Clark v. the Prudential Ins. Co. of Am.

736 F.Supp.2d 902

Beverly CLARK, Jesse J. Paul and Marc H. Litwack, Plaintiffs,

v.The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant.

Civ. No. 08-6197 (DRD).

United States District Court, D. New Jersey.

Sept. 9, 2010.

Bruce Nagel, Esq., Robert H. Solomon, Esq., Roseland, Nagel Rice LLP, NJ, Charles N. Freiberg, Esq., Brian P. Brosnahan, Esq., David A. Thomas, Esq., Jacob N. Foster, Esq., Kasowitz, Benson, Torres & Friedman LLP, San Francisco, CA, Harvey R. Levine, Esq., Craig Miller, Esq., Levine, Steinberg, Miller & Huver, San Diego, CA, for the Plaintiffs, Beverly Clark, Jesse J. Paul, and Marc H. Litwack.

Douglas S. Eakeley, Esq., Maureen A. Ruane, Esq., John R. Middleton, Jr., Esq., Lowenstein Sandler PC, Roseland, NJ, John D. Aldock, Esq., Richard M. Wyner, Esq., Mark S. Raffman, Esq., Goodwin Proctor LLP, Washington, DC, for the Defendant, The Prudential Insurance Company of America.

OPINION

DEBEVOISE, Senior District Judge.

On February 3, 2010, Beverly Clark, Jesse J. Paul, and Marc H. Litwack ("Plaintiffs") filed an amended putative class action complaint against Prudential Insurance Company of America ("Prudential") alleging claims for fraudulent misrepresentation, fraudulent omissions, breach of the duty of good faith and fair dealing, violation of California's Unfair Competition Law, and violation of the New Jersey Consumer Fraud Act. The motion is directed at the Plaintiffs' individual claims for relief as they have yet to move for class certification. Prudential moves to dismiss all counts of the Third Amended Complaint (TAC) with the exception of Clark's claim for breach of the implied covenant of good faith and fair dealing. For the reasons set forth below, Prudential's motion to dismiss will be granted in part and denied in part.

I. BACKGROUND

A. Procedural History

In the original Complaint, filed December 17, 2008, the two original plaintiffs, Clark and 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 15, 2009, the Court granted the motion in part, and denied it in part. The Court dismissed Paul's claims with prejudice, and dismissed Clark's claims for consumer fraud and breach of fiduciary duty without prejudice. Clark's claim for breach of the implied covenant of good faith and fair dealing was not dismissed. Clark v. Prudential Ins. Co. of Am., Civ. No. 08-6197, 2009 WL 2959801, 2009 U.S. Dist. LEXIS 84093 (D.N.J. Sept. 14, 2009).

In its September 2009 Opinion, the Court applied New Jersey's choice of law analysis and determined that Clark and Paul's home states at the time they purchased their CHIP policies-California and Indiana, respectively-have the greatest interest in having their laws applied to the consumer fraud, breach of fiduciary duty, and breach of good faith and fair dealing claims.Id. at *15-16, 2009 U.S. Dist. LEXIS 84093 at *47. The Court found that under Indiana law, each of Paul's claims was barred by the applicable statute of limitations. The Court dismissed Clark's consumer fraud claim with leave to re-plead under the appropriate California law; dismissed Clark's breach of fiduciary duty claim for failure to allege that the relationship between Clark and Prudential involved a fiduciary duty under California law; and found that Clark's claim for breach of the duty of good faith and fair dealing stated a claim under California law. Id.

Subsequently, on October 30, 2009, 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 Clark and Paul would file a Second Amended Complaint asserting additional claims for common law fraudulent misrepresentation and fraudulent omission. The Second Amended Complaint (SAC) was filed on November 12, 2009, and Prudential filed a motion to dismiss the SAC on December 3, 2009. After that motion was partially briefed, the parties stipulated that the Plaintiffs could file the TAC, adding Litwack as a new plaintiff. The parties agreed that the Court would address, during a single motion hearing, the issues raised in both the motion to dismiss the SAC and the motion to dismiss the TAC. For ease of reference, the Court will refer to the present motion as a motion to dismiss the TAC, as the TAC contains all of the relevant allegations.¹

B. Allegations of the Complaint

The TAC alleges five claims for relief: (1) fraudulent misrepresentation, on behalf of Clark, Litwack, and Paul; (2) fraudulent omissions, on behalf of Clark, Litwack, and Paul; (3) breach of the duty of good faith and fair dealing, on behalf of Clark and Litwack; (4) violation of California's Unfair Competition Law (UCL), Cal. Bus. & Prof.Code § 17200, et seq. , on behalf of Clark; and (5) violation of the NJCFA on behalf of Litwack.

