Opinion
2:21-CV-00645-CAS-GJSx
06-13-2021
JANET T. SULLIVAN v. TRANSAMERICA LIFE INS. COMPANY
Attorneys Present for Plaintiffs: Franjo Dolenac. Attorneys Present for Defendants: Hutson Smelley, Ryan Goodland.
Attorneys Present for Plaintiffs: Franjo Dolenac.
Attorneys Present for Defendants: Hutson Smelley, Ryan Goodland.
Present: The Honorable CHRISTINA A. SNYDER Judge.
CIVIL MINUTES - GENERAL
Proceedings: TELEPHONE HEARING RE: DEFENDANT TRANSAMERICA LIFE INSURANCE COMPANY'S NOTICE OF MOTION AND MOTION TO DISMISS COUNTS III, IV, AND V OF PLAINTIFFS' COMPLAINT FOR FAILURE TO STATE A CLAIM (Dkt. 25, filed on April 1, 2021)
I. INTRODUCTION
On January 23, 2021, plaintiffs Janet T. Sullivan and Janet T. Sullivan, as trustee of the Teuton Irrevocable Trust Dated June 21, 2002 ("Trust") (together, "plaintiffs"), filed suit in this Court against defendant Transamerica Life Insurance Company ("Transamerica"). Dkt. 1 ("Compl."). Plaintiffs' claims arise from Transamerica's allegedly improper Monthly Deduction Rate increases.
On April 1, 2021, Transamerica filed the instant motion to dismiss. Dkt. 25 ("Mot."). Plaintiffs opposed on April 26, 2021. Dkt. 28 ("Opp.")· Transamerica replied on May 3, 2021. Dkt. 29 ("Reply"). The Court held a hearing on May 17, 2021.
Having carefully considered the parties' arguments and submissions, the Court finds and concludes as follows.
II. BACKGROUND
Sullivan is a citizen of Florida, and the Trust is organized under the laws of Kentucky. Compl. ¶¶ 20-21. Transamerica is organized under the laws of Iowa, with its principal place of business in Cedar Rapids, Iowa. Id. ¶ 23.
Plaintiffs allege claims relating to three universal life insurance policies issued by Transamerica's predecessor in interest, Transamerica Occidental Life Insurance Company ("Policies"). Id. *f 27. The Policies were issued in Kentucky. Id. The first policy. No. 60090492, is owned by the Trust. Id; see dkt. 1-1, Exh. 1 ("492 Policy"). It was issued on June 18, 2002, and insured the life of Freeman E. Teuton ("Freeman") for the amount of $1,050,000. Id. The second policy. No. 60090489, is also owned by the Trust ("489 Policy"). Id. (Plaintiffs do not attach this policy to their complaint, but they allege it used the same form and has the same terms as does the 492 Policy. Id. ¶ 29.) This policy was issued on August 11, 2002, and insured the life of Ann H. Teuton ("Ann") for the amount of $100,000. Id. ¶ 28. The third policy, No. 60093475, is owned by Sullivan. Id; see dkt. 1-2, Exh. 2 ("475 Policy"). It was issued on June 18, 2002, and insured the lives of both Ann and Freeman for the amount of $895,603. Id.
Plaintiffs allege they are the original owners and beneficiaries of the Policies. Id. ¶ 28. Sullivan is the daughter of Ann and Freeman and, as mentioned above, is the trustee of the Trust. Id. The Trust's beneficiaries are family members of the insureds, Ann and Freeman. Id. Pursuant to the Policies' terms, policy holders deposit premiums into an account for each policy. Each month, Transamerica withdraws a monthly deduction from each account and deposits a separate amount of interest. Id. ¶ 30. Interest accrues on the account's balance based upon minimum rates and average annual rates guaranteed by each policy. Id¶32. The Policies accrue a minimum interest rate of 4%. Id. The amount in a policy's account is known as the "Accumulation Value." Id. Universal life insurance policies allow policyholders to alter the amount and frequency of their premium payments. Id. at ¶ 7. The Policies remain in force as long as the Accumulation Value each month is sufficient to cover Transamerica's monthly deduction. Id. at ¶ 30. If the Accumulation Value is insufficient to cover a monthly deduction, the policy enters a grace period during which the policyholder may pay additional premiums to prevent lapse. Id. at ¶ 32. At the end of the grace period, if the Accumulation Value remains too low, the policy will lapse, that is, terminate. Id.
