Bajwa v. United States Life Insurance Co., 1:19-cv-00938-NE-SAB

AHSAN BAJWA, Plaintiff, v. UNITED STATES LIFE INSURANCE COMPANY, Defendant.

No. 1:19-cv-00938-NE-SAB

United States District Court, E.D. California

June 28, 2021

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT (DOC. NO 13)

INTRODUCTION

Plaintiff Ahsan Bajwa filed the complaint commencing this breach-of-contract and tort action in the Fresno County Superior Court on June 6, 2019. (Doc. No. 1 at 7.) Defendant United States Life Insurance Company removed the action to this federal court on July 10, 2019 under diversity jurisdiction. (Id. at 1-2.) On May 28, 2020 defendant filed a motion for partial summary judgment. (Doc No. 13.) Plaintiff filed an opposition on July 7, 2020. (Doc No. 16.) On July 15, 2020, defendant filed a reply brief. (Doc No. 17.)

For the reasons that follow, the court grants, in part, and denies, in part, defendant's motion for partial summary judgment.

BACKGROUND

A. Factual Background

The central facts in this case are not in dispute. Defendant underwrites a group disabilityinsurance plan sponsored by the American Medical Association, pursuant to which plaintiff received disability insurance. (Doc. No. 16-1 (“Facts”) ¶ 1A.)^[1] The policy's terms include that it “is issued in and governed by the laws of Illinois, ” which is where the American Medical Association is incorporated and headquartered. (Id. ¶¶ 8A, 12A-13A.)

In 2002, plaintiff submitted a claim for disability benefits under the policy, and he began receiving benefits in 2003. (Id. ¶¶ 18A-19A, 5B; Doc. No. 16-2 ¶ 5.) Contemplating purchasing a home, plaintiff contacted defendant on March 6, 2018 to confirm he would continue to receive disability benefits. (Id. ¶¶ 7-8.) Plaintiff received a letter from Kathryn Davis, one of defendant's employees, so confirming:

Please be advised that you are currently receiving long-term disability benefits in the amount of $10, 000 monthly.

As long as you continue to meet your Policy's definition of totally disabled, you are eligible to receive this benefit for your lifetime. We will perform annual reviews every year to confirm that you continue to meet the definition of totally disabled.

(Id. ¶ 9.)

Based upon the assurance provided in this letter and a belief that he would receive $10, 000 per month for the rest of his life, plaintiff applied for financing to purchase a home and subsequently purchased the financed home. (Id. ¶¶ 10-12.) On September 7, 2018, plaintiff received another letter from Davis, informing him that his monthly benefits were being reduced to $2, 500 because he had turned 65. (Id. ¶ 13.)

B. Procedural Background

Plaintiff filed suit in state court on June 6, 2019, alleging four causes of action: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) negligent misrepresentation; and (4) fraud. (Doc. No. 1 at 7.) The court will refer in this order to plaintiff's claims 1 and 2 as the “Contractual Claims” and to claims 3 and 4 as the “Misrepresentation Claims.” In his Contractual Claims, plaintiff alleges that defendant was required to continue paying $10, 000 disability payments each month for the rest of his life, and defendant's failure to do so breached both the contract and the implied covenant of good faith and fair dealing. In the Misrepresentation Claims, plaintiff further alleges that defendant's sending a letter confirming plaintiff's benefits but then changing its position with respect to the amount of those benefits after plaintiff relied on it constitutes negligent misrepresentation and fraud.

Defendant filed a general denial in the state court proceeding, asserting several affirmative defenses and then removed the action to this federal court. (Doc. No. 1 at 1, 27-31.) On May 28, 2020, defendant filed the pending motion for partial summary judgment. Plaintiff filed an opposition, (Doc. No. 16), to which defendant filed a reply with an ex parte application for an extension of time to file its reply, which the court granted. (Doc. Nos. 17, 18, 19.)

DISCUSSION

A. Preemption of Plaintiff's Misrepresentation Claims

Defendant seeks summary judgment in its favor with respect to plaintiff's Misrepresentation Claims on the grounds that those claims are preempted by § 155 of the Illinois Insurance Code, 215 Ill. Comp. Stat. § 5/155 (“§ 155”). In this regard, defendant argues it is entitled to partial summary judgment as to plaintiff's Misrepresentation Claims because they are based “on allegations of U.S. Life's unreasonable and wrongful handling of his disability claim under the Policy and failure to pay him a specified monthly disability benefit for his lifetime due under the Policy, ” which, according to defendant, “is exactly the conduct governed by [§] 155.” (Doc. No. 13-1 at 19.) Because analysis of this contention of defendant involves other issues posed by the pending motion, the court will address it first and assumes for purposes of resolving this issue that Illinois law applies.

