e-served: may 17 2019 4:15pm pdt via case...

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DEF. CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM’S MEMORANDUM OF

CONTENTIONS OF FACT AND LAW / CASE NO. BC517444

DURIE TANGRI LLP MICHAEL J. PROCTOR (SBN 148235) [email protected] ALLYSON R. BENNETT (SBN 302090) [email protected] 530 Molino Street, Suite 111 Los Angeles, CA 90013 Telephone: 213-992-4499 Facsimile: 415-236-6300 DURIE TANGRI LLP DARALYN J. DURIE (SBN 169825) [email protected] RAGESH K. TANGRI (SBN 159477) [email protected] ADAM R. BRAUSA (SBN 298754) [email protected] GALIA Z. AMRAM (SBN 250551) [email protected] AARON J. BENMARK (SBN 312880) [email protected] 217 Leidesdorff Street San Francisco, CA 94111 Telephone: 415-362-6666 Facsimile: 415-236-6300 Attorneys for Defendant CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM

DRINKER BIDDLE & REATH LLP SHELDON EISENBERG (SBN #100626) [email protected] ADAM J. THURSTON (SBN #162636) [email protected] ERIN E. MCCRACKEN (SBN #244523) [email protected] ALEXIS N. BURGESS (SBN 279328) [email protected] 1800 Century Park East, Suite 1500 Los Angeles, CA 90067-1517 Telephone: 310-203-4000 Facsimile: 310- 229-1285 Attorneys for Defendant CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF LOS ANGELES

ELMA SANCHEZ, et al.,

Plaintiffs,

v.

CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM, et al.,

Defendants.

Judicial Council Coordination Proceeding No. 4936 Case No. BC517444 CLASS ACTION Assigned for all purposes to the Honorable William F. Highberger—Dept. SS10 [Filing Fees exempt pursuant to Gov’t Code § 6103] DEFENDANT CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM’S MEMORANDUM OF CONTENTIONS OF FACT AND LAW Trial Date: June 10, 2019 Judge: Honorable William F. Highberger Ctrm: SS10

E-Served: May 17 2019 4:15PM PDT Via Case Anywhere

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ii DEF. CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM’S MEMORANDUM OF


TABLE OF AUTHORITIES Page

I. INTRODUCTION ...........................................................................................................................1

II. FACTUAL CONTENTIONS ..........................................................................................................1

A. CalPERS Launches the Long-Term-Care Program at the Direction of the California Legislature. .........................................................................................................2

B. CalPERS Hires LTCG to Administer and Market the LTC Program. .................................2

C. CalPERS Hires Towers Perrin to Set Initial Premiums for the LTC Program. ...................3

D. CalPERS Retains the Right to Change Premiums Over Time. ............................................3

E. CalPERS Offers Several Types of Coverage, Including Coverage With and Without Inflation Protection. ...............................................................................................5

F. CalPERS Raises Rates Between 2003 -2011, Without Any Challenge From Plaintiffs. ..............................................................................................................................7

G. CalPERS Approves Another Rate Increase in 2012. ...........................................................8

III. ISSUES OF LAW ............................................................................................................................9

A. The Contract Permits CalPERS to Raise Premiums for Policyholders With and Without Inflation Protection. ...............................................................................................9

1. The Court Should Interpret the EOC in Light of Ordinary Contract Principles..................................................................................................................9

2. The Policy Permits Rate Increases on an Issue-Age Basis for All Policyholders With Similar Coverage Written on the Same Form. .......................10

3. CalPERS Is Not Prohibited From Raising Rates on Policies With Inflation Protection. ..............................................................................................................12

B. Plaintiffs’ Claims Are Time-Barred...................................................................................13

C. Damages Should Not Put Plaintiffs in a Better Position Than They Would Have Been In But-for Any Alleged Breach. ...............................................................................14

1. Plaintiffs Fail to Account for the Fact That the Alternative to the Challenged Increase Was an Across-the-Board Increase, not No Increase. ..........14

2. Unaccrued Potential Future Benefits Are Not Recoverable as Damages. .............15

3. Future Damages as a Whole Are Not Recoverable Because CalPERS Will Respect the Judgment. ...........................................................................................15

4. Policyholders Who Cancelled Their Policies Cannot Recover Damages Because They Failed to Mitigate. ..........................................................................15

IV. JURY TRIAL .................................................................................................................................16

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iii DEF. CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM’S MEMORANDUM OF


TABLE OF AUTHORITIES

Page(s)

Cases

Admiral Ins. Co. v. Superior Court (A Perfect Match, Inc.), 18 Cal. App. 5th 383, 387 (2017) ......................................................................................................... 10

Austero v. Nat’l Cas. Co., 84 Cal. App. 3d 1 (1978) ...................................................................................................................... 15

Bay Cities Paving & Grading, Inc. v. Lawyers’ Mut. Ins. Co., 5 Cal. 4th 854 (1993) .............................................................................................................................. 9

Brandon & Tibbs v. George Kevorkian Accountancy Corp., 226 Cal. App.3d 442 (1990) ................................................................................................................. 14

City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 68 Cal. App. 4th 445 (1998) ................................................................................................................. 10

County of Marin v. Assessment Appeals Bd., 64 Cal. App. 3d 319 (1976) .................................................................................................................. 10

Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809 (1979) (en banc) ........................................................................................................... 15