The monthly deduction is equal to (1) the Monthly Deduction Rate ("MDR") multiplied by the difference between the Accumulation Value and the death benefit then multiplied by .001; plus (2) a monthly deduction for any policy riders; plus (3) a set policy fee; plus (4) a monthly expense charge per thousand rate multiplied by .001, times the face amount of the policy. Id. at ¶ 30. Plaintiffs allege that the first element above, relating to the MDR, is the largest and most significant charge. Id. at ¶ 31. Plaintiffs further allege that the MDRs under the Policies "are based initially on certain characteristics of the insured, including gender, age, and risk class" and increase as the insured ages. Id. at ¶ 33. The Policies state that Transamerica "will determine the Monthly Deduction Rate for each policy month at the beginning of that policy month." Id. at ¶ 34.
The Policies enumerate certain factors that Transamerica may consider in increasing the MDR. Relevant here, Transamerica may only base changes upon its expectations as to "future cost factors," and "not [to] distribute past surplus or recover past losses[.]" Id. at •¡ 34-35 (emphasis added). The Policies also enumerate the cost factors Transamerica may consider in setting the MDR. "Such cost factors may include, but are not limited to: mortality; expenses; interest; persistency; and any applicable federal, state and local taxes." Id. at ¶ 34. Finally, the Policies set maximum MDRs. Id. ¶ 10.
Under the Policies, the death benefit is generally equal to the face amount. See 492 Policy at 2, 8; 475 Policy at 2, 7. Plaintiffs are permitted to reduce the face amount of the Policies pursuant to certain conditions. See 492 Policy at 19; 475 Policy at 17. If plaintiffs decrease the face amount, the MDR is based on the reduced face amount. See 492 Policy at 20; 475 Policy at 17.
Plaintiffs allege that in June 2015, Transamerica began raising the MDRs in a manner that violated the Policies' terms. Compl. ¶ 37. According to plaintiffs, "[b]y drastically raising the Monthly Deduction Rates on the Policies by 100% without a proper basis, Transamerica has breached the express and implied terms of the Policies." Id. at ¶ 1. Plaintiffs further contend that the purpose of these increases is "to force Plaintiffs and other policyholders to (a) pay exorbitant premiums that Transamerica knows would no longer justify the ultimate death benefits: (b) lapse or surrender their policies and forfeit the premiums that they have paid to date, thereby depriving policyholders of the benefits of their policies; or (c) decrease the death benefit to a level commensurate with the premiums the policyholder originally intended to pay, as in this case." Id. at •f 13.
Specific to this case, on April 29, 2016, Transamerica notified plaintiffs that it would increase the Policies' MDRs by 100%, effective June 18, 2016. Id. ¶¶ 71-72. In order to prevent lapse in the face of these MDR increases, plaintiffs requested that Transamerica reduce the face amount of each of the Policies before the impending MDR increase. Id. ¶ 73. (Reducing the face amount would reduce monthly deductions because, among other things, a significant component of the monthly deduction is the difference between the Accumulation Value and the face amount, multiplied by the MDR. Id. ¶ 30; see Id. ¶ 3.) Plaintiffs allege they were forced to reduce the cumulative face amount of the Policies by $906,789, which represented a decrease of between 55% and 71% of each Policy's face amount. Id. ¶¶ 14, 73.
