Judicial Council of California Issues Opinion in Peter Fischl Vs. Pacific Life Insurance Case

SACRAMENTO, California, Aug. 25 -- The Judicial Council of California issued the following opinion (No. B320820) on Aug. 24, 2023:

* * *

In the Court of Appeal of the State of California, Second Appellate District, Division Two

PETER FISCHL, Plaintiff and Appellant, v. PACIFIC LIFE INSURANCE COMAPNY, Defendant and Respondent.

ORDER MODIFYING OPINION

NO CHANGE IN THE JUDGMENT

THE COURT:

It is ordered that the opinion filed herein on August 3, 2023, be modified as follows:

1. In the caption on page 1, change the spelling of the name of Defendant and Respondent from "PACIFIC LIFE INSURANCE COMAPNY" to "PACIFIC LIFE INSURANCE COMPANY".

2. In line 7 of page 21, replace the number "2434.2(c)" with the number "2534.2(c)" so the full sentence reads as follows:

Specifically, he asserts that section 2534.2(c) "unambiguous[ly]" imposes a duty on the insurance company to perform its own analysis; as explained above, we have come to a contrary conclusion.

There is no change in the judgment.

LUI, P. J.

ASHMANN-GERST, J.

HOFFSTADT, J.

* * *

In the Court of Appeal of the State of California, Second Appellate District, Division Two

PETER FISCHL, Plaintiff and Appellant, v. PACIFIC LIFE INSURANCE COMAPNY, Defendant and Respondent.

APPEAL from a judgment of the Superior Court of Los Angeles County, Peter A. Hernandez, Judge. Affirmed.

Gordon W. Renneisen and Benjamin Blakeman for Plaintiff and Appellant.

Finlayson Toffer Roosevelt & Lilly and Matthew E. Lilly for Defendant and Respondent.

A regulation promulgated by California's Insurance Commissioner requires insurance companies who sell variable life insurance--that is, a life insurance policy that also functions as an investment vehicle--to "adopt" and "use[]" standards in order to assess whether such insurance is "suitab[le]" to recommend and issue to potential investors. (Cal. Code Regs., tit. 10, Sec. 2534.2, subd. (c) (section 2534.2(c));/1 Ins. Code, Sec. 10506, subd. (h).) In this case, an investor's broker conducted a suitability analysis and thereafter recommended that the investor purchase a variable life insurance policy from a specific insurance company. The investor subsequently sued the broker and the insurance company, in part on the ground that the suitability analysis was negligently conducted; the investor settled with the broker and, as part of that settlement, released the insurance company from liability for "all claims that result from" the broker's "negligent" "acts or omissions," including the broker's "violation of . . . any . . . state . . . regulation" "except to the extent that [the insurance company] caused, contributed to, or compounded such." This appeal therefore presents two questions. First, does section 2534.2(c) obligate an insurance company to conduct an independent suitability analysis before issuing a variable life insurance policy (such that the company in this case remains liable, notwithstanding the release, for its own failure to conduct such an analysis)? Second, does the insurance company's ratification of the broker's negligent analysis by issuing the policy to the investor render the company liable notwithstanding the release? We conclude that the answer to each question is "no." Because the trial court granted summary judgment for the insurance company after coming to the same conclusion, we affirm.

FACTS AND PROCEDURAL BACKGROUND

I. Facts

Peter Fischl (plaintiff) is a thoracic surgeon.

After the stock market crash now known as the "Great Recession" of 2008, plaintiff asked his sister to recommend a good financial planner. She recommended Gregory Acosta (Acosta).

Acosta held a license to sell life insurance and a license to sell variable products. In 2008, he conducted these sales as part of his financial planning business through two companies-- namely, Gregory R. Acosta, Inc. and Diamond Bar Executive Benefit Programs & Insurance Services, Inc.(the Acosta entities). He was also a broker of variable products under the outside firms of Kestra Investment Services, LLC (Kestra) and Securities America, Inc. (Securities America) at different times. Between 30 and 40 insurance companies appointed Acosta to offer his clients the various companies' investment and life insurance products to aid in his clients' retirement planning.