Erreca v. Western States Life Ins. Co., 19 Cal. 2d 388 (1942) ........................................................................................................................... 14

Franklin v. Massachusetts, 505 U.S. 788 (1992) .............................................................................................................................. 15

Hartford Healthcare Corp. v. Anthem Health Plans, Inc., No. 3:17-CV-1686 (JCH), 2017 WL 4955505 (D. Conn. Nov. 1, 2017) ............................................. 11

Nat’l City Police Officers’ Ass’n v. City of Nat’l City, 87 Cal. App. 4th 1274 (2001) ............................................................................................................... 10

Piscitelli v. Friedenberg, 87 Cal. App. 4th 953 (2001) ................................................................................................................. 15

Pistorius v. Prudential Ins. Co., 123 Cal. App. 3d 541 (1981) ................................................................................................................ 15

Ticor Title Ins. Co. v. Employers Ins. of Wausau, 40 Cal. App. 4th 1699 (1995) ............................................................................................................... 11

Titan Corp. v. Aetna Cas. & Surety Co., 22 Cal. App. 4th 457 (1994) ................................................................................................................. 10

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iv DEF. CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM’S MEMORANDUM OF


Trustees of Chicago Reg’l Council of Carpenters Pension Fund v. CMG Commercial Floor Maint. Co., No. 09 C 983, 2010 WL 2740307 (N.D. Ill. July 9, 2010) ............................................................. 11, 12

Wilson v. Los Angeles Cty. Metro. Transp. Auth., 23 Cal. 4th 305 (2000) .......................................................................................................................... 14

Statutes

Cal. Civ. Code § 1636 ................................................................................................................................... 9

Cal. Gov’t Code § 911.2 ............................................................................................................................. 13

Cal. Gov’t Code § 945.6 ............................................................................................................................. 13

Cal. Gov’t Code § 21660 .............................................................................................................................. 2

Cal. Gov’t Code § 21661 .............................................................................................................................. 2

Other Authorities

Black’s Law Dictionary (10th ed. 2014) ..................................................................................................... 11

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1 DEF. CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM’S MEMORANDUM OF


I. INTRODUCTION

Plaintiffs’ contracts with CalPERS state on the first page that CalPERS may raise rates, and the

contracts explain how CalPERS must implement rate increases and the protections to be afforded

policyholders when and if it does.1 In their quest to come up with an interpretation of the contract that

would preclude the challenged rate increases, Plaintiffs have effectively crossed those provisions out of

the contract. Plaintiffs argue that CalPERS cannot raise premiums for policyholders with inflation

protection if the need for an increase is caused (even in part) by expenses associated with paying benefits

to policyholders with inflation protection. The solvency of the CalPERS long-term-care fund is a

function of dollars in and dollars out (projected out over time). Dollars out, including dollars to be paid

to Plaintiffs with inflation protection, are an inherent part of that equation. Plaintiffs also argue that

CalPERS cannot differentiate among policyholders whose coverage is written on the same form: that

would mean that if CalPERS cannot raise rates for policyholders with inflation protection, CalPERS also

cannot raise rates for any other policyholders either. Plaintiffs thus contend that CalPERS wrote a

contract that prohibits it from raising rates on anyone when it is doing so to protect fund solvency.

(Plaintiffs have not identified any situation in which they think rate increases are permissible, and it is

hard to imagine what they would be under Plaintiffs’ view of the world.) The contract is not a suicide

pact: It explicitly allows for rate increases, including those necessary to ensure that CalPERS can pay

benefits to its policyholders, and CalPERS complied with the contractual provisions governing the

implementation of them.

II. FACTUAL CONTENTIONS

CalPERS launched its long-term-care program in the mid-1990s, and it hired one of the top

actuarial firms to help it set premiums. The actuaries had to make a number of assumptions about what

the program would look like decades later: How many people would sign up? How long would they pay

premiums before going into claim? How much would their care cost when they did go into claim?

1 CalPERS provides the following comprehensive background for the benefit of the Court. At a jury trial, however, only a subset of this evidence and law would be relevant and admissible with respect to Plaintiffs’ breach of contract claim, which is the only claim that will be tried on a class basis. Accordingly, CalPERS presents the contentions herein without prejudice to its arguments regarding the proper scope of issues that should be presented to a jury.

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CalPERS set premiums that were designed to remain level in view of those actuarial assumptions, as well

as a set of assumptions around projected rates of return on investments. CalPERS recognized, however,

that over the ensuing decades, these assumptions could turn out to be inaccurate. Unsurprisingly then,

CalPERS also built into the contract provisions that would allow it to raise rates. Otherwise, CalPERS

would have no way to ensure that it would be able to pay policyholders their contractually-mandated

benefits down the road.

A. CalPERS Launches the Long-Term-Care Program at the Direction of the California Legislature.

In 1995, the California Legislature enacted the Public Employees’ Long-Term Care Act, which

authorized and directed CalPERS to set up a program to provide long-term-care insurance to certain

California state employees, retirees and family members. Cal. Gov’t Code §§ 21660-21661. Long-term-

care insurance policies provide coverage for potential future costs if an individual becomes unable to

perform daily tasks on his or her own, such as the costs of a nursing home or in-home care.