Following Ann's death, a claim was submitted to Transamerica to collect the death benefit on the 498 Policy, around August 23, 2018. Id. ¶ 74. (Plaintiffs do not specify whether they submitted a claim for the original face amount or the reduced face amount.) Transamerica paid the reduced death benefit on that policy, which equaled $58,364. Id. Following Freeman's death, claims were submitted to Transamerica to collect the death benefit on the 492 Policy and the 475 Policy, on November 12, 2020. Id. ¶ 75. (Again, plaintiffs do not specify the amount for which they submitted claims.) In their complaint, plaintiffs allege that Transamerica has failed to pay the death benefits on those policies. Id. However, it appears Transamerica has since paid out these claims based on the reduced face amount of the Policies. Reply at 3.
Plaintiffs filed suit on January 23, 2021. Plaintiffs' complaint alleges claims for (1) breach of contract (claim one); (2) breach of the implied covenant of good faith and fair dealing sounding in contract (claim two); (3) breach of the implied covenant of good faith and fair dealing sounding in tort (claim three); (4) violation of the Kentucky Unfair Claims Settlement Practices Act, Ky. Rev. Stat. § 304.12-230 ("KUCSPA") (claim four); and (5) conversion (claim five). Compl. ¶¶ 77-121. Transamerica now moves pursuant to Federal Rule of Civil Procedure 12(b)(6) ("Rule 12(b)(6)") to dismiss plaintiffs' third, fourth and fifth claims for failure to state a claim. Mot. at 1.
III. LEGAL STANDARD
A motion pursuant to Rule 12(b)(6) tests the legal sufficiency of the claims asserted in a complaint. Under this Rule, a district court properly dismisses a claim if "there is a Tack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.'" Conservation Force v. Salazar. 646 F.3d 1240, 1242 (9th Cir. 2011) (quoting Bahsteri v. Pacifica Police Dep't 901 F.2d 696, 699 (9th Cir. 1988)). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to provide the 'grounds' of his 'entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twomblv, 550 U.S. 544, 555 (2007). "[F]actual allegations must be enough to raise a right to relief above the speculative level." Id. In considering a motion pursuant to Rule 12(b)(6), a court must accept as true all material allegations in the complaint, as well as all reasonable inferences to be drawn from them. Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). The complaint must be read in the light most favorable to the nonmoving party. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). However, "a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations." Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009); see Moss v. United States Secret Service, 572 F.3d 962, 969 (9th Cir. 2009) ("[F]or a complaint to survive a motion to dismiss, the non-conclusory 'factual content,' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief."). Ultimately, ''[determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 679.
Unless a court converts a Rule 12(b)(6) motion into a motion for summary judgment, a court cannot consider material outside of the complaint (e.g., facts presented in briefs, affidavits, or discovery materials). In re American Confl Corp ./Lincoln Sav. & Loan Sec. Litig., 102 F.3d 1524, 1537 (9th Cir. 1996), rev'd on other grounds sub nom Lexecon, Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26 (1998). A court may, however, consider exhibits submitted with or alleged in the complaint and matters that may be judicially noticed pursuant to Federal Rule of Evidence 201. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999); see Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001).
As a general rule, leave to amend a complaint which has been dismissed should be freely granted. Fed.R.Civ.P. 15(a). However, leave to amend may be denied when "the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency." Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986).
IV. DISCUSSION
A. Tortious Breach of Implied Covenant
Plaintiffs allege that Transamerica breached the covenant of good faith and fair dealing implied in all insurance contracts in Kentucky. One manner in which plaintiffs allege Transamerica breached the implied covenant is by forcing plaintiffs to reduce the face amounts of the Policies, thereby denying plaintiffs the amount of those reductions in death benefits. Compl. ¶ 92(f)-(h).
Under Kentucky law, courts apply one test to both common law and statutory bad faith claims against insurers. Rawe v. Liberty Mut. Fire Ins. Co., 462 F.3d 521, 527 (6th Cir. 2006); see Wittmer v. Jones. 864 S.W.2d 885, 890 (Ky. 1993). Under this test, a plaintiff must establish: "(1) that the insurance policy obligates the insurer to pay the insured's claim; (2) that the insurer's denial lacks a reasonable basis in law or fact; and (3) that the insurer knowingly or recklessly acted without a reasonable basis for denying the claim." Miller v. Seneca Specialty Ins. Co.. Inc.. No. 5:18-cv-054-TBR, 2019 WL 3431588, at *3 (W.D. Ky. July 29, 2019) (citation omitted); see Wittmer, 864 S.W.2d at 890.