One of the various products Acosta offered was a variable life insurance policy. Variable life insurance is a hybrid of a life insurance policy and an investment vehicle: It resembles a life insurance policy insofar as the policy holder pays annual premiums and the policy pays out a death benefit in the event of the holder's death; it resembles an investment vehicle insofar as the premiums are placed in a holder-specific account and invested in the market as retirement funds (with the attendant tax benefit), and may be withdrawn from the account upon retirement--although doing so reduces the amount of the death benefit. (See Sec. 2534.1, subd. (p) [defining "Variable life insurance policy"].)

In 2008, the Acosta entities and Securities America had contracts with Pacific Life Insurance Company (Pacific Life) that authorized them to act as a broker (or "producer") for Pacific Life, and thus to offer their clients one of several variable life insurance policies from Pacific Life. At that time, Pacific Life had adopted--and in its contracts with its brokers, obligated those brokers to "strict[ly]" adhere to--"suitability standards" that required the brokers to (1) investigate a potential applicant's financial condition and investment goals, and (2) assess whether any Pacific Life variable life insurance policy the broker was recommending was suitable as an investment vehicle for that applicant (that is, whether those policies were consistent with the "customer's needs")./2 Consistent with his contractual obligations and longstanding practice, Acosta gathered information about plaintiff's finances and investment goals by asking plaintiff questions and sending a "fact-finder" to obtain pertinent documentation, and then assessed whether any of Pacific Life's variable life insurance policies were suitable for plaintiff. Acosta memorialized this information--including plaintiff's income and net worth, investment knowledge and experience, and risk tolerance. During the inquiry into suitability, plaintiff spoke only with Acosta and his employees; plaintiff at no point interacted with Pacific Life. On the basis of his suitability analysis, Acosta recommended two Pacific Life insurance policies that he felt would be "best" for plaintiff. To avoid duplicative coverage, Acosta also recommended that plaintiff replace the two non-variable life insurance policies he had with other companies (with death benefits totaling $1.45 million) with the two new Pacific Life policies.

On the basis of Acosta's recommendation, plaintiff filed applications to Pacific Life for a variable life insurance policy-- the Select Exec III policy--and a second policy, the Versa-Flex NLG policy. In the applications, plaintiff also acknowledged that he had "considered [his] liquidity needs, risk tolerance and investment time horizon in selecting" the policies. Along with those applications, Acosta certified that he had conducted a suitability analysis. Consistent with its longstanding practice, Pacific Life did not independently examine whether either policy was "suitable" for plaintiff's financial condition and goals. In determining whether to grant the applications, however, Pacific Life's underwriters did examine whether these policies presented an "unacceptable risk" to Pacific Life. The underwriters determined that they did not, and issued the two policies to plaintiff./3

The Select Exec III policy:

* Required plaintiff to make an initial premium payment of $130,000, and then to make annual premium payments of $54,950 for each of the next six years;

* Anticipated that plaintiff would withdraw $75,374 per year as part of his retirement earnings starting in year 16 of the policy (that is, when plaintiff turned 75 years old); and

* Paid out a death benefit of $2,058,424 if plaintiff passed away during the first seven years, but then dropped the death benefit to $1 million for the next seven years, and then dropped the death benefit further as each annual withdrawal was made.

The Versa-Flex NLG policy required plaintiff to make a $54,000 initial premium payment, no payment in the second year, and a $17,654 premium payment for each year thereafter; the death benefit was fixed at $1 million.

Between 2008 and 2014, plaintiff made the premium payments on the two Pacific Life policies. Because plaintiff's annual income during that period was $180,000, plaintiff did not pay the premiums entirely out of his income and instead resorted to liquidating portions of his other assets.

In 2015, plaintiff met with the investment advisor he had used prior to 2008. That advisor told him that the two Pacific Life policies were not "suitable" for plaintiff's financial condition and investment goals; on the basis of that advice, plaintiff surrendered the Select Exec III policy and let the Versa-Flex NLG policy lapse, both at a loss.

* * *

Footnotes:

1/ All further statutory references are to title 10 of the California Code of Regulations unless otherwise indicated.

2/ Those standards in effect at that time are not included in the record.

3/ Plaintiff also purchased annuities and mutual funds from Pacific Life around the same time, but has abandoned any claims related to those acquisitions in this appeal.

* * *

Original text here: https://www.courts.ca.gov/opinions/documents/B320820M.PDF