Villalpando v. Transguard Insurance Co. of America

Citations: 17 F. Supp. 3d 969; 2014 U.S. Dist. LEXIS 21450; 2014 WL 644391Docket: C 13-4028 SC

Court: District Court, N.D. California; February 18, 2014; Federal District Court

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Defendants Transguard Insurance Company of America and Exel Direct, Inc. filed motions to dismiss Plaintiff Daniel Diaz Villalpan-do's first amended complaint, which the Court denied. Plaintiff, a Mexican citizen living in California, sought work as a truck driver in September 2008. After a brief meeting with Exel's representative, Jim Dalpino, Plaintiff was offered a job contingent upon signing documents as an independent contractor. Due to his limited English proficiency, Plaintiff requested Spanish translations of the documents, but none were provided. Despite this, Dalpino instructed him to sign an 'Equipment Lease Agreement' and an 'Independent Truckman’s Agreement,' both of which were backdated. Plaintiff was led to believe he was securing workers' compensation insurance as part of the agreement, based on Dalpino’s assurances. Plaintiff alleges that Dalpino acted on behalf of Transguard in arranging and confirming insurance coverage, and claims that Transguard and Exel were connected through the National Association of Independent Truckers, which marketed insurance products to independent trucking firms.

Plaintiff asserts that Exel is a member of NAIT and that Transguard provided insurance for Exel, with Plaintiff's insurance premiums deducted from his pay as an independent contractor. Transguard was aware of this arrangement and ratified it by accepting payments for the insurance and disbursing benefits. Although Plaintiff believed he had purchased workers compensation insurance based on assurances from Exel’s representative, Mr. Dalpino, he never received a copy of his policy until after requesting it following a serious injury sustained while delivering for Exel on October 17, 2010. The injury resulted in extensive medical issues and surgeries, with Transguard initially covering some medical bills and providing temporary disability payments. 

However, when Plaintiff sought continued disability benefits after being informed by his doctors that he could not return to work, Transguard denied the claim, citing a requirement to apply for Social Security benefits, a stipulation of which Plaintiff was unaware. As a non-citizen, he was ineligible for these benefits due to insufficient work credits, which he learned after being denied. Transguard later communicated that the denial was not due to his disability but rather his lack of Social Security approval, maintaining that he did not qualify for benefits as he had not worked long enough. Plaintiff contends that Defendants were aware he could not qualify for the insurance sold to him and misrepresented it as workers compensation insurance that would cover his injuries.

Plaintiff alleges that his insurance coverage with Transguard is effectively 'illusory' due to his ineligibility for benefits stemming from his lack of U.S. citizenship and Social Security credits. He claims that Transguard's denial of benefits constitutes material non-disclosure under California insurance law, as he was not informed of his ineligibility for coverage when he paid premiums for 202 weeks. Furthermore, Plaintiff argues that Transguard engaged in prohibited post-claims underwriting by determining his ineligibility after he submitted a claim, rather than denying coverage based on his disability status.

Plaintiff asserts that Defendants sold insurance policies to individuals who did not understand English, leading them to enter contracts under false pretenses. He brings several causes of action against Transguard: (1) breach of insurance contract, (2) declaratory relief for a declaration of disability and entitlement to benefits, and (3) breach of the implied covenant of good faith and fair dealing. Additionally, he claims against both Transguard and Exel for (4) intentional misrepresentation and concealment, and (5) negligent misrepresentation.

Transguard moves to dismiss the breach of contract and declaratory relief claims, arguing that Plaintiff fails to identify specific benefits he was entitled to that were denied and acknowledges receipt of temporary total disability benefits. They assert that the policy explicitly states that there is no workers’ compensation coverage for Plaintiff, which invalidates his claims for continuous disability benefits. 

The legal standard for a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) requires the court to assess the sufficiency of the claims, accepting well-pleaded factual allegations as true. However, legal conclusions and vague assertions do not meet the necessary criteria. Claims involving fraud must adhere to the heightened pleading standards of Rule 9(b), requiring specificity regarding the fraudulent circumstances.