Transamerica moves to dismiss plaintiffs' claim for tortious bad faith to the extent it seeks to recover the differences between the initial and reduced face amounts of the Policies. Mot. at 7. According to Transamerica, plaintiffs have failed to allege the first element of a tortious bad faith claim: the contractual obligation to pay the claim. Id. at 8. Transamerica reasons that, "[b]ecause the face amounts were reduced [at plaintiffs' request], [Transamerica] did not breach the contracts by only paying the death benefits based on the current face amounts," which Transamerica contends were all the Policies required it to pay. Id. at 9-10. Transamerica argues that plaintiffs are only entitled to state a bad faith claim for the amount of coverage due at the time of the insureds' deaths. Reply at 3-4.
Transamerica argues in the alternative that, if California applies to plaintiffs' tortious bad faith claim, the claim would still fail. See Mot. at 8 n.6. Transamerica does not, however, argue that California law should apply. In a previous case challenging Transamerica's MDR increases, this Court found that California law did not apply to the non-resident plaintiffs' tortious bad faith claim because California lacked a sufficient interest in applying its law to the claim. Hamra v. Transamerica Life Ins. Co., No. 2:18-cv-06262-CAS (GJSx), 2019 WL 468803, at *IO (CD. Cal. Feb. 6, 2019). Nevertheless, in light of the fact that no party argues against the application of Kentucky law to the tortious bad faith claim, the Court assumes, without deciding, that Kentucky law applies.
Plaintiffs respond that they have alleged that the Policies covered their claims, and that they are not required to allege more. Opp. at 6-7. In any event, plaintiffs argue, the Policies' terms "support Plaintiffs' recovery for the original face amounts" because the "inflated premium payments" required by the MDR increases "would have covered the initial face amounts but for the MDR increase." Id. at 7. Effectively, plaintiffs argue that Transamerica's alleged breach forced plaintiffs to forfeit a certain portion of the death benefits due under the Policies-even though their monthly payments would have kept the Policies in force with the full face amounts-and that Transamerica thus denied plaintiffs coverage when it paid only the reduced face amount. Id. at 8. Plaintiffs urge that Transamerica "cannot rely on its bad faith acts to skirt tort liability." Ia\ There is no dispute that, at the time plaintiffs submitted claims to Transamerica for the death benefits owed on the Policies, the plain terms of the Policies obligated Transamerica to pay the death benefits based on the reduced face amounts. See 492 Policy at 19; 475 Policy at 17. This is because plaintiffs reduced the face amounts pursuant to the terms of the Policies, and because the Policies establish that the death benefit is based on the face amount. As such, the plain terms of the Policies do not support a finding that Transamerica denied plaintiffs a portion of the death benefits by not paying the difference between the original and reduced face amounts.
Furthermore, plaintiffs' allegations that the Policies' terms support plaintiffs' recovery for the original face amounts may well state a claim for breach of contract. But that does not mean that the Policies' terms support recovery in tort. Put another way, at the moment Transamerica increased the MDRs, Transamerica may have breached the terms of the Policies. But at that moment, plaintiffs would not have been able to state a claim for tortious bad faith under Kentucky law because there had been no denial of benefits-the Policies did not obligate Transamerica to pay any death benefit at that time. See Miller, 2019 WL 3431588, at *4 ("[A] plaintiffs bad faith claim must be dismissed where the defendant had no obligation to pay the plaintiffs insurance claim when the plaintiff submitted the claim[.]" (emphasis added)). Likewise, when plaintiffs reduced the face amounts on the Policies, they could not have stated a claim for tortious bad faith under Kentucky law because, again, there had been no denial of benefits. Thus, while it may be true that Transamerica had a contractual obligation to pay death benefits based on the original face amounts, and that it avoided that obligation by impermissibly raising the MDRs on the Policies, it does not follow, in this case, that this misconduct is actionable in tort under Kentucky law. In sum, Kentucky's tortious bad faith law is limited to scenarios where insurers deny a benefit due upon submission of a claim, and the facts here do not fit that mold. See Davidson v. Am. Freightways, Inc., 25 S.W.3d 94, 100 (Ky. 2000) ("The gravamen of the UCSPA is that an insurance company is required to deal in good faith with a claimant ... with respect to a claim which the insurance company is contractually obligated to pay."). As such, plaintiffs fail to state a claim for tortious bad faith to the extent it relates to Transamerica's failure to pay death benefits based on the original face amounts.