CalPERS’ long-term-care program (the “LTC Program”), both at inception and today, is not-for-

profit and self-funded. This means it has only two sources of revenue from which it can pay out benefits

to policyholders: premiums paid by policyholders and income generated as a result of CalPERS’

investment of those premiums. If revenue from premiums and investment income is insufficient to pay

policyholders the benefits to which they are entitled, a rate increase is the only way for CalPERS to make

up the shortfall.

CalPERS began offering LTC policies in 1995. The class Plaintiffs are CalPERS policyholders

who purchased policies from 1995-2002 (the “LTC1” policies) or from 2003-2004 (the “LTC2” policies)

with certain types of coverage.

B. CalPERS Hires LTCG to Administer and Market the LTC Program.

To administer the LTC Program, CalPERS worked with a leading LTC administrator, the Long

Term Care Group (“LTCG”). CalPERS also asked LTCG to develop the application and marketing

materials relating to the LTC Program. CalPERS distributed these materials to public agencies, made the

materials available online, and conducted on-site informational sessions to explain the features of the

LTC Program to prospective members. August 12, 2015 Eileen Tell Dep. Tr. at 21:4–23:21, 37:11–

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38:20, 47:4–15. Individual public agencies also provided information about the LTC Program to the

agencies’ employees. Id. CalPERS did not always have direct input into or oversight over the

information that these third parties provided. Id. Upon request, public employees received an

“application package,” which included materials that outlined the various coverage options offered by

CalPERS. Id.

C. CalPERS Hires Towers Perrin to Set Initial Premiums for the LTC Program.

In 1995, long-term-care insurance was a relatively new insurance product, and there was limited

experience with pricing LTC products. To set the initial premiums, CalPERS hired a leading LTC

actuarial firm, Towers Perrin. Towers Perrin had to make a variety of actuarial assumptions projected

forward years into the future, including frequency and number of claims resulting in benefits being paid,

duration of claims, and overall costs of claims.

In 1996, CalPERS also retained a second actuarial firm, Coopers & Lybrand, to analyze Towers

Perrin’s pricing model and provide a second opinion. Coopers & Lybrand ultimately calculated a

suggested premium that was within 5.5% in the aggregate of the initial premium pricing proposed by

Towers Perrin. Pls.’ Trial Ex. 13, CalPERS_006721 at 19. Given the forward-looking nature of the

assumptions underlying the pricing and the infancy of the long-term-care industry, Coopers & Lybrand

did not recommend that CalPERS change the premium schedule that Towers Perrin had developed or

deviate from the assumptions made by Towers Perrin in setting premiums. Id. at 7. Instead, Coopers &

Lybrand recommended that CalPERS monitor the LTC Program as more data became available and

revise its assumptions as necessary, which CalPERS did. Id.

D. CalPERS Retains the Right to Change Premiums Over Time.

When CalPERS launched the LTC Program in 1995, premiums were designed to remain level

over time (unless a policyholder chose to exercise the Benefit Increase Option, discussed below).

CalPERS realized, however, that premium increases might become necessary: CalPERS, like every

other long-term-care insurance provider, was operating with limited actuarial and financial data, and the

assumptions underlying its pricing model might need to change over time as more information became

available. And CalPERS had to have sufficient funds to pay policyholders benefits for which they were

eligible. In fact, CalPERS promised that the coverage it was providing was “guaranteed renewable,”

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meaning that CalPERS could not “cancel or refuse to renew [a policyholder’s] coverage until benefits

have been exhausted as long as [the policyholder] pay[s] premiums on time.” Declaration of Adam R.

Brausa submitted herewith (“Brausa Decl.”) Ex. 1, Evidence of Coverage (“EOC”) at 1. Thus, CalPERS

needed to ensure the LTC Program was sufficiently funded not only to pay currently accrued benefits for

policyholders who had gone into claim, but also to pay benefits that were projected to accrue many years

into the future.

CalPERS explained its right to raise rates in its agreements with policyholders. The contract

itself defines what constitutes the contract: the Evidence of Coverage that the individual receives after he

or she has been approved, and the application form that the policyholder filled out and submitted to the

insurance company in order to obtain that coverage, along with papers attached to it, if any. Brausa Decl.

Ex. 1, EOC at 49 (“This Agreement with Your Application and the attached papers, if any, is the entire

contract between You and Us.”). On the first page of the EOC, in bold text, the EOC instructs

policyholders to “Please read [the EOC] carefully.” Id. at 1. On the same page, the EOC explains that if

the policyholder decides she doesn’t want the policy on the terms set forth in the EOC, she can “cancel

[her] coverage for any reason within 30 days after [she] receiv[es] this Evidence of Coverage.” Id. The

EOC also includes an integration clause and does so in layman’s terms, explaining in a section titled

“The Contract”:

Entire Contract. This Agreement with Your Application and the attached papers, if any, is the entire contract between You and Us. No change in this Agreement will be effective until approved in writing by Us. This approval must be noted on or attached to this Agreement.

Brausa Decl. Ex. 1, EOC at 49.

On the very first page of the EOC, CalPERS explained that it may change premiums. CalPERS

told policyholders that:

Your premiums will never increase due solely to a change in Your age or health. PERS can, however, change Your premiums, but only if We change the premium schedule on an issue-age basis for all similar coverage issued in Your state on the same form as this coverage . . . .

