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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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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United States District Court

For the Northern District of California

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) 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.
)
)
)
)

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18

I.

INTRODUCTION

19

Now before the Court are Defendants Transguard Insurance

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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.

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motions are fully briefed, 1 and the Court finds them appropriate

24

for decision without oral argument, Civ. L.R. 7-1(b).

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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.

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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

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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

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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.

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to backdate the form to September 3, 2008, which Plaintiff did.

13

FAC ¶ 15.

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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

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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

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20

insurance agency.

Id. ¶¶ 8-9.

Plaintiff alleges that Mr. Dalpino

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was acting on behalf of Transguard when he arranged for, sold, and

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confirmed the issuance of coverage on Transguard's behalf.

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9; ECF No. 40 ("Villalpando Decl.") ¶¶ 9-12.

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alleges that Transguard and Exel were related through the National

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Association of Independent Truckers ("NAIT"), an "affiliation

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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

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was paid per delivery, and the cost of his insurance premiums was

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deducted from his paychecks.

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of this arrangement because it had arranged for Exel to negotiate

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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

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insurance Plaintiff purchased through Exel, and also by paying

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benefits of such coverage.

13

Mr. Dalpino, however, Plaintiff never obtained any copy of any

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evidence of insurance (including a copy of his policy), though

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sometime after that meeting, Plaintiff did receive a one-page

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document entitled "Evidence of Insurance."

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Throughout this time, based on Mr. Dalpino's statements and

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representations, Plaintiff believed he had purchased the requisite

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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,

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Plaintiff was badly injured when a refrigerator fell on top of him.

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Id. ¶ 20.

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Id.

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sprains/strains of the arms, shoulders, neck and thoracic spine,

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including a cervical and lumbar radiculopathy, thus necessitating

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surgeries."

27

and may require future surgeries.

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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.

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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

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ask for continuing disability benefits.

6

Id.

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obtain continuing disability benefits, his policy required that he

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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

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never been given a copy of his insurance policy until he asked for

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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

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did not understand, the provisions of which Defendants concealed

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from him.

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purchased workers compensation insurance that would cover his total

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disability and medical expenses, an expectation he contends is

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verified by his weekly payments and the payments of his medical

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bills, which Plaintiff contends resulted in Transguard's

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ratification of Mr. Dalpino's and Exel's conduct for Transguard's

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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,

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Plaintiff requested Social Security benefits -- which at that point

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he had thought were only for retirement, not pre-retirement

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disability.

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was not eligible for Social Security benefits because he did not

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have enough "credits." 3

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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

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1

working in certain jobs for certain periods of time, and Plaintiff

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contends that for Social Security eligibility, he would have needed

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to work for ten years (forty work quarters) in eligible jobs.

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¶ 28.

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Id.

After Plaintiff received that notice of ineligibility,

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Transguard informed Plaintiff via an email dated October 15, 2012,

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that Plaintiff's claim would be denied "not because he was totally

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disabled from working but because he was not 'approved for Social

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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

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Security.'"

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contends that Defendants had always known that he could not qualify

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for the insurance they sold him.

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hid this fact from him, telling him instead that he was purchasing

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workers compensation insurance that would apply if he was injured

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while working for Exel.

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Plaintiff's beliefs and expectations about his insurance, he paid

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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

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insurance benefit denial was improper because it renders his

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insurance coverage "illusory," since Plaintiff could never be

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covered under the plan given his lack of U.S. citizenship and

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Social Security credits.

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Defendants' position is an act of material non-disclosure under

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California insurance law, since they never told him that he would

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not be eligible for coverage under the plan he paid for.

Id. ¶ 30.

He also maintains that

Id. ¶ 31.

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by letters dated September 12, 2002, but the Court assumes that
this was a typo, given the narrative.

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1

Plaintiff contends that Defendants' coverage position is also a

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prohibited type of post-claims underwriting, since Transguard

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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

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Plaintiff's not being disabled.

See id. ¶ 32.

The gist of Plaintiff's complaint is that Defendants

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8

collaborated to sell insurance policies to people like Plaintiff

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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

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condition of their employment. 4

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Plaintiff asserts against Transguard causes of action for (1)

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breach of insurance contract; (2) declaratory relief, seeking a

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declaration that Plaintiff is disabled and entitled to benefits

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wrongfully withheld; and (3) breach of the implied covenant of good

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faith and fair dealing.

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and Exel causes of action for (4) intentional misrepresentation and

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concealment, and (5) negligent misrepresentation.

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move to dismiss.

Id. ¶ 33.

Based on these facts,

Plaintiff asserts against both Transguard

Defendants each

20
21 III.

LEGAL STANDARD

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A motion to dismiss under Federal Rule of Civil Procedure

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12(b)(6) "tests the legal sufficiency of a claim."

Navarro v.

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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

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28

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Indeed, Plaintiff contends that a vast majority of his delivery
department colleagues were not U.S. citizens. FAC ¶ 32.

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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

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plausibly give rise to an entitlement to relief."

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Iqbal, 556 U.S. 662, 679 (2009).

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must accept as true all of the allegations contained in a complaint

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is inapplicable to legal conclusions.

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elements of a cause of action, supported by mere conclusory

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statements, do not suffice."

United States District Court

For the Northern District of California

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"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.

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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

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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

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A.

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26

Transguard's Motion
i.

Breach of Contract & Declaratory Relief

Transguard moves to dismiss Plaintiff's breach of contract and

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declaratory relief claims, arguing that: (1) Plaintiff does not

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identify any policy benefits to which he was entitled but that

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Transguard refused to pay, (2) Plaintiff admits that Transguard

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paid the policy's temporary total disability benefits, and (3) the

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policy's provision relating to continuous total disability benefits

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is valid and enforceable.

Transguard MTD at 10-11.

Transguard notes that Plaintiff's "Evidence of Insurance" form

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6

clearly states that none of Plaintiff's coverage is workers'

7

compensation coverage, rendering continuing disability benefits

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unavailable to Plaintiff because he did not qualify for his own

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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

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requirements for continuing disability benefits, and Transguard

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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

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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

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Exel, Mr. Dalpino signed documents only on Exel's behalf, and also

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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.

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To the

Plaintiff contends that Transguard's legal arguments are

7

misleading.

He states that the Court should focus on the fact that

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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

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Security -- a condition Transguard allegedly knew that Plaintiff

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could not satisfy.

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renders Transguard's coverage illusory and constitutes post-claim

14

underwriting, so the Court should impose a coverage obligation on

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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

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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.

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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

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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

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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

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appellant's constitutional challenge to an SSA denial of disability

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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
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22
23
24
25
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27
28

27