Judge David S. Cunningham, Case Number: 23STCV07597, Date: 2025-02-25 Tentative Ruling

Judge: David S. Cunningham, Case: 23STCV07597, Date: 2025-02-25 Tentative Ruling

Moving Party: Farmers Group, Inc. (“FGI”), Truck Underwriters Association, and Fire Underwriters Association (collectively “Defendants”)

* granted as to exhibit C (the Court will judicially notice the existence of the document); and

* denied as to exhibits D through F (the documents are private documents, and it is uncertain when they were drafted and whether they are the versions that were operative during the relevant time period).

Plaintiffs’ case regards interinsurance exchanges and attorneys-in-fact. The operative complaint alleges:

2. Plaintiffs are subscribers in reciprocal insurance exchanges, which are unincorporated associations organized for the purpose of providing insurance to all subscribers— the owners—on a nonprofit basis on the best possible terms.

3. Plaintiffs and the three Defendants (collectively “FGI”) entered into form adhesion contracts called subscription agreements under which Plaintiffs, and all other putative class members, appointed FGI as their agent to act in their stead and carry out the purpose of their reciprocal exchanges, granting FGI broad authority to run their reciprocal insurance exchanges for the benefit of all subscribers.

4. In fact, FGI acts as the alter ego of the exchanges and controls its finances. (See infra, section IV.B.)

5. The subscription agreements address the compensation that FGI will collect from Plaintiffs and subscribers for acting as their agent, but FGI does not adhere to the terms in practice.

6. The express language of the subscription agreements state that FGI can collect a fixed 20% of the premiums subscribers pay (or 25% for subscribers of one exchange) and do not authorize either subscribers or FGI to unilaterally amend that term or waive it to take a different amount.

7. Those fixed-percentage compensation terms are excessive and FGI could not collect those amounts without bankrupting the subscribers’ exchanges.

8. FGI never discloses that material fact to Plaintiffs and subscribers or that, in practice, FGI does not follow the subscription agreements’ compensation term and has entered into a different, secret agreement about its fees that FGI uses to award itself nearly all the exchanges’ profits that should have economically benefited subscribers.

9. Instead, FGI tells Plaintiffs and subscribers—including new subscribers—that its subscription agreements grant it discretionary authority to award itself up to 20% of the premiums they pay (or 25% for subscribers of one exchange), with FGI having sole discretion to set the award, which varies every year.

10. Under California law, if an agent has general authority to set its fee, the agent’s decision on what to pay itself is twice tested: first, for legal authorization under the contract, and second by equity to ensure the agent exercised that authority consistent with its duties of loyalty and to act in the principal’s best interest. (See, e.g., Civil Code, § 2322.)

11. Plaintiffs bring this class action because FGI violated its fiduciary duties by running the reciprocal insurance exchanges for the benefit of its parent and its shareholders, not the Plaintiffs and all putative class members. Put otherwise, FGI runs the reciprocal exchanges as if it owned them, putting its interests and those of its parent’s shareholders over the true owners, Plaintiffs and all subscribers, to whom FGI owes strict fiduciary duties.

12. In fact, FGI ignores, and violates, the subscription agreements’ purpose and its compensation terms that Plaintiffs and subscribers agreed to.

13. Instead, FGI awards itself the excessive fees and profits using a different agreement having different compensation terms that FGI never disclosed to Plaintiffs and subscribers. The terms of that undisclosed agreement confirm how FGI is acting for the benefit of its parent by identifying the maximum profits it can award itself without financially impairing the reciprocal exchanges and then paying itself that amount.

14. As a result of its illegal acts, FGI has Plaintiffs and subscribers pay it profits of well over $1 billion each year, sums that exceed its expenses by over 100%.

15. The subscription agreements FGI drafted, however, did not grant FGI any authority to enter into separate agreements about its compensation and how it is calculated, or to unilaterally amend in any way the terms of that contract, let alone to do so without the approval of its principals, the subscribers, while keeping the other agreement secret.

16. Not only did it breach the contract with Plaintiffs, FGI violated the law by not disclosing the new agreement about its compensation to the insurance commissioner before entering into the agreement and collecting fees under its terms—as the law required—to allow the commissioner the opportunity to review the fee terms to ensure they are fair and reasonable and did not harm Plaintiffs or subscribers. (See infra, section IV.C.2.)

17. Thus, FGI kept the agreement secret—and contorted its impact by misrepresenting its conduct as “waiving” fees—to evade regulation of its fees and laws intended to protect Plaintiffs and all subscribers.