Id. at 1 (the “Guaranteed Renewable Provision”). The contract also includes a heading “Can Premium

Rates Ever Change?” and answers the question “yes”:

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The premium rates shown in the Schedule of Benefits may be changed on the anniversary of Your Coverage Effective Date and on any premium due date thereafter. Any changes made will be on an issue age basis for all similar coverage issued in Your state on the same form as this coverage and made by action of the PERS Board of Administration, according to the criteria they establish.

Id. at 44.

To the extent premium changes are necessary, CalPERS must provide advance notice to

policyholders:

We will give You written notice of any proposed change in Your premium rates at least 60 days in advance of such change. Unless You notify Us within 28 days after receiving Our notice, You will be considered to have elected to maintain Your current benefit amount at the increased premium rate.

Id. at 44. And the contract explains policyholders’ options if premiums change. Under a heading titled

“What Are Your Options if Premium Rates Change?” the EOC explains that:

If premium rates are increased on a class basis, You will have the option of:

• maintaining Your current benefits at the increased premium rate; or

• electing a decrease in coverage to a coverage amount We offer that maintains or reduces Your current premium. The procedure for decreasing coverage is described in the section on Coverage Provisions on page 58.

Id. at 44.

E. CalPERS Offers Several Types of Coverage, Including Coverage With and Without Inflation Protection.

Since the LTC program began, CalPERS has offered three long-term-care plans: the

Comprehensive Plan, the Nursing Home & Assisted Living/Residential Care Facility Plan, (the “Facility

Plan”) and the Partnership Plan. Brausa Decl. Ex. 2, Wedding’s LTC Appl. at PLTF - Wedding 000182.

Individuals seeking to enroll in CalPERS’ LTC program first had to select which of the three plans they

wanted. The three plans differ in a number of ways. For example, the Comprehensive Plan and

Partnership Plan both cover costs associated with care both inside and outside of the home, but the

Facility Plan does not. The Facility Plan covers only care outside of the home—for example, in a

nursing home or other assisted living facility. Each of these different plans was written on a different

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form. See Def.’s Trial Ex. 2028, CalPERS_002480 (Comprehensive Plan), Def.’s Trial Ex. 2027,

CalPERS_002411 (Facility Plan), Def.’s Trial Ex. 2026, CalPERS_002220 (Partnership Plan).

After selecting a plan, policyholders then had to choose among the different types of coverage

available under that plan. All plans had a maximum daily benefit for different services; for example, the

initial daily maximum benefit for nursing home care under Holly Wedding’s plan was $120/day. Def.’s

Trial Ex. 2012, PLTF - Wedding 000143 at 1. All Partnership Plans included automatic inflation

protection, pursuant to which total available benefits would increase by 5% a year to keep up with

inflation. Policyholders with the Comprehensive Plan or Facility Plan had to choose between two

different ways of protecting themselves against inflation. One option was to select coverage with

automatic inflation protection, and receive a built-in 5% year-over-year increase in available benefits.

The EOC explains that CalPERS will increase any unused balance remaining in a policyholder’s Total

Coverage Amount by 5% each year, compounded, and that “[t]he unused balance of Your Total

Coverage Amount is the initial Total Coverage Amount reduced by the amount of any claims paid and

increased by the coverage increases made since the Coverage Effective Date.” Brausa Decl. Ex. 1, EOC

at 32.

Alternatively, policyholders could forego inflation protection coverage, and instead choose to

take advantage of the Benefit Increase Option, pursuant to which they could purchase additional

coverage down the road. For all policyholders, premiums would initially be set based on their “issue

age”: their age when their policy was first issued. However, policyholders who exercised the Benefit

Increase Option would not only have to pay additional premiums, the new premiums would be pegged to

their issue age at the time they exercised the option and purchased the additional coverage. Brausa Decl.

Ex. 1, EOC at 33–34. In other words, policyholders who chose to increase their coverage under the Benefit

Increase Option would pay increased premiums as a result of that increase in coverage.

For both the Comprehensive Plan and the Facility Plan, the policyholder also had to choose

between a 3 year plan, which capped benefits at a pre-determined amount (initially, $131,400, which

translated into 3 years of maximum daily benefits) or a plan with lifetime benefits, which had maximum

daily benefit amounts, but no overall cap. Brausa Decl. Ex. 2, Wedding’s LTC Appl. at PLTF - Wedding

000182.

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Named plaintiff Holly Wedding, like the other two named plaintiffs, made a “coverage selection”

(as indicated next to the **) with “automatic inflation” and “Lifetime coverage”:

Brausa Decl. Ex. 2, Wedding’s LTC Appl. at PLTF - Wedding 000182.

F. CalPERS Raises Rates Between 2003 -2011, Without Any Legal Challenge From Plaintiffs.

Each year, an actuarial firm conducts an annual valuation of the LTC Program to review the

actuarial assumptions and projected fund solvency. As more data became available in the years

following 1995, the initial actuarial assumptions proved to be inaccurate. Moreover, financial market

crashes in 2001–02 and 2007–08 caused CalPERS to realize less income from its investments than

anticipated. CalPERS was not alone. The same problems plagued private insurers, many of which

implemented significant premium increases or exited the market entirely.