The following are the allegations of the TAC, which are, for the purpose of this motion only, accepted as true and construed in the light most favorable to the Plaintiffs. Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir.2008).

i. Prudential

Prudential is, and at all relevant times was, a corporation organized and existing under the laws of the State of New Jersey with its principal place of business in Newark, New Jersey. (TAC ¶ 15.) Prior to 2001, Prudential was a mutual life insurance company. ( Id. ¶ 16.)

Prudential sold an individual health policy, known as the Comprehensive Health Insurance Policy ("CHIP"), to individuals throughout the United States from 1973 through 1981. ( Id. ¶ 1.) CHIP is a major medical insurance policy designed to provide policyholders with coverage for medical expenses, including high or unexpected medical expenses. ( Id. ¶ 2.) The risk of high medical expenses is managed by Prudential through the creation of a risk pool, where a large group shares the risk that certain policyholders will generate higher than expected claims. ( Id.) Large premium increases are generally not necessary in a functioning risk pool because the premiums of healthy low-cost members subsidize the higher costs of less-healthy members. ( Id.) Prudential developed, marketed, and sold CHIP in theDistrict of Columbia and all 50 states of the United States. ( Id. ¶ 18.)

The CHIP stated the following regarding continuation or termination of the policy:

You may continue this Policy in force for successive premium periods of one month each by payment of the premiums as specified in the following paragraphs. However, Prudential may refuse to continue this Policy as of any Policy Date anniversary, but only if Prudential is then refusing to continue all policies with the same provisions and premium rate basis in the jurisdiction where you reside. If Prudential takes this action you will be notified not less than 31 days before the Policy Date anniversary.

( Id. ¶ 20.)

ii. Prudential " Closes the Block"

In 1981, Prudential ceased selling CHIP to new policyholders (it "closed the block"). ( Id. ¶ 1.) Prudential did not disclose to its policyholders that it had closed the block. ( Id.) The block closure prevented new policyholders from entering into the CHIP risk pool. ( Id. ¶ 3.) New policyholders are generally healthier, and their premiums subsidize the premiums of less-healthy policyholders, who have higher rates of claims. ( Id.) Prudential knew that the result of closing the CHIP block would be that the CHIP risk pool would face an "anti-selection crisis" where healthy policyholders who could secure coverage elsewhere terminated their CHIP. ( Id.) With CHIP closed to new entrants, and an insufficient percentage of healthy policyholders remaining to subsidize the costs of unhealthy policyholders, Prudential knew the result would be what is called a "death spiral." ( Id.) In a death spiral, repeated cycles of higher premiums and a continually shrinking number of healthy policyholders cause premiums to eventually become so high that they force policyholders to drop their policies. ( Id.)

Prudential knew at the time it closed the block that the design features of the CHIP policy made a death spiral inevitable after the block was closed. ( Id. ¶ 4.) For example, the CHIP policy lacked inside limits on specific policy benefits, which allowed very ill policyholders to incur massive claims. ( Id. ¶ 25.) A lack of inside limits accentuates the dynamics of a death spiral. ( Id.) Prudential had access to the relevant actuarial data related to the CHIP and the risk pool, and policyholders relied on Prudential's actuarial expertise in managing the pool. ( Id. ¶ 27.) Although Prudential knew that massive increases in premiums in the future were inevitable because it had closed the block, it concealed these facts from policyholders. ( Id. ¶ 4.) Policyholders were informed when premiums increased, but they had no reason to know that the premium increases were a result of closing the block. ( Id. ¶ 5.) Prudential made uniform written representations to policyholders about individual rate increases, but in such documents it never disclosed that the reason for the rate increase was that the CHIP block had closed or that such closure made extreme rate increases inevitable. ( Id.) Prudential also did not disclose that, by the time the inevitable massive increases in the premiums forced them to drop their policies, the policyholders might be unable to secure comparable coverage for medical conditions that they developed later. ( Id. ¶ 6.) Because Prudential failed to disclose that closing the CHIP block would inevitably result in unaffordable premiums, policyholders were unable to make an informed choice whether to renew CHIP or search for alternative health insurance. ( Id. ¶ 7.) Expert information and actuarial knowledge concerning the...