr, at p. 732.) Each insurer could only be potentially liable for claims arising from these types of insurance transactions performed by Sharma on its behalf.
The fatal defect in plaintiffs' claims is that they do not arise out of or relate to the solicitation, preliminary negotiations, and/or execution of, their insurance contracts. Moreover, the complaint does not sufficiently allege that any insurance company authorized Sharma to act on its behalf to sell unrelated investments. To the contrary—despite boilerplate assertions about what the insurers allegedly "knew or should have known"—it is clear from the complaint that the insurance companies had no control over Sharma's representations related to his marketing of Gold Coast. As in Asplund, the fraudulent investment products at issue were products in which the defendants had no financial interest and were outside the scope of Sharma's agency relationship with defendants. The insurers cannot be held accountable for Sharma's misconduct that exceeded the scope of his insurance agency. (Kephart, supra, 136 Cal.App.4th at p. 292 ["vicarious liability is inappropriate when an employee's misconduct does not arise from the conduct of the employer's enterprise"]; Farmers Ins. Group v. County of Santa Clara (1995) 11 Cal.4th 992, 1013 ["[F]or purposes of respondeat superior, employees do not act within the scope of employment when they abuse job-created authority over others for purely personal reasons."].)
In attempting to hold the insurance companies liable for Sharma's misconduct, plaintiffs contend the trial court was required to accept as true the allegation that Sharma was acting on behalf of the insurance companies when he fraudulently advised plaintiffs to invest in Gold Coast. Plaintiffs are incorrect. Neither we nor the trial court are required to assume the truth of contentions or conclusions of fact or law, such as those contained in plaintiffs' complaint. (See Moore v. Regents of University of California (1990) 51 Cal.3d 120, 134, fn. 12 (Moore) [bare allegations of agency, such as alleging a defendant "was the agent" of another and did all things alleged as an agent "acting within the course and scope of said agency," are "egregious examples of generic boilerplate"].)
Plaintiffs allege that Sharma made fraudulent recommendations—such as recommending that plaintiffs surrender their annuities and fund investments in Gold Coast—during the time he was authorized to sell "insurance products issued by the insurance company Defendants." In other words, Sharma was only able to defraud plaintiffs because he was the insurers' agent, and was thus in a position to provide both legitimate and fraudulent financial advice. But this does not give rise to liability. "The nexus required for respondeat superior liability—that the tort be engendered by or arise from the work—is to be distinguished from 'but for' causation. That the employment brought tortfeasor and victim together in time and place is not enough." (Lisa M., supra, 12 Cal.4th at p. 298, fn. omitted.) As we have discussed, the complaint's allegations establish that Sharma was an independent insurance agent who operated his own financial advisory business. The complaint is devoid of any allegations that Sharma purported to serve the interests of the insurance companies when he formed and marketed Gold Coast. Furthermore, because Sharma exceeded the scope of his insurance agency in giving plaintiffs fraudulent financial advice, his knowledge of false representations is not imputed to the insurers as plaintiffs contend. (Triple A Management Co. v. Frisone (1999) 69 Cal.App.4th 520, 534-535 [knowledge acquired by an agent within the course and scope of his agency duties is imputed to the principal because the agent is under a legal duty to disclose it; knowledge is not imputed when agent obtains information outside the scope of agency].)
Plaintiffs' additional assertion that completing "surrender transactions" was within the scope of Sharma's agency misses the point because plaintiffs' losses were not caused by, or a result of, the surrender transactions. There is no allegation in the complaint that the insurance companies failed to fully and faithfully honor policy terms concerning surrenders. Notably, no plaintiff claimed to suffer any damages under the circumstances when proceeds from a surrendered annuity were used to purchase a different annuity policy. The harm to plaintiffs plainly arose from their investments in Gold Coast—and the complaint does not adequately allege the insurers exercised control over Sharma vis-à-vis Gold Coast.
Plaintiffs' claims premised on Sharma's alleged ostensible authority are similarly defective. The complaint makes clear that Sharma's actions and fraudulent representations caused plaintiffs to invest in his Ponzi scheme. Plaintiffs, for example, allege Sharma solicited plaintiffs to retain him; Sharma advised plaintiffs to invest in Gold Coast as a "safe and secure investment"; and Sharma made various false representations because he "intended to deceive" plaintiffs. But ostensible agency must be established through the conduct of the principal and cannot be created by the purported agent's conduct or representations. (Young v. Horizon West, Inc. (2013) 220 Cal.App.4th 1122, 1132; see Civ. Code, § 2317 ["Ostensible authority is such as a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess."].)