CalPERS has implemented a series of premium increases over time, all but the most recent of

which were not challenged by Plaintiffs. Over time, CalPERS also changed its asset portfolio to include

more conservative investments that lowered the assumed rate of return on its investments (sometimes

referred to as the “discount rate”). Between 2002 and 2011, CalPERS reduced its discount rate from 8%

to 6.25%. See Def.’s Trial Ex. 2015, CalPERS_005747 at 23; Def.’s Trial Ex. 2212, PLTF000071 at 1.

These reductions in the discount rate reduced long-term volatility in the LTC Program and reduced the

risk of additional, larger premium increases being required to offset significant investment losses, but

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they also meant that CalPERS was projecting that it would need more revenue to cover its expected

future costs than originally assumed.

Due to the combination of investment income that was less than originally projected and costs

that were more than originally projected, in 2003, CalPERS implemented premium increases ranging

from 6–30% on all LTC1 policyholders, including policyholders with inflation protection. Def.’s Trial

Ex. 2187, CRECA Docs for Towers Watson 000426 at 12. For most issue age groups, larger percentage

increases were implemented for Comprehensive and Facility Plans with inflation protection compared to

the same plans without inflation protection. Id. Larger percentage increases also were implemented for

younger issue-age groups for all Comprehensive and Facility Plans (all Partnership Plans were given a

6% increase for all ages). Id.

In 2007, CalPERS again implemented premium increases ranging from 5–47.1% on all LTC1 and

LTC2 policyholders. Def.’s Trial Ex. 2187, CRECA Docs for Towers Watson 000426 at 13.

Comprehensive or Facility Plan policyholders with inflation protection and/or lifetime benefits were

subject to higher increases across all age groups. Id.

In 2010, CalPERS again raised premiums across all plans. Def.’s Trial Ex. 2187, CRECA Docs

for Towers Watson 000426 at 13. LTC1 and LTC2 policyholders with inflation coverage and/or lifetime

coverage saw their premiums go up 22%, whereas other LTC1 and LTC2 policyholders received only a

15% increase. Id. In addition, CalPERS announced that LTC1 policyholders with lifetime and inflation

protection coverage would be subject to an ongoing 5% annual increase starting in 2011. Def.’s Trial Ex.

2139, CalPERS_006962 at 4.

The named Plaintiffs did not challenge any of these increases, nor did any of the members of the

class.

G. CalPERS Approves Another Rate Increase in 2012.

By 2012, CalPERS concluded that its previous stabilization efforts were not sufficient to preserve

the long-term health of the LTC Program. CalPERS again revised its asset allocation to be even more

conservative, reducing its discount rate further to 5.75%. Def.’s Trial Ex. 2187, CRECA Docs for

Towers Watson 000426. This revised asset allocation was projected to minimize the risk of additional

premium increases caused by downturns in the market. Def.’s Trial Ex. 2173, CalPERS_036696 at 16.

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The revised asset allocation also meant, however, that CalPERS was projecting that it would receive less

revenue than it had previously assumed. In the end, after working with actuarial experts, CalPERS

proposed an 85% increase in premiums for LTC1 and LTC2 policyholders with lifetime and/or inflation

protection coverage spread across two years, which would replace the then-ongoing 5% annual increases

that had been in place since 2011. After public hearings, the CalPERS Board approved the premium

increases in October 2012. CalPERS sent letters about the proposed premium increase to all affected

policyholders in early 2013, almost two years before it was scheduled to be implemented. Def.’s Trial

Ex. 2207, PLTF - Wedding 000013.

As was the case with prior premium increases, CalPERS adhered to its contractual obligation to

provide policyholders with options to maintain or reduce current premium payments instead of paying

the proposed increase, by reducing coverage to varying degrees. For example, as an alternative to paying

the proposed increase, Ms. Wedding was also offered three options that would reduce her monthly

premiums by up to roughly 60%, but still provide total coverage amounts of $332,880, $665,760, or

$1,109,600, depending on the amount of the premium reduction. Def.’s Trial Ex. 2249, March 30, 2015

Ltr. to Wedding at 3.

III. ISSUES OF LAW

A. The Contract Permits CalPERS to Raise Premiums for Policyholders With and Without Inflation Protection.

1. The Court Should Interpret the EOC in Light of Ordinary Contract Principles.

Insurance policies are contracts governed by the rules of contractual interpretation. “[T]he

mutual intention of the parties as it existed at the time of contracting,” governs contract interpretation.

Cal. Civ. Code § 1636. “Such intent is to be inferred, if possible, solely from the written provisions of

the contract.” Bay Cities Paving & Grading, Inc. v. Lawyers’ Mut. Ins. Co., 5 Cal. 4th 854, 867 (1993).

An insurance policy is ambiguous only if it “is capable of two or more constructions both of which are

reasonable.” Id. (citation omitted). Policy language “cannot be found to be ambiguous in the abstract,”

but rather “must be construed in the context of the instrument as a whole.” Id. (citation omitted)

(emphasis omitted). “Courts will not adopt a strained or absurd interpretation in order to create an

ambiguity where none exists.” Id. (citation omitted). If, and only if, a provision is ambiguous, the

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ambiguity is resolved according to the “objectively reasonable expectations of the insured.” Admiral Ins.

Co. v. Superior Court (A Perfect Match, Inc.), 18 Cal. App. 5th 383, 387 (2017).

