INSURANCE-RELATED COURT CASES
Digested from case reports published online
Variable life scuffle
Peter Fischl was a thoracic surgeon. After the stock market crash known as the “Great Recession” of 2008, Fischl asked his sister to recommend a financial planner. She recommended Gregory Acosta.
Acosta held a license to sell life insurance and variable life insurance products. In 2008, he conducted these sales as part of his financial planning business through two companies: Gregory R. Acosta, Inc., and Diamond Bar Executive Benefit Programs & Insurance Services, Inc. (the Acosta entities). He was also a broker of variable life products under the outside firms of Kestra Investment Services, LLC, and Securities America, Inc., at different times. Between 30 and 40 insurers appointed Acosta to offer his clients the companies’ investment and life insurance products to aid in his clients’ retirement planning.
In 2008, the Acosta entities and Securities America had contracts with Pacific Life Insurance Company that authorized them to act as a broker for Pacific Life and thus to offer their clients one of several variable life insurance policies from Pacific Life. At that time, Pacific Life had adopted—and in its contracts with its brokers, obligated those brokers to “strict[ly]” adhere to—“suitability standards” that required the brokers to (1) investigate a potential applicant’s financial condition and investment goals, and (2) assess whether any Pacific Life variable life insurance policy the broker was recommending was suitable as an investment vehicle for that applicant.
Acosta gathered information about Fischl’s finances and investment goals by asking him questions and sending a fact finder to obtain pertinent documentation, and then assessed whether any of Pacific Life’s variable life insurance policies were suitable for Fischl. Acosta transmitted this information—including Fischl’s income and net worth, investment knowledge and experience, and risk tolerance—to Pacific Life. During the inquiry into suitability, Fischl spoke only with Acosta and his employees; at no point did he interact with Pacific Life.
Based on his suitability analysis, Acosta recommended two Pacific Life policies that he believed would be “best” for Fischl. To avoid duplicative coverage, Acosta also recommended that Fischl replace the two non-variable life policies he had with other companies (with death benefits totaling $1.45 million) with the two new Pacific Life policies.
Based on Acosta’s recommendation, Fischl filed applications to Pacific Life for a variable life insurance policy— the Select Exec III policy—and a second policy, the Versa-Flex NLG policy. In the applications, Fischl also acknowledged that he had “considered [his] liquidity needs, risk tolerance, and investment time horizon in selecting” the policies. Along with those applications, Acosta certified that he had conducted a suitability analysis. Consistent with its long-standing practice, Pacific Life did not independently examine whether either policy was “suitable” for Fischl’s financial condition and goals. In determining whether to grant the applications, however, Pacific Life’s underwriters did examine whether these policies presented an “unacceptable risk” to Pacific Life. The underwriters determined that they did not and issued the two policies to Fischl.
Between 2008 and 2014, Fischl made the premium payments on the two Pacific Life policies. Because Fischl’s annual income during that period was $180,000, he did not pay the premiums entirely out of his income and instead resorted to liquidating portions of his other assets.
In 2015, Fischl met with the investment advisor he had used prior to 2008. That advisor told him that the two Pacific Life policies were not “suitable” for Fischl’s financial condition and investment goals; based on that advice, Fischl surrendered the Select Exec III policy and let the Versa-Flex NLG policy lapse, both at a loss.
On July 19, 2016, Fischl sued Acosta, the Acosta entities, Kestra, Securities America, and Pacific Life. Fischl asserted claims for fraud, negligent misrepresentation, breach of fiduciary duty, negligence, financial elder abuse, and violation of California’s unfair competition law (UCL). He alleged that his damages were $495,254.78.
Fischl’s claims against Acosta, the Acosta entities, Kestra, and Securities America proceeded to arbitration. That arbitration resulted in a January 2019 settlement agreement. Acosta, the Acosta entities, Kestra, and Securities America agreed to pay Fischl a total of $400,000. In exchange, Fischl entered into two releases.
The trial court granted summary judgment for Pacific Life. Fischl appealed.
The appellate court affirmed the trial court’s decision granting summary judgment for Pacific Life. The court explained that the law and the undisputed evidence in this case indicated that it is the broker who typically conducts this suitability analysis. Variable life insurance policies are a “variable product,” and a different insurance commissioner regulation requires “brokers and agents selling variable products [to] comply with suitability standards.” The court further explained that the statute does not obligate an insurance company to conduct its own independent suitability analysis, regardless of whether the broker has also conducted one. Moreover, Pacific Life’s conduct—whether labeled “direct” or “vicarious” in the eyes of the law—fell completely within the terms of the release.
Fischl v. Pacific Life Insurance Company—Court of Appeal of the State of California, Second Appellate District, Division Two—August 3, 2023—No. B320820.