DICKINSON R. DEBEVOISE, District Judge.
This case concerns allegations of deception and bad faith against a health insurance company, The Prudential Insurance Company of America ("Prudential"). Plaintiffs Beverly Clark, Jesse J. Paul, Warren Gold, Linda M. Cusanelli, Carole L. Walcher, and Terri L. Drogell (collectively, "Plaintiffs") have filed a putative class action complaint against Prudential. Before the Court are two motions: Plaintiffs' motion for class certification, and Prudential's motion for summary judgment on behalf of four of the six named plaintiffs based on the statute of limitations.
The heart of the complaint is that Prudential stopped selling a previous health insurance policy to new customers ("closing the block"), knowing that this would result in a prohibitive increase in premium rates. Plaintiffs content that Prudential had falsely misrepresented to its policy holders that the only reason for increased premiums would be increasing age of the insured and rising medical costs and failed to disclose that a major reason for the premium increases was the closing of the block.
For the reasons set forth below, Plaintiffs' motion for class certification is DENIED. Prudential's separate motion for summary judgment, addressed independently below for the sake of judicial efficiency, is GRANTED with respect to Ms. Clark and Ms. Drogell, and DENIED with respect to Ms. Cusanelli and Mr. Gold.
The facts of this case and procedural history are discussed at great length in several prior opinions dated September 14, 2009 (ECF 39), September 9, 2010 (ECF 98), March 15, 2011 (Doc No. 156), and May 13, 2011 (ECF 170). Plaintiffs are six former customers of Prudential who purchased health insurance plans marketed under the name Coordinated Health Insurance Program ("CHIP").
Plaintiffs filed a motion for class certification on February 22, 2012, on behalf of roughly 17,000 current and former CHIP policyholders spanning four states, California, Indiana, Ohio, and Texas, under various state laws. The proposed class consists of individuals who paid one or more CHIP major medical premiums based on a rate increase effective on or after March 1, 1982. Plaintiffs seek recovery for Prudential's failure to disclose that it stopped selling CHIP to new policyholders, and the consequences thereof to existing policyholders, namely severe premium increases and the risk of being locked-out of other policies and locked-in to CHIP due to the development of a serious chronic condition. Plaintiffs claim that this omission prevented class members from making the rational choice to switch to an alternate policy, and it gave the lie to Prudential's representations that premium increases would be based only on medical cost inflation, increases in policyholder age, and between 1985 to 1990 high claim cost.
Prudential filed the second motion herein considered for summary judgment on July 13, 2012. Prudential essentially raises a statute of limitations defense, arguing that four of the named plaintiffs had knowledge of the underlying material facts and the time has run to bring their claims.
With regard to the handling of the two motions, the Court is informed by the reasoning set forth in
In the original Complaint, the two original plaintiffs, Ms. Clark and Mr. Paul, asserted three causes of action for: (1) violation of the New Jersey Consumer Fraud Act, N.J. Stat. Ann. 56:8-1 et. seq., ("NJCFA"); (2) breach of fiduciary duty; and (3) breach of the duty of good faith and fair dealing. Prudential moved to dismiss the individual plaintiffs' claims. In an Opinion and Order dated September 14, 2009, the Court granted the motion in part, dismissing all claims except for Ms. Clark's claim for breach of the implied covenant of good faith and fair dealing.
Subsequently, on October 30, 2009, Ms. Clark filed an Amended Complaint, asserting claims for unfair competition and breach of the duty of good faith and fair dealing against Prudential under California law. Thereafter, the parties stipulated that Ms. Clark and Mr. Paul would file a Second Amended Complaint with additional claims for common law fraudulent misrepresentation and fraudulent omission. The Second Amended Complaint ("2AC") was filed on November 12, 2009. It was shortly followed by a motion to dismiss on December 3, 2009. The motion was partially briefed, and the parties stipulated that the Plaintiffs could file a Third Amended Complaint ("3AC"), adding Marc H. Litwack as a new plaintiff. The parties agreed that the Court would address, during a single motion hearing, the issues raised in both the motions to dismiss the 2AC and the 3AC. As a result of amendments and stipulation the following five claims for relief were pleaded: 1) fraudulent misrepresentations (by Clark, Litwack and Paul); 2) fraudulent omissions (by Clark, Litwack and Paul); 3) breach of duty of good faith and fair dealing (by Clark and Litwack); 4) violation of California Unfair Competition Law (by Clark); and 5) violation of New Jersey Consumer Fraud Act (by Litwack).
In an opinion dated September 9, 2010, this Court dismissed Mr. Litwack's claims with prejudice as barred by the filed rate doctrine as applied under New Jersey law. The September 9, 2010 opinion also dismissed Ms. Clark's requests for injunctive relief and treble damages under California's Unfair Competition Law (UCL), Cal. Bus. & Prof. Code § 17200, et seq., and dismissed Mr. Paul's misrepresentation claim only to the extent that it is based on the renewal provision. The Court held that for statute of limitation purposes, the discovery rule is applicable to UCL claims, and that Ms. Clark had sufficiently pled that she had exercised reasonable diligence and yet was unable to discover the death spiral and its consequences until 2005 at the earliest.
On November 9, 2010, Plaintiffs filed a Fourth Amended Complaint ("4AC"). The 4AC asserted four claims: 1) fraudulent misrepresentation on behalf of a Multi-State Fraud Class; 2) fraudulent omission on behalf of a Multi-State Fraud Class; 3) breach of good faith and fair dealing on behalf of a California Subclass; 4) violation of California Unfair Competition Law on behalf of a California Subclass. The proposed class definition was "all persons living in California, Indiana, New York, Ohio or Texas who renewed a CHIP after Prudential closed the block." Warren Gold and Linda Cusanelli were added as Plaintiffs.
Thereafter on December 16, 2010, Prudential filed a motion to dismiss or strike portions of the 4AC, arguing inter alia that a recent decision rendered by the California Court of Appeal mandated dismissal of the California causes of action and that the New York, Ohio, and Texas class claims were untenable under the filed rate doctrine. Before this motion could be argued, Plaintiffs and Prudential entered into a stipulation under which Plaintiffs would file a Fifth Amended Complaint ("5AC"). The 5AC added claims by Plaintiffs Carole L. Walcher and Terri L. Drogell. The Parties stipulated that this Court's ruling on the pending motion would apply with the same force as to the allegations of the 5AC, and that the pending motion would also be considered a motion to dismiss Ms. Drogell's claims as barred by the filed rate doctrine.
On March 15, 2011, the Court rendered an opinion which denied Prudential's motion to dismiss the California causes of action premised on duty to disclose, and granted Prudential's motion to strike the New York claims based on the filed rate doctrine, but denied the motion to strike the Ohio and Texas claims based on the filed rate doctrine. (ECF 156.)
The operative complaint is the Fifth Amended Complaint ("5AC"), submitted on February 16, 2011, which alleges four causes of action raised by six plaintiffs who purchased their health insurance plans in California, Indiana, Ohio, and Texas. The 5AC alleges (1) fraudulent misrepresentation, on behalf of a Multi-State Fraud Class; (2) fraudulent omissions, on behalf of a Multi-State Fraud Class; (3) breach of the duty of good faith and fair dealing, on behalf of a California Subclass; and (4) violation of California's Unfair Competition Law (UCL), Cal. Bus. & Prof. Code § 17200, et seq., on behalf of a California Subclass. (ECF 140.) The prayer for relief includes a) an Order determining that the action may be maintained as a class action and providing class certification; b) compensatory damages according to proof at trial; c) punitive or exemplary damages; d) restoration of all money or property which may have been acquired by Prudential by means of unfair competition; e) reasonable attorneys fees, and all costs and disbursements including, without limitation, filing fees and reasonable costs of suit; and f) such other further relief as this Court deems just and proper. (
This case has also been heavily litigated in discovery. Most recently, on May 13, 2011, the Court reversed the Magistrate Judge's March 1, 2011 discovery order denying Plaintiff's challenge to the confidentiality designation of fifteen documents.
The CHIP policy is a form of individual health insurance, distinct from group health insurance. "One of the goals of CHIP was to show there was no need for national health insurance, that is, that health insurance could be provided by the private sector. Despite good intentions, the design included [ ] major flaws." (Chud Decl., Ex. 2, CHIP Business Plan Memorandum, PRU-BC-00001287).
CHIP has particularly rich benefits. (
The terms of CHIP permitted purchasers to continue to renew the policies indefinitely at their election and as such, Prudential strictly limited its own right to discontinue the CHIP policy. Specifically, Prudential maintained the right to discontinue the policy only upon canceling all CHIP policies in the state of the policyholder's residence.
To some degree, CHIP is used as a bridge program to employer-sponsored coverage or Medicare as individuals approach 65. A 1975 study led Prudential to stop accepting applications from persons who were unemployed, in a present job for less than six months, or from students within twelve months of graduation. (
Prudential sold CHIP throughout the United States from 1973 through 1981. On December 17, 1981, Prudential "closed the block," or stopped selling CHIP to new customers. Thus, sales to new policyholders, which were down from previous years but still totaled 80,000 in 1981, virtually ceased.
Premiums started to increase immediately following block closure, and within five years of the block closure, by 1986, fewer than 10% of the CHIP policies remained.
Starting in 1990, Prudential limited premiums through rate capping of 10% every year. Prudential instituted the cap to minimize constructive cancellation lawsuits that arose in 1986 for premiums raised to a point where the insured could not afford them and thus his or her policy was forced to lapse. (Chud Decl., Ex. 2, PRU-BC-00001288.) Prudential lifted the subsidy cap in 2001, and the increased premiums were then directly ascribed to whatever CHIP policyholders remained.
The nature and breadth of the communications being at issue, the following is an overview of the main written communications sent to CHIP policyholders. First, Prudential sent a form letter known as a "welcome letter" to every CHIP policyholder at or about the time of policy issuance advising that premium increases would be based solely on increases in age and medical cost inflation.
Subsequent to the block closure, Prudential sent annual notices of premium increases to CHIP policyholders whose policies were still in force. These notices did not advise policyholders that premium increases were being affected by the closed block.
In 1985, Prudential began sending to all CHIP policyholders whose policies were still in force annual "notice of rerate" form letters that preceded each premium increase at the policy anniversary. Plaintiffs argue that these uniform letters (the "three reason" letter) falsely advised that the
In 1989, Prudential modified the annual "notice of rerate" form letter to drop the reference to high claim costs, such that the new letter advised that the
None of these annual notices mentioned the Plaintiffs' contested reason for premium increases — the block closure, the death spiral and its inevitable creation of absurdly high premiums, or its lock-out/lock-in consequences whereby new customers are locked-out and sick customers are locked-in due to development of a pre-existing condition and inability to secure alternate health insurance accordingly.
In addition to the welcome letter, the three-reason letter, and the two-reason letter, on May 12, 1995, Prudential sent a letter to California policyholders referencing California Assembly Bill 1743. (See Chud Decl., Ex. 21.)
