Villalpando v. Transguard Insurance Company of America

Filing 52

ORDER by Judge Samuel Conti granting 49 Motion for Leave to File; denying 18 Motion to Dismiss; denying 28 Motion to Dismiss (sclc2, COURT STAFF) (Filed on 2/19/2014)

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1 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE NORTHERN DISTRICT OF CALIFORNIA 8 United States District Court For the Northern District of California 9 10 11 12 13 14 15 16 ) C 13-4028 SC ) DANIEL DIAZ VILLALPANDO, ) ORDER ON MOTIONS TO DISMISS ) Plaintiff, ) ) v. ) ) TRANSGUARD INSURANCE COMPANY OF ) AMERICA, EXEL DIRECT, INC., and ) DOES 1-100, ) ) Defendants. ) ) ) ) 17 18 I. INTRODUCTION 19 Now before the Court are Defendants Transguard Insurance 20 Company of America ("Transguard") and Exel Direct, Inc.'s ("Exel") 21 (collectively "Defendants") motion to dismiss Plaintiff Daniel Diaz 22 Villalpando's first amended complaint. 23 motions are fully briefed, 1 and the Court finds them appropriate 24 for decision without oral argument, Civ. L.R. 7-1(b). 25 1 26 27 28 ECF Nos. 14 ("FAC"). The As explained ECF Nos. 18 ("Transguard MTD"), 27 ("Opp'n to Transguard"), 28 ("Exel MTD"), 31 ("Transguard Reply"), 39 ("Opp'n to Exel"), 45 ("Exel Reply"). Plaintiff also moves to file a sur-reply, ECF No. 49, which the Court GRANTS despite Exel's opposition, ECF No. 41. However, the sur-reply is non-dispositive because, as noted below, it involves factual disputes not appropriate for resolution on a motion to dismiss. 1 below, both motions are DENIED. 2 3 II. BACKGROUND 4 Plaintiff, a Mexican citizen residing in California, was 5 seeking work as a truck driver in September 2008. FAC ¶ 13. On 6 September 8, he met with Jim Dalpino, a representative of Exel. 7 Id. 8 deliver merchandise, mainly home appliances, to customers who 9 purchase those items from stores that use Exel as a delivery Exel is an Ohio-based delivery service that hires drivers to United States District Court For the Northern District of California 10 provider. Id. At that meeting, Plaintiff and others who were 11 looking for work as truck drivers talked with Mr. Dalpino for about 12 ten minutes, after which Plaintiff was told that he had a job with 13 Exel but would need to sign certain papers "confirming certain 14 aspects of his work" as an independent contractor. Id. 15 At the time of the meeting, Plaintiff's English was not 16 fluent, so Mr. Dalpino spoke to him in Spanish and explained that 17 there were four conditions for the job. 18 would have to (1) "agree to pay for the cost of renting a truck 19 suitable to be used for this delivery service," (2) "pay for a 20 second person to ride with him on deliveries," (3) "pay for 21 liability insurance for the truck, as well as coverage for damage 22 to the truck and any contents," and (4) "pay for insurance on 23 himself and any person assisting him, which Plaintiff believed was 24 workers compensation coverage." See id. ¶ 14. Plaintiff Id. 25 Upon being asked to read and sign certain legal documents, 26 Plaintiff told Mr. Dalpino that he could not read or understand 27 English documents and would need to have them in Spanish. 28 16. Id. ¶ He was told that no translated documents were available. 2 Id. 1 Nevertheless, Mr. Dalpino instructed Plaintiff to sign a document 2 called an "Equipment Lease Agreement," FAC Ex. 1, which included an 3 "Exhibit C," a specific document related to Plaintiff's 4 responsibility to obtain insurance. 5 Plaintiff to sign and initial a portion of Exhibit C, which he also 6 told Plaintiff would confirm Plaintiff's purchase of worker's 7 compensation insurance. 8 initialed that part of Exhibit C, which reads as follows: "Workers 9 Compensation Coverage - Workers compensation coverage for the Id. ¶ 15. Mr. Dalpino apparently told Mr. Dalpino also signed and United States District Court For the Northern District of California 10 CONTRACTOR and for the CONTRACTOR's W2 Labor." Id.; Equipment 11 Lease Agreement Ex. C. 12 to backdate the form to September 3, 2008, which Plaintiff did. 13 FAC ¶ 15. 14 workers compensation coverage. 15 Plaintiff to sign an "Independent Truckman's Agreement," which was 16 also backdated. 17 on Mr. Dalpino's representations and statements as to Exel's 18 employment requirements. Mr. Dalpino also told Plaintiff he needed At that point, Plaintiff believed that he was buying FAC Ex. 2. 2 Id. Mr. Dalpino also instructed For all documents, Plaintiff relied Id. ¶ 16. Exel provided insurance through Transguard, a multi-line 19 20 insurance agency. Id. ¶¶ 8-9. Plaintiff alleges that Mr. Dalpino 21 was acting on behalf of Transguard when he arranged for, sold, and 22 confirmed the issuance of coverage on Transguard's behalf. 23 9; ECF No. 40 ("Villalpando Decl.") ¶¶ 9-12. 24 alleges that Transguard and Exel were related through the National 25 Association of Independent Truckers ("NAIT"), an "affiliation 26 group" formed to market products and services -- in this case, Id. ¶ Plaintiff also 27 28 2 Collectively, the Equipment Lease Agreement and Independent Truckman's Agreement are the "Agreements." 3 1 insurance -- to independent trucking companies. Id. ¶ 4. 2 According to Plaintiff, Exel is a NAIT member, and Transguard 3 provided its insurance coverage to Exel, via its agent, in that 4 capacity. See id. 5 After Plaintiff joined Exel as an independent contractor, he 6 was paid per delivery, and the cost of his insurance premiums was 7 deducted from his paychecks. 8 of this arrangement because it had arranged for Exel to negotiate 9 its employees' insurance coverage. Id. ¶ 17. Id. Transguard allegedly knew Plaintiff adds that United States District Court For the Northern District of California 10 Transguard ratified this conduct by accepting payments for the 11 insurance Plaintiff purchased through Exel, and also by paying 12 benefits of such coverage. 13 Mr. Dalpino, however, Plaintiff never obtained any copy of any 14 evidence of insurance (including a copy of his policy), though 15 sometime after that meeting, Plaintiff did receive a one-page 16 document entitled "Evidence of Insurance." 