The Court observes without deciding that plaintiffs may be able to recover the difference between the initial face amounts and the death benefits actually paid as damages for breach of contract. See 11 Corbin on Contracts § 55.3 (2020) (purpose of damages for breach of contract is "to put the injured party in as good a position as that party would have been in if performance had been rendered as promised").
At the May 17, 2021 hearing, plaintiffs argued that Transamerica's tortious breach was not the MDR increases themselves, but rather that it occurred when Transamerica failed to pay death benefits based on the original face amounts. According to plaintiffs, at this point Transamerica denied plaintiffs an amount due under the Policies-the difference between the initial and reduced face amounts. But, as discussed above, this argument ignores the fact that plaintiffs contractually agreed to receive a reduced benefit, so Transamerica was not contractually obligated to pay death benefits based on the initial face amounts. This argument therefore does not save plaintiffs' tortious bad faith claim.
B. KUCSPA
Plaintiffs allege that Transamerica violated the KUCSPA for several reasons, including, as discussed in relation to the common law tortious bad faith claim, by forcing plaintiffs to reduce the face amount of their Policies. Compl. ¶¶ 101-103.
Kentucky law treats a violation of the KUCSPA as a statutory bad faith claim, and, as noted above, applies the same test to both forms of bad faith claims. Rawe, 462 F.3d at 527. Accordingly, Transamerica moves to dismiss plaintiffs' statutory bad faith claim to the extent it relies on Transamerica's alleged failure to pay death benefits based on the Policies' original face amounts for the same reasons as discussed above. Mot. at 10.
Because the Court has concluded that plaintiffs fail to state a common law bad faith claim, it follows that their claim under the KUCSPA likewise fails to the extent it relates to Transamerica's failure to pay death benefits based on the Policies' original face amounts.
C. Conversion
Although plaintiffs initially alleged conversion on two grounds, it appears the only remaining ground is that Transamerica converted the difference between the Policies' initial face amount and their reduced face amount. Compl. ¶¶ 109, 110(b), 111(b).
Plaintiffs initially alleged conversion based on Transamerica's failure to pay any death benefits whatsoever on the 492 and 475 Policies. Compl. ¶¶ 110(a), 111(a). But apparently Transamerica has since paid death benefits based on the reduced face amount on these Policies. See Reply at 3.
Transamerica argues that the economic loss rule bars plaintiffs' conversion claim because plaintiffs only allege harm caused by Transamerica's alleged breach of contract. Mot. at 11. Plaintiffs respond that their conversion claim arises from Transamerica's alleged breach of the implied covenant of good faith and fair dealing, not a contractual term. Opp. at 9-10.
As a point of departure, the parties brief their arguments on plaintiffs' conversion claim under the assumption that California law applies, without addressing whether Kentucky-or some other state-law should govern. As with plaintiffs' tortious bad faith claim, in a previous case challenging Transamerica's MDR increases, this Court found that California law did not apply to the non-resident plaintiffs' conversion claim because California lacked a sufficient interest in applying its law to the claim. See Credit Suisse Lending Tr. USA v. Transamenca Life Ins. Co.. No. 2:20-cv-02516-CAS (GJSx), 2020 WL 4042899, at *I5 (CD. Cal. July 13, 2020). Furthermore, the Court can find no principled reason why Kentucky law would apply to plaintiffs' tortious bad faith claim while California law would apply to their conversion claim. Nevertheless, because the parties have not briefed the question of choice of law, the Court evaluates plaintiffs' claim under both Kentucky and California law, without deciding which applies.