The EOC should be construed as a whole, so as to give effect to all of its provisions. See County

of Marin v. Assessment Appeals Bd., 64 Cal. App. 3d 319, 324–325 (1976) (stating that a “contract must be

construed as a whole and the intention of the parties must be ascertained from the consideration of the

entire contract, not some isolated portion.”); see also City of Atascadero v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 68 Cal. App. 4th 445, 473 (1998). (“Any contract must be construed as a whole, with the various

individual provisions interpreted together so as to give effect to all, if reasonably possible or practicable.”);

Titan Corp. v. Aetna Cas. & Surety Co., 22 Cal. App. 4th 457, 474 (1994) (court should “interpret contractual

language in a manner which gives force and effect to every clause rather than to one which renders clauses

nugatory”); see also Nat’l City Police Officers’ Ass’n v. City of Nat’l City, 87 Cal. App. 4th 1274, 1279

(2001) (“An interpretation which renders part of the instrument to be surplusage should be avoided.”).

2. The Policy Permits Rate Increases on an Issue-Age Basis for All Policyholders With Similar Coverage Written on the Same Form.

The EOC provides that CalPERS may not raise rates due solely to changes in a policyholder’s age

or health. “[Cal]PERS can, however, change [a policyholder’s] premiums, but only if We change the

premium schedule on an issue-age basis for all similar coverage issued in [the policyholder’s] state on

the same form as this coverage.” Brausa Decl. Ex. 1, EOC at 1. In other words, CalPERS is permitted to

increase premiums so long as the increase applies to all policyholders who meet three conditions: (1)

they have the same “issue-age”; (2) they have “similar coverage”; and (3) their coverage is issued in the

same state “on the same form.”

The parties agree that “issue-age” means “the policyholder’s age when the policy was first

issued.” Pls.’ Opp’n to Def.’s Mot. to Bifurcate Contract Interpretation and CalPERS’ Statute of

Limitation Defense at 11. The parties also appear to agree that policies are written “on the same form” if

they are written on the same policy form: in other words, all LTC1 Comprehensive Plan policies on the

same form. The parties disagree, however, as to what it means for policyholders to have “similar

coverage.”

Policies with inflation protection do not provide similar coverage to policies without inflation

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protection and policies with lifetime coverage do not provide similar coverage to policies without

lifetime coverage. Courts have recognized that “[i]n the context of an insurance policy, coverage means

‘inclusion within the scope of an insurance policy, . . .’” Ticor Title Ins. Co. v. Employers Ins. of

Wausau, 40 Cal. App. 4th 1699, 1709 (1995); see also Hartford Healthcare Corp. v. Anthem Health

Plans, Inc., No. 3:17-CV-1686 (JCH), 2017 WL 4955505, at *7 (D. Conn. Nov. 1, 2017) (holding that

“the plain meaning of the term ‘coverage’ refers to the type or amount of benefits or services covered

under a plan . . . .”); Black’s Law Dictionary (10th ed. 2014) (defining coverage as “[i]nclusion of risk

under an insurance policy; the risks within the scope of an insurance policy”).

Plaintiffs appear to contend that “similar coverage” refers to the form on which the coverage was

written, and that CalPERS could only change premiums, if at all, on an issue-age basis for all persons

who were issued policies on the same coverage form. The Guaranteed Renewable Provision provides that

the increase must apply equally to policyholders only if they have both “similar coverage” and that coverage

was written on “the same form.” Brausa Decl. Ex. 1, EOC at 1 (increase must be made on an issue-age basis

“for all similar coverage issued in Your state on the same form as this coverage”). Interpreting “similar

coverage” to mean “on the same form” would render the “similar coverage” requirement redundant.

Plaintiffs’ argument that the contract distinguishes between benefits and coverage is beside the

point. When an insured submits a covered claim, the insured is paid benefits. Black’s Law Dictionary

(10th ed. 2014); see also Trustees of Chicago Reg’l Council of Carpenters Pension Fund v. CMG

Commercial Floor Maint. Co., No. 09 C 983, 2010 WL 2740307, at **3-4 (N.D. Ill. July 9, 2010)

(holding that “benefits are essentially pecuniary” and while “[c]overage determines which treatments are

included in an insurance plan, and how much of the cost of each treatment is included[,] benefits describe

the payments attendant to a covered treatment”). Accordingly, policyholders who purchase insurance

coverage may (or may not) receive benefits, depending on whether they ever submit a covered claim.

The contract confirms this distinction when it expressly links changes in coverage to changes in available

benefits, e.g., coverage amounts. For example, in the event of a premium increase, a policyholder has the

choice to maintain “current benefits at the increased premium rate,” or “elect a decrease in coverage to a

coverage amount” that maintains or reduced the policyholder’s current premium. Brausa Decl., Ex. 1,

EOC at 44.

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Thus, policyholders who purchase inflation protection coverage and submit a covered claim will

receive inflation protection benefits. Policyholders who purchase inflation protection coverage do not

have coverage that is similar to policyholders who elect to forego inflation protection coverage, however,

because policyholders without inflation protection coverage are not eligible to receive inflation

protection benefits.