17 Throughout this time, based on Mr. Dalpino's statements and 18 representations, Plaintiff believed he had purchased the requisite 19 workers compensation insurance that Exel required. Id. At the time of his meeting with Id. ¶ 18 & Ex. 3. Id. On October 17, 2010, while making a delivery for Exel, 20 21 Plaintiff was badly injured when a refrigerator fell on top of him. 22 Id. ¶ 20. 23 Id. 24 sprains/strains of the arms, shoulders, neck and thoracic spine, 25 including a cervical and lumbar radiculopathy, thus necessitating 26 surgeries." 27 and may require future surgeries. 28 contacted Transguard to make a claim for him. He was knocked unconscious and airlifted to a hospital. He suffered, among other things, "a concussion, Id. He spent several months undergoing rehabilitation Id. 4 While he recovered, Exel Id. ¶ 22. 1 Transguard paid some of Plaintiff's bills, and also provided 2 payments of $500 per week for 104 weeks, through October 2012. 3 However, after Plaintiff's doctors told him that he would not be 4 able to return to work at Exel, Plaintiff contacted Transguard to 5 ask for continuing disability benefits. 6 Id. 7 obtain continuing disability benefits, his policy required that he 8 apply for Social Security benefits. Id. Id. Transguard refused. Transguard's representative told Plaintiff that in order to Id. United States District Court Plaintiff was unaware of such a requirement and, in fact, had 10 For the Northern District of California 9 never been given a copy of his insurance policy until he asked for 11 one after Transguard's refusal. 12 Defendants contend that he did not purchase workers compensation 13 insurance, but rather a different type of insurance that Plaintiff 14 did not understand, the provisions of which Defendants concealed 15 from him. 16 purchased workers compensation insurance that would cover his total 17 disability and medical expenses, an expectation he contends is 18 verified by his weekly payments and the payments of his medical 19 bills, which Plaintiff contends resulted in Transguard's 20 ratification of Mr. Dalpino's and Exel's conduct for Transguard's 21 benefit. Id. ¶ 25. Id. He has since discovered that Until that point Plaintiff believed he had Id. 22 In accordance with Transguard's representative's instructions, 23 Plaintiff requested Social Security benefits -- which at that point 24 he had thought were only for retirement, not pre-retirement 25 disability. 26 was not eligible for Social Security benefits because he did not 27 have enough "credits." 3 28 3 Id. ¶¶ 24-25. However, as a non-citizen, Plaintiff Id. ¶ 26. Such credits are accumulated by Plaintiff states that his notification of ineligibility arrived 5 1 working in certain jobs for certain periods of time, and Plaintiff 2 contends that for Social Security eligibility, he would have needed 3 to work for ten years (forty work quarters) in eligible jobs. 4 ¶ 28. 5 Id. After Plaintiff received that notice of ineligibility, 6 Transguard informed Plaintiff via an email dated October 15, 2012, 7 that Plaintiff's claim would be denied "not because he was totally 8 disabled from working but because he was not 'approved for Social 9 Security Disability . . . [and he did] not qualify for disability United States District Court For the Northern District of California 10 benefits because [he had] not worked long enough under Social 11 Security.'" 12 contends that Defendants had always known that he could not qualify 13 for the insurance they sold him. 14 hid this fact from him, telling him instead that he was purchasing 15 workers compensation insurance that would apply if he was injured 16 while working for Exel. 17 Plaintiff's beliefs and expectations about his insurance, he paid 18 premiums for 202 weeks. 19 Id. ¶ 27 (alterations in the original). Id. ¶ 28. Id. ¶¶ 28-30. Plaintiff He alleges that they In accordance with Id. ¶ 29. Based on these facts, Plaintiff alleges that Transguard's 20 insurance benefit denial was improper because it renders his 21 insurance coverage "illusory," since Plaintiff could never be 22 covered under the plan given his lack of U.S. citizenship and 23 Social Security credits. 24 Defendants' position is an act of material non-disclosure under 25 California insurance law, since they never told him that he would 26 not be eligible for coverage under the plan he paid for. Id. ¶ 30. He also maintains that Id. ¶ 31. 27 28 by letters dated September 12, 2002, but the Court assumes that this was a typo, given the narrative. 6 1 Plaintiff contends that Defendants' coverage position is also a 2 prohibited type of post-claims underwriting, since Transguard 3 determined after Plaintiff submitted a claim that he was never 4 eligible for benefits and was never insured for workers 5 compensation -- as opposed to a denial of coverage based on 6 Plaintiff's not being disabled. See id. ¶ 32. The gist of Plaintiff's complaint is that Defendants 7 8 collaborated to sell insurance policies to people like Plaintiff 9 who could not understand English when entering the insurance United States District Court For the Northern District of California 10 contracts, but were nevertheless tricked into entering them as a 11 condition of their employment. 4 12 Plaintiff asserts against Transguard causes of action for (1) 13 breach of insurance contract; (2) declaratory relief, seeking a 14 declaration that Plaintiff is disabled and entitled to benefits 15 wrongfully withheld; and (3) breach of the implied covenant of good 16 faith and fair dealing. 17 and Exel causes of action for (4) intentional misrepresentation and 18 concealment, and (5) negligent misrepresentation. 19 move to dismiss. Id. ¶ 33. Based on these facts, Plaintiff asserts against both Transguard Defendants each 20 21 III. LEGAL STANDARD 22 A motion to dismiss under Federal Rule of Civil Procedure 23 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. 24 Block, 250 F.3d 729, 732 (9th Cir. 2001). 