Fischl v. Pacific Life Ins. Co. ( 2023 )

Filed 8/3/23
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
PETER FISCHL, B320820
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. KC068602)
v.
PACIFIC LIFE INSURANCE
COMAPNY,
Defendant and
Respondent.
APPEAL from a judgment of the Superior Court of Los
Angeles County, Peter A. Hernandez, Judge. Affirmed.
Gordon W. Renneisen and Benjamin Blakeman for Plaintiff
and Appellant.
Finlayson Toffer Roosevelt & Lilly and Matthew E. Lilly for
Defendant and Respondent.
******
A regulation promulgated by California’s Insurance
Commissioner requires insurance companies who sell variable
life insurance—that is, a life insurance policy that also functions
as an investment vehicle—to “adopt” and “use[]” standards in
order to assess whether such insurance is “suitab[le]” to
recommend and issue to potential investors. (Cal. Code Regs., tit.
10, § 2534.2, subd. (c) (section 2534.2(c)); 1 Ins. Code, § 10506,
subd. (h).) In this case, an investor’s broker conducted a
suitability analysis and thereafter recommended that the
investor purchase a variable life insurance policy from a specific
insurance company. The investor subsequently sued the broker
and the insurance company, in part on the ground that the
suitability analysis was negligently conducted; the investor
settled with the broker and, as part of that settlement, released
the insurance company from liability for “all claims that result
from” the broker’s “negligent” “acts or omissions,” including the
broker’s “violation of . . . any . . . state . . . regulation” “except to
the extent that [the insurance company] caused, contributed to,
or compounded such.” This appeal therefore presents two
questions. First, does section 2534.2(c) obligate an insurance
company to conduct an independent suitability analysis before
issuing a variable life insurance policy (such that the company in
this case remains liable, notwithstanding the release, for its own
failure to conduct such an analysis)? Second, does the insurance
company’s ratification of the broker’s negligent analysis by
issuing the policy to the investor render the company liable
notwithstanding the release? We conclude that the answer to
each question is “no.” Because the trial court granted summary
1 All further statutory references are to title 10 of the
California Code of Regulations unless otherwise indicated.
2
judgment for the insurance company after coming to the same
conclusion, we affirm.
FACTS AND PROCEDURAL BACKGROUND
I. Facts
Peter Fischl (plaintiff) is a thoracic surgeon.
After the stock market crash now known as the “Great
Recession” of 2008, plaintiff asked his sister to recommend a good
financial planner. She recommended Gregory Acosta (Acosta).
Acosta held a license to sell life insurance and a license to
sell variable products. In 2008, he conducted these sales as part
of his financial planning business through two companies—
namely, Gregory R. Acosta, Inc. and Diamond Bar Executive
Benefit Programs & Insurance Services, Inc.(the Acosta entities).
He was also a broker of variable products under the outside firms
of Kestra Investment Services, LLC (Kestra) and Securities
America, Inc. (Securities America) at different times. Between 30
and 40 insurance companies appointed Acosta to offer his clients
the various companies’ investment and life insurance products to
aid in his clients’ retirement planning.
One of the various products Acosta offered was a variable
life insurance policy. Variable life insurance is a hybrid of a life
insurance policy and an investment vehicle: It resembles a life
insurance policy insofar as the policy holder pays annual
premiums and the policy pays out a death benefit in the event of
the holder’s death; it resembles an investment vehicle insofar as
the premiums are placed in a holder-specific account and
invested in the market as retirement funds (with the attendant
tax benefit), and may be withdrawn from the account upon
retirement—although doing so reduces the amount of the death
3
benefit. (See § 2534.1, subd. (p) [defining “Variable life insurance
policy”].)
In 2008, the Acosta entities and Securities America had
contracts with Pacific Life Insurance Company (Pacific Life) that
authorized them to act as a broker (or “producer”) for Pacific Life,
and thus to offer their clients one of several variable life
insurance policies from Pacific Life. At that time, Pacific Life had
adopted—and in its contracts with its brokers, obligated those
brokers to “strict[ly]” adhere to—“suitability standards” that
required the brokers to (1) investigate a potential applicant’s
financial condition and investment goals, and (2) assess whether
any Pacific Life variable life insurance policy the broker was
recommending was suitable as an investment vehicle for that
applicant (that is, whether those policies were consistent with the
“customer’s needs”). 2 Consistent with his contractual obligations
and longstanding practice, Acosta gathered information about
plaintiff’s finances and investment goals by asking plaintiff
questions and sending a “fact-finder” to obtain pertinent
documentation, and then assessed whether any of Pacific Life’s
variable life insurance policies were suitable for plaintiff. Acosta
memorialized this information—including plaintiff’s income and
net worth, investment knowledge and experience, and risk
tolerance. During the inquiry into suitability, plaintiff spoke only
with Acosta and his employees; plaintiff at no point interacted
with Pacific Life. On the basis of his suitability analysis, Acosta
recommended two Pacific Life insurance policies that he felt
would be “best” for plaintiff. To avoid duplicative coverage,
Acosta also recommended that plaintiff replace the two non-
2 Those standards in effect at that time are not included in
the record.
4
variable life insurance policies he had with other companies (with
death benefits totaling $1.45 million) with the two new Pacific
Life policies.