Transguard asserts that the Plaintiff does not meet the policy’s criteria for continuing disability benefits and, having paid the benefits required, there is no breach of contract. The company also argues that the Plaintiff has not established a plausible agency relationship between Transguard and Exel, noting that Mr. Dalpino acted solely on behalf of Exel and that the Plaintiff's agreements were only with Exel, which was merely a customer of Transguard. Consequently, these factual disputes are not resolvable under a Rule 12(b)(6) motion, as the Plaintiff's allegations are deemed plausible under Rules 8 and 9. The Court denies Transguard’s motion based on these arguments.

The Plaintiff counters that Transguard's denial of total disability benefits was not based on the Plaintiff's disability status, but rather on a lack of sufficient credits for Social Security qualification, which Transguard allegedly knew the Plaintiff could not meet. This scenario, according to the Plaintiff, makes Transguard's coverage illusory and suggests post-claim underwriting, warranting a coverage obligation. The Plaintiff differentiates two cases cited by Transguard—Miller v. Monumental Life Insurance Co. and Harvell v. Chater—arguing that they do not support Transguard’s claims as they involved summary judgments rather than the current dismissal context. The essence of the dispute revolves around whether the Social Security requirement in the policy, knowing the Plaintiff's ineligibility, renders the policy unlawful, with the Plaintiff suggesting that such requirements are strategically included by insurers to limit their obligations and risk.

Insurance policies in California cannot offer illusory coverage, which occurs when a promise imposes no obligation on the promisor. In this case, Plaintiff asserts that Transguard's policy was illusory because, despite paying premiums for over 200 weeks, Transguard had no obligation to pay total disability benefits due to Plaintiff's ineligibility for Social Security, which Transguard allegedly knew. Transguard counters that it was unaware of Plaintiff's Social Security status and was not responsible for determining if the policy met Exel's requirements. The court finds that whether Transguard had an obligation hinges on its knowledge of Plaintiff's ineligibility for Social Security at the time of contract formation. Although Transguard claims it cannot be liable for its agents' negligence, Plaintiff alleges intentional torts by Mr. Dalpino, an agent for Transguard, suggesting possible knowledge of the ineligibility. The case contrasts with Fagundes, where the court ruled the insurance coverage was not illusory because the plaintiff chose a low coverage amount. In contrast, the Plaintiff here alleges that Transguard knowingly avoided liability by accepting premiums while being aware of the lack of obligation to pay certain benefits. As a result, the court concludes that Plaintiff has sufficiently alleged that the insurance agreement is illusory, denying Transguard's motion to dismiss.

Transguard is accused of engaging in unlawful postclaims underwriting under California Insurance Code section 10384, which prohibits the rescinding or limiting of health and disability policies if medical underwriting is incomplete prior to issuance. The plaintiff argues that Transguard's denial of benefits based on his ineligibility for Social Security constitutes a postclaim determination, effectively indicating that he was not insured for workers’ compensation or disability coverage. The plaintiff asserts that Transguard was aware that many Exel employees would likely be ineligible for coverage due to contractual clauses regarding Social Security. In response, Transguard claims it did not engage in postclaims underwriting but adhered to the policy terms requiring proof of a Social Security Disability Award. 

The court finds that the plaintiff’s allegations support a claim of postclaims underwriting, as Transguard may have failed to resolve reasonable questions regarding the insured's eligibility for benefits. The court also notes that the reasoning in Hailey v. California Physicians’ Service, while based on the Health and Safety Code, aligns with the principles applicable under the Insurance Code, emphasizing the prohibition against unexpected denial of coverage after claims are submitted.

Additionally, the plaintiff alleges a breach of the implied covenant of good faith and fair dealing, which mandates that insurers must not harm their insured's right to benefits. This breach occurs when an insurer acts unreasonably in handling a claim, prioritizing its own interests over those of the insured. The court acknowledges the plaintiff’s claims are sufficient to survive a motion to dismiss under Rule 12(b)(6).