Plaintiffs cite Blackburn v. Witter (1962) 201 Cal.App.2d 518 to support their theory of liability based on ostensible agency, but it is distinguishable. In Blackburn, the plaintiff received fraudulent investment advice from Long, an employee/agent of the defendant brokerage houses. (Id. at p. 519.) The court found that the brokerage houses had extended ostensible authority on Long to offer a sham investment because they had created internal "research divisions" within their companies "to induce customers to rely upon them for [investment] advice," and that the elderly plaintiff believed the brokerage houses' research divisions were recommending the sham investment. (Id. at p. 522.) In contrast, plaintiffs do not allege they believed the insurance companies were recommending Gold Coast. The well-pleaded factual allegations make clear that plaintiffs retained Sharma (and his financial advisory business) for investment advice and that only Sharma was recommending Gold Coast. The complaint does not sufficiently allege that Sharma was ostensibly authorized by the insurance companies to offer a noninsurance product.
Finally, Plaintiffs claim that the insurance defendants ratified Sharma's actions. This claim also lacks merit. "A principal cannot ratify the act of the alleged agent, unless the 'agent' purported to act on behalf of the principal." (Emery v. Visa Internat. Service Assn. (2002) 95 Cal.App.4th 952, 961, italics added.) Here, Sharma was acting to benefit himself only. Only Sharma earned fees for providing financial advisory services to his individual clients. In addition, the insurers persuasively argue that plaintiffs' relinquishing their annuities and investing the proceeds in Gold Coast was not in the insurers' interests; thus, it cannot be reasonably inferred they approved or adopted Sharma's acts as their own. In sum, none of the allegations in the complaint supports any inference that Sharma was acting on behalf of defendant insurers when Sharma engaged in his fraudulent actions. On the contrary, the allegations of the complaint demonstrate that Sharma acted on his own behalf as part of his scheme to get plaintiffs to invest in his companies.
C. The Insurance Companies Did Not Owe Plaintiffs a Duty to Protect Against or Warn of Sharma's Fraud
Plaintiffs argue the insurance companies should have known of Sharma's fraudulent financial advice and had a "duty" to warn them, due to a special or fiduciary relationship. We conclude this argument lacks merit as defendants owed no duty under the facts alleged here.
"[U]nder the common law, as a general rule, one person owed no duty to control the conduct of another [citations], nor to warn those endangered by such conduct [citations]," absent some special relationship to either the person whose conduct needs to be controlled or to the foreseeable victim of that conduct. (Tarasoff v. Regents of University of California (1976) 17 Cal.3d 425, 435 (Tarasoff).) The existence of a duty "is not an immutable fact, but rather an expression of policy considerations leading to the legal conclusion that a plaintiff is entitled to a defendant's protection." (Ludwig v. City of San Diego (1998) 65 Cal.App.4th 1105, 1110.) To overcome a demurrer, the complaint must state facts from which the existence of a duty may be inferred; otherwise, the bald assertion of a "duty" is a legal conclusion. (Rosales v. Stewart (1980) 113 Cal.App.3d 130, 133.)
Plaintiffs first contend the insurers' duty arose from their status as insurers. Yet as we have indicated, the insurers' duty to control Sharma extended only to insurance transactions, which do not form the basis for plaintiffs' alleged injuries here. With respect to the insurers' relationship with plaintiffs, it is well established that an insurer is not a fiduciary of an insured. (Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates, Inc. (2004) 115 Cal.App.4th 1145, 1158.) "Even assuming a fiduciary-type relationship exists, neither the duty nor the covenant of good faith and fair dealing extends beyond the terms of the insurance contract in force between the parties." (New Plumbing Contractors, Inc. v. Nationwide Mutual Ins. Co. (1992) 7 Cal.App.4th 1088, 1096; see Gibson v. Gov't Employees Ins. Co. (1984) 162 Cal.App.3d 441, 451 (Gibson) [insurer has no duty to inform insured of the availability of other insurance coverage by the insurer or other carriers].) The insurers did not owe plaintiffs the type of extracontractual duties plaintiffs seek to impose here.