18. Indeed, upon information and belief, FGI knows that the Texas insurance commissioner had questioned the profits FGI awards itself as excessive—but it has no authority to regulate them either—and that the California insurance commissioner would come to the same conclusion if FGI followed it fiduciary duties and the law and disclosed the new agreement.

19. Even Moody’s Investor Service has taken note of FGI’s excessive profits to give the reciprocal insurance exchanges a negative rating outlook: “FGI collects considerable management fees from Farmers, making this operation valuable to Zurich but somewhat limiting Farmers’ ability to generate capital. The negative rating outlook reflects Farmers’ weak profitability and persistently high operational and financial leverage relative to peers.” (Moody’s Investor Service, Rating Action: Moody’s affirms Farmers Insurance Group's ratings; outlook remains negative (December 14, 2020).) It is valuable to Zurich, FGI’s parent, solely because of FGI’s fiduciary violations and illegal profit transfers.

20. FGI’s fiduciary breaches have damaged Plaintiffs and putative class members. FGI’s violations have caused Plaintiffs and putative class members to pay higher premiums for insurance than they would have absent FGI’s fiduciary violations; to lose the opportunity receive more in dividends than they did receive because of FGI’s fiduciary violations; and to have insurance with materially weaker and riskier reciprocal insurance exchanges than they would have had for the same premium absent FGI’s fiduciary violations. (See infra, section IV.D.)

21. Further, because FGI owed Plaintiffs and putative class members fiduciary duties, Plaintiffs and putative class members can elect to pursue all remedies available to them, including equitable remedies such as disgorgement of profits and replacing FGI as their agent. Plaintiffs do not have to elect the legal or equitable remedies they will pursue, however, at the pleading stage.

(Second Amended Complaint (“SAC”), ¶¶ 2-21, emphasis in original, underlining of case name added.)

Here, Defendants demur to the cause of action for breach of fiduciary duty and move to strike Plaintiffs’ excessive-fees/excessive-profits allegations, request for disgorgement, and request for punitive damages.

When considering demurrers, courts read the allegations liberally and in context, and “treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.” (Serrano v. Priest (1971) 5 Cal.3d 584, 591.) “A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.” (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) It is error “to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.)

“Motions to strike can be used to reach defects in or objections to pleadings that are not challengeable by demurrer.” (Edmon & Karnow, Cal. Practice Guide: Civ. Procedure Before Trial (The Rutter Group June 2023 Update) ¶ 7:156.) “Complaints, cross-complaints, answers and demurrers are all subject to a motion to strike [citation].” (Ibid.) “Moreover, a motion to strike can be used to attack the entire pleading, or any part thereof – i.e., even single words or phrases (unlike demurrers).” (Ibid.)

The motion can be used to strike “any ‘irrelevant, false or improper matter inserted in any pleading’” or “any pleading or part thereof ‘not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court.’” (Id. at ¶ 7:167, emphasis in original.)

The fiduciary-duty cause of action is the only cause of action alleged in the SAC. The allegations state:

222. Plaintiffs re-allege and incorporate by reference each of the preceding paragraphs as though fully set forth herein.

223. Plaintiffs bring this fiduciary duty claim on behalf of themselves and the Class against FGI and its subsidiary Defendants, who acted as attorneys-in-fact for the Farmers Insurance Exchange, Fire Insurance Exchange, and Truck Insurance Exchange.

224. FGI owed a fiduciary duty to Plaintiffs and subscribers to act in good faith, in their best interests, and with the same care as an ordinary person in a similar position would use under similar circumstances, and in accordance with California law.

225. FGI failed to fulfill this duty, acting at times to benefit itself and its parent corporation, Zurich, to the detriment of Plaintiffs and subscribers, creating a conflict of interest.

226. FGI breached its fiduciary duties, including its duties of loyalty, care, and to avoid conflicts, to its respective Plaintiff(s) and subscribers by engaging in these actions:

a. Running the Exchanges for the benefit of its parent, Zurich, and its shareholders and not the true owners, Plaintiffs and all subscribers;

b. Identifying the maximum amount Plaintiffs and subscribers could pay FGI without impairing the Exchanges and then awarding itself that amount as its profit, with FGI’s excessive profits exceeding 100% of its expenses;

c. Obtaining Plaintiffs and subscribers’ agreement for compensation terms in FGI’s form subscription agreement, such as a fixed 20% or 25% of premiums—conduct that continues today—that FGI knows are excessive and unsustainable and that FGI will not follow and has not followed for years;

d. Refusing to disclose the existing compensation approach and amend the form subscription agreement’s fixed-percentage compensation terms to conform to FGI’s long-term practice of collecting a variable-percentage fee in order to avoid regulation of its fees and protect its excessive profits;