On the basis of Acosta’s recommendation, plaintiff filed
applications to Pacific Life for a variable life insurance policy—
the Select Exec III policy—and a second policy, the Versa-Flex
NLG policy. In the applications, plaintiff also acknowledged that
he had “considered [his] liquidity needs, risk tolerance and
investment time horizon in selecting” the policies. Along with
those applications, Acosta certified that he had conducted a
suitability analysis. Consistent with its longstanding practice,
Pacific Life did not independently examine whether either policy
was “suitable” for plaintiff’s financial condition and goals. In
determining whether to grant the applications, however, Pacific
Life’s underwriters did examine whether these policies presented
an “unacceptable risk” to Pacific Life. The underwriters
determined that they did not, and issued the two policies to
plaintiff. 3
The Select Exec III policy:
● Required plaintiff to make an initial premium
payment of $130,000, and then to make annual premium
payments of $54,950 for each of the next six years;
● Anticipated that plaintiff would withdraw $75,374
per year as part of his retirement earnings starting in year 16 of
the policy (that is, when plaintiff turned 75 years old); and
● Paid out a death benefit of $2,058,424 if plaintiff
passed away during the first seven years, but then dropped the
3 Plaintiff also purchased annuities and mutual funds from
Pacific Life around the same time, but has abandoned any claims
related to those acquisitions in this appeal.
5
death benefit to $1 million for the next seven years, and then
dropped the death benefit further as each annual withdrawal was
made.
The Versa-Flex NLG policy required plaintiff to make a
$54,000 initial premium payment, no payment in the second
year, and a $17,654 premium payment for each year thereafter;
the death benefit was fixed at $1 million.
Between 2008 and 2014, plaintiff made the premium
payments on the two Pacific Life policies. Because plaintiff’s
annual income during that period was $180,000, plaintiff did not
pay the premiums entirely out of his income and instead resorted
to liquidating portions of his other assets.
In 2015, plaintiff met with the investment advisor he had
used prior to 2008. That advisor told him that the two Pacific
Life policies were not “suitable” for plaintiff’s financial condition
and investment goals; on the basis of that advice, plaintiff
surrendered the Select Exec III policy and let the Versa-Flex
NLG policy lapse, both at a loss.
II. Procedural Background
A. Plaintiff sues
On July 19, 2016, plaintiff sued Acosta, the Acosta entities,
Kestra, Securities America, and Pacific Life. In that original
complaint, plaintiff asserted claims for fraud, negligent
misrepresentation, breach of fiduciary duty, negligence, financial
elder abuse, and violation of California’s Unfair Competition Law
(UCL) (Bus. & Prof. Code, § 17200 et seq.). He alleged his
damages were $495,254.78.
6
B. Plaintiff settles with Acosta, the Acosta entities,
Kestra, and Securities America
Plaintiff’s claims against Acosta, the Acosta entities,
Kestra, and Securities America proceeded to arbitration. That
arbitration resulted in a January 2019 settlement agreement.
Acosta, the Acosta entities, Kestra, and Securities America
agreed to pay plaintiff a total of $400,000. In exchange, plaintiff
entered into two releases. He “release[d] and forever
discharge[d]” the settling parties “from any and all claims.”
Plaintiff also “release[d] and forever discharge[d]” Pacific Life
“from all claims that result from any of Acosta’s acts or omissions
. . . that are negligent . . . or that result from Acosta’s . . .
violation of, or refusal or failure to comply with: (1) the terms of
Pac[ific] Life’s Producer’s Contract with Acosta;” or “(2) any
federal or state law, rule or regulation . . . except to the extent
that Pac[ific] Life . . . caused, contributed to, or compounded
such.” The release against Pacific Life carved out claims “for its
direct conduct including, but not limited to, underwriting and
marketing of its life insurance policies.”
C. Pacific Life moves for summary judgment
After the trial court sustained successive demurrers to each
of plaintiff’s first, second, and third amended complaints with
leave to amend, plaintiff filed the operative fourth amended
complaint. This complaint named Pacific Life as the sole
defendant, and asserted four claims: (1) intentional
misrepresentation, (2) negligent misrepresentation, (3)
negligence, and (4) violation of the UCL. This complaint
quadrupled the original prayer for damages, and thus sought
damages of “no less than” $1,992,000.
7
Pacific Life moved for summary judgment on two
grounds—namely, (1) plaintiff’s claims were time-barred, and (2)
the release plaintiff signed bars any liability against Pacific Life
based on Acosta’s negligence in conducting the suitability
analysis (which Pacific Life assumed to be negligent for purposes
of the motion), and Pacific Life owes no further duty that survives
the release. Plaintiff opposed the motion, including on the
ground that Pacific Life had a duty—imposed by section
2534.2(c)—to independently analyze his suitability for the
variable life insurance policy that remains actionable
notwithstanding the release. Following a full round of briefing,
two unauthorized surreplies the trial court struck, and a hearing,
the trial court granted summary judgment for Pacific Life.
Although the court rejected Pacific Life’s arguments that
plaintiff’s claims were untimely, the court found that Pacific Life
had no duty to conduct an independent suitability analysis that
survived the release. With regard to the last point, the court
ruled that (1) section 2534.2(c) spells out “the requirements an
insur[ance company] must meet in order to be qualified to issue
variable life insurance,” and in no way “impose[s] suitability
standards” on those companies; and (2) even if that regulation
imposes suitability standards, it “does not require that the
determination of suitability be made by the insurer.” 4
D. Plaintiff appeals
After the court entered judgment for Pacific Life, plaintiff
filed this timely appeal.