Under Kentucky law, "[c]onversion is an intentional tort that involves the wrongful exercise of dominion and control over the properly of another." James T. Scatuorchio Racing Stable. LLC v. Walmac Stud Mgmt.. LLC. 941 F.Supp.2d 807, 826 (E.D. Ky. 2013) (citation omitted). "[A] claim of conversion consists of the following elements: (1) the plaintiff had legal title to the converted properly; (2) the plaintiff had possession of the property or the right to possess it at the time of the conversion; (3) the defendant exercised dominion over the property in a manner which denied the plaintiff[']s rights to use and enjoy the properly and which was to the defendant's own use and beneficial enjoyment; (4) the defendant intended to interfere with the plaintiff[']s possession; (5) the plaintiff made some demand for the property's return which the defendant refused; (6) the defendant's act was the legal cause of the plaintiff[']s loss of the property; and (7) the plaintiff suffered damage by the loss of the property." Id. (quotation omitted, some alterations in original). "While a conversion action may be maintained for the recovery of money physically taken by Defendant from Plaintiffs possession, a conversion action will not lie to enforce a mere obligation to pay." Id. at 827 (quotation omitted). Finally, a "conversion claim cannot be brought where the property right alleged to have been converted arises entirely from the [plaintiffs] contractual rights." Id. (quotation omitted, alteration in original).
Likewise, California law recognizes "the tort of conversion ... as the wrongful exercise of dominion over personal properly of another." Voris v. Lampert. 7 Cal. 5th 1141, 1150 (2019) (quotation omitted). To establish a claim for conversion, a plaintiff must establish the following elements: "(a) plaintiffs ownership or right to possession of personal properly, (b) defendant's disposition of property in a manner inconsistent with plaintiffs property rights, and (c) resulting damages." Id. (quotation omitted). And while California law recognizes conversion of money in limited circumstances, "money cannot be the subject of an action for conversion unless a specific sum capable of identification is involved." Id. at 1151. "A mere contractual right to payment does not entitle the plaintiff to seek immediate possession as a cause of action for the tort of conversion." Vestis. LLC v. Caramel Sales. Ltd.. No. 8:18-cv-02257-DOC (KES), 2019 WL 3312212, at *8 (CD. Cal. Apr. 30, 2019) (quoting In re Bailey, 197 F.3d 997, 1000 (9th Cir. 1999)).
Here, plaintiffs allege that Transamerica converted the difference between the initial face amount of the Policies, and the reduced face amount. But plaintiffs cannot state a claim for conversion of these funds under either Kentucky or California law. This is because plaintiffs never had a possessory interest in the initial face amounts-rather, they had a contractual right to that amount at the death of the insureds. A contractual right to payment is insufficient to state a claim for conversion. See Scatuorchio, 941 F.Supp. at 827 (no claim for conversion where "property right alleged to have been converted arises entirely from the plaintiffs contractual rights"); Vestis, 2019 WL 3312212, at *8 (no claim for conversion over "[a] mere contractual right to payment"). Moreover, plaintiffs' argument that their conversion claim arises from Transamerica's alleged breach of the implied covenant of good faith and fair dealing rather than an express contractual term is unavailing. It does not change the fact that the money which plaintiffs allege was converted was never in plaintiffs' possession, but rather was merely payable to them, pursuant to the Policies, at the death of the insureds. Accordingly, plaintiffs fail to state a conversion claim.
