2015 0415 - Document 791 - Order Regarding Post-Jury Trial UCL Proceedings Judge Selna - 75p - 

• Ms. MacGowan testified at trial over the course of three days, and was a credible witness. 
• By guaranteeing that charges will never exceed some higher amount, but actually charging much less, LSW is able to hold smaller reserves for Provider and Paragon policies. These smaller reserves accrue to the benefit of the policyholders, because higher reserves would mean more expensive policies and less value being returned to policyholders. (4/22 Trial Tr. 22:10-24:6.)
• Provider and Paragon, like any other whole or universal life insurance policy, permit policyholders to use accumulated cash value in a variety of different ways. (4/9 Trial Tr. 125:14-20, 128:1-5.)
• If a policyholder funded his or her policy, the probability that it would ever lapse is virtually zero. (4/22 Trial Tr. 30:9-32:22, 61:1-8; Trial Ex. 874.)
• Plaintiffs’ expert also testified that if a policyholder maximally funded the policy or chose not to take loans, he or she could ensure that the policy would never lapse. (4/10 Trial Tr. 44:23-45:12, 173:19-174:1.)
• LSW did not, and does not, run any Monte Carlo analysis to determine the likelihood that a Provider or Paragon policy will lapse based upon the particular funding and withdrawal pattern selected by any policyholder when applying for a policy. Nor does LSW attempt to project how the stock market may perform in the future to determine its impact on policy values. The unrebutted testimony at trial is that no insurance company performs such analysis for IUL products. (4/18 Trial Tr. 31:17-22, 162:3-19; 4/22 Trial Tr. 38:9-23.)
• In addition to receiving information from agents, policyholders are free to, and do, obtain information about their policies by conducting their own research or by consulting with third party advisors. (See, e.g., 4/16 Trial Tr. 222:13-223:23, 224:5-226:3; 4/17 Trial Tr. 47:4-20, 72:4-12, 72:25-75:15, 76:21-77:6; Trial Ex. 743.)
• There was no evidence that Paragon and Provider sales were conducted in a uniform manner. <Matthew DeSantos>. (4/23 Trial Tr. 50:1-14, 55:5-16, 56:6-23, 58:23-60:15, 92:27.)
• The actuaries responsible for developing Provider and Paragon, Ms. MacGowan and Mr. Tivilini, wanted LSW to lead the insurance industry in its disclosure and explanation of all of the policies’ features. Mr. Tivilini testified that he never encountered any resistance at LSW to that goal. (Tivilini Dep. Tr., Docket 735 Ex. B at 60:4-15.)
• Another document that may be used during a sale is an illustration. An illustration is not meant to replace the policy contract or contain all of the details of a policy, but provide a brief summary that demonstrates the mechanics of the Provider and Paragon policies with certain, specified “what-if scenarios.” 4/18
• Illustrations are heavily regulated by the Department of Insurance. These regulations specify the content that may appear in an illustration, and require that certain disclosures be made in all illustrations. LSW and other insurers are required to submit an example of an illustration to the Department of Insurance as part of the Department’s initial review and approval of a product. (4/18 Trial Tr. 64:21-65:4, 143:14-146:17.) By regulation, LSW (like any other insurer) has appointed an illustration actuary who is responsible for ensuring that the illustrations comply with these regulations. Craig Smith and Elizabeth MacGowan, LSW’s illustration actuaries since the Provider and Paragon policies were
  launched, testified at trial. (4/17 Trial Tr. 195:12-19; 4/18 Trial Tr. 86:5-16, 147:13-22; 4/22 Trial Tr. 161:14-20.)
• Once the illustration is generated by the agent, they sit down again and discuss the illustration, how the product may work, and  some of the features associated with the policy. Each of these conversations is different, because every policyholder is different. (4/23 Trial Tr. 91:3-21.)
• LSW’s Provider and Paragon illustrations show how the policies may perform in the future under three scenarios: Guaranteed, Current Basis A and Current Basis B.  (4/10
  Trial Tr. 149:2-150:23, 151:2-152:1, 172:11-173:3, Trial Exs. 30 at 30.0007-30.0008, 30.0011-30/0012, 30.0014-30.0020; 48 at 48.0007-48.0008, 48.0012, 48.0014-48.0020.) Each of these scenarios is based on assumed consumer behavior in the future, including out-of-pocket premium payments, loan amounts and timing, and index strategy allocation. (4/16 166:16-25; Trial Exs. 4 at 
  4.0012-4.0023; 30 at 30.0012-30.0023; 48 at 48.0012-48.0023.)
• (4/10 Trial Tr. 149:20-151:5; 4/15 Trial Tr. 155:20-23 (Ms. Spooner “knew that the guaranteed column in the scenario . . . was really the only one that LSW was guaranteeing”); Trial Exs. 30 at 30.0014-30.0020; 48 at
  48.001448.0020.)
• An illustration can also include pages breaking out the individual charges and fees associated with the policy. This, too, is not included in the default case, but can be easily added with one click by using a drop-down menu on the illustration software. LSW trains its agents that they should explain all charges and fees associated with the policies, and tells agents that they should generate the additional reports if their clients desire additional detail. (4/18 Trial Tr. 109:17-110:6; 4/23 Trial Tr. 76:4-79:8; Trial Ex. 96 at 96.0011.)
• Although all policyholders receive an illustration at some point at or before the time they receive a copy of their policy, not all policyholders receive sales illustrations. In fact, at least a quarter of LSW’s policy files do not contain any sales illustrations. And even among those policies where there was a sales illustration in the policy file, Plaintiffs did not provide any evidence of the frequency with which policyholders actually received a sales illustration. (4/11 Trial Tr. 59:11-60:16.)