4 The court also rejected plaintiff’s misrepresentation claims
because plaintiff offered no evidence that he had any “direct
dealings” with Pacific Life, relied on any of its representations, or
suffered injury due to Pacific Life’s conduct in this regard.
8
DISCUSSION
Plaintiff argues that the trial court inappropriately entered
summary judgment for Pacific Life on his negligence and UCL
claims because Pacific Life remains liable to plaintiff—
notwithstanding plaintiff’s release absolving Pacific Life of
liability for claims “result[ing] from” Acosta’s “negligent” “acts or
omissions”—because (1) section 2534.2(c) obligated Pacific Life to
conduct its own, independent suitability analysis, so its liability is
not based only on Acosta’s negligent analysis; or (2) Pacific Life,
by subsequently issuing the two policies, “ratified” Acosta’s
negligent suitability analysis (thereby making that analysis its
own and rendering Pacific Life “directly” liable to plaintiff). 5
Summary judgment is appropriate, and the moving party
(typically, the defendant) is entitled to judgment as a matter of
law, where (1) the defendant carries its initial burden of showing
either the nonexistence of one or more elements of the plaintiff’s
claim or the existence of an affirmative defense, and (2) the
plaintiff thereafter fails to show the “‘existence of a triable issue
of material fact’” as to those elements or affirmative defense.
(Pereda v. Atos Jiu Jitsu LLC (2022) 85 Cal.App.5th 759, 767
(Pereda); Code Civ. Proc., § 437c, subd. (p)(2).) Our task in
evaluating whether these standards for granting summary
judgment have been met requires us to view the evidence in the
light most favorable to the losing party below, and to resolve any
5 Plaintiff has expressly abandoned his misrepresentation
claims on appeal. Plaintiff has also implicitly abandoned all
other aspects of his negligence and UCL claims except those
premised on Pacific Life’s alleged duty to conduct an independent
suitability analysis. (Golden Door Properties, LLC v. County of
San Diego (2020) 50 Cal.App.5th 467, 555 [“‘“Issues not raised in
an appellant’s brief are deemed waived or abandoned”’”].)
9
evidentiary doubts and ambiguities against summary judgment.
(Gonzalez v. Mathis (2021) 12 Cal.5th 29, 39; Elk Hills Power,
LLC v. Board of Equalization (2013) 57 Cal.4th 593, 605-606.)
We independently review a trial court’s grant of summary
judgment. (Salas v. Sierra Chemical Co. (2014) 59 Cal.4th 407,
415.) To the extent the summary judgment ruling turns on
questions of statutory, regulatory, or contractual interpretation,
we also review those subsidiary questions de novo. (People ex rel.
Lockyer v. Shamrock Foods Co. (2000) 24 Cal.4th 415, 432
[statutory]; Department of Industrial Relations v. Occupational
Safety & Health Appeals Bd. (2018) 26 Cal.App.5th 93, 100
[regulatory], E.M.M.I. Inc. v. Zurich American Ins. Co. (2004) 32
Cal.4th 465, 470 [contractual].)
We now turn to the two questions presented by our review
of Pacific Life’s summary judgment motion.
I. Does an Insurance Company Have a Duty to Conduct
Its Own, Independent Suitability Analysis of a Variable
Life Insurance Product?
Plaintiff’s first argument to overcome the release, and
thereby hold Pacific Life liable for negligence and unlawful
business practices under the UCL, hinges on whether an
insurance company has a duty—imposed by section 2534.2(c)—to
independently analyze whether its variable life insurance policy
is suitable for an applicant.
The existence of a duty is a predicate for a negligence claim
(Hoffmann v. Young (2022) 13 Cal.5th 1257, 1268), and a duty
can be derived from (1) a statute (Issakhani v. Shadow Glen
Homeowners Assn., Inc. (2021) 63 Cal.App.5th 917, 925, 929
(Issakhani), citing Vesely v. Sager (1971) 5 Cal.3d 153, 164); or (2)
a regulation, but only if our Legislature has properly delegated
10
the power to promulgate that regulation-based duty to an
administrative agency (Conservatorship of Gregory (2000) 80
Cal.App.4th 514, 522; cf. Dyna-Med, Inc. v. Fair Employment &
Housing Com. (1987) 43 Cal.3d 1379, 1389 [regulation cannot
create a duty if “Legislature has withheld” power to do so]). A
UCL claim can also rest on the violation of a regulation, but for a
different reason: Business and Professions Code section 17200
makes “unlawful” conduct actionable (Bus. & Prof. Code, §
17200), and conduct that violates a regulation can be unlawful
(Klein v. Chevron U.S.A., Inc. (2012) 202 Cal.App.4th 1342, 1383).
The regulation at issue here is section 2534.2(c). 6 In
pertinent part, it provides:
“Every insurer seeking approval to enter into the
variable life insurance business in this State shall
adopt by formal action of its Board of Directors and
file with the Commissioner a written statement
specifying the Standards of Suitability to be used by
the insurer, and applicable to its officers, directors,
employees, affiliates, and agents with respect to the
suitability of variable life insurance for the applicant.
Such Standards of Suitability shall be binding on the
insurer and those to whom it refers, and shall specify
that no recommendation shall be made to an
applicant to purchase a variable life insurance policy
and that no variable life insurance policy shall be
issued in the absence of reasonable grounds to believe
that the purchase of such policy is not unsuitable for
such applicant on the basis of information furnished
6 For purposes of this opinion, we will assume that our
Legislature, in Insurance Code section 10506, subdivision (h),
properly delegated the power to promulgate this regulation to the
Insurance Commissioner. (Cal. Code Regs., tit. 10, § 2534.)