Illinois Insurance Code § 155(1) sets maximum recoverable amounts for actions brought against insurance companies related to certain vexatious or unreasonable behavior:

In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action [certain maximum amounts.]

In light of that statute, it appears Illinois does not recognize an independent tort claim against insurers for breach of the implied covenant of good faith and fair dealing because § 155 “provides an extracontractual remedy for policyholders who have suffered unreasonable and vexatious conduct by insurers with respect to a claim under the policy.” Cramer v. Ins. Exch. Agency, 675 N.E.2d 897, 902 (Ill. 1996). However, § 155 does not preempt “a separate and independent tort action involving insurer misconduct.” Id. at 900. In Cramer, the Supreme Court of Illinois determined that “[w]ell-established tort actions, such as common law fraud, require proof of different elements and remedy a different sort of harm than the statute does” and are thus not preempted. Id. at 902. The court in Cramer concluded that the statute's purpose is “to provide a remedy for insurer misconduct, ” id. at 901, and specifically, misconduct regarding the payment of claims:

Although some companies are very liberal in the payment of claims, this is by no means true of all. In the absence of any allowance of attorneys' fees, the holder of a small policy may see practically his whole claim wiped out by expenses if the company compels him to resort to court action, although the refusal to pay the claim is based upon the flimsiest sort of a pretext.

Id. at 901 (quoting H. Havinghurst, Some Aspects of the Illinois Insurance Code, 32 Ill. L. Rev. 391, 405 (1937)).

On the other hand, the court in Cramer recognized that “[m]ere allegations of bad faith or unreasonable and vexatious conduct, without more, however, do not constitute such a tort. Courts therefore should look beyond the legal theory asserted to the conduct forming the basis for the claim.” Id. at 904.

Thus, under the decision in Cramer the following standard is to be applied: § 155 preempts tort claims against insurers for misconduct regarding the payment of claims or for unreasonable and vexatious conduct. However, it does not preempt claims for well-established torts that require proof of different elements and remedy a different sort of harm than misconduct involving payment of claims. This determination depends on the conduct a plaintiff alleges, not the legal theory cited in support thereof.

Defendant contends that § 155 does not preempt his Misrepresentation Claims because they are alternatives to his Contractual Claims. (Doc. No. 16 at 26.) Thus, according to plaintiff, even if plaintiff's Contractual Claims fail, his alternative Misrepresentation Claims still survive, and thus they are independent and separate torts from his Contractual Claims. (Id.)

As a starting point, plaintiff's Misrepresentation Claims require proof of different elements than his Contractual Claims. According to plaintiff, in Illinois the elements of fraud are: “(1) a false statement of material fact; (2) the party making the statement knew or believed it to be untrue; (3) the party to whom the statement was made had a right to rely on the statement; (4) the party to whom the statement was made did rely on the statement; (5) the statement was made for the purpose of inducing the other party to act; and (6) the reliance by the person to whom the statement was made led to that person's injury.” (Doc. No. 16 at 27 n. 1 (quoting Siegel v. Levy Organization Development Co., 607 N.E.2d 194 (Ill. 1992).)^[2] Plaintiff further contends that the elements for negligent misrepresentation differ only as to the required mental state. (Id. (citing Kopley Grp. V., L.P. v. Sheridan Edgewater Properties, Ltd., 876 N.E.2d 218 (Ill. Ct. App. 2007).) Those elements do not require proof of a breach of contract. Thus, plaintiff contends, his Misrepresentation Claims “require proof of different elements” than his Contractual Claims. See Cramer, 675 N.E.2d at 902.

Plaintiff relies upon the decision in Commonwealth Ins. Co. v Stone Container Corp., No. 99 C 8471, 2001 WL 477151 (N.D. Ill., May 3, 2001), where the court found a tort was independent for § 155 purposes because it was an alternative to a contract claim. There, Stone Container, a pulp and paper manufacturer, was looking to purchase insurance for its paper mill. Id. at *1. It received a marketing...