Small v. Allianz Life Insurance Company of North America

(District Court Erred in Certifying Two Subclasses Challenging the Loss of Life Insurance for Failing to Pay Premiums where the Insurer Failed to Strictly Comply With Statutorily Mandated Notice Requirements Because Plaintiffs Failed to Show that Either Subclass Met the Requirements of Federal Rule of Civil Procedure 23(a) and (b))

(December 2024) - In Small v. Allianz Life Insurance Company of North America, 2024 WL 5051192 (9th Cir. Dec. 10, 2024), the Ninth Circuit Court of Appeals reversed the District Court’s class certification order. In this case, the issue before the court was whether the District Court erred in certifying a class challenging the loss of life insurance for failing to pay premiums where the insurer, Allianz Life Insurance Company of North America (“Allianz”), failed to strictly comply with the statutorily mandated notice provisions. The answer to this question depended on whether a plaintiff alleging a violation of California Insurance Code sections 10113.71 and 10113.72 (the “Statutes”) only needed to show the insurer violated the notice requirements or whether the plaintiff must also show that the violation caused them harm. The Ninth Circuit held it was the latter and reversed the class certification order as a result.

By way of background, in 2012, the California Legislature enacted the Statutes to prevent people with life insurance policies from inadvertently losing them due to their failure to pay the premiums. The Statutes, however, do not explain whether the notice requirements applied retroactively to policies already in place, or whether they only applied to policies created after the Statutes went into effect. In McHugh v. Protective Life Insurance Co., 12 Cal. 5th 213, 220 (2021), the California Supreme Court answered that question, finding that the Statutes “apply to all life insurance policies in force when [the Statutes] went into effect, regardless of when the policies were originally issued.” Since that ruling, policyholders and beneficiaries have filed a number of lawsuits based on insurers’ failure to comply with the Statutes.

In 2020, Small sued Allianz in federal court, alleging Allianz failed to comply with the Statutes notice requirements. Small then moved to certify a class of approximately 1,800 members consisting of “owners or beneficiaries of life insurance policies issued before 2013 whose policies were terminated for nonpayment of premiums without receiving an opportunity to designate one or more persons to receive notices of unpaid premiums.” The class sought payment of any death benefits due under the policies, as well as a judicial declaration that the policies were wrongfully terminated and therefore remain in full force despite non-payment. Allianz opposed certification, arguing the class did not satisfy the requirements under Rule 23(a) or 23(b). On May 23, 2023, the District Court granted class certification and sua sponte divided the class into the following two subclasses: (1) owners of policies with currently living insureds seeking to have their policies reinstated (the “Living Insured Subclass”); and (2) beneficiaries of policies with deceased insureds seeking breach of contract money damages in the amount of the death benefit (the “Beneficiary Subclass”). Allianz subsequently appealed the District Court’s order, arguing the District Court erred in certifying the class under Rule 23 because both subclasses failed to meet the commonality, typicality, and adequacy requirements of Rule 23(a) and the predominance and appropriateness of relief provisions of Rule 23(b).

In order to determine whether a class can be certified, the Ninth Circuit noted that it must first determine what plaintiffs must show to recover for alleged violations of the Statutes under California law. The Statutes do not authorize a private right of action and the California Insurance Code classifies an insurance policy as a contract, so the Ninth Circuit concluded that the cause of action is breach of contract, which requires that the damages be caused by the breach. The question then became whether to make out such a claim, the plaintiff need only show the Statutes were violated (the “violation-only”), or whether the plaintiff must also show that the violation caused them harm (the “causation” theory). The Ninth Circuit noted that district courts faced with this issue have been split between the two competing theories. The Ninth Circuit concluded that it believes the California Supreme Court would adopt the “causation” theory, reasoning as follows:

In sum, considering that (1) the Statutes contain no private cause of action and thus require a breach of contract theory for which causation is a key element; (2) McHugh I– III suggest that California favors the “causation” theory; (3) there are no California Supreme Court or Court of Appeal cases adopting the “violation-only” theory for the Statutes; (4) several federal district courts have adopted the “causation” theory for the same reasons we do; (5) district courts that have adopted the “violation-only” theory predominantly rely on non-precedential Thomas; and (6) public policy favors the “causation” theory and weighs against the “violation-only” theory given the realities of the life insurance industry, we think that the California Supreme Court would similarly adopt a “causation” theory to recover for violations of the Statutes.

Using the “causation theory”, the Ninth Circuit then looked at whether the District Court did in fact err in certifying the subclasses. The Ninth Circuit noted that plaintiffs have the burden of proving that each of the four requirements of Rule 23(a) have been satisfied (i.e., numerosity, commonality, typicality, and adequacy) and that at least one requirement of Rule 23(b) has been satisfied. The Ninth Circuit first held that the commonality requirement was satisfied with respect to the Beneficiary Subclass “because case law shows that whether a violation of the Statutes occurred is an appropriate common question, and the record…shows that this question can be adjudicated on a class-wide basis.” However, with respect to the predominance question under Rule 23(b)(3) (i.e., whether the common question predominates over individualized questions), the Ninth Circuit held that using the “causation theory”, because Plaintiffs within the Beneficiary Subclass must not only establish a violation but that the violation caused them harm, the common question of whether Allianz violated the Statutes did not predominate “because causation cannot be determined on a class-wide basis.” For the same reasons, the Ninth Circuit concluded that a class action was not the ”superior” means to adjudicate the claims, as required under Rule 23(b)(3).  As a result, the Ninth Circuit concluded that the Beneficiary Subclass could not be certified. 

The Ninth Circuit also held that the District Court erred when it certified the Living Insured Subclass by finding that it was entitled to class-wide equitable relief as provided in Rule 23(b)(2), which applies when “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” The Ninth Circuit reasoned that the issue was that Allianz had presented evidence that many members of the class knowingly let their policies lapse as a means of termination and thus, neither an injunction forcing specific performance nor the District Court’s declaration constitute “indivisible” relief that “benefits all its members at once.” 

The Ninth Circuit also found that the District Court erred in certifying the class based on adequacy and typicality under Rule 23(a). Specifically, the Ninth Circuit held that LaWanda Small “is not an adequate representative with typical questions to represent both Subclasses.” The Ninth Circuit agreed with Allianz that Small is not adequate to represent the Living Insured Subclass because she is only a member of the Beneficiary Subclass and is therefore only eligible for damages and not equitable relief. Allianz also argued that “Small lacks typicality because her questions are atypical of members whose policies were intentionally terminated because Small alleges hers lapsed inadvertently,” and the Ninth Circuit agreed. 

In light of the foregoing, the Ninth Circuit held that the District Court erred in granting class certification because Small failed to show that either subclass met the requirements of Rule 23(a) and 23(b). As a result, the Ninth Circuit reversed the District Court’s order and remanded the case for further proceedings.