Individual policyholders also discussed CHIP premiums with Prudential representatives via telephone. While the form letters described above were sent with uniformity to all policyholders, policyholders also had the option of calling Prudential representatives for further inquiry or assistance. Indeed, policyholders were directly invited to do so via the three-reason and two-reason letters. (Chud Decl., Exs 14, 15.) Oral communications with named Plaintiffs are detailed further below. For example, Ms. Clark's bookkeeper called Prudential in 1993 and learned that CHIP was closed. (Clark Dep. at 93:24 - 95:18, 121:5-121.) Additionally, a Prudential representative advised Ms. Cusanelli in 2005 that CHIP was a "closed block of business" and that premiums were set based on "the claims that are being paid out." (Cusanelli 2005 Tscpt at 3:22, 4:22-5:2, 6:6-10, 7:11-10.) Similarly, Mr. Gold learned from a call to Prudential in 2004 that CHIP was a "closed block of business." (Gold 2004 Tscpt at 7:3-18.) Last, Ms. Walcher's financial advisor called Prudential on her behalf and learned that CHIP was a "closed book of business." (Walcher Dep. at 27:11-28:10.) Of note, recordings exist for most calls made since 2002, however only incomplete records exist for calls made before that time. (
The block closure was also publicized in widely-distributed newspaper reports beginning in December 1981. For example, on December 18, 1981, the Wall Street Journal ran an article of Prudential's suspension of CHIP sales due to rising medical costs. (Chud Decl., Ex. 68.) The same day, the Newark, NJ Star-Ledger stated the same and quoted a company statement that "[b]ecause of the comprehensiveness of its benefits, the CHIP policy has been particularly susceptible to rapidly escalating medical care costs[.]" (
CHIP policyholders dwindled over time. As mentioned above, within five years of the block closure, fewer than 10% of the CHIP policies remained. By 2001, when Prudential stopped capping premium increases at 10%, 99% of the proposed class had already dropped the CHIP policy. The chart below illustrates the number of policyholders by state over years material to this action.
(
The above chart is constructed based on the record. (
The majority of nationwide CHIP policyholders are enrolled in limited medical coverage policies. At the time the CHIP block was closed in 1981, of the 261,489 CHIP policies in force, approximately 38% (or 97,971) were major medical policies and 63% (or 163,518) were limited medical coverage policies. Limited medical policyholders currently constitute more than 70% of all CHIP policyholders.
Plaintiffs' Complaint alleges that "Prudential knew that the block closure would inevitably cause premiums to increase to affordable levels." (5AC ¶ 5.) As an example of the inevitable "extremely large premium increases," Plaintiffs recite the individual class representatives' premium increases after 2000. (
Prudential began misrepresenting the reason for premium increases — the late-1981 block closure and its inevitable death spiral. Plaintiffs claim that once Prudential ceased selling CHIP policies, it destabilized the risk pool for existing policyholders, rendering it a virtual certainty that premiums would spiral out of control until all plan participants were forced to drop their coverage.
As one federal court succinctly described this phenomenon:
Similarly, the Fifth Circuit Court of Appeals examined the CHIP Policy in question and its effects in 1987 and found as follows:
Thus, Plaintiffs propose a class action on behalf of a putative class of roughly 17,000 members spanning four states, California, Indiana, Ohio, and Texas, under various state laws. The proposed class consists of individuals who paid one or more CHIP major medical premiums based on a rate increase effective on or after March 1, 1982. Plaintiffs seek recovery for Prudential's failure to disclose that it stopped selling CHIP to new policyholders, and related severe consequences to existing policyholders, namely severe premium increases and the risk of being locked out of other policies and locked into CHIP due to the development of a serious chronic condition. Plaintiffs claim that this omission prevented class members from making the rational choice to switch to an alternate policy, and it gave the lie to Prudential's representations that premium increases would be based only on medical cost inflation; increases in policyholder age; and, between 1985 to 1990, high claim cost.
Prudential opposes the effort to certify the class, arguing that individual issues predominate over common ones. Surprisingly, Prudential does not concede that the block closure leads to premium increases and a death spiral. Nonetheless, the Court's role is not to assess the merits, but rather to review the factual evidence based on a preponderance of the evidence, and assess whether the Federal Rules of Civil Procedure are satisfied with respect to class certification.
All six named Plaintiffs held their policies until 2004 or later,
Ms. Clark is currently a resident of Vancouver, British Columbia. Ms. Clark purchased CHIP from Prudential, with a policy date of September 13, 1978, in San Diego, California, where she then resided, at a monthly premium rate of $46.09. By 1982, her premium was $149.66 per month. (Clark Dep. 44:23-45:1.) Ms. Clark terminated her policy in September of 2005 when her monthly premium reached $5,600 (or $68,388 per year), an increase from $4,217.65 per month (or $50,611.80 per year). (Clark Decl. ¶ 11.)
Ms. Clark was attracted to the CHIP policy because it was "fully comprehensive." (Clark Dep. 24:22.) When asked why she renewed her policy in 1984, she responded, "I never considered giving it up. I loved my policy, I thought it was a great policy . . [b]ecause it was fully comprehensive." (Clark Dep. 57:18-25.)
Ms. Clark concedes that she "didn't know what to think" when her premiums "started becoming quite enormous" in the 1980s. (Clark Dep. 78:3-17.) She further explains, "I couldn't understand why my rates were becoming so enormous, unless, perhaps, they were trying to get rid of me." (
Ms. Clark concedes that in 1993 she believed that Prudential was "trying to get [her] to drop the policy . . . [b]y increasing [her] rates." (
In 1993, although Ms. Clark attests that she believed Prudential's representations that the premium rates were based on her age and medical inflation, she her bookkeeper, Karen Ellis, to look into the issue because the price "made no sense to me whatsoever." (Clark Dep. at 93:24-95:18, 94:16-95:9, 121:5-21.) Prudential indicated to Ms. Ellis that CHIP was no longer being sold to the public. (
In response to questioning concerning receipt of a letter from Prudential that several factors caused CHIP premiums to increase including increase in age and increasing cost of medical care, Ms. Clark responded that at the time she received the letter, she thought those were the actual reasons why her premiums increased. However, when asked next whether she thought these were the only reasons, Ms. Clark responded, "Well, like I said, I was quite shocked sometimes. I did wonder how could medical costs be this expensive." (Clark Dep. 112:1-9.)
In November of 1996, Prudential sent Ms. Clark a letter regarding her residency status, stating that it "reserve[d] the right to discontinue" her policy if she intended to stay in London more than six months. (See Raffman Decl., Ex. 3 at 2, Clark Dep. Ex. 22.) Before responding to Prudential, Ms. Clark again enlisted the assistance of her attorney Mr. Dean Goetz, writing him that she had "a very old policy" and that Prudential "tr[i]ed many times to cancel me." (
Ms. Clark had approximately four telephone conversations with Prudential in the 2000s, regarding the reason why the rates were going up. (Clark. Dep. 204:24-205:6.) Ms. Clark testified that she made the calls "to vent my anger probably." (
At some point before her policy terminated in 2005, Ms. Clark telephoned a Prudential representative, who said that the premiums were increasing due to age and rising medical costs. (Clark Dep. 197:14-198:17.) The Prudential representative made no mention of the closed block. (
In the Fall of 2005, Ms. Clark asked Mr. Goetz to contact the Insurance Commission in California to see if there was a solution to her fear of being left without health insurance after having paid Prudential for so many years, and to look into the reason for the premium increases. (Clark Dep. 196:11-21, 198:12-17.) On October 14, 2005, Mr. Goetz wrote a letter to the California Department of Insurance stating:
(Raffman Decl., Ex. 5, Goetz Dep. Ex. 16 at PRUDG000010.) As of October 2005, Ms. Clark still held hope that she would get the CHIP policy reinstated at a lesser price. (Clark Dep. 216:21-25.)
Subsequently, Ms. Clark filed a complaint with the California Department of Insurance (DOI) about the CHIP premium increases. (Clark Decl. ¶ 11.) Prudential responded on November 10, 2005 by repeating that her premiums were based on "the overall experience of the population" and her "age, gender and coverage" without mentioning the block closure of its consequences. (
Mr. Paul is a resident of Indiana and purchased CHIP from Prudential, effective July 2, 1980, in Indianapolis, Indiana, where he then resided, at an initial monthly premium of $25.50. (Paul Decl. ¶ 2.) He considered CHIP his "Linus Ban Pelt blanket" and his "piece of the rock," because he "believed that [Prudential was going to keep premiums as low as possibly based solely upon increasing medical costs and [] increasing age, and [he] wanted to keep this policy for life." (
Mr. Paul is an attorney and had previously read about a state or federal regulation that limited or prohibited rating policies in "dead-end groups." (
Mr. Paul then filed a complaint about the premium increase with the Indiana Department of Insurance in 2003, and received written responses from Prudential and the Indiana Department of Insurance. Neither of these responses disclosed (1) that the CHIP block closure rendered a death spiral a certainty; (2) that the death spiral causes increasing premiums; (3) that those premiums would eventually rise to astronomical levels; (4) that a policy holder who develops a medical problem may be unable to secure other health insurance due to his or her pre-existing condition and may be locked in to CHIP until the premiums became unaffordable. (
In 2004, Prudential again raised his monthly premium, this time from $1,036.66 to $1.501.28 (or $18,015.36 per year), a 45% increase. (
After finding from the Indiana Department of Insurance in 2004 that CHIP was in a premium spiral, Mr. Paul attempted to obtain alternative insurance from other health insurance companies. (Paul Decl. at ¶ 12.) However, these applications were denied due to development of preexisting conditions, including high blood pressure and high cholesterol. Mr. Paul then explored the possibility of obtaining coverage from the Indiana Comprehensive Health Insurance Association ("ICHIA"), but did not pursue such coverage at that time because the State of Indiana retained the ability to terminate ICHIA coverage without notice and he "did not want to move to a policy such as ICHIA that was terminated at the whim of . . . politicians or Indiana law." (
Mr. Paul alleges that he did not discover the material facts constituting the basis of his claims before six years prior to the filing of the Complaint on December 17, 2008. (
Mr. Gold is currently a resident of Nevada. Mr. Gold purchased CHIP from Prudential on or about March 26, 1980 in California, where he then resided, at a monthly premium payment of approximately $30.18. (Gold Decl. ¶ 2.) He terminated his policy in May of 2006 when his monthly CHIP premium reached $2,029.01 (or, approximately $24,000 per year). (
Mr. Gold purchased the CHIP plan due to the limitations on Prudential's termination of the plan, the absence of a maximum benefit cap, and the limited factors for premium increases. (
As of April 4, 1984, Mr. Gold increased his deductible from $1,000 to $5,000 to lower his premium. (
In March 2004, Mr. Gold called Prudential regarding a "huge raise" in his quarterly premium. (Raffman Decl. Ex. 12, 3/16/04 Tr. at 2.) On the same 2004 call, Mr. Gold advised the Prudential representative: "I don't know if you're aware or not, but this policy has not been written in many, many years." (
(
In a 2006 call with Prudential, Mr. Gold was concerned with his premium change from $1500 to $2000 per month, and said "this is the worse I've ever heard as far as what people are paying." (Raffman Decl. Ex. 13, 3/16/06 Tr. at 4.) Mr. Gold called in an effort to lower his premiums. (
When Mr. Gold received notice in 2006 of the increase in his monthly premium, he began to look for other insurance. (Gold Dep. 49:12-19.) He thereafter procured health insurance with The Anthem Blue Cross Blue Shield because he could no longer afford the CHIP policy which had reached $30,000 per year. (
Ms. Cusanelli is currently a resident of California, which is where she resided in or about October 24, 1978 when she purchased CHIP at an initial monthly premium payment of $52.62. (Cusanelli Decl. ¶ 2; Cusanelli Dep. 63:15-22, 150:21-151:10.) She had bought the policy "for the long-term." (
As of 1982 or 1983, Ms. Cusanelli considered her CHIP premiums to be "excessive." (
Ms. Cusanelli was diagnosed with invasive malignant melanoma in or about January 1995, and was told by her doctor that she would have a hard time finding alternate health insurance and as a result should keep her current insurance with Prudential. (Cusanelli Decl. ¶ 10; Cusanelli Dep. at 60:8-20.)