3. CalPERS Is Not Prohibited From Raising Rates on Policies With Inflation Protection.

Inflation Protection does not create a blanket prohibition on rate increases for policies with

inflation protection coverage. The EOC contrasts Inflation Protection with the Benefit Increase Option,

which appears on the very next page and gives policyholders the option to “periodically increase [their]

coverage amounts” to help offset the effects of inflation. Brausa Decl. Ex. 1, EOC at 33. The Benefit

Increase Option comes with a price: Policyholders who elect to increase their coverage will also be required

to pay an increase in premiums to cover the cost of that increased coverage—and the premium will be based

on their age at the time that they increase their coverage, not their original issue age. Id. at 33–34. The

Inflation Protection works differently: unlike the case with the Benefit Increase Option, the “premium rate

[for policyholders with inflation protection] will not increase as a result of these annual benefit increases.”

Id. 32 (emphasis added) (the “Inflation Protection Provision”).

Plaintiffs contend that if the cost of paying benefits to policyholders with inflation protection

coverage is a “substantial factor” in the need for a rate increase, then the increase would violate that

Inflation Protection Provision. But that interpretation of the contract would prohibit any rate increase

necessitated by an imbalance between expected assets and expected costs—which is to say, any increase

motivated by the need to protect policyholders from the risk of fund insolvency. Plaintiffs have not

articulated the circumstances under which they think the policy would permit a rate increase on

policyholders with inflation protection, and under their interpretation it is hard to imagine one.

Indeed, Plaintiffs’ interpretation of the Inflation Protection Provision, coupled with their

interpretation of the Guaranteed Renewable Provision, would appear to prohibit any rate increases at all.

If CalPERS cannot raise rates on policyholders with inflation protection because of the Inflation

Protection Provision, and must treat policyholders with and without inflation protection the same way

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under the Guaranteed Renewable Provision, then CalPERS could not raise rates on anyone. That

conclusion cannot be squared with the contract’s repeated insistence that CalPERS reserves the right to

increase premiums and its explanation of how CalPERS must implement such increases and the options it

must provide to its policyholders if and when it does so.

B. Plaintiffs’ Claims Are Time-Barred.

The statute of limitations requires that claims against public entities be presented to the entity

within one year of accrual, and then filed within six months after a notice of rejection, or within two

years of accrual absent a notice of rejection. Cal. Gov’t Code §§ 911.2(a), 945.6. Here, Plaintiffs have

not alleged that they filed a government claim based on any of the prior premium increases and thus, the

statute of limitations period on any claim based on prior rate increases by CalPERS would be one year.

Plaintiffs’ complaint was filed in August 2013, more than a year after the 2011 increases, and longer still

after the 2010, 2007, and 2003 increases.

Plaintiffs contend that the 2013 increase breached the EOC because (1) CalPERS did not subject

everyone with policies written on the same coverage form to the same increase on an issue-age basis and

(2) one factor that necessitated the premium increase was the cost of providing inflation protection

benefits. The Court denied summary adjudication of CalPERS’ statute of limitations defense because the

Court concluded there were factual disputes about whether the same could be said about the prior

premium increases. In fact, the answer is yes.

In 2011, for example, individuals with Comprehensive Plains that included lifetime coverage and

inflation protection coverage were subject to an annual increase of 5%, whereas policyholders with

Comprehensive Plans without these coverage options were not subject to any ongoing annual increase.

Similarly, in 2010, individuals with Comprehensive Plans that included lifetime coverage and

inflation protection coverage were subject to larger percentage increases than policyholders with

Comprehensive Plans that did not include lifetime or inflation protection coverage. Under Plaintiffs’

current theory that all persons with LTC1 and LTC2 policies on the Comprehensive Plan have similar

coverage, this would constitute a breach of CalPERS’ obligation to treat all policyholders with similar

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coverage the same. The same is true of the increases in 2003 and 2007: almost all policyholders with

inflation protection coverage were subject to larger premium increases than those without.

These prior increases were also all implemented to stabilize the LTC Program in the face of an

imbalance between projected assets and projected expenses, including the projected cost of paying

inflation protection benefits. Plaintiffs’ claims for breach are thus barred by the applicable statute of

limitations.

C. Damages Should Not Put Plaintiffs in a Better Position Than They Would Have Been In But-for Any Alleged Breach.

Even if Plaintiffs were to prove CalPERS is liable for breach of contract, CalPERS will

demonstrate that Plaintiffs’ request for over $1.3 billion,2 the majority of which is based on future,

unaccrued benefits, is impermissible.

1. Plaintiffs Fail to Account for the Fact That the Alternative to the Challenged Increase Was an Across-the-Board Increase, not No Increase.

Plaintiffs seek to recover over $1.3 billion, which consists primarily of future damages Plaintiffs

allege they will suffer by virtue of either (1) continuing to pay higher premiums or (2) potentially

receiving reduced benefits. Plaintiffs fail to account for alternative actions CalPERS might have taken

in the past or might take in the future, including putting in place an alternative, permissible increase (if

there is one) and conforming its conduct to the Court’s orders going forward. Instead, Plaintiffs

improperly seek damages that would put them in a better position than they would have been but-for the

breach. See Wilson v. Los Angeles Cty. Metro. Transp. Auth., 23 Cal. 4th 305, 316 (2000) (holding that

“damages should not put the promisee in a better position than performance of the promise would have

put him.”) (citation omitted); Brandon & Tibbs v. George Kevorkian Accountancy Corp., 226 Cal.