A claim under the implied covenant requires the withholding of benefits under an insurance policy and that such withholding was unreasonable. The determination of reasonableness is typically a factual question. The plaintiff alleges that Transguard failed to investigate his entitlement to benefits and prioritized its own interests over his, claiming this constitutes a breach of good faith and fair dealing. The plaintiff also asserts that the policy's coverage is illusory, indicating bad faith on Transguard's part. Transguard counters that any issues stemmed from the plaintiff's failure to obtain workers’ compensation coverage and that it had no duty to investigate the plaintiff's eligibility for benefits.

The court finds that the plaintiff has sufficiently pled a claim for breach of the implied covenant, noting that Transguard's agent sold the insurance despite knowing the plaintiff's likely inability to obtain coverage. The plaintiff also claims intentional and negligent misrepresentation by both defendants, asserting that they sold insurance to unsophisticated individuals while knowing that certain benefits would not be paid. The elements for intentional fraud include a material representation made with knowledge of its truth, intending for the other party to act upon it, which the plaintiff claims occurred. The court considers the plaintiff's allegations sufficiently detailed to withstand a motion to dismiss.

Additionally, both the Equipment Lease Agreement and the Independent Truckman’s Agreement include identical arbitration provisions.

CONTRACTOR and COMPANY are bound to final and binding arbitration for all claims and causes of action against each other, including tort claims and statutory violations, per the applicable state laws governing arbitration. The arbitration provision explicitly prohibits class actions and constitutes a waiver of CONTRACTOR's right to a jury trial. Exel argues that all of Plaintiff's tort claims are subject to this mandatory arbitration despite Plaintiff's assertion of not being able to read the contracts at the time of signing. Exel seeks dismissal of Plaintiff's claims or a stay to compel arbitration, referencing the court's authority in such matters. Plaintiff counters that he did not knowingly agree to arbitration due to language barriers. However, Exel contends that Plaintiff understood English when recruited, but the court finds this factual dispute inappropriate for resolution at this stage and accepts the allegations in Plaintiff's First Amended Complaint (FAC) as true. 

The court's focus is on the validity of the arbitration provision, not the entire contract’s validity, under section 2 of the Federal Arbitration Act (FAA). While arbitration agreements are generally enforceable under federal law, state law governs the validity and enforceability of contracts. Plaintiffs can challenge arbitration clauses without needing to specifically address them in their complaints, as long as the challenge is distinct from the overall contract's validity. 

Additionally, Plaintiff claims exemption from the FAA's arbitration requirements, arguing he fits the definition of a "transportation worker" engaged in interstate commerce, which is exempt under the FAA. He cites a case applying an eight-factor test to determine this status.

The Court determines that the Federal Arbitration Act (FAA) applies to the case, rejecting the applicability of precedents such as Circuit City. The FAA's provision relates specifically to employment contracts; however, the Plaintiff claims to be an independent contractor, making the classification of his relationship with Exel a factual issue requiring further examination. The Court notes that the distinction between independent contractors and employees is significant in assessing FAA exemption and cannot be assumed as the Plaintiff has not adequately briefed this point. The Agreements clearly state that the relationship is not employer-employee.

The Court also addresses the Plaintiff's argument regarding lack of capacity to agree to the arbitration clause. It finds insufficient clarity in the Plaintiff's claims—whether he lacked capacity for the arbitration clause specifically or the entire Agreements. Under California law, a person who can read and understand a contract is typically bound by it, barring fraud. Even illiterate individuals are expected to seek assistance in understanding contracts. Given the vague nature of the Plaintiff's allegations regarding his understanding, the Court is not convinced he lacked capacity concerning just the arbitration clause. This issue pertains to the overall contract's formation, which falls under the arbitrator's jurisdiction, while the arbitration clause itself is a matter for the Court.

The Court dismisses the capacity argument, suggesting it better fits an unconscionability claim. To invalidate an arbitration clause, a party must demonstrate both procedural and substantive unconscionability. The Court notes that a particularly oppressive contract term requires less evidence of procedural unconscionability to be deemed unenforceable.