In September of 2002, Ms. Cusanelli filed a petition for bankruptcy. (Cusanelli Dep. at 41:10-13.) That petition did not mention any outstanding claims associated with the instant case. (
Ms. Cusanelli believed that her increases between 1997 ($501 monthly) to 2000 ($531 monthly) were "fairly reasonable. It gets worse later on." (
In response to premium increases from 2001 to 2003, Ms. Cusanelli called Prudential to investigate whether she could change her deductible. (Cusanelli Dep. 122:18-123:19.) In a September 2003 call to Prudential, Ms. Cusanelli stated that her CHIP premiums were "getting nasty." (Raffman Decl. Ex. 10, 9/9/03 Tr. at 1.) In September 2005, Ms. Cusanelli's monthly premium CHIP increased to over $1900, an amount she found "intolerable." (Cusanelli Dep. 71:3-20.)
In the Fall of 2004, Ms. Cusanelli received a letter from Prudential that monthly rates were increasing to $1,459 because of age and increased healthcare costs. She believed the stated causes for the premium increases because she had been with Prudential since 1978 and "didn't think they'd lie to me." (
On October 7, 2005, Ms. Cusanelli called Prudential to complain about the "intolerable" annual increase in premiums. (Cusanelli Dep. 71:15-20; Raffman Decl. Ex. 14, 10/7/05 Tr. at 4.) During that call, the Prudential representative stated that "[w]e're a closed block of business in this office," and Ms. Cusanelli responded, "Right." (
Ms. Cusanelli called Prudential again on October 13, 2005. (Raffman Decl. Ex. 15, 10/13/05 Tr. at 3.) During that call, Ms. Cusanelli expressed that "[m]aybe they don't have those policies anymore and they'd like to, you know, would love to get rid of it." (
Thereafter, Ms. Cusanelli spoke with a neighbor knowledgeable about insurance, and submitted applications for alternate individual insurance policies in late 2006 and early 2007. (Cusanelli Dep. 149:5-17.)
Ms. Cusanelli alleges that she did not discover the material facts constituting the basis of her claims before three years prior to the filing of the Complaint on December 17, 2008. Ms. Cusanelli did not learn what the term "closed the block" meant until she was contacted by an attorney associated with Plaintiff's counsel. (
Ms. Walcher is currently a resident of Pennsylvania who purchased in or about 1974 in Indiana, where she then resided. (Walcher Decl. ¶ 2.) Her initial monthly premium payment was $23.17 per month. (
Ms. Walcher purchased the policy due to the features of its coverage:
(Walcher Dep. 44:10 - 45:3.)
Before purchasing the CHIP policy, Ms. Walcher examined Blue Cross Blue Shield and the university policies available through Indiana University. (
In 1983, Ms. Walcher's annual CHIP premium almost doubled from $82.61 to $163.01. Despite this increase, Ms. Walcher renewed her policy because she assumed that all other insurance companies were experiencing the same increasing costs. "I kept reading about them in the paper, et cetera. So [ ] it never occurred to me that this was something that was [ ] something unique to Prudential." (
Ms. Walcher alleges that she did not discover the material facts constituting the basis of her claims before six years prior to the filing of the Complaint on December 17, 2008. In some of the later years, her CHIP premiums were paid out of a family trust created by her father for educational or health bills. She now understands that Andrew Hayes, a trust officer for the family trust, contacted Prudential by telephone at some point and was told that Prudential was no longer selling CHIP policies, but he did not convey that information to her. (Walcher Decl. ¶ 10.) In any event, she claims that she would not have understood the consequences of CHIP being a closed block. (
In 1998, Ms. Walcher was diagnosed with diabetes. In phone calls to two main providers of individual policies in her area in 2004, to Blue Cross Blue Shield and Universal of Pittsburgh Medical (UPMC), Ms. Walcher was told that this preexisting condition caused her to be unable to obtain alternate insurance. (
Ms. Drogell purchased CHIP in Ohio, where she is still a resident, on or about May 22, 1979, at a monthly premium payment of $48.22. (Drogell Decl. ¶ 2.) She stopped making premium payments when her monthly premium quote in May 2004 reached $2,225.45 (or $26,705.40 per year). (
In a May 2003 call to Prudential, Ms. Drogell complained that the increase in her CHIP premium that year was "unbelievable." (Raffman Decl. Ex. 16, 5/27/03 Tr. at 7.) In that call, Ms. Drogell advised that "somebody from Prudential a long time ago told me that they had not sold this plan for a long time — this CHIP policy." (
After being told on the May 2003 call that the premiums were increasing due to increased medical costs and age, Ms. Drogell responded, "Okay. Because I mean my parents are like 20 something years older than me and they pay way less and I just don't — and my mom has MS so I just don't understand why mine is so high." (
Ms. Drogell alleges that after the call, she renewed the policy because "I trusted what they were telling me" and "I believed that . . . the increase was being based on age, as she [the Prudential representative] said, and increased medical costs." (Drogell Decl. ¶ 11; Drogell Dep. 179:6-180:11.)
The Court is presented with lengthy and detailed reports by four experts which go to the Gordian Knot of whether damages can be measured by common formula. Substantial discussion has been raised on this issue, as the expert reports presented new but related adjustments and contentions up to and through the submission of their Declarations.
Plaintiffs' expert, Dr. H.E. Frech, III, first proposed two approaches to calculate damages for the class by common evidence and common formula. First, Dr. Frech pointed to internal Prudential documents which note the presence of comparable plans offered by competitors such as Blue Cross/Blue Shield, Occidental, Mutual of Omaha, Metropolitan, Golden Rule, Washington National, Great Republic, United Fire, and Associated Life plans. (Frech Initial Report, 36-37.) Thus, Dr. Frech proposed that damages to the class can be defined as the difference between the excess amount of CHIP premiums paid by policyholders and the amount which policyholders would have paid had they switched into the alternative, similar plan. However, Dr. Frech did not expand on this theory by, for example, illustrating a reliable common method to overcome individual policyholder characteristics such as age, gender, geography, availability, and risk factor. Indeed, little of his initial report is dedicated to this proposal, which is largely abandoned in his rebuttal report and Declaration.
The second approach proposed, which reflects the majority of Dr. Frech's efforts, is the use of a "yardstick" method to calculate excess premiums paid. The yardstick method is generally employed to calculate damages as the difference between the price actually paid for a product subject to an alleged improper conduct, and the price for similar products in the absence of (or "but for") the improper conduct.
Rather than identify similar items on the market to establish the but-for premium, Dr. Frech attempts to construct the but-for premium using personal health care expenditure per capita, with a deductible leveraging adjustment, as a proxy. His but-for premium is intended to reflect what policyholders would have likely experienced if they had switched out of CHIP and into an alternative health insurance plan prior to block closure.
Dr. Frech argues that this but-for premium index is a reasonable calculation because the national growth rate of the personal health care expenditures per capita, with an adjustment for deductible leveraging, correlates with the national growth rate in average premiums for individual insurance reported in third-party market surveys. (
Dr. Frech maintains:
Then, Dr. Frech identifies the actual CHIP premium paid which was influenced by the alleged improper conduct. The index with which Dr. Frech proposes to assess actual CHIP premiums over time is based on percent changes reported in Prudential actuarial memoranda from 1973 to 1989, and rate tables which he constructs from year 1989 to account for capping. The rate tables are based on information of rates submitted to each state and an assessment of Prudential's capping methodology. The actual premiums are assessed separately for each state relevant in this litigation, since percentage premium rate changes and capping rules did at times vary by state but were predominantly common within a given state. (
Thus, Dr. Frech submits Figure 7 as the index of actual CHIP premiums for California during the class period based on Prudential's reported average premium increases and incorporating the effects of capping. The graph shows steady increases through the eighties, a plateau through the nineties on account of the capping, and drastic increases after 2001 when the cap was lifted:
(Frech's Initial Report, 45.)
Next, Dr. Frech offers Figure 9 to illustrate how the difference between the actual premium index and the but-for premium index in California can calculate the percent excess premium assigned:
(
According to the figure above, in 1990, 70 percent of the actual CHIP premiums were in excess of alternative but-for premiums. (
Thus, Dr. Frech proposes that the total dollar amount of excess premiums paid by the class can be calculated by multiplying the excess premium percentage by the total actual CHIP premiums paid by the class in each state (i) for each year (t):
Dollar Excess Premiumit = Percent Excess Premiumit X Total Dollar Premiumit The present value of the excess dollar premiums paid by the class can then be calculated using an appropriate prejudgment interest rate.
Using this methodology, Dr. Frech preliminarily calculates the total damages to the class, with adjustment for deductible leveraging and a 7 percent simple interest rate for prejudgment interest for each state as $198,694,328. (
Dr. Strombom, Mr. Wildsmith, and Professor Buchmueller are Prudential's experts. Dr. Strombom argues that in order to calculate the extent of economic damages sustained by each number of the class, a determination must first be made whether the individual class member would have altered his or her choice of health coverage plan upon proper disclosure of the block closure and its consequences. Dr. Strombom submits that Plaintiffs wrongly assume that class members would have uniformly and immediately switched from CHIP to alternate health insurance coverage if proper disclosure was made. For example, Dr. Strombom notes that CHIP policyholders interested in short-term coverage, and those who developed a pre-existing condition prior to the block-closure, would not likely be affected by news of future premium changes. Thus, Dr. Strombom maintains that an individual inquiry would be necessary for a determination of switching behavior, but speculates that "it is reasonable to assume that the thousands of policyholders who abandoned CHIP shortly after block closure are unlikely to have behaved differently regardless of whether they had received different or additional information from Prudential[ ]." (Strombom Initial Report, 20.)
After determining the potential impact of new information on class member conduct, Dr. Strombom observes that an individual analysis of the alternate options available to each policy holder is necessary. "As a general matter, the options available to an individual CHIP policyholder are likely to have depended on his or her employment status, health status, associations, geography, willingness and ability to research options and other factors." (
Last, Dr. Strombom submits that the final stage of the inquiry is a comparison of total costs between the CHIP policy and the alternate option if chosen, such as deductibles and out-ofpocket expenses. He explains that the magnitude of these differences depends on the actual health experience of individual policyholders, and essentially that some policyholders were better off under CHIP because of its robust coverage, which would have otherwise resulted in significant financial loss under other plans. This identification of individual policyholders who were better off under CHIP based on the total cost and expenses covered, is therefore argued to be again a matter requiring individual inquiry.
