Consumers’ Access to Justice

A Recent Federal Court Decision Strips Consumers Who Receive Illustrations at the Time of Policy Delivery of Their Rights to Enforce Existing Laws Against Fraud and Unfair Practices in the Use of Illustrations to Sell Life Insurance

A federal court recently denied a group of California consumers who bought life insurance policies from Life Insurance Company of the Southwest (“LSW”) the right to enforce existing California laws prohibiting illegal insurance sales even though the same court had already found that LSW’s sales to those consumers were made in violation of California law. The court denied  these consumers their day in court solely because they received their illustrations at the same time they received their policies.  The court incorrectly held that the consumers could not legally rely on the illustrations in deciding whether to buy the policies because the court believed the consumers were bound by the policies the moment the policies were handed to them, which is wrong because it ignores consumers’ rights under California’s “Free Look Statute” to take ten days to review the policy and illustration before deciding whether to keep the policy.  The court’s decision was based on a misunderstanding of existing California law, which should be clarified so that consumers are able to enforce existing laws when they are victimized by illegal practices.

In Joyce Walker, et al. v. Life Insurance Company of the Southwest, Case No. CV 10-09198-JVS (Central District of California, December 22, 2017), Dkt. 874 at 18-20, the federal district court for the Central District of California held that LSW illegally sold its Provider and Paragon life insurance policies by giving its customers policy illustrations that violated California’s Illustration Statute (California Insurance Code Section 10509.950, et seq.) The illustration is the most important written disclosure that a consumer is given when buying a life insurance policy. For policies that are designed to have a cash value (such as universal life and whole life), it shows how the Accumulated Cash Value and Cash Surrender Value of the policy would develop over time based upon assumptions stated in the illustration concerning levels of Fees and Crediting Rates. Recognizing the importance of the illustration, the law of California (and just about every other state) closely regulates the contents of illustrations and requires that a copy of the illustration must be given to the consumer no later than the time the policy is delivered. Cal. Ins. Code § 10509.958. If the consumer accepts the policy, the consumer then has a minimum of 10 days within which to review the illustration and the policy and decide whether to keep the policy or to cancel it; this period of at least 10 days is called the “free look period” and is guaranteed by the “Free Look Statute” (Cal. Ins. Code § 10127.9).

But the court in the LSW case ruled that even though LSW gave its customers illustrations that violated the Illustration Statute (by omitting required definitions that would have disclosed that LSW’s interest rate guarantees were not annual guarantees and were effectively worthless), the court held that consumers who received their illustrations at the same time they received their policies could not be part of a class action brought to enforce the Illustration Statute. The court ruled that the consumers were bound to the policies the moment the policies were delivered to them; the court then ruled that the consumers could not, as a matter of law, have relied on the illustrations because they were bound to the policies before they ever had an opportunity to review the illustrations! Joyce Walker, et al. v. Life Insurance Company of the Southwest, Case No. CV 10-09198-JVS (Central District of California, October 22, 2018), Dkt. 1003 at 6-7. As a result, the court ruled, consumers who received illustrations only at the time of policy delivery had no ability to enforce the Illustration Statute that the court agreed LSW’s illustrations violated.

The court’s decision is plainly wrong. Not only was the court incorrect that the policy could become binding on the consumer before the consumer accepted it, the Free Look Statute makes clear that the consumer must be given a further period of at least ten days within which to review the illustration, the policy, and anything else the consumer might want to review. The Illustration Statute required LSW to give each prospective policyholder a copy of the illustration no later than the time the illustration was delivered, and the Free Look Statute gave the prospective policyholder the right to rely on the illustration in deciding whether or not they wanted to be bound to the policy. The court’s ruling renders both of these statutory rights useless and makes it impossible for consumers to enforce existing rights against insurers who make fraudulent, misleading or otherwise unlawful statements in illustrations given to consumers at the time the policy is delivered.

Although the court’s decision is still subject to appeal and might still be corrected by the courts, that process could take years. And the case might be settled before appeal, meaning that the incorrect decision would never be corrected and would remain on the books to mislead consumers and other courts into believing that consumers have no right to sue insurers who make fraudulent, misleading or unlawful statements in their illustrations given to consumers at the time the policy is delivered. Because the laws of most other states are the same as California’s laws on these issues, consumers across the country are at risk of having their rights eliminated by the decision in the LSW case.

Potential Public Policy Response: The simplest way to fix the problems created by the erroneous decision in the LSW case would be to pass legislation clarifying that consumers have the right to rely on illustrations given to them at any time before and including the time the policy is delivered, and that consumers have the right to enforce existing laws prohibiting  fraudulent, misleading, or otherwise illegal illustrations.  This change would not create any new claims against insurers but would only clarify that consumers who receive their illustrations at the time of policy delivery have the same rights to enforce existing California law as consumers who receive their illustrations before policy delivery.  For example, new legislation could provide: “A prospective purchaser of a life insurance policy has the right to rely on an illustration received before or at the time of policy delivery in deciding whether to be bound to the policy. Any consumer who bought a life insurance policy after receiving a fraudulent, misleading, or otherwise unlawful illustration at or before the time of policy delivery may bring an action under the Unfair Practices Act (Cal. Bus. & Prof. Code §§ 17200-17208) to enforce any California law that is violated by the illustration.”