Procedural unconscionability concerns situations where there is oppression or surprise stemming from unequal bargaining power, whereas substantive unconscionability pertains to excessively harsh or one-sided outcomes. Under California law, contracts of adhesion, particularly terms that a weaker party could not negotiate, are generally deemed at least somewhat procedurally unconscionable. The Plaintiff claims his limited English proficiency at the time of signing led to misunderstandings, alleging that Mr. Dalpino either misled him or failed to disclose key terms of the Agreements. Given the form contracts were created by a more powerful entity, the Court recognizes procedural unconscionability in this context. 

Due to significant procedural unconscionability, the Plaintiff needs to show only minimal substantive unconscionability for the arbitration clause to be deemed unenforceable. The Plaintiff contends that the arbitration clause is substantively unconscionable due to Exel’s oppressive behavior and misrepresentations that led to a lack of understanding on the Plaintiff's part. Exel argues that the clause is bilateral, thus fair, and is both conspicuous and understandable. The Court acknowledges that the arbitration clause does have a basic level of bilaterality, as it requires both parties to arbitrate employment-related claims without limiting either party’s relief.

However, the Plaintiff asserts that the arbitration clause contradicts his reasonable expectations due to his status as the weaker party. The California Supreme Court has highlighted two limitations on adhesion contracts: one, that contracts must align with the reasonable expectations of the weaker party, and two, that even reasonable contracts can be unenforceable if they are unduly oppressive. The Court’s evaluation of a party's reasonable expectations also involves whether they had adequate notice of the arbitration clause and if they should have anticipated such a clause based on their familiarity with the contract type.

A contract of adhesion was deemed not contrary to a party's expectations, as the individual had entered numerous similar contracts. The court examined whether reasonable consumers would expect the arbitration clause in a warranty to encompass only warranty-related disputes or all potential disputes. The plaintiff's reasonable expectations regarding the arbitration clause are fact-based rather than purely legal. The court determined that the plaintiff, a non-English-speaking manual laborer, had sufficiently alleged that he was misled by Mr. Dalpino regarding the agreements. The complaint suggests that Transguard and Exel exploited the plaintiff's vulnerable status. The court noted that the combination of slight substantive unconscionability and strong procedural unconscionability favored denying Exel's motion to dismiss based on the arbitration clause. Consequently, Exel's motion to compel arbitration was also denied, although it may raise the arbitration issue in future motions. The court denied the motions to dismiss from Transguard and Exel regarding the plaintiff's first amended complaint. The court granted the plaintiff's request to file a sur-reply, noting it involves factual disputes unsuitable for resolution on a motion to dismiss. The agreements in question include the Equipment Lease Agreement and Independent Truckman's Agreement. The court acknowledged a potential typo regarding the plaintiff's notification of ineligibility date. The court recognized Transguard's request for judicial notice of certain documents but did not acknowledge the truth of the facts alleged in the state complaint. The court declined to find the policy ambiguous or inconspicuous at this stage, reserving such determinations for later proceedings.

"Po-stclaims underwriting" refers to the process of rescinding, canceling, or limiting a plan contract due to the plan's failure to complete medical underwriting and address all reasonable questions related to the application before issuing the contract. The Plaintiff's request to file a sur-reply has been granted by the Court; however, the sur-reply focuses solely on factual issues regarding the Plaintiff's English proficiency at the time of entering the Agreements. Consequently, the Court will not address these issues now. The prohibition against class actions may conflict with California law according to Ninth Circuit precedent, but this matter is not presently before the Court, so it will not be considered. Additionally, the language concerning the Plaintiff’s waiver of the right to a jury trial raises questions about the bilateral nature of the clause. Nevertheless, since both parties agree to arbitration, indicating a mutual waiver of the jury trial right, the Court leans toward interpreting the waiver provision in a manner that does not strongly support or oppose a finding of unconscionability.