Mr. Wildsmith's findings largely corroborate Dr. Strombom's arguments as to the individual inquiry necessary to gauge causation and damages. Mr. Wildsmith adds that there is a lack of commonality as to the premiums which CHIP policyholders paid to Prudential, as premiums varied based on age, gender, geographic location, the premium rate increases approved in their resident state, and the operation of the premium caps implemented. Additionally, the premiums paid by any given policyholder also varied over time based on changes in residency, deductibles, and the addition or removal of dependants. (Wildsmith Initial Report, 24.)
Mr. Wildsmith submits that even if the CHIP block remained open, reduction of enrollment and sales would have been likely, due to the "significant shift" in the 1980s and 1990s "towards managed care products based on networks of providers with negotiated payment rates, and away from traditional `indemnity' products such as CHIP." (
Of particular note to the question of whether a common formula to encompass class damages may be achieved, Mr. Wildsmith challenges Dr. Frech's underlying assumption as unfounded: that benefit payments under individual health insurance policies track changes in total per capita personal health expenditures.
As to the first assumption, Mr. Wildsmith raises the invalidity of the rise of total personal health expenditures per capita as a proxy for expenses covered by insurance, because the former is based on a materially different set of goods and services. First, it includes costs for dental, vision, nursing home services, and over-the-counter pharmaceuticals. Second, it is based on the entire U.S. population rather than just those covered by individual health insurance. Therefore, it is affected by unrelated factors such as the uninsured rate, the average age of the national population, and fees paid to health care providers by Medicare, Medicaid, and the Veteran's Administration. For example, of the total national personal health care expenditures for 2009, only approximately one-third were funded through private health insurance, while the remaining two-thirds was attributable to other sources of funding which, in many cases, provide services to very different populations such as Medicaid beneficiaries, Veterans Administration patients and the uninsured. (
Mr. Wildsmith further challenges the use of the proxy by applying Dr. Frech's own data to illustrate the percentage to which it diverges from CHIP premiums even before the block was closed:
Thus, using Dr. Frech's own data, by 1976, the index for California CHIP premiums was 10 percent higher than the index for personal health expenditures, and by 1981, the divergence exceeded over 50 percent higher. (
To further disprove applicability of the proxy, Mr. Wildsmith points to the nonmonolitic nature of average premiums in the individual health insurance market. For example, one of Dr. Frech's sources estimates that the average single premium for 2002 ranges from $1,871 to $2,568. (Wildsmith Rebuttal Report, 4.)
Mr. Wildsmith questions of Dr. Frech's second assumption that the cost of alternative coverage and the pre-closure or open-block cost of CHIP coverage are substantially identical.
Additionally, Mr. Wildsmith undermines Dr. Frech's demonstration of reasonableness of the but-for index when applied to the named Plaintiffs.
Relatedly, Mr. Wildsmith contends that this type of assessment must be conducted on an individual level for various adjustments over time in addition to age, such as changing health status and differences in deductible leveraging over time between different deductible levels. For example, the increase for Mr. Gold due to aging over the same time period would have been approximately 196 percent. (Id. at 15.) Similarly, the cumulative effect of the deductible leveraging adjustments for California range from 10 percent for a $100 deductible to 88 percent for a $5,000 deductible. (
Based on documents produced by Prudential, Mr. Wildsmith also submits the following chart to illustrate the decreasing enrollment, sales, and ongoing lapse rate of the CHIP policy since its introduction on the market:
(Wildsmith Rebuttal Report, 29.) Due to these calculations, Mr. Wildsmith submits that "[c]losure of the CHIP block did not accelerate the departure of healthy policyholders from the block. The lapse rate for 1982 was almost identical to that for 1981 (43.2 percent versus 43.1 percent) and the lapse rate declined steadily in subsequent years." (
In a concession to criticism of his approach by Prudential's experts, at the last hour Dr. Frech submitted in his Declaration three proposed adjustments to his formula.
First, Dr. Frech attempts to adjust for the industry shift from indemnity to managed health care plans by looking to the dwindling percentage of employees covered under indemnity health plans in medium and large firms, and estimating the reduction in health care spending associated with the shift. Relying on an estimate produced in a 1996 report by the Office of the Chief Economist for the U.S. Department of Labor, Dr. Frech assumes that managed care is 20% less expensive than the indemnity plan over time. Thus, an adjusted formula for implied indemnitybased expenditure for each state (s) and each year (t) is proposed: Implied Indemnity Expenditurest = (Original Expenditurest) / (Percent Indemnityt) + 0.8(1 — Percent Indemnity)
In response to Mr. Wildsmith's criticism that the but-for index does not account for the increase in the percent of the uninsured population, Dr. Frech argues that the impact on growth in health expenditures per capita from a change in the percent uninsured is negligible. Like the first adjustment, Dr. Frech proposes a formula which incorporates the rising percentage of the nation's uninsured population and the relative percentage cost of 38% which uninsured individuals spend on health insurance as compared to insured individuals:
Dr. Frech shows that incorporating these conservative adjustments for the shift to managed care and the increase in the percent uninsured result in only minor changes to his preliminary estimates of aggregated damages to the class. (
Third, Dr. Frech responds to Mr. Wildsmith's criticism of the use of the personal health care expenditures per capita proxy in creating a but-for premium index because the expenditure accounts for materially different set of goods and services. By way of reminder, Mr. Wildsmith contested that the proxy is inappropriate because it "includes types of services typically excluded by individual health insurance, such as dental, vision and nursing home services and the cost of over-the-counter pharmaceuticals," and thus that the expenditures cover services provided to "very different populations such as Medicaid beneficiaries, Veterans Administration patients and the uninsured." (Wildsmith Rebuttal Report, 2-3;
Last, Dr. Frech notes that the approach and methodology which he proposes has also been used in a peer-reviewed academic study co-authored by one of the leading health care economists, Professor Joseph Newhouse. To measure premium growths for indemnity plans, the authors used personal health care expenditures per capita as a but-for index.
Dr. Strombom and Mr. Wildsmith critique the proposed adjustments as unsound. Dr. Strombom underscores two fundamental flaws in Dr. Frech's proposal: 1) his failure to identify a specific similar policy to establish an "actual, not made up" yardstick; and 2) the false assumption that "the individual circumstances and knowledge of each policyholder can be ignored in determining the existence and extent of damages." (Strombom Decl., 3.)
Turning to Dr. Frech's proposed modification to account for the shift in the industry, Dr. Strombom points out that Dr. Frech provides "no evidence that the share of employees at medium and large employers enrolled in indemnity plans is representative of the share of expenditures under indemnity plans in his index." (
Similarly, Mr. Wildsmith believes that that Dr. Frech has still failed to identify the alternative coverage to which his proposed index would apply: "The alternatives available to the proposed class members would vary from person to person. Those purchasing individual coverage would be re-underwritten and many, due to changes in health status since they purchased their CHIP policies, would face higher premiums or be denied coverage. Thus, even if his proposed index were technically sound, he has not indentified [sic] an appropriate base to which it may be applied to estimate the cost of alternative coverage." (Wildsmith Decl., 1.)
Additionally, Mr. Wildsmith maintains that the per capita national health expenditure proxy is not a valid basis for constructing the index. Specifically, Mr. Wildsmith contends that it is "implausible" for Dr. Frech to suggest that there is no material difference in spending patterns between different health insurance programs and populations and thereby rely on national average data. Mr. Wildsmith provides the Economic Healthcare Indices recently introduced by Standard and Poor's as an example of a more sophisticated analysis with distinguishing factors. In contrast, "Dr. Frech is led to conclude that the pattern of cost increases for individual plans, employer-sponsored plans, and government-sponsored programs such as Medicare and Medicaid are materially the same — despite the significant differences in the programs and covered populations." (
Last, Mr. Wildsmith asserts that Dr. Frech's proposed remedies are oversimplified and inadequate. In addition to the issue Dr. Strombom raises above, regarding the lack of reliability of the twenty percent figure to demonstrate the difference in costs between plans, Mr. Wildsmith takes issue with Dr. Frech's calculation to reflect the impact of changes in the uninsured rate on national healthcare spending: "Both the uninsured rates and the estimates of the impact of coverage on health spending are for the non-elderly population, but Dr. Frech applies them to spending data that includes both the elderly and non-elderly. The uninsured rates are national rates, but Dr. Frech applies them to state-specific spending data — even though uninsured rates vary significantly between states. Once again, Dr. Frech has offered an ad hoc fix rather than a serious analysis of the impact of coverage levels on the cost of health care in the states covered by this litigation." (
Mr. Wildsmith maintains that "[t]he use of inappropriate data cannot be corrected through simple, ad hoc fixes." (Id.) Were a rescue of his proposed index possible, "it would require removing all of the many extraneous and confounding factors that lie between the claims paid by health insurers for policyholders enrolled in unmanaged indemnity plans (which ultimately drives the price of such policies), and aggregate national spending on personal health care. Whatever such an analysis might ultimately look like (assuming it is even possible, which has not been shown), it would of necessity be developed using fundamentally different data and methods than Dr. Frech has proposed." (Wildsmith Decl., 6-7.)
Plaintiffs filed an additional brief objecting to evidence proffered by Prudential in opposition to the motion for class certification. In turn, Prudential filed a response brief with a supplemental declaration and additional exhibits attached thereto. Although, as Plaintiffs concede, the majority of Plaintiffs' objections to evidence are inapposite to the class certification determinations presently before the Court because they relate to the merits, the Court will address each objection below. The objections are grouped by category or type.
Plaintiffs challenge Mr. Salinas's Declaration in its entirety pursuant to Fed. R. Ev. 602, for lack of personal knowledge of the attested matters. Plaintiffs contest Mr. Salinas's knowledge of the nature and frequency of oral communications between CHIP policyholders and Prudential agents, as evidenced in admissions arising in his deposition. (Supp. Thomas Decl. Ex. 2). Plaintiffs contend that Mr. Salinas only sold life insurance (not health insurance) as a Prudential agent for only seven months before CHIP was introduced on the market, and that the focus of his conversations with agents thereafter was only on life insurance and potential other lines of business. Mr. Salinas worked at Prudential in a variety of positions from 1969 to retirement in 2005, ranging from planning and research analysis of policies, operations management, and agency compliance. He engaged in conversations with agents, mostly related to life insurance due to the nature of the industry at the time. However, Mr. Salinas also had personal knowledge that agents would be contacted with respect to older policies, and be responsible for communicating policies relating to them. Mr. Salinas directly answered that he does not "have any reason to assume that an agent would treat health insurance any differently from life insurance or property and casualty in his discussion with clients[.]" (Salinas Dep. 105:6-14.) The Court finds that Mr. Salinas is qualified to speak to the general frequency and nature of oral communications between agents and CHIP policyholders, which are the pertinent statements which Plaintiffs object to in Prudential's opposition brief. As Prudential notes, Plaintiffs "do not seriously dispute that agents communicated with policyholders about CHIP after 1981, including about CHIP rate increases. Indeed, documents that plaintiffs affirmatively submitted and documents to which they do not object confirm that fact." (Prudential's Resp. to Obj. of Evid. Br. at 5, footnote with referencing documents omitted).