25 on the lack of a cognizable legal theory or the absence of 26 sufficient facts alleged under a cognizable legal theory." "Dismissal can be based 27 28 4 Indeed, Plaintiff contends that a vast majority of his delivery department colleagues were not U.S. citizens. FAC ¶ 32. 7 1 Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 2 1988). 3 should assume their veracity and then determine whether they 4 plausibly give rise to an entitlement to relief." 5 Iqbal, 556 U.S. 662, 679 (2009). 6 must accept as true all of the allegations contained in a complaint 7 is inapplicable to legal conclusions. 8 elements of a cause of action, supported by mere conclusory 9 statements, do not suffice." United States District Court For the Northern District of California 10 "When there are well-pleaded factual allegations, a court Ashcroft v. However, "the tenet that a court Threadbare recitals of the Id. (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Claims sounding in fraud are subject to the heightened 11 12 pleading requirements of Federal Rule of Civil Procedure 9(b), 13 which requires that a plaintiff alleging fraud "must state with 14 particularity the circumstances constituting fraud." See Kearns v. 15 Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009). "To satisfy 16 Rule 9(b), a pleading must identify the who, what, when, where, and 17 how of the misconduct charged, as well as what is false or 18 misleading about [the purportedly fraudulent] statement, and why it 19 is false." 20 Inc., 637 F.3d 1047, 1055 (9th Cir. 2011) (quotation marks and 21 citations omitted). United States ex rel Cafasso v. Gen. Dynamics C4 Sys., 22 23 IV. DISCUSSION 24 A. 25 26 Transguard's Motion i. Breach of Contract & Declaratory Relief Transguard moves to dismiss Plaintiff's breach of contract and 27 declaratory relief claims, arguing that: (1) Plaintiff does not 28 identify any policy benefits to which he was entitled but that 8 1 Transguard refused to pay, (2) Plaintiff admits that Transguard 2 paid the policy's temporary total disability benefits, and (3) the 3 policy's provision relating to continuous total disability benefits 4 is valid and enforceable. Transguard MTD at 10-11. Transguard notes that Plaintiff's "Evidence of Insurance" form 5 6 clearly states that none of Plaintiff's coverage is workers' 7 compensation coverage, rendering continuing disability benefits 8 unavailable to Plaintiff because he did not qualify for his own 9 plan's coverage. See id. Transguard's point here is that because United States District Court For the Northern District of California 10 Plaintiff clearly does not satisfy the policy's coverage 11 requirements for continuing disability benefits, and Transguard 12 paid the benefits that were required of it, there is no breach. 13 Id. 14 nothing that would create a plausible agency relationship between 15 it and Exel -- e.g., that Mr. Dalpino was an agent for Transguard, 16 or that Exel is a member of a trucking-industry affiliation group 17 that offers its members insurance -- so any understanding Plaintiff 18 had that he was purchasing workers' compensation insurance cannot 19 be imputed to Transguard. Further, Transguard contends that Plaintiff has pleaded Id. at 10-11. 20 On this latter point, Transguard cites Plaintiff's pleadings 21 that Plaintiff's independent contractor arrangement was only with 22 Exel, Mr. Dalpino signed documents only on Exel's behalf, and also 23 to a state court action Plaintiff filed against Exel indicating 24 that Exel was just one of Transguard's customers, not, for example, 25 its agent. 26 ("State Compl."). 5 27 5 28 Id. at 11 (citing ECF No. 11-1 ("Transguard RJN") Ex. 1 The Court finds that these are all factual The Court takes notice of Transguard's RJN under Federal Rule of Evidence 201, to the extent that the documents include public state court filings. The Court does not take notice of the truth of any 9 1 disputes not subject to determination on a Rule 12(b)(6) motion, 2 since Plaintiff's pleadings, taken as true, are plausible and 3 detailed enough to meet the requirements of Rules 8 and 9. 4 extent that Transguard's motion depends on these arguments, it is 5 DENIED. 6 To the Plaintiff contends that Transguard's legal arguments are 7 misleading. He states that the Court should focus on the fact that 8 Transguard denied Plaintiff's total disability benefits claim not 9 on the basis of whether Plaintiff was disabled, but only because United States District Court For the Northern District of California 10 Plaintiff had not acquired enough credits to qualify for Social 11 Security -- a condition Transguard allegedly knew that Plaintiff 12 could not satisfy. 13 renders Transguard's coverage illusory and constitutes post-claim 14 underwriting, so the Court should impose a coverage obligation on 15 Transguard. 16 See Opp'n at 6. This, according to Plaintiff, Id. Plaintiff first seeks to distinguish two of Transguard's 17 cases: Miller v. Monumental Life Insurance Co., 502 F.3d 1245 (10th 18 Cir. 2007) and Harvell v. Chater, 87 F.3d 371 (9th Cir. 1996). 19 Transguard cited Miller in support of its statement that "many 20 courts have found provisions [requiring Social Security disability 21 qualification] such as that in Transguard's policy enforceable." 22 Mot. at 12 (citing Miller, 502 F.3d at 1251). 23 oversimplifies Miller. 24 in which a plaintiff had been awarded Social Security disability 25 benefits but denied coverage under a plan that used Social Security 26 benefits determinations as conditions precedent for continuous 27 total disability coverage. 28 Transguard That case was a summary judgment decision See Miller, 502 F.3d at 1254-55. fact alleged in the State Complaint. 10 It 1 was not a general approval of such clauses, or a case analyzing 2 allegations at the motion to dismiss stage. 3 does not find Miller relevant to Plaintiff's argument either. 