New Release: Responsibilities of Insurance Agents and Brokers

In the July release of Matthew Bender’s Responsibilities of Insurance Agents and Brokers, the author, Bertram Harnett, added the case of  Berry v. Indianapolis Life Ins. Co. , 600 F. Supp.2d 805 (N.D.Tex. 2009).  Insurers face exposure from such conduct because they directly participated in it, or because they are vicariously responsible for their agents’ behavior under the basic principles of respondeat superior. Even before the merits of a plaintiff’s claim against an agent or insurer for unfair or deceptive practices can be addressed, courts often consider the threshold question of whether a complaint’s allegations are sufficiently detailed to put the defendant on notice of what its misconduct was and how it should proceed to mount a defense. In Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L.E.2d 929 (2007), the U.S. Supreme Court tightened the pleading requirements for complaints, stating that a complaint must now include “enough facts to state a claim to relief that is plausible on its face.” 550 U.S. at 570. This new articulation of the standard for adequacy of complaints has generally been recognized as increasing the need for specificity in pleading, and it has led many courts to evaluate more critically, and more receptively, defendants’ motions to dismiss complaints because allegations are too conclusory or indefinite to state a claim adequately. While Twombly has often been read broadly to elevate pleading requirements generally, in circumstances where plaintiffs allege fraudulent activity or a conspiracy -- two areas that were already subject to heightened requirements for specificity in pleading -- the impact of Twombly could be even greater.

Such was the case in Berry v. Indianapolis Life Ins. Co. , 600 F. Supp.2d 805 (N.D.Tex. 2009), a class action commenced in a Texas federal district court by insureds who resided in several states against four insurance companies and several of their agents and consultants. The plaintiffs were individual professionals (doctors, dentists and owners of construction companies) and the companies they operated. They collectively alleged that they had been victimized by a concerted scheme on the part of all the defendants to market “defined benefit plans,” and to market the life insurance policies used to fund these plans by making fraudulent or negligent misrepresentations about the tax benefits of the plans without disclosing the risk that the IRS might deem them illegal. The allegations in the complaint as to the representations by all the agents selling these plans were essentially identical: that the insurance policies were appropriate for use in funding the plan; that the policies provided a permissible death benefit under the plan; that the premiums for the policies would qualify as tax deductible; and that the plans and policies complied with all applicable tax laws and regulations. Further, the agents allegedly did not disclose that the IRS had refused to recognize the tax benefits of this kind of program and various other risks. The plaintiffs claimed these actions amounted to fraud, conspiracy to commit fraud, misrepresentation and violations of trade practice and consumer protection statutes in Texas and California.  The defendants moved to dismiss the complaints as failing to adequately state a claim. In the end, the federal district court agreed with the defendants.

As to the conspiracy claim, the Berry court found that the complaint’s allegations that the defendants proceeded “to work together ... to further develop and market this purported [tax benefit] arrangement” was not sufficient to support a conspiracy allegation. Berry 600 F. Supp.2d at 814-815. The allegations failed to specify who was involved, what the interactions among defendants were, when any meeting of the minds between any of the defendants occurred or sufficient facts to explain how “working together” amounted to a conspiracy to commit fraud. As to the alleged fraud itself, the court noted that the complaint did not explain why the agents’ statements about the plans’ benefits in 2001 and 2002 were false when they were made since, at that time, the IRS had not yet gone on record declaring such plans to be abusive.FN11 The fact the IRS later reached a conclusion to that effect did not retroactively validate the complaint’s allegations. The court regarded the agents’ alleged representations concerning how the IRS would treat the plans in the future, even if true, as either opinions regarding future events that are not actionable as fraud or as matters on which it was not justifiable for the plaintiffs to rely. As to the failures to disclose various risks associated with the plans, such as that the IRS might find them abusive, the court ruled that the allegations about the omissions were deficient for the same reasons as the allegations about the misrepresentations -- the complaint did not explain what information the insurers knew at the relevant time but did not disclose.

Finally, the court disposed of the state statutory claims noting first, as to the Texas claim, FN12 that there was no allegation that any misconduct occurred in Texas or that a defendant resided in Texas. As to the California statutory claims,FN13 the complaint was deficient in not adequately pleading that any of the plaintiffs resided in California at the time of the misrepresentations, that the public was likely to be deceived by any false advertising claim and for not pleading with sufficient particularity with respect to the fraudulent practices.

Thus, in all respects, the Berry court found the class action complaint deficient and it dismissed the case with permission to re-plead to correct the numerous deficiencies. When the plaintiffs submitted their amended complaint, however, the court still found all the fundamental allegations lacking for the same essential reasons set forth in its original opinion.FN14 The only allegation that the court permitted to stand was the claim that the defendants violated the false advertising prohibition in California state law because some of the plaintiffs were residents of California; they alleged that the defendants’ misrepresentations occurred in California; and they now alleged that the misrepresentations were likely to deceive members of the public.FN15 On that basis alone, the remnants of the case were allowed to proceed.

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FN11   Indeed, the insurers had obtained a legal opinion from a law firm that the defendants life insurance policy “more likely than not ... can meet the requirements of Section 412(i) of the [Internal Revenue] Code.”  600 F. Supp.2d at 808.

FN12   The plaintiffs alleged claims under the Texas Insurance Code and Deceptive Trade Practices Act, Sections 17.45 and 17.50.

FN13   The plaintiffs alleged violations of California Business and Professions Code Section 17200 arising from: (1) violations of Business and Professions Code Section 17500 prohibiting false advertising; (2) the California Consumer Legal Remedies Act (Cal. Civ. Code Section 1770); and (3) fraud.

FN14   Berry v. Indianapolis Life Ins. Co., 638 F. Supp.2d 732 (N.D. Tex. 2009).

FN15   California Bus. & Prof Code Section 17200.

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