Although plaintiffs fail to state a conversion claim, the Court addresses the parties' arguments regarding the economic loss rule. The Kentucky Supreme Court explained that "[t]he 'economic loss rule' prevents the commercial purchaser of a product from suing in tort to recover for economic losses arising from the malfunction of the product itself, recognizing that such damages must be recovered, if at all, pursuant to contract law." Giddings & Lewis, Inc. v. Industrial Risk Insurers. 348 S.W.3d 729, 733 (Ky. 2011). Notably, the economic loss rule only applies to "claims [that] arise from the sale of a defective product sold in a commercial transaction." Rodrock v. Gumz. No. 4:ll-cv-00141-JHM, 2012 WL 1424501, at *3 (W.D. Ky. Apr. 24, 2012) (citing Giddings. 348 S.W.3d at 733); Ronald A. Chisholm. Ltd. v. Am. Cold Storage. Inc., No. 3:09-cv-00808-CRS, 2013 WL 2242648, at *l 1 (W.D. Ky. May 21, 2013) ("Giddings-along with several recent lower court opinions from the Sixth Circuit-limit the [economic loss] rule's application to claims arising from a defective product sold in a commercial transaction."). Because there are no such allegations here, the economic loss rule would not bar plaintiffs' conversion claims under Kentucky law. See Rodrock, 2012 WL 1424501, at *3 (denying motion to dismiss conversion claim pursuant to economic loss rule where "claims [did] not arise from the sale of a defective product sold in a commercial transaction"). Nevertheless, as stated above, plaintiffs fail to state a conversion claim under Kentucky law because their alleged property rights arise from contractual rights.
Under California law, the economic loss rule is more sweeping. "The economic loss rule [states] that no tort cause of action will lie where the breach of duty is nothing more than a violation of a promise which undermines the expectations of the parties to an agreement." JMP Securities LLP v. Altair Nanotechnologies. Inc.. 880 F.Supp.2d 1029, 1042 (N.D. Cal. 2012); see also Robinson Helicopter Co.. Inc. v. Dana Corp., 34 Cal.4th 979, 988 (2004) ("The economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise."). The California Supreme Court has explained that the purpose of this rule is to maintain a distinction between tort law and contract law. See Robinson Helicopter, 34 Cal.4th at 988 ("Quite simply, the economic loss rule 'prevent[s] the law of contract and the law of tort from dissolving one into the other." (citation omitted, alteration in original)); see also Giles v. General Motors Acceptance Corp.. 494 F.3d 865, 873 (9th Cir. 2007) ("Broadly speaking, the economic loss doctrine is designed to maintain a distinction between damage remedies for breach of contract and for tort."). Accordingly, "[t]he [economic loss] rule generally bars tort claims based on contract breaches, 'thereby limiting contracting parties to contract damages." UMG Recordings. Inc. v. Global Eagle Entm't Inc.. 117 F.Supp.3d 1092, 1103 (CD. Cal. 2015) (citing United Guar. Mortg. Indem. Co. v. Countrywide Financial Corp.. 660 F.Supp.2d 1163, 1180 (CD. Cal. 2009)).
Here, because plaintiffs' claims arise from Transamerica's alleged breach of the Policies, the economic loss rule confines plaintiffs to recovery in contract. There are, as plaintiffs point out, four exceptions to the economic loss rule, including where "the covenant of good faith and fair dealing is breached in an insurance contract[.]" Oracle USA. Inc. v. XL Global Services. Inc.. 2009 WL 2084154, at *4 (N.D. Cal. Jul. 13, 2009) (citing Butler-Rupp v. Lourdeaux. 134 Cal.App.4th 1220 (2005). But plaintiffs' bad faith claim does not provide an exception to the economic loss rule for their conversion claim; rather, the exception applies to the bad faith claim itself As such, this exception to the economic loss rule would not save plaintiffs' conversion claim. In any event, plaintiffs fail to state a claim for conversion because they allege only a contractual right to payment, as discussed above.
V. CONCLUSION
In accordance with the foregoing, the Court GRANTS defendant's motion to dismiss and DISMISSES without prejudice plaintiffs' third claim for relief insofar as it relates to the difference between the original and reduced face amounts, fourth claim for relief insofar as it relates to the difference between the original and reduced face amounts, and fifth claim for relief in its entirety. Plaintiffs shall have until June 2, 2021, to amend their pleadings to address the deficiencies noted herein.
IT IS SO ORDERED.