11
after reasonable inquiry of such applicant concerning
the applicant’s insurance and investment objectives,
financial situation and needs, and any other
information known to the insurer or to the agent
making the recommendation.
Lapse rates for variable life insurance within the first
two policy years, which are significantly higher than
both those encountered by the insurer . . . for
corresponding fixed benefit life insurance policies and
lapse rates of other insurers issuing variable life
insurance policies shall be considered in determining
whether the guidelines adopted by the insurer are
reasonable and also whether the insurer and its
agents are engaging, as a general business practice,
in the sale of variable life insurance to persons for
whom it is unsuitable. . . .” (§ 2534.2, subd. (c).)
In examining this regulation, we must answer two distinct
but interrelated questions: (1) Does the regulation require
someone to conduct a suitability analysis before a variable life
insurance policy may issue, and (2) Does the regulation require
the insurance company to independently conduct such an
analysis, even if someone else (usually, the broker) has already
done so?
In answering these questions, we interpret regulations the
same way we interpret statutes. (Hoitt v. Department of
Rehabilitation (2012) 207 Cal.App.4th 513, 523 (Hoitt).) This
means our “‘“fundamental task”’” is to “‘“effectuate the law’s
purpose.”’” (City of San Jose v. Superior Court (2017) 2 Cal.5th
608, 616-617.) Because the best indicator of the legislature’s—or,
in this case, agency’s—intent is found in the words of the
regulation itself, we start with the text. (Ibid.) If the text is
12
unambiguous and consistent with the purpose of the regulation,
our analysis ends. (Torres v. Parkhouse Tire Service, Inc. (2001)
26 Cal.4th 995, 1003; Issakhani, supra, 63 Cal.App.5th at pp.
931-932, citing People v. Valencia (2017) 3 Cal.5th 347, 358.) But
if it is not, we may apply the other canons of statutory
construction. (Lucent Technologies, Inc. v. Board of Equalization
(2015) 241 Cal.App.4th 19, 40.) If available, we must also look to
how the agency that promulgated the regulation has interpreted
that regulation and give that interpretation deference. (Sanchez
v. State of California (2009) 179 Cal.App.4th 467, 477-478.)
A. Does section 2534.2(c) require someone to
conduct a suitability analysis?
The answer to this question is “yes.”
By its plain text, section 2534.2(c) obligates an insurance
company to adopt and file “Standards of Suitability” with the
Insurance Commissioner as a prerequisite to “enter[ing] into the
variable life insurance business in this State.” (§ 2534.2, subd.
(c).) Thus, the regulation undoubtedly dictates one of the
prerequisites for being qualified to sell variable life insurance
policies in California. But, contrary to what the trial court ruled,
the regulation does more. As set forth above, the regulation goes
on to define the content of those standards, dictating that they
must “specify” that no variable life insurance policy shall be
recommended or issued to an applicant unless there are
“reasonable grounds to believe that the purchase of such policy is
not unsuitable” for the applicant based on an investigation of the
applicant’s goals, financial condition, and any other pertinent
information. (Ibid.) And, more to the point, the regulation
mandates that the suitability standards an insurance company
adopts “shall be binding on the insurer and those to whom it
13
refers.” (Ibid.) This last provision obligates someone to conduct a
suitability analysis before a variable life insurance policy may be
recommended or issued. There is no agency interpretation of this
regulation to the contrary.
The law and the undisputed evidence in this case indicate
that it is the broker who typically conducts this suitability
analysis. Variable life insurance policies are a “variable product,”
and a different Insurance Commissioner regulation requires
“brokers and agents selling variable products [to] comply with
suitability standards.” (Cal. Code Regs., tit. 10, § 2534.44, subds.
(c) & (e).) Brokers comply with this regulation by performing
that analysis themselves. Indeed, this is confirmed by the
undisputed evidence in this case, which, as noted above, shows
that it is the broker who performs the suitability analysis to
determine whether a variable life insurance policy suits the
applicant, while the insurance company accepts the broker’s
suitability analysis and instead performs an underwriting
analysis to determine whether the policy suits the insurance
company. This division of labor makes practical sense: A
suitability analysis presupposes the gathering of information
regarding the applicant’s finances and goals, and the broker is
the one who must gather this same data in order to determine
which products to recommend to his client and then to fill out
applications for the products the broker ultimately recommends.
(See, e.g., Ins. Code, § 10509.913, subd. (i) [defining “‘Suitability
information’” for purposes of annuity transactions].)