4 Again, it was a case about whether a Social Security Administration 5 ("SSA") decision satisfied a clause similar to the one challenged 6 here -- it had nothing to do with whether inclusion of the clause 7 was unlawful in some way. 8 the Ninth Circuit reviewed a grant of summary judgment that was 9 based on the district court's rejection of the plaintiff- However, the Court The same applies to Harvell, in which United States District Court For the Northern District of California 10 appellant's constitutional challenge to an SSA denial of disability 11 insurance benefits. The parties' present dispute, given Plaintiff's arguments, 12 13 turns on whether Transguard's inclusion of the Social Security 14 requirement in the policy, knowing Plaintiff would be ineligible, 15 renders the policy unlawful in some way. 16 unlike those in Miller or Harvell, is that the requirement's 17 inclusion in Plaintiff's policy was a calculated choice: people 18 like Plaintiff are unlikely to qualify for Social Security 19 disability benefits, given the credit requirement, so insurance 20 companies like Transguard have virtually no obligations for 21 continuous disability coverage, and they shoulder no virtually 22 risk. See Opp'n at 7-12. 6 a. 23 "Illusory" Agreements In California, insurance policies may not provide illusory 24 25 Plaintiff's argument, coverage. See Md. Casualty Co. v. Reeder, 221 Cal. App. 3d 961, 26 27 28 6 Plaintiff also asks the Court to find the policy in question ambiguous or inconspicuous. The Court declines to do so on a motion to dismiss, especially when the policy itself is not in evidence. These issues can be resolved at a later date. 11 1 977 (Cal. Ct. App. 1990). An illusory promise is a promise under 2 which the promisor assumes no obligation, as when the promise is 3 conditioned on something a promisor knows will not occur or is 4 wholly under the promisor's control. 5 Cal. 4th 1, 15-16 (Cal. 2000). See Asmus v. Pac. Bell, 23 6 Plaintiff argues that Transguard's policy was illusory 7 because, while Plaintiff paid premiums for more than 200 weeks, 8 Transguard had no obligation to pay total disability benefits 9 because Transguard knew that Plaintiff could not have been eligible United States District Court For the Northern District of California 10 for Social Security prerequisite. 11 Plaintiff concludes that Transguard's coverage was illusory. 12 Transguard disagrees. See Opp'n at 8. Therefore Id. It argues that it had no knowledge of 13 Plaintiff's Social Security situation; that neither it or its 14 agents had any duty to determine whether Plaintiff's policy was 15 adequate to meet Exel's requirements (and that it cannot be liable 16 for its agents' negligence in failing to recommend adequate 17 coverage); and that, in any event, Plaintiff obtained the benefits 18 to which he was entitled, in the form of temporary disability 19 benefits and medical benefits. 20 See Transguard Reply at 4-6. The Court does not find the disputed terms illusory on their 21 face: they are conditional, so whether Transguard had an obligation 22 depends on whether it knew Plaintiff would not be eligible for 23 Social Security benefits or whether it controlled that eligibility. 24 See Asmus, 20 Cal. 4th at 15-16. 25 apply -- SSA makes those determinations -- Transguard would need to 26 have known of Plaintiff's Social Security ineligibility at the time 27 it made the contract with Plaintiff. 28 Since the latter clearly does not See FAC ¶ 30. Plaintiff has alleged that Mr. Dalpino was acting as an agent 12 1 for Transguard, and that through this mutually beneficial 2 relationship, Transguard knew about Plaintiff's ineligibility for 3 Social Security benefits. 4 contends that it is not liable for its agents' negligence in 5 failing to recommend adequate or proper insurance coverage, Reply 6 at 5 (citing Shultz Steel Co. v. Hartford Ac. & Indemnity Co., 187 7 Cal. App. 3d 513, 518-19 (Cal. Ct. App. 1984), and they are not 8 wrong about that, but Plaintiff has alleged intentional torts, not 9 negligence, on Mr. Dalpino's part. United States District Court For the Northern District of California 10 See id. ¶¶ 7, 9, 12, 30. Transguard Further, Transguard's citation to Fagundes v. American 11 International Adjustment Co., 2 Cal. App. 4th 1310 (Cal. Ct. App. 12 1990), is inapposite. 13 car accident, argued that his insurance policy's coverage was 14 illusory because both he and the other driver had $15,000 15 Uninsured/Under-Insured Motorist ("UM/UIM") benefits plans. 16 1313-14. 17 the plaintiff obtained no sum whatsoever. 18 held that this was not an illusory contract: the plaintiff chose 19 the lowest coverage amount and the insurance company paid it -- the 20 fact that plaintiff had apparently chosen a sub-optimal plan did 21 not render the plan's coverage illusory. 22 Fagundes, Plaintiff has alleged that Transguard knew it would not 23 have to pay benefits under part of the plan. 24 The plaintiff in Fagundes, who had been in a Id. at This meant that after all parties' claims were processed, Id. at 1314. The court Unlike the plan in Plaintiff's pleadings suggest that Transguard knew that it 25 would not have to pay Plaintiff's total disability benefits, which 26 at this stage indicates that Plaintiff has adequately pled that the 27 insurance agreement is illusory. 28 context of Plaintiff's allegations: if Transguard had a working Further, this is plausible in the 13 1 relationship with Exel of the type Plaintiff alleges, and 2 Transguard knew about Exel's contractors' general ineligibility for 3 Social Security benefits, it could accept Exel contractors' premium 4 payments but be fairly secure in the knowledge that it would not 5 incur any obligation to pay certain benefits. 6 to dismiss fails on this point. b. 7 8 9 Transguard's motion Post-Claim Underwriting Plaintiff also argues that Transguard has unlawfully engaged in prohibited "postclaims underwriting." Under California United States District Court For the Northern District of California 10 Insurance Code section 10384, postclaims underwriting of health and 11 disability policies is defined as "the rescinding, canceling, or 12 limiting of a policy or certificate due to the insurer's failure to 13 complete medical underwriting and resolve all reasonable questions 14 arising from written information submitted on or with an 15 application before issuing the policy or certificate." 