Plaintiffs next claim a duty arose because Sharma held himself out as a financial advisor, but again the complaint does not allege facts establishing that the insurers exercised control over Sharma's provision of financial advisory services to plaintiffs. Rather, the complaint alleges that Sharma's financial advisory business was owned and operated by him alone, and plaintiffs paid him (or his firm) fees for services. Plaintiffs cite several federal district court cases to support the proposition that an insurance company may owe a fiduciary duty to its insureds in the marketing and sales of annuity contracts. (See, e.g., Abbit v. ING United States Annuity and Life Ins. Co. (S.D.Cal. 2014) 999 F.Supp.2d 1189, 1192 (Abbit); Negrete v. Fid. & Guar. Life Ins. Co. (C.D.Cal. 2006) 444 F.Supp.2d 998, 1000 (Negrete) [involving the marketing and sales of Fidelity deferred annuity products].) These cases are inapposite because plaintiffs' claims here did not arise out of their annuities, but rather out of their investments in Gold Coast.
Plaintiffs urge us to find that the insurance companies owed them a "duty of care" based on an analysis of the factors set forth in Rowland v. Christian (1968) 69 Cal.2d 108, which held that a land possessor had a duty to warn her guest of a dangerous, concealed condition posing an unreasonable risk of harm on the premises. (Id. at p. 119.) In determining whether a duty exists, the factors to be considered are "the foreseeability of harm to the plaintiff, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, the policy of preventing future harm, the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and the availability, cost, and prevalence of insurance for the risk involved." (Id. at pp. 112-113.) "The most important of these considerations in establishing duty is foreseeability." (Tarasoff, supra, 17 Cal.3d at p. 434.)
Applying these factors, we conclude the complaint does not allege sufficient facts to support the imposition of a duty of care on the insurance companies to protect plaintiffs from Sharma's misconduct. Sharma exercised complete control over his own financial advisory business and Gold Coast, and owed the insurers no duty to disclose matters related to his separate business dealings. The plaintiffs do not adequately explain, nor are we able to ascertain, how an insurer would be able to foresee (and prevent) an independent agent's giving of fraudulent financial advice to clients of the agent's separately owned business. The insurers' connection to plaintiffs derived from their annuity contracts, from which plaintiffs suffered no injury. Moreover, insurers must already abide by statutory regulations in their sales of annuity contracts. (See, e.g., Ins. Code, § 10127.13 [required disclosures relating to life insurance and annuity contracts for senior citizens, including surrender charges].) Imposing any additional "duty" on insurance companies in this case would render them "personal financial counselors or guardians of the insured . . . [going] well beyond anything required by law or dictated by common sense." (Gibson, supra, 162 Cal.App.3d at pp. 451-452.)
Without elaboration, plaintiffs assert that "it would not be burdensome" for the insurance companies to keep track of their independent agents' activities. We disagree. Sharma was not employed by the insurance companies, and he was free to operate other businesses. The insurance companies convincingly argue that imposing a duty to supervise independent agents as if they were employees—in the manner proposed by plaintiffs here—would require a structural change in the insurance industry and inevitably increase the cost of insurance (or render it unavailable) to the detriment of consumers. The insurance companies were neither blameworthy for Sharma's misconduct nor could they have reasonably prevented plaintiffs' losses. Accordingly, plaintiffs have not established that the insurers owe them a duty of care under Rowland or Tarasoff.
D. Plaintiffs Have Failed to Establish Any Legal Basis to Hold the Insurance Companies Liable for Sharma's Fraud
Plaintiffs final theory of liability is that the insurance companies were negligent in hiring, retaining, and supervising Sharma. " 'An employer may be liable to a third person for the employer's negligence in hiring or retaining an employee who is incompetent or unfit.' " (Phillips v. TLC Plumbing, Inc. (2009) 172 Cal.App.4th 1133, 1139.) Here, however, Sharma was an independent insurance agent, and the complaint does not sufficiently allege his incompetence in performing the duties of an insurance agent. "Furthermore, '[l]iability under this rule also requires some nexus or causal connection between the principal's negligence in selecting or controlling an actor, the actor's employment or work, and the harm suffered by the third party.' " (Id. at p. 1140.) That causal connection is lacking here; as already discussed, the insurance companies did not hire or retain Sharma to advise plaintiffs to invest in Gold Coast. (See Ins. Code, §§ 31, 32, & 35.) Plaintiffs' theory of negligent hiring and supervision fails because plaintiffs do not allege any facts, as opposed to legal conclusions, indicating that the insurance companies should have known about Sharma's fraudulent representations and advice.