Plaintiffs seek to exclude opinion evidence of Mr. Wildsmith regarding whether Prudential's loss ratio reflects the massive subsidies of the CHIP policy during the block closure. Plaintiffs argue that the evidence is irrelevant to the determination of class certification. Relatedly, Plaintiffs' contest the admissibility of Mr. Wildsmith's criticism of Dr. Frech's finding of the relatively small pool of class members who may have developed a preexisting condition during block closure, who therefore had difficulty procuring alternate health insurance, and its effect upon Prudential's losses from paying the medical claims of those who developed preexisting conditions. Plaintiffs essentially challenge the admissibility of any evidence of Prudential's loss ratio and related subsidy as irrelevant to the determination of class certification. The Court finds that the matter regarding the loss ratio and subsidies is indeed irrelevant to any basis to the opposition to the certification of the class; such evidence will therefore not be considered in the class action discussion below.
Plaintiffs concede that the seven pertinent statements in Prudential's Opposition brief to which they object are based on impermissible hearsay evidence, but do not undermine the certifiability of the class and subclasses. Indeed, the contested statements go to the merits. Nonetheless, Plaintiffs argue that they should be excluded from the record and the Court's consideration. In general, the seven statements go to whether:
Plaintiffs object to Prudential's introduction of several excerpts of deposition testimony and one declaration from civil actions twenty years prior, and two internal Prudential memoranda. With respect to the Deposition of Julius Vogel and Alan Ferguson in another civil action arising in the District Court for the Central District of California, the Court finds that the deposition evidence is admissible because plaintiff therein was a successor in interest and the testimony involves the same subject matter pursuant to Fed. R. Civ. P. 32(a)(8). Indeed, that case related to whether Prudential breached its duty when it misrepresented to the plaintiff its decision to stop selling CHIP despite skyrocketing insurance premiums. (Chud Suppl. Decl., Ex. 2.) Similarly, the deposition testimony in the civil action is admissible pursuant to Fed. R. Ev. 804(b)(1), because the "predecessor in interest [ ] had an opportunity and similar motive to develop it by direct, cross-, or redirect examination."
Last, the two internal memoranda which Plaintiffs take issue with are admissible hearsay. The Bonnie Snider memorandum fits under the business record exception, Fed. R. Evid. 803(6), and under the rule of completeness to the extent that they relate to CHIP's business plan which Plaintiffs cite to in the record (
After a full review of the seven objected statements, the Court finds all seven objections based on hearsay are denied.
This litigious proceeding is replete with thousands of pages of briefs, sur-replies, and testimony. Plaintiffs now surprisingly contest that certain sections of Declarations made by Prudential's experts Mr. Wildsmith and Dr. Strombom exceed rebuttal of Dr. Frech's opinion. In turn, Prudential persuasively notes Dr. Frech's inclusion in his Declaration of new attempts to make "adjustments in the potential damages methodology proposed to account for concerns" raised by Prudential's experts. (Frech Decl., 2.) Further, Prudential argues that if Dr. Frech had wanted to rebut critiques of his opinions that Prudential's experts made in their reports and deposition testimony, then he could have done so properly within thirty days pursuant to Fed. R. Ev. 26(a)(2)(D)(ii). Indeed, the portions in the Strombom and Wildsmith Declarations which Plaintiffs contest go to why Dr. Frech's Declaration, with its new adjustments, did not fix the problems that he set out to fix. Thus, the Court finds that the opinions are proper rebuttal evidence, and the objections are denied.
Plaintiffs argue that Prudential's experts rendered "impermissible legal argument" about "the requirements for proof of damages" by criticizing Dr. Frech's failure to identify or refer to any actual comparator products in support of his yardstick approach to damages. However Dr. Frech himself purports that his damages theory is based upon the existence of "alternative, similar plans" into which policyholders might have switched. (Frech Initial Report, 38.) Dr. Strombom's and Mr. Wildsmith's criticism goes to the methodology employed to calculate damages in their expert capacities. Thus, the opinions are admissible for such purposes.
First, Plaintiffs seek to exclude expert testimony by Wayne Clarke and Allen Haight, and related assertions in Prudential's opposition papers that CHIP's benefits were "unique" and with "no competition." Plaintiffs argue that neither expert witness has any basis for testifying to the matter, and therefore lack personal knowledge pursuant to Fed. R. Evid. 602.
Moreover, Mr. Haight clearly testified that he believed that CHIP was "unique" due to the general sentiment at the company. (Thomas Supp. Decl., Ex. 4, Haight Dep. at 80:4-24) ("I believed that, I guess, because everybody in my company said we're the only ones doing this.") In response to whether he ever studied what policies competitors offered in the individual health market, Mr. Haight admits, "I'm sure I did, but I don't recall it. But I'm — probably.") (Chud Decl., Ex. 95, Haight Dep. at 80:4-7.) Accordingly, the objection as to Mr. Haight and Mr. Clarke's testimonies goes to weight rather than admissibility.
Second, Plaintiffs seek to exclude Prudential's assertion and supporting testimony by Dr. Strombom and Mr. Wildsmith, that at the time of the block closure in December 1981, "the CHIP block included many policyholders whose health status would have made it difficult or impossible for them to secure alternate health insurance coverage, as other insurers would not have subsidized their medical claims like Prudential did." (MCC Opp. Br. at 7 & n. 19.) Plaintiffs seek to exclude the testimony and argument to the extent that the matters are inadmissible pursuant to Rule 602, and fail to comply with the foundational requirements of Rule 701as to lay opinion and Rule 702 as to expert opinion.
(Dr. Frech Initial Report, 38.)
Third, Plaintiffs contest Mr. Clarke's testimony that in 1981, agents were Prudential's "primary contact with [its] policyholders," should be excluded because Mr. Clarke did not begin his employment with Prudential until 1989 and therefore lacks personal knowledge of communications between CHIP policyholders and agents during the relevant time period and matters supporting the notion that agents were the "primary contact" with policyholders. Again, as Prudential's Rule 30(b)(6) corporate witness, Mr. Clarke is not required to have personal knowledge. Moreover, as Prudential notes, there is ample documentary evidence to confirm that agents played a role in communicating with policyholders. Indeed, the two and three-reason letters explicitly invite policyholders to call agents with questions.
Fourth, Plaintiffs contest any assertion that "the block closure had not caused CHIP premiums to rise" (MCC OB at 8 & n.24, emphasis in original) to the extent that it is supported by Mr. Clarke's deposition testimony. (Chud Decl. Ex. 96, Clarke Dep. at 73:12-75:19) ("Prudential does not believe today, nor did it believe at the time, that there was a direct impact of the block closure on premiums."). Plaintiffs argue that because Mr. Clarke was not at the company at the time of the block closure, he lacks personal knowledge of the impacts. Once again, as Prudential's Rule 30(b)(6) corporate witness, Mr. Clarke is not required to have personal knowledge. Nor do Plaintiffs dispute that he was sufficiently educated on the issue as is required by Rule 30(b)(6), particularly given that it was based on his review of "information known or reasonably available to the organization," including deposition testimony by Prudential executives in the 1980s in which they stated the same.
Fifth, Plaintiffs contest the assertion that some policyholders would have understood the three-reason letter, and particularly the reason related to high claim cost — that premiums are rising more rapidly than the general medical care charges, to "convey that CHIP premiums were increasing due to adverse forces specific to CHIP, as opposed to reasons that would also affect other insurers' premiums." (MCC OB at 12-13 & n.35.) Specifically, Plaintiffs seek to exclude supporting testimony by Dr. Strombom. (Chud Decl. Ex. 87, Strombom Dep. at 223:3-14) ("That to my mind says — you know, captures the essence of the — what we think of as adverse selection or a spiral in claims cost"). Plaintiffs note that Dr. Strombom immediately responded in context that the three-reason letter did not disclose the risk of lock-in (
Thus, Plaintiffs seek to exclude the testimony to the extent that Dr. Strombom is attempting to offer an opinion as to whether the three-reason letter would be perceived by some consumers as disclosing the "essence" of adverse selection or some form of a spiral, because he lacks foundation to provide that opinion. Of note, Dr. Frech's deposition largely supports Dr. Strombom's statement. (Chud Decl. Ex. 88, Frech. Dep. at 174:14 - 175:14) (depending on "level of sophistication," a policyholder could infer from the high claim cost clause in the threereason letter that "CHIP premiums were going up for reasons that are not shared by those other policies"). Pursuant to Rule 702, Dr. Strombom is testifying in the form of his opinion as to his expert knowledge, including his extensive experience studying consumer behavior concerning health insurance. (
Last, Plaintiffs seek to exclude deposition testimony by Frank Rubino (Chud Decl. Ex. 98, Rubino Dep. at 203:25-204:9) to support the assertion that "a lot of agents had close relationships with these policyholders." (MCC OB at 15 & n. 45.) Plaintiffs argue that there is no evidence that Mr. Rubino, a former Prudential actuary, had any personal knowledge of any "close relationships" between agents and policyholders, or the quantity of agents with such relationships. Mr. Rubino's testimony was in response to questioning as to the principles or guidance which he used in making recommendations for premium rates between 1979 and 1993. While Mr. Rubino was asked follow-up questions on this issue, he was not specifically probed on his knowledge of close relationships between agents and policyholders. Moreover, Mr. Rubino is not required to have personal knowledge on this subject, because he is testifying as a corporate representative witness. Therefore, the testimony is admissible.
Having fully briefed the relevant factual background, the Court now turns to the merits of the motions. Part II addresses the motion for class certification. Part III addresses the motion for summary judgment based on the statute of limitations.
Perhaps Plaintiffs anticipated the hopeless intermingling of the original categorization of the classes proposed by presenting a new proposal for class structure. Nevertheless, the Court will set forth the original proposed class structure for completeness.
Plaintiffs initially proposed one Multi-State Fraud Class ("MSF Class") and five overlapping subclasses of the MSF Class, on behalf of roughly 17,000 current and former CHIP policyholders from four states, California, Indiana, Ohio, and Texas, who paid one or more CHIP major medical premiums based on a rate increase effective on or after March 1, 1982.
Plaintiffs proposed that the MSF Class be defined as:
All members of the MSF Class asserted claims for fraudulent concealment, which were not limited to situations of active concealment of a material fact, but encompassed any failure to disclose material facts when there is a duty to speak. (
Apart from fraudulent concealment, Plaintiffs asserted additional claims on behalf of five overlapping subclasses of the MSF Class: (1) the "California Subclass"; (2) the "Post-1984 Subclass"; (3) the "Post-1989 Subclass"; (4) the "Constructive Fraud-Omissions Subclass"; and (5) the "Constructive Fraud — Misrepresentations Subclass." (
Plaintiffs submitted that these five subclasses fell into three groups, outlined below, based on the additional claims asserted (
On behalf of the California Subclass, Plaintiffs additionally asserted a claim under California law for breach of the implied covenant of good faith and fair dealing and claims for violation of all three prongs of the UCL — fraudulent, unfair, and unlawful.
The members of the Post-1984 Subclass received the fraudulent "three reason" notice of rerate form letters from Prudential and asserted claims based on them.
The members of the Post-1989 Subclass received the fraudulent "two reason" notice of rerate form letters from Prudential and asserted claims based thereon.