In most situations, this division of labor will have no effect
on an insurance company’s liability for a defective suitability
analysis. If an insurance company itself conducts a suitability
analysis that is later determined to be negligent, the company
14
would of course be liable for its own negligence. (E.g., Pereda,
supra, 85 Cal.App.5th at p. 768 [“[a] defendant is directly liable
for ‘his own negligence’”]; American States Ins. Co. v. Progressive
Casualty Ins. Co. (2009) 180 Cal.App.4th 18, 34 [same].) But if a
broker negligently conducts a suitability analysis, both the
broker and the insurance company would be liable. The broker is,
of course, liable to the third party for his own negligence that
causes harm. (Pereda, at p. 768; Bayuk v. Edson (1965) 236
Cal.App.2d 309, 320 [agent remains liable].) But the insurance
company is also liable, as the broker was acting as the company’s
agent in conducting the suitability analysis—either because (as
here) the company contractually authorized and obligated the
broker to perform that analysis, or because the company
subsequently ratified the broker’s conduct by adopting his
suitability analysis as its own in relying on that analysis to issue
a policy (rather than conducting its own analysis). (Ins. Code, §
1704.5, subd. (a) [insurer deemed to have authorized life
insurance agent as its agent if it issues policy pursuant to
application submitted by agent]; Civ. Code, § 2307 [“An agency
may be created . . . by a precedent authorization or a subsequent
ratification”]; Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400,
410-411 [agency may be created by contract]; Rakestraw v.
Rodrigues (1972) 8 Cal.3d 67, 73-74 (Rakestraw) [ratification
creates an agency relationship and constitutes approval by the
ratifier of the agent’s act]; Reusche v. California Pacific Title Ins.
Co. (1965) 231 Cal.App.2d 731, 737 (Reusche) [principal who has
knowledge of agent’s conduct can thereafter become liable by
ratifying it]; O’Riordan v. Federal Kemper Life Assurance Co.
(2005) 36 Cal.4th 281, 288 [agent’s knowledge imputed to
principal].)
15
Thus, plaintiff would in the ordinary case be able to assert
a claim against Pacific Life for Acosta’s negligent suitability
analysis. It is only because plaintiff released Pacific Life of
liability for Acosta’s “negligent” “acts or omissions” that we must
ask whether plaintiff can sidestep that release on the theory that
Pacific Life had a duty to conduct its own, independent suitability
analysis. We now turn to that question.
B. Does section 2534.2(c) obligate an insurance
company to conduct its own, independent suitability
analysis, regardless of whether the broker has also
conducted one?
1. Analysis
The answer to this question is “no,” and chiefly for two
reasons.
First, the text of section 2534.2(c) all but dictates the
conclusion that the regulation does not impose a mandatory duty
on the insurance company to conduct its own, independent
suitability analysis before issuing a variable life insurance policy.
To begin, the regulation specifies that the suitability standards
that an insurance company must adopt will be “used by the
insurer, and [are also] applicable to its officers, directors,
employees, affiliates, and agents with respect to the suitability of
variable life insurance for the applicant.” (§ 2534.2, subd. (c),
italics added.) The italicized language indicates that the
standards may be “used” by the company’s “agents” (who are
listed separately from “employees”)—that is, the broker a
company contractually obligates to conduct that suitability
analysis or the broker who performs such an analysis upon which
the company later opts to rely—which makes little sense if the
company itself must always conduct that analysis. Relatedly, the
16
regulation specifies that the suitability standards “shall be
binding on the insur[ance company] and those to whom it refers.”
(Ibid., italics added.) This italicized language also contemplates
that the suitability analysis may permissibly be conducted by
someone other than the insurance company—namely, the brokers
to whom the company’s standards refer. Further, the regulation
specifies that the analysis into suitability must turn on (1)
information “furnished after reasonable inquiry of [the] applicant
concerning the applicant’s” (a) “insurance and investment
objectives” and (b) “financial situation and needs,” and (2) “any
other information known to the insurer or to the agent making the
recommendation.” (Ibid., italics added.) This italicized language
indicates that the suitability analysis may rest in part on
information known only to the company or to the agent (that is,
the broker), which suggests that either may conduct the analysis.
Lastly, the second paragraph of section 2534.2(c) obligates the
Insurance Commissioner to consider the “rate[]” by which
applicants purchasing variable life insurance policies let those
policies lapse, as means of determining, among other things,
“whether the insurer and its agents are engaging . . . in the sale
of variable life insurance to persons for whom it is unsuitable.”
(Ibid., italics added.) This italicized language also contemplates
that the agents—that is, the brokers—are selling the policies and
conducting the suitability analysis that is a prerequisite to such
sales. These textual clues indicate that an insurance company
need not conduct its own suitability analysis.
Second, the canons of statutory construction reinforce our
conclusion that section 2534.2(c)’s text does not obligate an
insurance company to conduct its own, independent suitability
analysis. Two canons point us to this conclusion.
17
The first pertinent canon provides that the use of
“materially different language” in provisions “addressing the
same subject or related subjects” is indicative of a different
meaning. (People v. Trevino (2001) 26 Cal.4th 237, 242; Rutgard
v. City of Los Angeles (2020) 52 Cal.App.5th 815, 827.) Akin to
section 2534.2(c), Insurance Code section 10509.914 obligates
either the insurance company or its broker to conduct a
suitability analysis to assess whether “an annuity or the
exchange of an annuity that results in another insurance
transaction” is “suitable for the consumer.” (Ins. Code, §
10509.914, subd. (a).) But this statute also requires insurance
companies to “maintain procedures [to] review . . . each
recommendation [of suitability] prior to issuance of an annuity”
and to “maintain reasonable procedures to detect
recommendations that are not suitable,” including by
“confirm[ing] . . . consumer suitability information” or conducting
“interviews.” (Ins. Code, § 10509.914, subds. (f)(1)(D) & (f)(1)(E).)