"Liability for negligent supervision and/or retention of an employee is one of direct liability for negligence, not vicarious liability." (Delfino v. Agilent Technologies, Inc. (2006) 145 Cal.App.4th 790, 815.)
In sum, plaintiffs have failed to establish any viable theory of liability—whether vicarious or direct—against the insurance companies.
III. The Complaint Fails to State a Cause of Action
A. Breach of Fiduciary Duty and Negligence
The complaint's first cause of action is for breach of fiduciary duty, the elements of which are "the existence of a fiduciary relationship, breach of fiduciary duty, and damages." (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820.) " '[B]efore a person can be charged with a fiduciary obligation, he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law.' " (City of Hope National Medical Center v. Genentech, Inc. (2008) 43 Cal.4th 375, 386.) An insurer may possess " 'fiduciary-like duties . . . because of the unique nature of the insurance contract, not because the insurer is a fiduciary.' " (Vu v. Prudential Property & Casualty Ins. Co. (2001) 26 Cal.4th 1142, 1151.) Insurers are not fiduciaries "in the same sense as the relationship between trustee and beneficiary, or attorney and client." (Id. at pp. 1150-1151.)
Here, the complaint does not state a claim for breach of fiduciary duty against the insurance company defendants. As we have noted, plaintiffs' claims do not arise from their annuity policies but rather from their investments in Gold Coast. The complaint does not sufficiently allege the insurance companies acted as plaintiffs' investment advisors, knew of Sharma's fraudulent advice, or knew the proceeds of any surrendered policies were being used in a Ponzi scheme. The trial court properly sustained demurrers to the first cause of action.
The complaint's fourth cause of action is entitled "negligence of financial adviser," and alleges nonspecifically that "Defendants" held themselves out as financial professionals and committed malpractice. However, the more specific allegations in the complaint reveal that only Sharma—not any insurer—held himself out as a financial advisor. The complaint does not identify the insurers' breach of a cognizable legal duty to plaintiffs as required to state a claim for negligence. (Ladd v. County of San Mateo (1996) 12 Cal.4th 913, 917.) Thus, the court properly sustained demurrers to the fourth cause of action.
B. Tort of Another
The complaint's second cause of action is entitled "tort of another claim for attorney's fees" and seeks to recover attorney fees against the insurance company defendants. (See Prentice v. North American Title Guaranty Corp. (1963) 59 Cal.2d 618, 620.) Because we conclude plaintiffs have failed to state a valid claim against the insurance companies, their "tort of another" claim likewise fails. (E.g., Gray v. Don Miller & Associates, Inc. (1984) 35 Cal.3d 498, 507 [to obtain attorney fees from a party, the party must be the cause of plaintiff filing suit against a third party].)
C. Elder Abuse
The third cause of action is for elder abuse under Welfare and Institutions Code section 15610 et seq. (the Elder Abuse Act). Plaintiffs contend they have stated a claim for financial abuse of an elder.
Financial abuse of an elder "occurs when a person or entity does any of the following: [¶] (1) Takes, secretes, appropriates, obtains, or retains real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both. [¶] (2) Assists in taking, secreting, appropriating, obtaining, or retaining real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both. [¶] (3) Takes, secretes, appropriates, obtains, or retains, or assists in taking, secreting, appropriating, obtaining, or retaining, real or personal property of an elder or dependent adult by undue influence, as defined in section 15610.70." (Welf. & Inst. Code, § 15610.30, subd. (a), italics added; Mahan v. Charles W. Chan Ins. Agency, Inc. (2017) 14 Cal.App.5th 841, 856.)
The complaint fails to state a cause of action for financial elder abuse against the insurance companies, which for reasons discussed ante, are not vicariously or directly liable for Sharma's fraudulent conduct. There is no allegation in the complaint that the insurers knew the proceeds from plaintiffs' surrendered annuities were being used to perpetuate Sharma's Ponzi scheme. The complaint's allegations do not support that the insurance companies had an intent to defraud plaintiffs, misused their funds, or exerted undue influence to obtain their funds, vis-à-vis the annuity policies.