These two subclasses were, together, sometimes referred to by Plaintiffs as the "Fraudulent Misrepresentation Subclasses." Moreover, all members of the Post-1989 Subclass were also members of the Post-1984 Subclass except the small number of class members whose policies were issued on or after August 1, 1990.
This subclass additionally asserts claims for constructive fraud based on omissions.
This subclass additionally asserted claims for constructive fraud based on misrepresentations. These two subclasses were, together, referred to by Plaintiffs as the "Constructive Fraud Subclasses." Moreover, all members of the "Constructive Fraud — Misrepresentations Subclass" were also members of the "Constructive Fraud — Omissions Subclass."
Plaintiffs submitted a chart designed to overcome this confusion, but which in fact serves to illustrate how confusing the original categorization was:
(MCC Br., App. A: Subclass Membership.)
Pursuant to leave of Court, Plaintiffs submit a revised proposal to create just two subclasses: (1) the "California Subclass"; and (2) a new "Misrepresentations Subclass." (Revised Proposal for Subclasses Br. at 3) (ECF 209.) Plaintiffs propose that this new "Misrepresentations Subclass" would consolidate the previously submitted "Post-1984 Subclass," "Post-1989 Subclass," and the "Constructive Fraud-Misrepresentations Subclass." Further, Plaintiffs propose to eliminate the "Constructive Fraud — Omissions Subclass" as a separate subclass, because all class members have a fraudulent concealment claim based on omissions, and all class members except Texas class members also have a constructive fraud claim based on omissions.
Thus, Plaintiffs revised proposal to define the class, subclasses, and underlying claims is as follows:
All MSF class members maintain a fraudulent concealment claim (based on omissions), and all MSF class members, except for Texas class members, also have a constructive fraud claim based on omissions.
The California Subclass now includes fraudulent concealment and constructive fraud claims, in addition to a UCL claims and an implied covenant claim.
The Misrepresentations Subclass now includes claims applicable to all members for common law fraudulent misrepresentation based on either or both of the two or three-reason form letters. Additionally, the California or Indiana members of this subclass also have a constructive fraud claim based on misrepresentations. Plaintiffs submit that the elements of these two claims are overlapping, and the fact that Ohio and Texas do not recognize constructive fraud claims on misrepresentations may be reflected in the jury instructions.
Prudential opposes the new proposal, arguing that there is no conceivable range of subclasses, or jury charge/verdict form equivalents, that would both accommodate the many material differences in proof evident among the 17,000 putative class members, and honor Prudential's and absent class members' due process right to a fair trial on all disputed issues. Prudential argues that the new proposal does nothing to cure the differences in substantive law, individualized factual determinations, and significant differences among the class members and representatives which render this action inappropriate for class treatment.
"District courts have discretion under Rule 23 to certify a class."
A class action is
The district court must conduct a "rigorous analysis" of the evidence and arguments in making a class certification decision.
Thus, "Rule 23 makes clear that a district court has limited authority to examine the merits when conducting the certification inquiry."
"Factual determinations necessary to make Rule 23 findings must be made by a preponderance of the evidence. In other words, to certify a class the district court must find that the evidence more likely than not establishes each fact necessary to meet the requirements of Rule 23."
Rule 23(a) states four threshold requirements applicable to all class actions: (1) numerosity (the "class is so numerous that joinder of all members is impracticable"); (2) commonality ("there are questions of law or fact common to the class"); (3) typicality ("the claims or defenses of the representative parties are typical of the claims or defenses of the class"); and (4) adequacy of representation ("the representative parties will fairly and adequately protect the interests of the class"). These four requirements are "meant to assure both that class action treatment is necessary and efficient and that it is fair to the absentees under the particular circumstances."
The Supreme Court recently instructed that "[w]hat matters to class certification . . . is not the raising of common `questions' — even in droves — but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. Dissimilarities with the proposed class are what have the potential to impede the generation of common answers."
In addition, parties seeking class certification must show that the action is of a type prescribed by Rule 23(b). Here, Plaintiffs submit that Rule 23(b) (3) applies. Rule 23(b)(3) adds two requirements beyond the Rule 23(a) prerequisites: "questions of law or fact common to class members [must] predominate over any questions affecting only individual members" and class resolution must be "superior to other available methods for the fair and efficient adjudication of the controversy." FED. R. CIV. P. 23(b) (3).
The Rule 23(b) (3) further provides a non-exhaustive list of factors pertinent to a court's review of the predominance and superiority criteria:
FED. R. CIV. P. 23(b) (3).
In adding "predominance" and "superiority" to the qualification for certification list, the Advisory Committee sought to cover cases "in which a class action would achieve economies of time, effort, and expense, and promote . . . uniformity of decision as to persons similarly situated, without sacrificing procedural fairness or bringing about other undesirable results."
Where, as here, "an action is to proceed under Rule 23(b) (3), the commonality requirement [of Rule 23(a)] is subsumed by [Rule 23(b) (3)'s] predominance requirement."
Finally, both size of class and complexity of litigation should be limited to encourage manageability of class suits. Rule 23(c)(4) permits division of any action into subclasses so as to increase manageability. Rule 23(c)(4) provides that, if "a class [is] divided into subclasses[,] . . . each subclass [is] treated as a class." Therefore, subclasses must meet the requirements of Fed. R. Civ. P. 23. Rule 23(c)(4) provides the court with power to limit a class to particular issues. "Judicial economy considerations are central to the predominance test of Rule 23(b)(3) and the court's power to limit a class to selected issues under Rule 23(c)(4)." Newburg on Class Actions (West Group 4ed.) Vol. 2, at 168.
The proposed class and subclasses consist of thousands of policyholders and clearly meet the numerosity requirement of Rule 23(a)(1). However, the typicality and adequacy of representation requirements are not as clearly met pursuant to Rule 23(a)(3) and (a)(4). The allegations of this case turn on misrepresentations or omissions that the block was closed and related consequences, stemming from the welcome letter and the two and three-reason letters. The proposed class is on behalf of policyholders who maintained CHIP after the block was closed in 1981, and therefore were subject to the first premium increase that went into effect on March 1, 1982. However, the claims or defenses of the representative parties are not typical of those of the class, and it is therefore questionable that they would be able to fairly and adequately protect the interests thereof. None of the six proposed class representatives are in the approximately 85% and 94% of the proposed class who dropped the policy prior to distribution of the three and two-reason letters in 1985 and 1989 respectively. Indeed, all six experienced the the limited rate caps throughout the nineties, and are in the 1% of the proposed class members who maintained the policy until 2001 when the premium cap was lifted and premiums skyrocketed.
With respect to the commonality/predominance inquiry, Plaintiffs repeatedly rely on one of the unquestionable common nuclei of facts — that none of the form letters included an announcement or explanation related to the block closure and its consequences. However, the existence of that commonality does not ipso facto call for class certification.
Prudential argues that the Court should rely on the differences in state law to deny the motion for lack of commonality and predominance because class trial would be unmanageable. (MCC OB at 27-29.) Though the precise contours of common-law omissions and representations fraud claims vary from state to state, the cause of action generally requires: (1) omissions or misrepresentations of fact; (2) in the case of omissions, a duty to disclose; (3) intent to mislead; (4) materiality; (5) justifiable reliance; and (6) damages proximately caused by that reliance.
However, Prudential points to the scienter requirement in Texas, which does not exist in other states here, where Prudential would have had to have known that Texan policyholders did not possess and could not reasonably discover the omitted information.
Plaintiffs are unmoved by these differences, and argue that courts routinely certify classes involving application of the laws of just a handful of states. Indeed, the Third Circuit Court of Appeals provides ample instruction on this matter in
The heart of this case turns on the commonality among factual and legal issues pertinent to the alleged fraud. Namely, issues related to the uniformity of the omissions or representations of fact, materiality, justifiable reliance, and damages proximately caused by that reliance. "Commonality requires the plaintiff to demonstrate that the class members `have suffered the same injury'. . . . [The] claims must depend upon a common contention . . . That common contention, moreover, must be of such a nature that it is capable of classwide resolution — which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke."
Plaintiffs argue that an "objective" or "reasonable man" standard should apply here in one broad stroke as to the issue of materiality of the misrepresentation or omission, and that "[i]n light of this objective standard, courts routinely certify class actions asserting common law fraud or fraud-related claims on the premise that the trier of fact can conclude on a classwide basis that the pertinent facts omitted or misrepresented were material." (MCC Br. at 31-32.) Plaintiffs rely on various case holdings in support of this proposition. However, alleged misrepresentations such as that "YoPlus" promotes a better digestive health benefit than ordinary yogurt (
The Advisory Committee Notes further informs the Court:
FED. R. CIV. P. 23 advisory committee's note (emphasis added) (citing
The evidentiary record here makes clear that a substantial portion of the proposed class of 17,000 CHIP policyholders over a thirty year period would not find the pertinent information material, and that resolution of the materiality inquiry requires individualized consideration. First, the proposed class does not differentiate the substantial number of policyholders who dropped CHIP for reasons independent of the block closure and before the staggering premium increases took root. For example, even in the first two years of CHIP's introduction on the market in 1975 and 1976, 55.4% and 53.3% of policyholders dropped the policy. Similarly, an almost identical proportion of CHIP policyholders dropped out the year of the block closure and the first year that premium increases went into effect: 43.1% in 1981, and 43.2% in 1982.
Possible explanations for the drop-out are varied. For example, some policyholders were only interested in short-term coverage until they either gained employment and eligibility for employer-provided insurance. Another explanation for switching behavior is policyholder's aging into CHIP's separate and attractive limited medical program, which currently includes 70% of CHIP policyholders and held nearly two-thirds of policyholders when the block was closed. Similarly, perhaps some aged into Medicare and did not wish to convert into CHIP's supplemental limited medical policy. Although these limited medical care policyholders are not formulated as a part of the class here, the switching behavior of major medical policyholders into limited or other outside care is relevant because it goes to the intention to stay with CHIP for a long period of time and thus the materiality of the disclosure or omission. Another explanation for CHIP drop-outs is that policyholders joined the major national shift in the 1980s and 1990s away from indemnity plans like CHIP and towards managed health care plans. These possible explanations corroborate the high lapse rate prior to the block closure and the ongoing lapse rate well into the eighties. What is clear, however, is that uniform treatment of these policyholders as reliant on the omission or misrepresentation is not proper due to such varied and non-delineated factors.
Additionally, the proposed class includes policyholders who developed a pre-existing condition prior to block closure in 1981, and therefore were effectively locked-in to CHIP for reasons independent of the block closure. Dr. Frech concedes this point, submitting that 3.5 to 6.4% of class members "would not have been able to switch out of CHIP." (Frech Dep. at 202:13 - 203:15; Frech Initial Report, 109-113.) This translates to approximately 600 to 1,100 putative class members who cannot be identified without individualized fact finding.