Viewed as a whole, this Insurance Code statute puts a much
heavier onus on insurance companies to conduct suitability
analyses themselves or, at a minimum, closely audit the analyses
conducted by brokers. Tellingly, section 2534.2(c) has no such
verbiage. In granting the Insurance Commissioner the authority
to adopt section 2534.2(c) for regulating the variable life
insurance industry (Ins. Code, § 10506, subd. (h)), the Legislature
chose not to require the Insurance Commissioner to mandate the
same insurer-conducted suitability analysis as the Legislature
requires for annuities. Thus, reading section 2534.2(c) as
obligating an insurance company to conduct its own, independent
suitability analysis would not only completely ignore the stark
difference in language between section 2534.2(c) and Insurance
18
Code section 10509.914, but would—paradoxically—impose a
greater duty under section 2534.2(c) than exists under Insurance
Code section 10509.914.
The second pertinent canon counsels us to avoid construing
a statute (or, as pertinent here, a regulation) in a way that would
lead to absurd results. (Tuolumne Jobs & Small Business
Alliance v. Superior Court (2014) 59 Cal.4th 1029, 1037; see also,
Hoitt, supra, 207 Cal.App.4th at p. 523 [regulations must be
construed to “make [them] reasonable and workable”].)
Construing section 2534.2(c) to require an insurance company to
independently assess suitability makes less sense because it is
the brokers who have better access to the information necessary
for that assessment: It is the brokers who gather the pertinent
information about a client’s finances and investment goals when
they determine which of the many investment products available
to recommend to a specific client; because usually (though not
always) the burden is placed on the entity with superior access to
evidence rather than the entity with inferior access (accord, In re
Marriage of Prentis-Margulis & Margulis (2011) 198 Cal.App.4th
1252, 1268 [noting that courts sometimes shift burdens of proof to
account for “‘unequal access to evidence’”]), construing the
regulation to put the burden on insurance companies to conduct
an independent analysis makes little sense. Reading section
2534.2(c) to mandate an independent analysis would also set up
an illogical dichotomy: If an insurance company opts to sell its
variable life insurance policies through employee-agents, then
the employee-agent’s suitability analysis is the company’s
analysis, so there will only be one such analysis; but if an
insurance company opts to sell its policies through broker-agents,
then the broker-agent will conduct an analysis (to assess which
19
products to sell) and the company will be required to conduct a
second analysis. Yet there is no logical reason why the number of
suitability analyses that must be conducted should relate to the
type of sales structure an insurance company employs. Plaintiff
urges that we need not be concerned with this absurdity, but we
disagree. Lastly, interpreting section 2534.2(c) to require an
independent suitability analysis tends to presume that brokers
are incapable of assessing the suitability of various products for
their clients. Yet section 2534.9 requires brokers to be
specifically licensed to sell variable life insurance products. (§
2534.9, subd. (a).) It makes little sense to require brokers to have
a license to sell this specific product if they are simultaneously to
be deemed legally incapable of evaluating the suitability of that
product on their own.
For these reasons, we construe section 2534.2(c) as
permitting an insurance company to conduct its own analysis into
the suitability of a variable life insurance policy for a specific
client, or instead to rely upon the suitability analysis conducted
by a broker. 7
7 Because we conclude that the duty to conduct a suitability
analysis may be discharged by either the insurance company or
the broker, and that the insurance company will typically remain
liable on a theory of negligence no matter who conducts that
analysis, we need not address whether any duty imposed on the
insurance company may be delegated to the broker under the
“nondelegable duty” doctrine. That doctrine addresses whether
one entity’s delegation of a duty to a second entity absolves the
first of liability. (Maloney v. Rath (1968) 69 Cal.2d 442, 446;
California Assn. of Health Facilities v. Department of Health
Services (1997) 16 Cal.4th 284, 298; Evard v. Southern California
Edison (2007) 153 Cal.App.4th 137, 146-147.) In this case, the
only reason Pacific Life may be absolved of liability is not because
20
2. Plaintiff’s counter-arguments
Plaintiff offers what boils down to six arguments for why
section 2534.2(c) should be read to obligate an insurance
company to perform its own, independent analysis of the
suitability of a variable life insurance policy for each applicant.
First, plaintiff offers an alternative textual analysis of the
regulation. Specifically, he asserts that section 2434.2(c)
“unambiguous[ly]” imposes a duty on the insurance company to
perform its own analysis; as explained above, we have come to a
contrary conclusion. Relatedly, he attacks our analysis to the
extent it relies on the regulation’s language that a suitability
analysis may look to “any other information known to the insurer
or to the agent making the recommendation.” Specifically,
plaintiff argues that this language does not support our “no duty”
conclusion because the “any other information” prong is just one
of two sources of information that feeds into a proper suitability
analysis. We are unpersuaded. What makes this language
supportive of our conclusion is not that it is an appropriate source
of information; instead, what makes it supportive is that the
information may be known either to the company or to the broker,
which suggests that either may conduct the suitability analysis
with this additional information. Plaintiff’s broader attack that
our reading of this clause somehow impermissibly substitutes
“or” for “and” is unhelpful hyperbole that itself rests on a
misreading of the statute. What is more, our analysis of the plain
text of section 2534.2(c) rests upon four different textual clues
that are all inconsistent with plaintiff’s reading; plaintiff’s
argument addresses but one of those clues.
its duty is delegable, but rather because plaintiff voluntarily
released Pacific Life from that liability.