16 contends that Transguard's refusal to provide benefits based on 17 Plaintiff's ineligibility for Social Security amounts to a 18 postclaim determination that Plaintiff was neither eligible for 19 benefits nor insured for workers' compensation or any disability 20 coverage. 21 made this coverage decision despite knowing that he and many other 22 Exel employees would be ineligible for coverage due to the Social 23 Security clause in their contracts. 24 FAC ¶¶ 31-32. Plaintiff Plaintiff also alleges that Transguard Id. Transguard argues that it did not rescind, cancel, or limit 25 its policy due to a failure to resolve reasonable questions arising 26 from Plaintiff's written information. 27 that it merely complied with the terms of the agreement, which 28 requires as a condition precedent Plaintiff's proof of a Social 14 Reply at 6. It maintains 1 Security Disability Award. Id. 2 Plaintiff's authority, Hailey v. California Physicians' Service, 3 158 Cal. App. 4th 452, 465-66 (Cal. Ct. App. 2007), is inapposite 4 because it concerned the California Health and Safety Code's 5 provision on postclaims underwriting, not the California Insurance 6 Code's. The Court is not convinced. 7 Transguard also contends that Plaintiff has alleged that employees, who were instructed to purchase Transguard's insurance, 10 United States District Court Transguard and Exel were both on notice that many of Exel's insured 9 For the Northern District of California 8 would be ineligible for benefits under the plans because they were 11 also ineligible for Social Security. 12 allegations as true, Transguard's rescinding, canceling, or 13 limiting its policy without having resolved the reasonable question 14 of whether its insureds could ever obtain benefits amounts to 15 postclaims underwriting. 16 much appreciable difference between that case's reasoning on 17 postclaims underwriting or the California Health and Safety Code's 18 definition of the term. 7 19 prohibition on postclaims underwriting is consonant with 20 Plaintiff's claims here: the point of prohibiting such practices is 21 to prevent insureds from having to pay premiums and operate under 22 the assumption that they are insured, only to learn after 23 submitting a claim that they are not, in fact, insured. 24 App. 4th at 465. Taking Plaintiff's Regarding Hailey, the Court does not see The policy Hailey discusses regarding the 158 Cal. Taking Plaintiff's allegations as true, 25 26 27 28 7 Specifically, the Health and Safety Code reads: "For purposes of this section, 'postclaims underwriting' means the rescinding, canceling, or limiting of a plan contract due to the plan's failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on or with an application before issuing the plan contract." 15 1 Transguard knew or should have known at the time Plaintiff obtained 2 his policy that, due to Plaintiff's circumstances and Transguard's 3 relationship with Exel, it was likely that Plaintiff would not in 4 fact be insured. 5 Plaintiff has sufficiently alleged, for the purposes of 6 surviving a Rule 12(b)(6) motion, that Transguard's actions are 7 impermissible under the California Insurance Code's provisions on 8 postclaims underwriting. 9 United States District Court For the Northern District of California 10 11 ii. Breach of the Covenant of Good Faith and Fair Dealing Plaintiff contends that Transguard's conduct constitutes a 12 breach of the implied covenant of good faith and fair dealing. 13 the insurance context, the implied covenant requires the insurer to 14 refrain from injuring its insured's right to receive the benefits 15 of the insurance agreement. 16 Cal. 3d 809, 818 (Cal. 1979). 17 implied covenant when it engages in unreasonable conduct in 18 connection with an insured's claim, placing its own interests above 19 those of its insureds. 20 4th 922, 949 (Cal. Ct. App 2006) (citing Egan, 24 Cal. 3d at 818). 21 A claim under the implied covenant requires that (1) benefits under 22 the policy have been withheld, and (2) the reason for withholding 23 benefits was unreasonable or without proper cause. 24 Neal v. Farmers Ins. Exch., 21 Cal. 3d 910, 920 (Cal. 1978)). 25 issue of reasonableness is normally a question of fact. 26 Chamberay Homeowners Ass'n v. Assoc. Int'l Ins. Co., 90 Cal. App. 27 4th 335, 347 (Cal. Ct. App. 2001). 28 In Egan v. Mutual of Omaha Ins. Co., 24 An insurer tortiously breaches the Century Sur. Co. v. Polisso, 139 Cal. App. Id. (citing The Chateau According to Plaintiff, Transguard's failures to investigate 16 1 Plaintiff's entitlement to benefits and to give Plaintiff's 2 interests equal consideration to its own constitute breaches of 3 good faith and fair dealing. 4 its arguments that the policy's coverage is illusory to contend 5 Transguard acted in bad faith. 6 argues that it is Plaintiff's fault that he did not buy workers' 7 compensation coverage, that any misrepresentation or coercion was 8 due to Exel's behavior, and that Transguard had no duty to 9 investigate Plaintiff's ability to obtain the benefits he sought. United States District Court For the Northern District of California 10 11 FAC ¶¶ 47-48. Plaintiff also cites See Opp'n at 12-13. Transguard Transguard Reply at 7. The Court finds that Plaintiff has pled a claim for breach of 12 the implied covenant. 13 Transguard's agent with Exel sold Plaintiff the insurance, and 14 Transguard knew of Plaintiff's probable inability to obtain 15 coverage under the plan it sold. 16 Plaintiff has adequately alleged that Transguard deprived Plaintiff 17 of his benefits without proper cause, and that Transguard put its 18 own interests in obtaining premiums above Plaintiff's interest in 19 obtaining coverage or understanding the limitations of his plan. 20 21 iii. According to Plaintiff's complaint, Under these circumstances, Fraud and Negligent Misrepresentation Plaintiff alleges that both Defendants' conduct and 22 Transguard's denial of total disability benefits constitutes 23 intentional misrepresentation and concealment, as well as negligent 24 misrepresentation. 