Plaintiffs rely on cases like Negrete, supra, 444 F.Supp.2d 998, and Abbit, supra, 999 F.Supp.2d 1189, which involved elder abuse claims against insurers for the deceptive sales of annuity contracts. But plaintiffs do not allege the insurers engaged in deceptive sales of annuity contracts. The court properly sustained demurrers to the third cause of action.
D. Constructive Fraud and Fraud
The complaint's fifth and sixth causes of action relate to constructive fraud and fraud. Plaintiffs' brief makes clear that the complaint's fraud-related claims are not based on direct acts by the insurers, but on their vicarious liability for Sharma's acts. For reasons discussed ante, section II.B., the insurers are not vicariously liable for Sharma's fraudulent acts. Further, the insurers did not owe plaintiffs any duties beyond the terms of their annuity policies, see ante, section II.C. The demurrers to the fraud causes of action were properly sustained.
E. California's "Blue Sky Laws"
The seventh through ninth causes of action allege violations of California's securities laws based on Sharma's sales of securities in Gold Coast. (Corp. Code, §§ 25401, 25501, 25501.5, 25503, 25504, & 25110.) Plaintiffs admit the insurance companies did not directly sell any Gold Coast securities, but contend the insurance companies are liable as "controlling persons" of Sharma, who sold the securities.
Corporations Code section 25403 provides in pertinent part that "[e]very person who with knowledge directly or indirectly controls and induces any person to violate any provision of this division . . . shall be deemed to be in violation of that provision, rule, or order to the same extent as the controlled and induced person." (Corp. Code, § 25403; see AREI II Cases (2013) 216 Cal.App.4th 1004, 1013-1014 [joint and several liability for anyone who, with intent to deceive or defraud, materially assists in violating securities laws].)
The complaint does not sufficiently allege the insurers had knowledge of, controlled, or induced Sharma's sales of securities in Gold Coast, or that they provided material assistance in the alleged securities law violations. Instead, the complaint alleges Sharma independently formed and marketed Gold Coast. The fact that he additionally offered annuity policies on behalf of the insurers does not, without more, mean the insurers induced or assisted the sales of Gold Coast securities. Accordingly, the court properly sustained the insurers' demurrers to the seventh through ninth causes of action.
IV. The Trial Court Did Not Abuse Its Discretion in Denying Leave to Amend
On appeal, plaintiffs assert they should be granted leave to amend to allege nine additional facts—which, on inspection, are actually legal and factual conclusions that do not alleviate the fundamental defects in plaintiffs' claims. Six of the alleged facts relate to matters the insurance companies collectively "knew, or should have known," such as they allegedly "knew, or should have known, that Sharma's activities with Gold Coast and Safeharbor were illegal and/or criminal . . . ." Without details of how or why the insurers would have possessed this knowledge, these allegations do not suffice to state a claim. Another allegation—that Sharma's fraud was undertaken "within the course and scope of his authorized and ostensible agency for Respondents"—is plainly an improper legal conclusion. (Moore, supra, 51 Cal.3d at p. 134, fn. 12.) Plaintiffs would also additionally allege that the insurers paid Sharma "substantial sales commissions" for purchased policies, which is of no import because we have accepted as true that he was the insurers' agent for purposes of transacting insurance. Finally, plaintiffs seek to allege that the plaintiffs who surrendered annuity policies "incurred some type of financial penalty that benefitted [the insurance companies], to be shown according to proof." The latter fact would not cure the defective complaint because there would still be no allegation the surrender penalty itself was illegal, undisclosed, or improper under the terms of the annuity policy. In sum, the proposed amendments do not assist plaintiffs to state a cause of action against the insurance companies.
Because plaintiffs have failed to demonstrate there is a reasonable possibility the complaint can be amended to state a claim, and they have been afforded numerous opportunities to do so, the trial court did not abuse its discretion in denying leave to amend. (Rubenstein v. The Gap, Inc. (2017) 14 Cal.App.5th 870, 881-882.)
On reply, plaintiffs assert they can state additional causes of action, including (1) interference with prospective economic advantage and (2) money had and received. Because these claims are still based on the insurers' alleged vicarious liability for Sharma's wrongdoing, they are not viable against the insurance companies for the reasons we have discussed in this opinion.
DISPOSITION
The judgment is affirmed. Costs on appeal are awarded to the insurance company defendants.
GUERRERO, J. WE CONCUR: HALLER, Acting P. J. DATO, J.