e. Acting outside the authority Plaintiffs and subscribers granted FGI in the subscription agreement by entering into a separate undisclosed (shadow) agreement on how to calculate FGI fees and profits, and then awarding itself excessive profits under the amended compensation terms;

f. Entering into the separate, unauthorized shadow agreement amending the compensation terms in the subscription agreements, and then awarding itself excessive profits under that agreement, without the Plaintiffs’ and subscribers’ knowledge and without providing notice to Plaintiffs and all subscribers and the opportunity to disapprove;

g. Evading regulation by entering into the separate, unauthorized shadow agreement and collecting excessive profits under that agreement without first submitting it to the commissioner of insurance and subjecting its fees to regulation, as required by California law;

h. Evading regulation of its fees to protect FGI’s excessive profits and perpetuate FGI’s unlawful conduct and fiduciary violations;

i. Failing to disclose to Plaintiffs and subscribers the method for calculating the attorney-in-fact fees and profits FGI does collect;

j. Failing to provide Plaintiffs and subscribers with information about the management fees collected, including the total profits earned and the compensation received with a 100% profit margin baked in;

k. Taking actions to increase the subscriber base and premium base when there was no benefit to Plaintiffs and subscribers, only to FGI; and

l. Collecting excessive management fees and profits that increased the premiums paid by, or weakened the financial protection received by, Plaintiffs and subscribers;

m. Failing to disclose to Plaintiffs and subscribers FGI’s conflicts of interest; and

n. Refusing to stop their conduct and fulfill their fiduciary duties to Plaintiffs’ and subscribers

227. These fiduciary violations have damaged Plaintiffs and all subscribers, who can elect to pursue all legal and equitable remedies available to them, including disgorgement of FGI’s profits and replacing FGI as their agent.

228. These breaches of fiduciary duty were carried out with a conscious disregard of Plaintiffs’ and subscribers' rights and interests, and with oppression or malice, warranting the awarding of exemplary damages.

229. FGI’s breaches are ongoing, and FGI continues to falsely claim its actions are permitted by law and the subscription agreement. As such, FGI will continue to breach their fiduciary duties unless their conduct is enjoined by Court order.

230. An injunction is appropriate because Plaintiffs and subscribers have no option under FGI’s subscription agreement to remove and replace FGI, even for cause, and given FGI’s refusal to comply with their legal duties, if the Court does not grant Plaintiffs and all subscribers equitable relief to remove FGI as their attorney-in-fact, an injunction is the only way for subscribers to force their attorneys-in-fact to comply with their fiduciary duties going forward.

231. Plaintiffs incurred the burden of retaining counsel to sue, protect their interests, and enforce important rights affecting the public interest. As such, they are entitled to recover their attorneys’ fees and costs under Code of Civil Procedure section 1021.5.

Defendants contend Plaintiffs lack standing to bring the fiduciary-duty cause of action and fail to allege facts showing viable breaches.

Last time, “Plaintiffs described themselves as principals and Defendants as their agents.” (5/28/24 Ruling Re: Motion for Judgment on the Pleadings, p. 19.) “They assert[ed] that principals have standing to sue agents for breaches of fiduciary duty.” (Ibid.)

They also described themselves as subscribers and claimed subscribers have standing to sue for breaches of duties created by the contracts. (See ibid.)

The Court found that the first amended complaint (“FAC”) alleged harm to the nonparty exchanges, not to Plaintiffs:

. . . The harm alleged in the FAC is to the exchanges. Although attorneys-in-fact do owe fiduciary duties to insureds [citation], the Court does not see allegations showing specific, individual harm that Plaintiffs suffered. [Citation.] To qualify as the real parties in interest, Plaintiffs need to show actual harm to themselves related to at least one of the alleged breaches. [Citation.] Potential, speculative harm is not enough.

This time, Plaintiffs contend individual harm does not have to be alleged. They claim the law only requires them to allege that a fiduciary relationship exists. They contend they can seek disgorgement without showing personal damages. (See Opposition, pp. 2-3, 21-23.)

Additionally, Plaintiffs reassert that they are the real parties in interest because they are principals and subscribers. (See Opposition, p. 22 [claiming “FGI cites no case holding that subscribers lack standing to enforce the fiduciary duties owed them by their attorney-in-fact, or that a principal lacks standing to enforce the fiduciary duties owed by its agent”].)

“Every action must be prosecuted in the name of the real party in interest[.]” (Code Civ. Proc. § 367.) “A real party in interest ordinarily is defined as the person possessing the right sued upon by reason of the substantive law.” (Killian v. Millard (1991) 228 Cal.App.3d 1601, 1605.) Applied to a breach-of-fiduciary-duty claim, the real party in interest is the one who suffered “damage proximately caused by the breach.” (Gutierrez v. Girardi (2011) 194 Cal.App.4^th 925, 932 [listing elements].)