25 "(1) a representation of material fact by defendant, (2) with 26 knowledge, actual or virtual, of the true facts, (3) to a party 27 actually or permissively ignorant of the truth, (4) with the 28 intention, actual or virtual, that the other party act upon it, and The elements of an intentional fraud claim are: 17 1 (5) the other party was induced to act." 2 Mid-W. Nat. Life Ins. Co., 118 F. Supp. 2d 1002, 1012 (C.D. Cal. 3 2000) (citing San Diego Mun. Credit Union v. Smith, 176 Cal. App. 4 3d 919, 923 (Cal. Ct. App. 1986)). 5 misrepresentation cause of action differ only with respect to the 6 requisite state of mind. 7 Nanotechnologies Inc., 880 F. Supp. 2d 1029, 1042 (N.D. Cal. 2012). 8 9 Cedars Sinai Med. Ctr. v. The elements of a negligent Id.; JMP Sec. LLP v. Altair Plaintiff contends that Transguard (partly through its agent Mr. Dalpino) and Exel arranged to sell insurance to unsophisticated United States District Court For the Northern District of California 10 persons like himself, knowing that Plaintiff and others would pay 11 premiums on insurance plans that Defendants were aware would not 12 pay certain benefits. 13 according to Plaintiff, constitutes promissory fraud. 14 event, Plaintiff claims, Transguard and Exel's representations to 15 him about his insurance policy were made without reasonable inquiry 16 or belief in their truth, misleading him into paying for insurance 17 despite being ineligible for benefits. 18 is implausible for Mr. Dalpino to have been its agent, and for 19 Transguard to have known that Plaintiff would not qualify for 20 continuous total disability benefits. 21 Court disagrees. 22 sufficiently detailed and plausible to survive a Rule 12(b)(6) 23 motion. 24 B. 25 Both the Equipment Lease Agreement and the Independent See FAC ¶¶ 14, 28-29, 33-34, 53. This, In any Transguard argues that it Transguard Reply at 7. The At this point, Plaintiff's pleadings are Exel's Motion 26 Truckman's Agreement contain arbitration provisions, which are 27 identical. The relevant parts of the arbitration provision read: 28 18 1 2 3 4 5 6 7 8 9 Except as set forth below, CONTRACTOR agrees to submit to final and binding arbitration any and all claims and causes of action which CONTRACTOR may have against the COMPANY . . . . Similarly, COMPANY and its subsidiaries agree to submit to final and binding arbitration any and all claims and causes of action which they may have against CONTRACTOR . . . . This arbitration provision includes all tort claims and all claims based on an alleged violation of statute or public policy. , . The legal basis for this arbitration provision is the state laws governing arbitration in the state in which CONTRACTOR performs services under this Agreement . . . It is agreed that no class action or consolidated class actions will be available under the arbitration procedure. NOTE: This arbitration provision constitutes a waiver of CONTRACTOR'S right to a jury trial. Equipment Lease Agreement ¶ 16. Agreement ¶ 17; Independent Truckman's United States District Court For the Northern District of California 10 Exel contends that all of Plaintiff's tort claims against it 11 are subject to mandatory arbitration, regardless of Plaintiff's 12 contention that he could not read the operative contracts. See 13 Exel MTD at 4-5. Exel therefore asks the Court to dismiss 14 Plaintiff's claims, id. at 6 (citing cases supporting a district 15 court's ability to dismiss a case when all of the relevant claims 16 are arbitrable), or to stay the case and compel arbitration. 17 Plaintiff argues, among other things, that he did not 18 knowingly and voluntarily agree to submit to arbitration and to 19 relinquish his right to a jury trial, because he could not 20 understand or read English at the time he signed the Agreements. 21 In response, Exel begins with a threshold factual argument 22 that Plaintiff understood written and spoken English when he was 23 recruited by Exel. See Reply at 2-3; ECF Nos. 46 ("Dalpino Decl.") 24 & 47 ("Gutierrez Decl."). This factual dispute is inappropriate 25 for resolution at this time, and the Court declines to address it. 26 The only factual contentions properly before the Court are those in 27 28 19 1 the FAC, and the Court must take them as true at this time. 8 Since the crux of this dispute is not the invalidity of the 2 3 contract as a whole, but rather the arbitration provision itself, 4 the Court must decide whether the arbitration provision is invalid 5 and unenforceable under section 2 of the FAA. 6 MailCoups, Inc., 469 F.3d 1257, 1264 (9th Cir. 2006) (en banc). 7 While agreements to arbitrate are valid, irrevocable, and 8 enforceable as a matter of federal law, state law nonetheless 9 governs issues concerning the validity, revocability, and Nagrampa v. United States District Court For the Northern District of California 10 enforceability of contracts generally. 11 483, 492 n.9 (1987). 12 defenses may be asserted to invalidate arbitration agreements 13 without contravening the FAA. 14 Casarotto, 517 U.S. 681, 687 (1996). 15 specifically challenge arbitration clauses in their complaints. 16 See Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 17 F.3d 996, 998 (9th Cir. 2010). 18 challenge to the validity of an arbitration clause is a distinct 19 question from the validity of the contract as a whole, the question 20 of arbitrability is for the court to decide." i. 21 Perry v. Thomas, 482 U.S. As such, generally applicable contract Doctor's Assocs., Inc. v. Plaintiffs need not Rather, "as long as the plaintiff's Id. Exemption 22 As a threshold matter, Plaintiff contends that the FAA exempts 23 him from its arbitration requirements, because the FAA specifically 24 exempts from its coverage "contracts of employment of seamen, 25 railroad employees, or any other class of workers engaged in 26 8 27 28 Plaintiff moved for leave to file a sur-reply, ECF No. 49, which the Court GRANTS. However, Plaintiff's brief only concerns factual issues surrounding his ability to speak English at the time he entered the Agreements. The Court therefore declines to address the issues Plaintiff raises at this time. 20 1 foreign or interstate commerce." 