• Batch illustrations often differ from sales illustrations in important ways.
• Moreover, batch illustrations are based only on information reflected in an application; they do not depict loans and show premium payments persisting throughout the life of the policy — a funding pattern that Plaintiffs’ expert admitted would prevent the
  policies from ever lapsing. (4/10 Trial Tr. 173:17-22; 4/11 Trial Tr. 62:1-22, 93:6-11; 4/15 Trial Tr. 55:24-56:25; 4/18 Trial Tr. 110:7-16.)
• LSW trains agents to review any illustrations with the client, explain their contents, and answer any questions that the policyholder may have, including in particular those questions concerning the costs, guaranteed interest, non-guaranteed accumulation, and death benefit information. (Trial Ex. 59 at 59.0008; 96 at 96.0017.)
• Before she decided to apply for her policy, Ms. Walker spent months educating herself about the policy. ----As a part of this process, she had several substantive meetings with her independent insurance agents, Jeffrey Stemler and Michael Botkin. Each of these meetings lasted about an hour. (4/16 Trial Tr. 211:8-13; 4/17 Trial Tr. 48:1-49:6, 57:24-58:14, 61:4-11.)
• Mr. Cooper’s best recollection is that during these meetings he made clear that failure to make premium payments could cause Mr. Howlett’s and Ms. Spooner’s policies to lapse. Additionally, as he reviewed the illustration, Mr. Cooper pointed out the possibility that the policies could lapse. (4/16 Trial Tr. 36:5-37:17, 50:2251:9, 58:4-20; Trial Ex. 30 at 30.0007-30.0008,
  30.0014-30.0020.) Mr. Cooper also explained that their illustrations stated that the policies could lapse on a guaranteed basis. Mr. Cooper found it “very easy” to
  discuss this with his clients based on the information in the illustration. (4/16 Trial Tr. 79:7-22; Trial Ex. 30 at 30.0007-30.0008, 30.0014-30.0020.)
• Mr. Howlett and Ms. Spooner expected to receive retirement income from their Paragon policies, but they knew that the amount of retirement income they would receive was not guaranteed and that this retirement income could be subject to ordinary income tax unless they kept their policies in force. (4/15 Trial Tr. 139:13-140:11; 4/16 Trial Tr. 102:23-103:16; Trial Ex. 632 at 632.0028.)
• A. VOLATILITY CLAIM
  Plaintiffs’ volatility claim alleges that “LSW knew and concealed from policyholders the fact that [Provider and Paragon policies are] subject to a high probability of lapse . . . before the death of the insured.” (Final Pretrial Conference Order at 3.)
• (See 4/9 Trial Tr. 16:18-17:11 (Plaintiffs’ counsel
  stating in opening that “illustrations were not depicting reality because they did not account for volatility” and policies had “a very substantial risk of expiring, lapsing,
  if the plaintiffs tried to use them for retirement income as was illustrated.”).) However, despite this well-developed theory, Plaintiffs failed to support this theory with class-wide evidence.
• This concession not only detracts from the probative value of Dr. Brockett’s opinion regarding a class-wide volatility defect, it also considerably undermines Dr. Brockett’s overall credibility. The Court therefore concludes that Plaintiffs have offered no reliable or valid statistical evidence to establish that Paragon and Provider policies purchased by the class are prone to lapse.
• Plaintiffs must also prove consumer expectations in order to establish that allegedly omitted information — assuming it was in fact omitted — was contrary to those expectations. Daugherty, 144 Cal. App. 4th at 838
• Plaintiffs must prove by a preponderance of the evidence that LSW made an omission that was likely to mislead the public. See In re Tobacco II Cases, 46 Cal. 4th 298, 328 (2009) (elements of knowledge, justifiable reliance, and resulting damages not applicable to UCL fraud claims);
• As noted to previously, Plaintiffs have the difficult burden of proving a negative. (Docket No. 478 at 6-7.)
• This Court’s analysis therefore considers whether LSW had a duty to disclose, whether an omission was contrary to consumer expectations, and whether the omission identified by Plaintiffs was likely to mislead in light of LSW’s extensive disclosures.
• Moreover, as set forth below, even if consumers held such specific and particularized expectations, those expectations would not be reasonable in light of LSW’s other disclosures.
• “Under the reasonable consumer standard, plaintiff is required to show not simply that the defendants’ [statements] could mislead the public, but that they
  were likely to mislead the public.” Haskell v. Time, Inc., 965 F.Supp. 1398, 1406-07 (E.D. Cal. 1997) (emphasis in original).
• A comparison of Plaintiffs’ proposed disclosures and the disclosures actually set forth in the batch illustrations lead the Court to conclude that no significant portion of the consuming public, acting reasonably, was likely to be
  misled by any omission by LSW. Specifically, in comparing the disclosures actually made and Plaintiffs’ proposed disclosures, the latter represent a more specific articulation of the former.
• Plaintiffs have not proven any class-wide injury as a result of LSW’s omissions. No actual lapse has occurred in any policy when the premiums were made as indicated in the illustrations. Even employing Dr. Brockett’s Monte Carlo
  simulations, no lapse occurred in the first ten years of any policy he examined.