21
Second, plaintiff argues that it makes no sense for the
regulation to make the suitability standards “binding” on
insurance companies, but then to read it as excusing them from
having to conduct their own suitability analyses. After all,
plaintiff points out, the regulation bars both the recommendation
and the issuance of a variable life insurance policy without a
determination of suitability, and only the insurance company
may issue a policy. Both of these points establish, at best, that
someone must conduct a suitability analysis. As noted above, we
agree. However, plaintiff’s points do not establish who must
conduct that analysis or, more specifically, establish that the
insurance company must always conduct its own, independent
suitability analysis.
Third, plaintiff emphasizes that section 2534.7 requires any
“application for a variable life insurance policy” to contain three
items, one of which is “questions designed to elicit information
which enables the insurer to determine the suitability of variable
life insurance for the applicant.” (§ 2534.7, subd. (c).) Although
we must consider the meaning of section 2534.2(c) in light of the
broader cluster of regulations on the same topic (and of which
section 2534.7 is a part) (Issakhani, supra, 63 Cal.App.5th at pp.
931-932), section 2534.7 merely states that the questions on a
variable life insurance policy must help “the insurer” determine
suitability without addressing—let alone prohibiting—that the
insurance company may have the broker perform that
determination on its behalf. What is more, the information
relevant to suitability—as noted above and shown by the
undisputed facts here—is the very same information a broker
gathers when assessing which investment products to tailor to
his client, and thus will be reflected in whatever application form
22
pertains to the products that the broker determines is suitable.
In short, nothing in section 2534.7 undermines our conclusion
that section 2534.2(c) gives an insurance company leeway to
allow a broker to conduct the suitability analysis, although the
company ordinarily remains liable if the broker is negligent in
doing so.
Fourth, plaintiff urges that public policy demands that
section 2534.2(c) be read to mandate an independent suitability
analysis by the insurance company because brokers are
economically self-interested to find every product suitable for
their clients and therefore cannot be trusted to conduct an
objective analysis. We reject this argument because it ignores
the many ways in which this ostensible conflict of interest is
constrained. Brokers must obtain a specific license to sell
variable life insurance policies; if they are reckless with their
suitability analyses, they may well lose that license. (Cal. Code
Regs., tit. 10, § 2534.9, subds. (a) & (c); Ins. Code, § 1758.1.)
Brokers also owe their clients a fiduciary duty, particularly when
the clients rely on them to recommend which investment
products are suitable (Mark Tanner Constr. v. Hub Internat. Ins.
Servs. (2014) 224 Cal.App.4th 574, 584; Marsh & McLennan of
Cal., Inc. v. City of Los Angeles (1976) 62 Cal.App.3d 108, 117;
Hydro-Mill Co., Inc. v. Hayward, Tilton & Rolapp Ins. Associates,
Inc. (2004) 115 Cal.App.4th 1145, 1158; Eddy v. Sharp (1988) 199
Cal.App.3d 858, 865); if brokers are reckless with their suitability
analyses, they can be sued by their clients for breach of that duty.
Indeed, plaintiff initially sued Acosta and the Acosta entities for
breach of that very duty. And, as noted above, a broker’s
negligently performed suitability analysis in most cases puts the
insurance company on the hook, as well; if brokers are reckless
23
with their suitability analyses, insurance companies will be less
likely to defer to those brokers’ analyses or to authorize those
brokers to sell their products, which would hurt the brokers’
economic self-interest. Plaintiff’s prediction that our reading of
section 2534.2(c) will enable brokers to “go wild” ignores the law
and reality.
Fifth, plaintiff cites his expert witness’s declaration in
which the witness opines that section 2534.2(c) imposes a duty
upon insurance companies to conduct an independent suitability
analysis. This is irrelevant because “‘expert testimony is
incompetent on the . . . question whether [a legal] duty [of care]
exists because this is a question of law for the court alone’ to
decide. [Citations.]” (QDOS, Inc. v. Signature Financial, LLC
(2017) 17 Cal.App.5th 990, 1004; Shin v. Kong (2000) 80
Cal.App.4th 498, 505 [“An expert cannot create a legal duty of
care where none otherwise exists”].)
Sixth and lastly, plaintiff suggests that insurance
companies have a duty to conduct their own, independent
analysis because that is the custom in the industry. We reject
this suggestion because the undisputed facts in this case are
diametrically to the contrary. What is more, industry custom or
practice cannot create a legal duty. (See Sheward v. Virtue
(1942) 20 Cal.2d 410, 414 [“the doctrine of customary usage does
not apply to the question of legal duty under the law of
negligence”]; Robinet v. Hawks (1927) 200 Cal. 265, 274 [same];
Silberg v. Cal. Life Ins. Co. (1974) 11 Cal.3d 452, 462 [same]; Van
de Kamp v. Bank of America (1988) 204 Cal.App.3d 819, 835
[“Custom cannot overcome positive provisions of statutes”].)
24
II. Did Pacific Life’s Conduct in Issuing the Variable
Life Insurance Polices After Acosta’s Negligent Suitability
Analysis Constitute a “Ratification” that Renders Pacific
Life Liable Notwithstanding the Release?
Plaintiff’s second argument to overcome the release, and
thereby to hold Pacific Life liable under his negligence and UCL
claims, has three steps: (1) Pacific Life’s issuance of the two
policies and acceptance of plaintiff’s premium payments
constitutes a “ratification” of Acosta’s negligent suitability
analysis, (2) a principal that “ratifies” an agent’s conduct becomes
“directly” liable for that conduct (rather than “vicariously” liable),
and (3) the release only absolves Pacific Life of vicarious liability
for Acosta’s actions, leaving its direct liability actionable.
