Vanishing premium case reappears

Broberg v. Guardian Life Ins. Co., 90 Cal. Rptr. 3d 225 (Ct. App. 2009)

Guardian allegedly sold Dr. David Powell a $500,000 whole life insurance policy in 1993 by falsely promising that policy dividend and interest earnings would pay premium costs after the 11^th year, so that out-of-pocket premium costs would disappear—a “vanishing premium” policy. Plaintiffs (trustees of the Powell Irrevocable Trust) allegedly didn’t discover the deception until they were billed for additional out-of-pocket premiums in September 2004.

Guardian’s agent provided Powell a three-page illustration showing the elimination of out-of-pocket premiums in the 12^th year. The illustration indicated that it was prepared for Powell, not a preprinted form, and contained a handwritten notation “11 year” as well as a printed term “vanishing premium,” with a 30-year schedule that showed no “annual outlay” after the first 11 years. Powell alleged that Guardian knew at the time that its existing dividend scale, on which the illustration depended, was unlikely to continue. The first page had no disclaimers, cautionary language or footnotes. The second page did mention “important footnotes,” and the third page had 39 single-spaced, capitalized lines with various qualifications. In the middle of that, there was a disclaimer that the dividents were neither estimated nor guaranteed, but were simply based on the 1993 scale.

Powell sued for fraud, negligent misrepresentation and violation of California consumer protection law.

The trial court ruled that the disclaimers and the policy language itself put Powell on inquiry notice, meaning that the limitations period had run. Also, the disclaimers precluded a finding of justifiable reliance. Though Powell additionally alleged that Guardian failed to disclose actual annual reductions in its dividend scales in 1994-1996, the trial court held that the difference between Powell’s annual statements and the numbers he would have seen if the dividends had held steady should have put him on notice. The illustration showed a value of $23,642, while his 1997 annual benefit statement showed $23,362—a $280 difference. And the statutory CLRA claim wasn’t viable because life insurance isn’t “goods or services.”

The court of appeals reversed, except for the “goods or services” holding. (Kicking out the CLRA claim was important because that was the claim that provided for a recovery of attorneys’ fees.) As for the other claims, the limitations period begins to run when a reasonable person would have discovered the factual basis for a claim. The disclaimers were not so clear and obvious as to trigger notice.

For the same reasons, they were not sufficient to preclude reliance on other marketing representations as a matter of law. Only if reliance on a misrepresentation was manifestly unreasonable in light of the plaintiff’s own intelligence and information will she be denied recovery. She must not put faith in preposterous representations, nor may facts within her observation show the representations to be so obviously false that to rely on them requires closing her eyes to the truth. Her conduct must not be preposterous and irrational. Here, there was a factual dispute over whether Powell’s reliance was manifestly unreasonable. If he read and understood the disclaimers, that might bar his claims. But the disclaimers were buried in a sea of same-sized, capitalized print, and there was no cautionary language on the first page of the policy illustration containing the deceptive language and figures indicating that Powell’s out-of-pocket payments would “vanish,” so the disclaimers could not be found to be adequate as a matter of law. Any provision that limits coverage reasonably expected by an insured must be conspicuous, plain and clear. The same principle applied here.

Likewise, the policy term stating premiums would be payable “for life” didn’t trigger notice or preclude reasonable reliance as a matter of law. Powell’s argument wasn’t that he was told premiums would stop; he argued that he was told that policy earnings would pay the premiums after the 11^th year.

A dissent would have found that the statute of limitations had run because the disclaimers and the policy language were sufficient as a matter of law to give Powell notice that the cash values weren’t “guaranteed,” and thus also there could be no justifiable reliance on the other representations. The policy instructed, in bold type, “Read this policy carefully.” And it warned that the footnotes were “important.” The whole thing was only three pages, and the twelfth line on the third page began, “Figures depending on dividends are neither estimated nor guaranteed, but are based on the 1993 dividend scale. Actual future dividends may be higher or lower than those illustrated depending on the company’s actual future experience….” The dissent concluded that “[a] reasonable person would have followed these instructions, and having done so would have seen these disclaimers.” They were written in plain English, and would have given a reasonable person cause to suspect that the alleged representations about vanishing premiums might be wrong.