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• Additionally, this theory does not result in an actionable injury for reasons similar to the rationale articulated in a number of cases that do not find actionable UCL injury where motor vehicle parts fail beyond the warranty period. In those cases, manufacturers guarantee the parts for a specified period of time, and courts refuse to extend obligations beyond that specified period of time. See, e.g., Clemens, 534 F.3d at 1026-27 (no UCL claim based on “any particular head gasket lifespan”); Daugherty, 144 Cal. App. 4th 824, 838-39 (2006) (no UCL claim based on malfunction of parts likely to occur after expiration of warranty); Marchante v. Sony Corp. of Am., Inc., 801 F. Supp. 2d 1013, 1018 (S.D. Cal. 2011) (same);
  Berenblat, 2010 WL 1460297, at *7 (same). 
• Similarly, here, LSW provided guaranteed values and then an estimate of possible values, including the Current Basis B value. Like the possibility that vehicle or computer parts may continue to perform long after the manufacturer’s
  warranty has expired, so too can a policyholder achieve the policy performance depicted in the Current Basis B illustration. But those that performance is not promised, as parts are not guaranteed past their warranty date. No actionable injury results in either situation.

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• The evidence does not show that LSW acted with anything other than good faith in its dealings with consumers. (E.g., 4/18 Trial Tr. 48:17-23.) The uncontroverted testimony is that LSW believed that its illustrations and other disclosures complied with California law. (4/18 Trial Tr. 144:24-145:16.) In fact,
  Ms. MacGowan testified to her belief that LSW was actually forbidden from including any information in an illustration that was “based on” volatility in the S&P 500 Index. (4/18 Trial Tr. 51:25-54:23.) The evidence instead reveals that LSW’s motive in formulating its disclosures was to comply with the illustration regulation while making substantial disclosures about the risks associated with Provider and Paragon (like any other indexed life insurance policy).

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c. Avoidance of Injury

• Even assuming that Plaintiffs proved substantial injury, the evidence established that Plaintiffs and other policyholders could have avoided any such injury. For example, the evidence is undisputed that no policy has lapsed where the policyholders have paid their illustrated premiums.

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d. Public Policy

• If Plaintiffs must establish that the unfairness they allege is tethered to a legislatively-declared public policy, they have not done so. Plaintiffs’ claims that LSW violated statutes prohibiting fraud were rejected by the jury.

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• The evidence before the Court is that the named Plaintiffs consulted financial planners and otherwise took great care in making the decisions to purchase their policies. Although by illustrating the charges as separate line items, LSW could have highlighted those fees and charges more prominently, LSW’s witness also testified as to the benefits of showing projected policy values net of
  those fees to allow for comparison with other policies. (4/18 Trial Tr. 98:24-99:16, 128:23-130:8.) Moreover, whether the fees are “high” or not, they are disclosed in
  policyholders’ policy contracts, and reflected in all values shown in any illustration. (4/18 Trial Tr. 129:6-132:2; 4/23 Trial Tr. 100:2-102:6; e.g., Trial Ex. 49 at 49.0012; Trial Ex. 935 at 935.0007-935.0010, 935.0031-935.0032.) Because
  the evidence reveals that the categories of fees charged by LSW are common among IUL products, the Court cannot conclude that the charges are inconsistent with specific and particularized expectations of the targeted consumers.

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• the Court likewise discerns no bad faith in LSW’s decision to illustrate policy performance net of fees rather than to illustrate those fees as separate line items in all instances. The same is true regarding LSW’s decision to disclose in the sales illustrations the zero percent floor of annual growth.