9 U.S.C. § 1; see also Circuit 2 City Stores, Inc. v. Adams, 532 U.S. 105 (2001) (transportation 3 workers engaged in interstate commerce are exempt from the FAA). 4 In support of his argument that he is a transportation worker, 5 Plaintiff cites Veliz v. Cintas Corp., No. C 03-1180 SBA, 2004 WL 6 2452851, at *5 (N.D. Cal. Apr. 5, 2004), in which the court applied 7 an eight-factor test to determine whether the plaintiff counted as 8 a "transportation worker" subject to FAA exemption. 9 finds that case, as well as Circuit City, inapposite. The Court The FAA United States District Court For the Northern District of California 10 provision in question concerns employment contracts, and Plaintiff 11 has pled that he is an independent contractor. 12 (referencing "contracts of employment"). 13 Circuit, the issue of whether a party is an independent contractor 14 is a "highly factual" question. 15 Inc., 249 F.3d 1137, 1141 (9th Cir. 2001). See 9 U.S.C. § 1 According to the Ninth Harden v. Roadway Package Sys., Based on Plaintiff's allegations, the Court cannot find at 16 17 this point that he is exempt from the FAA. 18 indicated that the distinction between independent contractors and 19 employees is both highly factual and material for further analysis 20 of FAA exemption, see Harden, 249 F.3d at 1141, so the Court cannot 21 assume at this point (as Plaintiff appears to have done, given his 22 lack of briefing on the matter) that independent contractors and 23 employees alike are potentially exempt from the FAA. 24 7-9. 25 between Plaintiff and Exel is "not an employer-employee 26 relationship." 27 28 The Ninth Circuit has See Opp'n at Further, the Agreements indicate that the relationship See Independent Truckman's Agreement ¶ 9. Under these circumstances, and considering that the § 1 exclusion is to be both interpreted narrowly, Circuit City, 532 21 1 U.S. at 106, and understood to favor arbitration, Volt Info Scis., 2 Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 3 476 (1989), the Court declines to find at this time that Plaintiff 4 is exempt from the FAA. 5 this dispute, Plaintiff's allegation that Exel's motion should be 6 denied because it does not cite California arbitration law is 7 inapposite. ii. 8 9 Since the Court finds that the FAA governs Capacity and Unconscionability Plaintiff also argues he lacked capacity to agree to the United States District Court For the Northern District of California 10 arbitration clause in the Agreements. Opp'n to Exel at 6-7. 11 However, it is not clear from Plaintiff's brief or declarations 12 whether he contends that he specifically lacked capacity to enter 13 the arbitration clause, as opposed to the Agreements as a whole. 14 See id. 15 The rule in California is that "when a person with the 16 capacity of reading and understanding an instrument signs it, he 17 is, in the absence of fraud and imposition, bound by its contents . 18 . . ." 19 Cal. App. 4th 156, 162 n.6 (Cal. Ct. App. 2013). 20 plaintiff is illiterate, however, he still has the responsibility 21 to have a contract read to him if he does not understand it. 22 Hutchins v. TNT/Reddaway Truck Line, Inc., 939 F. Supp. 721, 724 23 (N.D. Cal. 1996). 24 exactly how much of the Agreements he understood, the Court is not 25 persuaded that Plaintiff lacked capacity to enter just one 26 particular clause of the Agreements. 27 Plaintiff had capacity goes to the formation of the entire contact, 28 which would be an issue for the arbitrator, as opposed to the AGI West Linn of Appian Grp. Investors DE LLC v. Eves, 217 Even if a See Based on Plaintiff's irregular allegations as to 22 The question of whether 1 question of the arbitration clause, which is for the Court. Bridge 2 Fund, 622 F.3d at 998. 3 argument, finding Plaintiff's contentions on this issue more suited 4 for an unconscionability argument. The Court rejects Plaintiff's capacity "To defeat an arbitration clause, the litigant must show both 5 6 procedural and substantive unconscionability, although 'the more 7 substantively oppressive the contract term, the less evidence of 8 procedural unconscionability is required to come to the conclusion 9 that the term is unenforceable, and vice versa.'" Bridge Fund, 622 United States District Court For the Northern District of California 10 F.3d at 1004 (quoting Armendariz v. Found. Health Psychcare Servs., 11 Inc., 24 Cal. 4th 83, 114 (Cal. 2000)). "Procedural unconscionability involves oppression or surprise 12 13 due to unequal bargaining power, while substantive 14 unconscionability focuses on overly harsh or one-sided results." 15 Id. (internal quotations and citations omitted). 16 law, contracts of adhesion, "or at least terms over which a party 17 of lesser bargaining power had no opportunity to negotiate," are 18 treated as procedurally unconscionable "to at least some degree." 19 Id. 20 Under California First, as to procedural unconscionability, Plaintiff alleges 21 that his English was poor at the time he signed the Agreements, and 22 that at least as to some of the Agreements' terms, Mr. Dalpino 23 either affirmatively misled him or omitted material facts about the 24 Agreements. 25 by an entity with far more bargaining power than Plaintiff, the 26 Court finds that Plaintiff has established procedural 27 unconscionability. 28 contract that was "imposed on employees as a condition of Since the Agreements are also form contracts drafted See Armendariz, 24 Cal. 4th at 114 (employment 23 1 employment" with "no opportunity to negotiate" was adhesive). 