Moreover, although a commonality exists as to the uniform form letters routinely sent out, substantial evidence has been submitted as to the nature and frequency of oral communications with Prudential agents. Indeed, the form letters directly invited policyholders to call agents with any questions. An examination of the oral communications with the proposed class representatives further elucidates the fact-specific individual inquiry that will be necessary to determine presence of the fraud. For example, in 1993, Ms. Clark asked her bookkeeper to call Prudential because the premium price "made no sense to [her] whatsoever." (Clark Dep. at 93:24-95:18, 121:5-21.) Following the phone call, Ms. Clark learned for the first time that the block was closed. (
In sum, issues related to typicality and adequacy of representation aside, although having some common core as to omission or misrepresentation of the block closure and its consequences, the fraud is not suitable for class treatment based on the varying degrees of its materiality and reliance by the proposed class of 17,000 policyholders over a thirty year period, and the lack of commonality with regard to communications with policyholders.
Although the analysis can end here, the Court will address the question whether the proposed approach to assessing damages meets the commonality and predominance requirement. That issue is heavily contested, as is evident by the thousands of pages of expert reports and exhibits. Despite repeated back and forth between the parties' experts, Dr. Frech has still failed to overcome the Plaintiff's burden to establish a common formula or methodology based on a preponderance of the evidence. Although Dr. Frech first cursorily proposes that alternative policies can offer an actual comparative but-for yardstick, he does not explain how these policies can be examined in light of policyholders' individual characteristics such as gender, age, risk level, geography, and deductible rate.
Perhaps in anticipation of his failure to overcome these individualized issues, Dr. Frech attempts to establish a "but-for" yardstick by calculation. However, despite multiple adjustments in response to criticism of his approach, he still has not satisfied the burden. Premiums vary based on a range of individualized factors including age, gender, geographic location, health status, approvals of premium rate increases by resident state, deductible levels, and addition or removal of dependants. Dr. Frech seems to justify his proposal by arguing that these individualized considerations go to the wayside because these they are already weighted and included in his actual premium index and the but-for premium index. (Frech Initial Report, 50.)
However, Mr. Wildsmith clearly demonstrates that once calculations are taken into consideration for just one of Ms. Clark's changing individual characteristics, the purported reasonableness of Dr. Frech's proxy due to a seeming congruence with the compound annual growth rate of personal health expenditure premiums fails. Specifically, once Mr. Wildsmith considers Ms. Clark's changing age, her damages assessment jumps from Dr. Frech's projected implied premium of $9,772 to $17,199.
"Unfair competition" is defined by the UCL to include "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising." Cal. Bus. & Prof. Code § 17200. The UCL's coverage is "sweeping, embracing anything that can properly be called a business practice and that at the same time is forbidden by law."
The Court will examine Prudential's arguments with respect to each of the three types, or prongs of conduct raised here.
Pursuant to a review of cases arising from California which address the matter, the Court previously held that there is ample authority to allow pursuit of the UCL claim for "unlawful" business acts based on the implied covenant of good faith. (MTD Opinion, 9/9/2010, Doc-98.) Under California law, it has long been recognized that "[t]here is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. This principle applies equally to insurance policies, which are a category of contracts."
Plaintiffs allege that Prudential breached the implied covenant of good faith and fair dealing by "failing to disclose the block closure and its significant negative consequences to policyholders." (MCC Br. at 66.) California courts deny certification of implied covenant claims where individualized evidence is needed to prove unfair interference, harm, and restitution.
Additionally, Plaintiffs rely on
The California Courts of Appeal are split as to which test should govern the `unfairness" analysis in a consumer suit, as the Court has previously discussed.
Here, as in the common law fraud analysis, individualized considerations predominate the inquiry as to conduct, harm or injury, and equitable relief.
The fraud prong of the UCL is distinct from common law fraud, which requires allegations of actual falsity and reasonable reliance.
An interesting potential contradistinction appears in California law to establish commonality under the fraudulent business prong of the UCL. Namely, the California Supreme Court instructs that reliance need not be determined by common proof and only the class representative need show it, while the issue of materiality of a representation is subject to common proof.
"[A]s
This analysis corresponds with that reached by the Seventh Circuit Court of Appeals — while the UCL does not require a showing of reliance and a plaintiff must show that the fraudulent conduct was likely to deceive a reasonable consumer, "[t]his standard is subject to common proof if the actionable conduct was both uniform and material. Thus, materiality is a relevant factor in the Court's class certification analysis."
Further, despite Plaintiffs' contentions that the reasoning reached by the Court of Appeal in
Similarly, in
Class certification based on fraudulent practices under the UCL is denied based on the varying communications with policyholders and the individualized determinations necessary to gauge materiality and equitable relief.
In conclusion, Plaintiffs' motion for class certification premised in common law fraud, the California Unfair Competition Law and the implied covenant of good faith and fair dealing, among a large class of 17,000 policyholders across four states spanning a thirty year period, must be denied because individualized inquiry is a superior and more efficient method for handling the mixed communications, particularities as to materiality and reliance on the omission or misrepresentation, and calculation of equitable relief.
The present motion for summary judgment is filed by Prudential against four of the six proposed class members based on the statute of limitations. The claims of Ms. Clark, Ms. Cusanelli, and Mr. Gold arise and are scrutinized under California state law, and those of Ms. Drogell under Ohio law. Although this motion relates to only four of the six originally proposed class representatives, collectively they are referred to as "Plaintiffs" below.
Federal Rule of Civil Procedure 56(c) provides for summary judgment when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law."
The moving party bears the initial burden of demonstrating the absence of a "genuine issue of material fact for trial."
"In considering a motion for summary judgment, a district court may not make credibility determinations or engage in any weighing of the evidence; instead, the non-moving party's evidence `is to be believed and all justifiable inferences are to be drawn in his favor.'"
The main issue is whether the individual plaintiffs were put on inquiry notice such that they incurred a duty to investigate further. Prudential argues that the facts support a finding that the individuals were suspicious of wrongdoing, and as such, were put on inquiry notice which thereby triggered a duty to investigate further. In turn, Plaintiffs argue that the facts do not support a finding that inquiry notice was triggered in the first place. Plaintiffs further contend that even if their suspicions were triggered, they would not have uncovered the material facts to substantiate their fraud claim upon further investigation. The relevant legal analysis is similar under both California and Ohio law.
The Ninth Circuit Court of Appeals recently provided a cogent overview of the California state law, which the Court has additionally reviewed in full. As the circuit court explained:
The Supreme Court of California explained that "[t]he discovery rule only delays accrual until the plaintiff has, or should have, inquiry notice of the cause of action. The discovery rule does not encourage dilatory tactics because plaintiffs are charged with presumptive knowledge of an injury if they have `information of circumstances to put [them] on inquiry' or if they have `the opportunity to obtain knowledge from sources open to [their] investigation.' In other words, plaintiffs are required to conduct a reasonable investigation after becoming aware of an injury, and are charged with knowledge of the information that would have been revealed by such an investigation."
For example, in
Similarly, the Supreme Court of Ohio explained:
Both Ohio and California law recognizes a distinction between discovery of an injury and discovery of wrongful conduct. For example, in
Norgard originally believed his injury was a result of a relatively rare sensitivity to a chemical which he was exposed to at his workplace. However years later, he became aware of the potential wrongdoing by his employer. Specifically, Norgard read an article in a local newspaper about beryllium lawsuits involving his employer and employees in another state. He then learned from an attorney that his employer had known that its air-sampling collections were faulty and inaccurate, that a large number of employees were developing a disease, and that there might have been problems related to respiratory equipment and ventilation that led to unnecessarily elevated beryllium exposures. The Supreme Court of Ohio thus drew the distinction between knowledge of injury and knowledge of wrongdoing, and held that the statute of limitations began to toll upon discovery of the wrongful conduct rather than the injury itself.
The
The distinction between
California law also recognizes this distinction. For example, in
The Court of Appeal found that the statute of limitations was tolled on her fraud-based claim, and explained:
In sum, the analysis under both California and Ohio law turns on a suspicion that something is wrong, based on a layperson's understanding, and a connection of the wrongdoing with the injury, such that further reasonable investigation is necessary, which would in turn uncover the facts constituting the fraud.
Here, Plaintiffs convolutedly argue that they did not have knowledge of their injury because they did not know that the above-market premiums were linked to Prudential's potential wrongdoing. Plaintiffs concede that "[t]he sole pertinent items of factual information possessed by these plaintiffs that Prudential identifies are (1) the amounts of their premium increases and (2) the fact that the CHIP block was closed." (MSJ Opp. Br. at 22, emphasis in original.) However, Plaintiffs argue that "[n]either of these facts, alone or in combination, would cause a reasonable person to investigate whether he was being defrauded." (
However, this is contrary to legal principles surrounding inquiry notice. Specifically, once the Plaintiffs' suspicions are aroused that something is amiss, and suspicion is linked to the injury, it is at that point when the statute of limitations begin to toll. Magic words such as death spiral or lock-in/lock-out need not be uttered here in order to trigger the statute of limitations. If that were the case, the litigants would forever have the right to bring a suit for fraud suit despite their suspicion of wrongdoing related to an injury. Plaintiffs' logic is circular. The suspicion that something is amiss itself suggests a fraud here because they are not being told the whole truth about the escalating premiums. They did not need to know the precise facts to allege the fraud in order to trigger the statute of limitations. "So long as a suspicion exists, it is clear that the plaintiffs must go find the facts; she cannot wait for the facts to find her."
Second, Plaintiffs argue that the limitations period did not run because a reasonably diligent investigation would not have uncovered the facts supporting the cause of actions, because the facts supporting the fraud were inaccessible and in the sole possession of the defendants. (MSJ Opp. Br. at 13-14.) "Without that information, Plaintiffs could not allege a colorable claim against Prudential. Such an inquiry would not have uncovered the death spiral and its consequences." (
Moreover, the experiences of the particular plaintiffs indicate that they had alternate avenues to explore, some of which indeed confirmed the existence of the closed block and its connection with illness and escalating premiums. For example, Ms. Clark contracted her attorney a number of times, who himself understood and stated to Prudential that her rights were being violated under California law. Additionally, Ms. Drogell spoke to an "insurance guy" who told her of the connection between the incurring premium rates and the sick closed block. These alternate avenues are, of course, notwithstanding the individuals' own understanding and conclusions or confirmations as to the connection of their injury and the wrongdoing, which is discussed further below in detail.
It is undisputed that the period for CA plaintiffs' UCL claims is four years (
The only dispute is over the limitations period for California plaintiffs' implied covenant claim. The dispute arises out of an argument of whether the implied covenant for good faith and bad dealing claim arises under a claim for tort, whereby it would be subject to a two year statute of limitations pursuant to Cal. Civ. Proc. 339(1), or whether it is a claim which sounds in contract, whereby it would be subject to a four year statute of limitations pursuant to Cal. Code. Civ. P. 343.