But there is an exception. Despite the elements, “a principal seeking disgorgement of a fiduciary’s wrongful gains is not required to prove it suffered economic damage from the breach in order to recover.” (Center for Healthcare Education and Research, Inc. v. International Congress for Joint Reconstruction, Inc. (2020) 57 Cal.App.5^th 1108, 1126 (“Center for Healthcare”).) “Where a person profits from transactions conducted by him as a fiduciary, the proper measure of damages is full disgorgement of any secret profit made by the fiduciary regardless of whether the principal suffers any damage.” (Ibid., emphasis added.)

In fact, if “an agent is guilty of concealment or nondisclosure of material facts relating to the subject matter of the agency, he forfeits his right to compensation.” (Ibid.) “It is not necessary that actual injury to the principal be shown[.]” (Ibid., emphasis in original.)

Given these rules, the demurrer is overruled. Plaintiffs seek disgorgement. (See SAC, ¶¶ 189-190, 227; see also id. at Prayer for Relief, ¶ E.) Plus, the principal and subscriber allegations create factual questions about the existence of fiduciary relationships. (See, e.g., id. at ¶¶ 38-58.) These factors suffice to get Plaintiff over the standing hurdle.

Defendants argue that Center for Healthcare is distinguishable because it analyzes an election of remedies rather than standing. (See Reply, p. 9.)

The Court disagrees. The gravamen of Center for Healthcare is that a principal is not obligated to prove actual injury when it pursues disgorgement. (See Center for Healthcare, supra, 57 Cal.App.5^th at 1126.) The rule applies with equal force here since (1) the SAC contains a request for disgorgement, and (2) Plaintiffs do not need to make an election between compensatory damages and disgorgement at the demurrer stage.

Defendants claim Center for Healthcare is distinguishable on another ground. They contend Center for Healthcare involved “secret profits” that exceeded “the agent’s agreed compensation” whereas Defendants received less than the “contractually authorized” amounts. (Reply, p. 9)

The contention is unpersuasive. Center for Healthcare was decided after a bench trial. The Court cannot determine today whether disgorgement will be available for the non-fees breaches once Plaintiffs’ case goes to trial. (See SAC, ¶ 226 [alleging multiple breaches beyond the excessive-fees breach].)

County of San Bernardino v. Walsh (2007) 158 Cal.App.4^th 533 and Meister v. Mensinger (2014) 230 Cal.App.4^th 381 do not change the result. They too were decided after bench trials.

Slovensky v. Friedman (2006) 142 Cal.App.4^th 1518 and Frye v. Tenderloin Housing Clinic, Inc. (2006) 38 Cal.4^th 23 also do not change the result. (See Reply, pp. 8-9.) Slovensky is a summary-judgment decision; the Frye court had the benefit of a summary-judgment record; and both cases analyze the attorney-client relationship, which is unique.

The Court wants to be clear. The Court is not saying that Plaintiffs can obtain compensatory damages in the absence of actual injury; the Court is saying that, at the pleading stage, actual injury is not required to seek disgorgement. A demurrer attacks the entirety of a cause of action. The SAC requests compensatory damages and disgorgement; Plaintiffs do not have to choose between the two at this point; and, standing-wise, the demurrer is unavailing because a portion of the cause of action – the portion requesting disgorgement – is adequately pled.

(SAC, ¶ 20.) The purpose of paragraph 20 is to allege financial harm so that Plaintiffs can be eligible to get compensatory damages. However, the Court finds that the first two purported financial injuries should be stricken because they stem from Plaintiffs’ excessive-fees theory. (See Opposition, pp. 18-20.) The Court already rejected the theory and declines to revisit it. (See 5/28/24 Ruling Re: Motion for Judgment on the Pleadings, pp. 10-13, 14-19.)[1]

Turning to the third purported financial injury, Plaintiffs claim the excessive fees and profits paid to FGI make the exchanges weaker and reduce the economic value of the insurance products. (See Opposition, pp. 20-21.) Plaintiffs allege that Defendants’ conduct increases the risk that the exchanges will fail. (See ibid.)

The Court strikes the allegation. Not only do Plaintiffs admit that the probability of failure is low (see at id. at p. 20; see also SAC, ¶ 183), but they also fail to allege direct harm caused by the purported weakening. For instance, they do not identify any unpaid insurance claims or fees above the contractually permitted percentages. (See Demurrer, p. 21; see also Reply, pp. 11-12.) The allegation is speculative.