2 Since the procedural unconscionability here seems high, the Court 3 also finds that Plaintiff need only make a minimal showing of the 4 arbitration clause's substantive unconscionability to render it 5 unenforceable. Bridge Fund, 622 F.3d at 1004. substantively unconscionable because Exel's conduct regarding the 8 arbitration clause is highly oppressive, and the clause did not 9 fall within his reasonable expectations (given Mr. Dalpino's 10 United States District Court Second, Plaintiff argues that the arbitration clause is 7 For the Northern District of California 6 misrepresentations and Plaintiff's own lack of understanding 11 surrounding the Agreements). 12 arbitration clause is bilateral -- both parties are equally subject 13 to it -- and also conspicuous and easily understandable, it cannot 14 be substantively unconscionable. Exel contends that because the See Exel Reply at 9-10. The Court finds that the arbitration clause has the requisite 15 16 "modicum of bilaterality" here. 17 The clause requires both party to submit all employment-related 18 claims to arbitration, and it does not limit either side's relief 19 or otherwise suggest that Plaintiff is more disadvantaged than Exel 20 here. 9 21 clause is contrary to his reasonable expectations as the weaker or 22 "adhering" party. 23 9 24 25 26 27 28 See id. Armendariz, 24 Cal. 4th at 117. However, Plaintiff argues that the arbitration Opp'n to Exel at 12-13 (citing Bruni v. Didion, The class action prohibition would appear to violate California law, per Ninth Circuit precedent, but it is not currently at issue in this case, so the Court does not examine it at this time. See Shroyer v. New Cingular Wireless Servs., Inc., 498 F.3d 976, 986-87 (9th Cir. 2007). Further, the clause's language about Plaintiff waiving his right to a jury trial could indicate that the provision is not fully bilateral, though the fact that both parties commit to arbitration (thereby waiving Exel's jury trial right), and the Court's interpretation of the clause in favor of arbitration, suggest that the waiver provision does not weigh heavily for or against unconscionability. 24 1 160 Cal. App. 4th 1272, 1290-91 (Cal. Ct. App. 2008); Lima v. 2 Gateway, Inc., 886 F. Supp. 2d 1170, 1183 (C.D. Cal. 2012) (citing 3 Bruni)). 4 "reasonable expectations" in substantive unconscionability cases as 5 follows: 6 7 8 9 United States District Court For the Northern District of California 10 11 The California Supreme Court noted the relevance of Generally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof. The first is that such a contract or provision which does not fall within the reasonable expectations of the weaker or "adhering" party will not be enforced against him. The second -- a principle of equity applicable to all contracts generally -- is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or "unconscionable." 12 Graham v. Scissor-Tail, Inc., 623 P.2d 165 (Cal. 1981) (in bank). 13 Later cases have referred to both the "reasonable expectations" and 14 "oppressive" limitations as being aspects of unconscionability. 15 Armendariz, 24 Cal. 4th at 113 (citing A&M Produce Co. v. FMC 16 Corp., 135 Cal. App. 3d 473, 486-87 (Cal. Ct. App. 1982)). 17 Part of a court's consideration of a party's reasonable 18 expectations also appears to involve whether the party had adequate 19 notice of the arbitration clause, and whether the party would 20 expect the clause to appear based on whether the party is familiar 21 with the type of contract at issue. 22 165 (finding that a contract of adhesion was not contrary to a 23 party's expectations because he had entered "literally thousands" 24 of such contracts); Marin Storage & Trucking, Inc. v. Benco 25 Contracting & Eng'g, Inc., 89 Cal. App. 4th 1042, 1057 (Cal. Ct. 26 App. 2001) (finding similarly); see also Fred Briggs Distrib. Co. 27 v. Cal. Cooler, Inc., 2 F.3d 1156 (9th Cir. 1993) (same). 28 consideration also concerns what reasonable consumers would expect 25 See Scissor-Tail, 623 P.2d at This 1 about the arbitration clause's scope -- for example, whether an 2 arbitration clause included in a warranty would relate only to the 3 warranty, as opposed to including every possible dispute between 4 the parties. See Bruni, 160 Cal. App. 4th at 1294-95. The issue of what Plaintiff's reasonable expectations were, 5 -- it involves facts. 8 enough to avoid dismissal based on the arbitration clause. 9 contract is adhesive, Plaintiff is a manual laborer who was not 10 United States District Court relative to this arbitration clause, is not purely a legal question 7 For the Northern District of California 6 fluent (or even literate) in English at the time he entered the 11 Agreements, and Mr. Dalpino allegedly misled him as to the 12 Agreements. 13 both Transguard and Exel worked to take advantage of his situation 14 as a non-English-speaking non-citizen, using their superior 15 bargaining powers to ensure that Plaintiff would later be 16 disadvantaged in certain ways. 17 The Court finds that Plaintiff has alleged The Further, the essence of Plaintiff's complaint is that At some point, the facts may indicate otherwise, but at this 18 stage the Court finds that the slight substantive unconscionability 19 factors, considered alongside the strong procedural 20 unconscionability in this case, favor rejecting Exel's motion to 21 dismiss based on the arbitration clause. 22 at 1004 (unconscionability analysis is a sliding scale). 23 Accordingly, Exel's motion to dismiss Plaintiff's FAC based on the 24 arbitration clause is DENIED, and its motion to compel arbitration 25 is DENIED for the same reasons. 26 arbitration in a later motion, but Plaintiff's allegations are 27 enough for his causes of action against Exel to survive at this 28 point. See Bridge Fund, 622 F.3d Exel may raise the issue of 26 1 2 V. CONCLUSION As explained above, Defendants Transguard Insurance Company of 3 America and Exel Direct Inc.'s motions to dismiss Plaintiff Daniel 4 Diaz Villalpando's first amended complaint are DENIED. 5 6 IT IS SO ORDERED. 7 8 9 Dated: February 13, 2014 UNITED STATES DISTRICT JUDGE United States District Court For the Northern District of California 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 27

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