The Court already found, in reliance on Cal. Code Civ. P. 343, the applicable statute of limitations to be four years. (ECF 39 at 34.) Prudential now puts forth, seemingly for the first time, a very cursory argument for the claim to arise under tort. Prudential simply lists one case,
Plaintiffs contend that a tortuous implied covenant claim under California law is limited to instances "when the breach occurs in the context of an insurance company's failure to properly settle a claim against an insured, or to resolve a claim asserted by the insured." (MSJ Opp. Br. at 7, quoting
An examination of the original pleading enlightens this discussion to show that this claim sounds in contract. The 5AC puts forth that "[t]he implied covenant of good faith and fair dealing required Prudential to refrain from any action that had the effect of destroying or injuring the right of its policyholders to receive the full benefit of the CHIP policy." (5AC ¶ 93.) Plaintiffs contend that "[t]he duty of good faith and fair dealing proscribes Prudential from discontinuing the CHIP policy except in the limited circumstances listed in the policy, and requires it to fully disclose material facts concerning the block closure and its implications for policyholders." (
First, Plaintiffs frame the claim as one based on the terms of the policy and it is their right to elect that theory. Second, Plaintiffs' punitive or exemplary damages requests, although found elsewhere in the complaint in support of other claims, are not embodied in the implied covenant claim. Third, more persuasive is that the alleged fraud here arises directly out of a policy between an insurer and insureds. Indeed, the case posited by Prudential explains the significance of these factors and supports the Court's previous finding that the four year statute of limitation applies here.
First,
Cal. App. 4th at 466 & n. 19. Second, "[t]he covenant of good faith is read into contracts in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract's purposes. In short, it is an implied-in-law term of the contract and its breach will necessarily result in a breach of the contract."
The Court is presented with a factual question whether Ms. Clark, Ms. Cusanelli, Mr. Gold, and Ms. Drogell were put on inquiry notice of wrongdoing in connection with their injury outside the statute of limitations prior to the filing of this action on December 17, 2008, which would have triggered a duty to investigate that would have confirmed the alleged fraud, such that summary judgment should be found against them as a matter of law. In order to overcome the limitations hurdle, Plaintiffs allege that they did not have sufficient information at their disposal to trigger an inquiry outside the applicable limitations period. Plaintiffs further argue that because this inquiry notice was not triggered, no duty to investigate flowed. The facts are set forth in full above, supra at 19-34.
The record shows that Ms. Clark repeatedly and unequivocally suspected that Prudential was trying to get rid of her. In the 1980s when her premiums "started becoming quite enormous," Ms. Clark notes that she "didn't know what to think." Plaintiffs argue that Ms. Clark's testimony only reflects a lack of understanding at that time as to why her premium increases were so large. However, closer inspection indicates otherwise. Ms. Clark attests, "I couldn't understand why my rates were becoming so enormous, unless, perhaps, they were trying to get rid of me." Thus, Ms. Clark clearly inferred a connection in the 1980s between her premium increases and some wrongdoing by Prudential. Ms. Clark again confirms the connection between her injury and suspected wrongdoing when she believed in or around 1993 that Prudential was "trying to get me to drop the policy . . . [b]y increasing my rates." Indeed, because the premiums "made no sense" to her "whatsoever[,]" Ms. Clark asked her bookkeeper to look into the issue in 1993. Those inquiries lead Ms. Clark to learn that the CHIP policy did not exist anymore. Additionally, in 1996, she wrote to her attorney that she "expect[ed] a fight" from Prudential regarding an issue related to her living abroad, and reaffirmed that Prudential "no longer [has] this policy and don't want it."
Under California law, the statute of limitations runs from the "date that the complaining party learns, or at least is put on notice, that a representation is false."
Moreover, Ms. Clark clearly suspected that her injury, the shocking premium rates, was caused by wrongdoing by at least 1993, and specifically "that someone has done something wrong to her," thereby triggering notice inquiry and the running of the limitations period.
Ms. Cusanelli uses a number of adjectives to describe the CHIP premiums over time. Indeed, even in 1982 or 1983, she considered them to be "excessive," and in a 2003 call she described them as "nasty." By September 2005, she describes the CHIP premium "intolerable" when it increased to over $1,900. However, these concerns about high premium increases only relates to discovery of her injury, not a suspicion of wrongdoing.
On October 7, 2005, Ms. Cusanelli spoke with a Prudential representative by phone, at which point she was informed that CHIP was a closed block of business, and Ms. Cusanelli responded "Right." Six days later, on October 13, 2005, Ms. Cusanelli called Prudential again, and expressed "[m]aybe they don't have those policies anymore and they'd like to, you know, would love to get rid of it." The Prudential representative again stated that CHIP was a closed block of business. Upon being advised of a potential thirty-five percent premium increase, Ms. Cusanelli responded "I'm sure they will do [it] every year because if they're not . . . writing this policy any more, they would just as soon get rid of all of us, you know, and have us go to something different."
Plaintiffs plead that Ms. Cusanelli's October 2005 calls indicate that she believed the representative's explanations for why changing the deductible on her CHIP policy would result in a higher premium because the 35% cap that Prudential had been applying would then be removed, resulting in a resetting of premiums at an even higher rate. Plaintiffs plead that her last remark reflects "only a surmise that, because it was no longer selling CHIP, Prudential no longer had an incentive to keep premiums low; it does not remotely suggest that she believed that the block closure was causing premiums to increase." (MSJ Opp. Br. at 32.)
In turn, Prudential argues that Ms. Cusanelli confirmed her prior awareness of the fact of the closure when she responded "Right" to being informed by the representative on the October 7, 2005 call that the block was closed. Prudential argues that this defeats the four-year limitations period for her UCL claim because the alleged prior knowledge dooms her attempt to establish reliance for that claim. Prudential's justifications are unpersuasive and beyond speculative, especially when the Court is to draw all justifiable inferences in favor of Ms. Cusanelli.
Prudential also argues that the October 2005 calls show that the company "freely shared the block-closure information, and thus that the information was readily available to her all along. Because Ms. Cusanelli's own words show that she considered her premiums to be `excessive' (or `nasty') for many years in advance of those calls, she has no basis to assert the delayed discovery rule as an excuse for failing to bring suit more than four years prior to December 17, 2008." (MSJ Br. at 26-27.)
The Court is not prepared to extend suspicion of wrongdoing here simply based on Ms. Cusanelli's assertion that the premium was "excessive" in 1982 or 1983. That statement must be taken in context, where her initial premium in 1971 was $52 per month, reached approximately $530 per month in 2000, and over $2,500 in 2007. In 1995, Ms. Cusanelli was diagnosed with invasive malignant melanoma. Additionally, in September of 2002, in her petition for bankruptcy, Ms. Cusanelli did not mention outstanding claims against Prudential related to the facts in this case. In her call to Prudential in 2003 in which she requested information for a possible deductible-adjustment to lower her premiums, she called the premiums "nasty." Prudential seems to argue that the "nasty" premium increases alone should have caused her suspicion to arise and seek the information readily available to her along the way. However, the facts do not indicate a suspicion of wrongdoing. Moreover, Ms. Cusanelli testified that she believed the stated reasons in her 2004 letter that monthly rates were increasing because of age and increased healthcare costs. Indeed, a reasonable trier of fact could justifiably infer that Ms. Cusanelli believed the premiums were increasing at the rate they did on account of the preexisting condition she developed in 1995.
The inquiry shifts when, in the second call in October 2005, Ms. Cusanelli again expressed concern with the rising premium rates and expressed that Prudential "[doesn't have] those policies anymore and they'd like to, you know, would love to get rid of it." Here, she was again informed of the closed block of business. Drawing all reasonable inferences in favor of her, it was upon this second call to Prudential where Ms. Cusanelli established the connection between her premium increases, the block closure, and the potential wrongdoing. There is simply no indication that Ms. Cusanelli suspected any wrongdoing prior to the October 13, 2005 call. The statute of limitations will therefore be tolled from this date. Because the Complaint was filed on December 17, 2008, Ms. Cusanelli is within the four year statute of limitations with respect to her UCL and implied covenant claims, and outside of the three year statute of limitations with respect to her common law fraud claim.
In March of 2004, Mr. Gold called Prudential regarding a "huge raise" in his premium, and expressed knowledge of the block closure. The exchange which followed is the subject of debate between the parties. The transcript of the telephone conversation is included supra at 27-28. Prudential argues that his statements indicate that he believed that his premiums were extraordinarily high, that the block was closed, and that premiums might be lower for a policy that was still being sold. (MSJ Br. at 24.) Prudential argues that "[g]iven Mr. Gold's expressed suspicion that the premiums he was complaining about were inflated (at least in part) due to the block's closure, he clearly believed that `something was amiss.'" (
On the other hand, Plaintiffs argue that the pertinent passage indicates that Mr. Gold was "inquiring whether Prudential would get to a point where it would cancel the remaining CHIP policies altogether." (MSJ Opp. Br. at 30.) Plaintiffs contend that it was when the representative indicated to Gold that the company had come up with "updated policies" and were "selling different policies," that Mr. Gold repeated the term "updated policy" and asked whether he would be better off pursuing one that would be cheaper. (
Drawing all reasonable inferences in favor of Mr. Gold, a rational trier of fact may find in his favor. Thus, there exists a genuine issue of material fact as to the March 2004 call. Although some connection between the premium cost and the block closure can be drawn out from the exchange, it is limited and not related to a suspicion of wrongdoing. Indeed, Mr. Gold's inquiry into switching into an updated policy is a follow-up from his concern of Prudential would cancel the few remaining policies.
Perhaps anticipating this genuine issue of material fact, Prudential points to a subsequent 2006 call during which Mr. Gold clearly indicates his suspicion that something is amiss when he expressed that he doesn't know anybody paying such high premiums and expresses concern of whether these rates are "normal." Prudential argues that Mr. Gold's suspicion in 2006 simply "confirms his previously expressed understanding [in the 2004 call] that block closure was causing premiums to spike." (MSJ Br. at 13.) While the 2006 call is a clear indication of suspicion and inquiry notice, it is not dispositive here because it is inside the statute of limitations. The Court is not prepared to protract the suspicion expressed here to his 2004 phone call. Prudential could have tried to prove this in deposition by asking if Mr. Gold learned anything new in the two-year interim, but evidently chose not do so. The facts do not support the transference of the suspicion to two years prior. Mr. Gold's understanding in 2004 is a genuine issue for trial, and thus summary judgment is denied as to him based on the statute of limitations.
Ms. Drogell clearly establishes her suspicion in a call on May 27, 2003 of her premium increases. In addition to expressing that the premiums were "unbelievable;" she expressed prior knowledge of the block closure, and that she spoke with an "insurance guy" who drew the connection between the premium increases, the block closure, and a potential remaining ill population of policyholders. She reaffirmed her understanding of that connection during that call. After the Prudential representative explained that the premium increases were due to increasing age and medical costs, Ms. Drogell again expressed disbelief, calling into comparison the premium rates of her parents, including that of her mother with multiple sclerosis. Ms. Drogell's testimony of her comparison with her parents' premium rates is somewhat reminiscent of the facts considered by the Supreme Court of Ohio in
In conclusion, Plaintiffs' motion for class certification is denied due to lack of commonality and predominance based on the individualized review necessary to establish materiality, reliance, and redress. Further, Prudential's motion for summary judgment is denied in part and granted in part. The statute of limitations has run with respect to Ms. Clark and Ms. Drogell. However, Ms. Cusanelli and Mr. Gold survive summary judgment because the running of their claims concern genuine issues of material fact.
An order will be entered in accordance with this opinion.
(Chud Decl., Ex. 21.)
(Clark Dep. 91:9-22, emphasis added.)
Fed. R. Evid. R. 702 (testimony by expert witnesses) provides:
FED. R. CIV. P. 23 advisory committee's note.