App.3d 442, 468 (1990) (“The damages awarded should, insofar as possible, place the injured party in

the same position it would have held had the contract properly been performed, but such damage may not

exceed the benefit which it would have received had the promisor performed.”).

2 CalPERS anticipates that Plaintiffs’ damages figure at trial may be even higher, after Plaintiffs’ experts account for additional data produced through February 28, 2019.

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2. Unaccrued Potential Future Benefits Are Not Recoverable as Damages.

Over half of the more than $1.3 billion Plaintiffs currently seek in damages is for the alleged lost

value of potential future benefits that have not yet accrued. This includes policyholders who elected to

reduce their coverage, but have not filed any claim.

An insurance policyholder “has no cause of action, nor the insurer any liability, except for

benefits which have accrued.” Erreca v. Western States Life Ins. Co., 19 Cal. 2d 388, 402 (1942). In

fact, “it is [l]egally impossible to breach a contract by refusing to pay benefits which have not yet

accrued under the terms of the policy.” Austero v. Nat’l Cas. Co., 84 Cal. App. 3d 1, 24 (1978)

(emphasis added), disapproved of on other grounds by Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d

809, 824 n.7 (1979) (en banc). “Defendant’s position that compensatory damages based on a contractual

cause of action for breach of an implied covenant of good faith in a disability insurance policy cannot

include a sum for future benefits is correct.” Pistorius v. Prudential Ins. Co., 123 Cal. App. 3d 541, 551

(1981). Further, “it is fundamental that ‘damages which are speculative, remote, imaginary, contingent,

or merely possible cannot serve as a legal basis for recovery.’” Piscitelli v. Friedenberg, 87 Cal. App.

4th 953, 989 (2001) (citation omitted). Whether any individual Plaintiff will ever make a claim, or suffer

an economic loss, is uncertain, and thus no claim has yet accrued. Accordingly, Plaintiffs cannot recover

these speculative, future damages.

3. Future Damages as a Whole Are Not Recoverable Because CalPERS Will Respect the Judgment.

Future damages are also unavailable because, to the extent CalPERS is found liable for breach,

future damages should not be awarded based on the assumption that CalPERS will continue to breach its

legal obligations. See Franklin v. Massachusetts, 505 U.S. 788, 803 (1992) (“we may assume it is

substantially likely that . . . executive . . . officials would abide by an authoritative interpretation” of

contested law).

4. Policyholders Who Cancelled Their Policies Cannot Recover Damages Because They Failed to Mitigate.

Lastly, Plaintiffs seek to recover damages for alleged lost benefits for policyholders who

cancelled their policies in the face of the 2013 increase. But these policyholders had an opportunity to

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mitigate damages by electing to reduce coverage and pay less in premiums. They elected not to do so

and instead chose to cancel their policies entirely. Plaintiffs offer no explanation for why such

policyholders would be entitled to recover the entire potential future value of benefits in the face of that

choice.

IV. JURY TRIAL

Plaintiffs’ claims for breach of contract and CalPERS’ affirmative defense based on the statute of

limitations are triable by jury. For the reasons set forth above, however, the Court should interpret the

contract as a matter of law before submitting any remaining factual issues to the jury.

Dated: May 17, 2019

By:

DURIE TANGRI LLP

DARALYN J. DURIE Attorney for Defendant CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM

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PROOF OF SERVICE

I am employed in Los Angeles Superior Court County, State of California, in the office of a

member of the bar of this Court, at whose direction the service was made. I am over the age of eighteen

years, and not a party to the within action. My business address is 530 Molino Street, Los Angeles

California 90013.

On May 17, 2019, I served the following documents in the manner described below:

DEFENDANT CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM’S MEMORANDUM OF CONTENTIONS OF FACT AND LAW

(BY COURT SERVICE PROVIDER) By electronic transmission via Court ordered service provider, Case Anywhere, the document(s) listed above to the person(s) at the email address(es) set forth below.

On the following part(ies) in this action:

Michael J. Bidart Steven M. Schuetze Kristin E. Hobbs SHERNOFF BIDART ECHEVERRIA LLP 600 South Indian Hill Boulevard Claremont, California 91711 Telephone: (909) 621-4935 Facsimile: (909) 625-6915 [email protected] [email protected] [email protected] Attorneys for Plaintiffs and the Class Gregory L. Bentley Clare H. Lucich Matthew W. Clark Evan W. Grant BENTLEY & MORE, LLP 4 Park Plaza, Suite 500 Irvine, CA 92614 Telephone: (949) 870-3800 [email protected] [email protected] Attorneys for Plaintiffs and the Class

Gretchen M. Nelson Stuart R. Fraenkel NELSON & FRAENKEL LLP 601 So. Figueroa Street, Suite 2050 Los Angeles, CA 90017 Telephone: (213) 622-6469 Facsimile: (213) 622-6019 [email protected] [email protected] Attorneys for Plaintiffs and the Class Stuart C. Talley KERSHAW, COOK & TALLEY PC 401 Watt Avenue Sacramento, CA 95864 Telephone: (916) 779-7000 Facsimile: (916) 721-2501 [email protected] Attorneys for Plaintiffs and the Class

I declare under penalty of perjury under the laws of the United States of America that the

foregoing is true and correct. Executed on May 17, 2019, at Los Angeles, California.

Melissa Sotto

X

e-served: may 17 2019 4:15pm pdt via case...

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