We will assume that plaintiff has established the first two
steps of his argument, even though the law with regard to
whether ratification necessarily amounts to direct or vicarious
liability is admittedly murky. A principal may implicitly “ratify”
the conduct of an agent—and thereby become liable for that
conduct under the law—by accepting the benefits of that conduct
with “knowledge of the material facts.” (Rakestraw, supra, 8
Cal.3d at pp. 73-74; Reusche, supra, 231 Cal.App.2d at p. 737;
Alvarado Community Hospital v. Superior Court (1985) 173
Cal.App.3d 476, 481 [“a principal will be held to have ratified the
agent’s actions where he voluntarily accepts the benefits of the
unauthorized transaction”]; Allied Mutual Ins. Co. v. Webb (2001)
91 Cal.App.4th 1190, 1194 [“an agent’s originally unauthorized
act may be ratified by implication where the only reasonable
interpretation of the principal’s conduct is consistent with
approval or adoption”]; Civ. Code, § 2310 [ratification reaches
“accepting or retaining the benefit of the [agent’s] act”].) Here,
25
Pacific Life ostensibly “ratified” Acosta’s suitability analysis by
issuing the policies that were recommended on the basis of that
analysis, and thereby obtaining the benefit of plaintiff’s premium
payments for those policies. Pacific Life certainly acted with
knowledge that Acosta performed that analysis, although the
only way that Pacific Life could know that his analysis was
negligently performed—particularly in light of plaintiff’s ability
to pay the premiums for six years—was if Pacific Life performed
its own, independent analysis and came to a different conclusion.
In any event, “ratification” of an agent’s conduct is usually
conceived of as rendering the principal “directly” liable (rather
than “vicariously” liable for that conduct) (Dickinson v. Cosby
(2019) 37 Cal.App.5th 1138, 1159; Shultz Steel Co. v. Hartford
Accident & Indemnity Co. (1986) 187 Cal.App.3d 513, 518, 523
[principal directly liable if he “ratifies the act”]; see generally,
Rest.3d Agency, § 7.03, subd. (1)(a)), although the line between
direct and vicarious liability—at least where the principal does
no more than accept the benefits of the agent’s acts—is a
notoriously fuzzy one. (Ritter v. Technicolor Corp. (1972) 27
Cal.App.3d 152, 154 [even with ratification, “the agent’s liability
is primary, and that of the principal, who committed no moral
wrong, is but secondary”]; Myers v. Trendwest Resorts, Inc. (2007)
148 Cal.App.4th 1403, 1427 [“‘Vicarious liability based on the tort
doctrine of respondeat superior and direct liability based on the
theory of actual or ostensible agency are different liability
theories which cases do not always distinguish between’”]; Martin
v. PacifiCare of California (2011) 198 Cal.App.4th 1390, 1407 [“A
claim is based on vicarious liability when a party free from fault
is held liable for another party’s acts or omissions. [Citation.] A
claim is based on direct liability when a party is held liable for its
26
own acts or omissions”]; Samantha B. v. Aurora Vista Del Mar,
LLC (2022) 77 Cal.App.5th 85, 109 [ratification is “an
alternative” to respondeat superior].)
But plaintiff’s argument fails on the third step. Contrary to
what plaintiff suggests, the release does not turn on the
distinction between “direct” liability and “vicarious” liability;
indeed, the release does not use that distinction at all. Instead,
the plain text of the release draws a different distinction: Pacific
Life is released from any liability based on “claims that result
from any of Acosta’s” “negligent” “acts or omissions” or that
“result from Acosta’s” “failure to comply” with the terms of his
contract with Pacific Life or any “state . . . regulation,” but is not
released from liability for its own conduct that “caused,
contributed to, or compounded” Acosta’s shortcomings or for “its
direct conduct including . . . underwriting and marketing of its
life insurance policies.” Here, plaintiff’s negligence and UCL
claims—as he has narrowed them by the time of this appeal—
seek to hold Pacific Life liable for Acosta’s negligent conduct in
performing the suitability analysis, which simultaneously
breaches Acosta’s contracts and section 2534.2(c). By issuing the
policies and accepting premiums without conducting a further
suitability analysis, Pacific Life certainly did not “cause[]”
Acosta’s defective analysis and also did not “contribute[] to” or
“compound” that analysis. Pacific Life’s conduct—whether
labeled “direct” or “vicarious” in the eyes of the law—thus falls
completely within the terms of the release; we decline plaintiff’s
invitation to rewrite the release to make Pacific Life’s continued
liability turn on a legal distinction that the release itself does not
adopt. That the release uses the word “direct” to still hold Pacific
Life liable for “its direct conduct including, but not limited to,
27
underwriting and marketing of its life insurance policies,” is
meant by context to hold Pacific Life responsible for its own
conduct rather than to incorporate the direct and vicarious
liability dichotomy used in the case law.
* * *
In light of our analysis, we have no occasion to reach the
parties’ alternative arguments regarding whether plaintiff’s
claims are barred by the statute of limitations.
DISPOSITION
The judgment is affirmed. Pacific Life is entitled to its
costs on appeal.
CERTIFIED FOR PUBLICATION.
______________________, J.
HOFFSTADT
We concur:
_________________________, P. J.
LUI
_________________________, J.
ASHMANN-GERST
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