Mai Nhia Thao v. Midland National Life Insurance

NONPRECEDENTIAL DISPOSITION
To be cited only in accordance with
Fed. R. App. P. 32.1
United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Argued November 12, 2013
Decided December 13, 2013
Before
ILANA DIAMOND ROVNER, Circuit Judge
DIANE S. SYKES, Circuit Judge
THOMAS M. DURKIN, District Judge*
Nos. 13-1272 & 13-2366
MAI NHIA THAO, Appeals from the United States District
Plaintiff-Appellant, Court for the Eastern District of
Wisconsin.
v.
No. 2:09-cv-01158-LA
MIDLAND NATIONAL LIFE
INSURANCE COMPANY, Lynn Adelman,
Defendant-Appellee. Judge.
ORDER
Mai Nhia Thao filed this diversity suit for breach of contract against Midland
National Life Insurance Company (“Midland”), from which she purchased a universal
life insurance policy. Thao contends that Midland has breached the terms of the policy
in calculating the monthly cost of insurance charge she is assessed: The policy states
*
Of the Northern District of Illinois, sitting by designation.
Nos. 13-1272 & 13-2366 Page 2
that the cost of insurance rate used to calculate that charge will be “based on” five
specified factors, but in practice Midland considers other unnamed factors in arriving at
that rate. The district court granted summary judgment to Midland, concluding that the
policy’s “based on” language did not limit the insurer to the five named factors in
calculating the cost of insurance rate. Thao v. Midland Nat’l Life Ins. Co., 2013 WL 119871(E.D. Wis. Jan. 9, 2013). Along the way to that judgment, the court denied Thao’s two
motions for class certification, R. 46; Thao v. Midland Nat’l Life Ins. Co., 2012 WL 1900114(E.D. Wis. May 24, 2012), and separately denied her motion to compel production of
Midland’s mortality data and, because it found Thao’s pursuit of the motion lacking
substantial justification, awarded Midland its fees and costs in opposing the motion,
Thao v. Midland Nat’l Life Ins. Co., 2012 WL 2924047 (E.D. Wis. July 18, 2012). Thao
appeals each of these three rulings. Without reaching the class certification issue, we
affirm.
I.
We turn first to the merits of Thao’s breach-of-contract claim. That claim, as we
have noted, turns on the meaning of the phrase “based on” as it is used in the insurance
policy’s description of how Midland will calculate the cost of insurance rate. The proper
construction of that phrase presents a legal question as to which our review is de novo.
E.g., Rexam Beverage Can Co. v. Bolger, 620 F.3d 718, 724 (7th Cir. 2010).
Wisconsin law governs Thao’s claim. As the Wisconsin Supreme Court has
observed, “An insurance policy is a contract and is interpreted by the same rules
governing contract construction.” Blum v. 1st Auto & Cas. Ins. Co., 786 N.W.2d 78, 83
(Wis. 2010). A court’s primary objective in construing a contract is to determine and
implement the intent of the parties. E.g., Fireman’s Fund Ins. Co. of Wis. v. Bradley Corp.,
660 N.W.2d 666, 673 (Wis. 2003). We must give the policy terms their ordinary meaning,
e.g., Tufail v. Midwest Hospitality, LLC, 833 N.W.2d 586, 592 (Wis. 2013), that is, the
meaning that a reasonable person in the position of the insured would give to those
terms, e.g., Schinner v. Gundrum, 833 N.W.2d 685, 703 (Wis. 2013).
Under the terms of the policy sold to Thao, she makes a monthly premium
payment to Midland which, following a deduction for premium load, is deposited into
a policy fund. Midland in turn makes a monthly deduction from the policy fund which
is comprised of three separately-calculated charges: (1) an “Expense Amount,” (2) the
“Cost of Insurance,” and (3) a “Rider Charge.” Policy § 7.4, R. 1 at 31. It is the way in
Nos. 13-1272 & 13-2366 Page 3
which Midland determines the second of these charges, the cost of insurance, that forms
the basis for Thao’s breach-of-contract claim. Section 7.7 of Thao’s policy provides:
COST OF INSURANCE RATES – The monthly Cost of Insurance Rates … will
never be more than those shown in the Table of Guaranteed Monthly Cost of
Insurance Rates in the Schedule of Policy Benefits. We may declare Cost of
Insurance Rates that differ from those shown in the Schedule of Policy Benefits.
Cost of Insurance Rates are based on the Issue Age, completed Policy Years, Sex,
Specified Amount, and Premium Class of the Insured.
R. 1 at 32 (emphasis supplied). Thao interprets the language indicating that the cost of
insurance rates (which of course are used to determine the monthly cost of insurance
charge) will be “based on” the five specified factors to mean that Midland will consider
only these factors in determining the cost of insurance charge that she will be assessed.1
In fact, Midland prepares rate tables that are organized around these factors (these
factors define the rows and columns in the tables), and in this way the specified factors
are used to determine which rate in the relevant table will be used for a particular
insured. But the rates themselves—the numbers in each cell of a table—are derived
from computer models that Midland’s actuaries use to evaluate the anticipated costs
and risks associated with the policies that Midland offers; and these models are based
on a variety of factors other than the five factors named in section 7.7 which affect both
the intended performance of a particular type of policy as well as Midland’s ability to
cover its costs and to make a profit. These factors include (a) the goals of a particular
type of policy (accumulation of cash value, for example); (b) estimates of future
conditions or events, including the distribution of insureds by age at the time of policy
issue and underwriting class, the timing and amount of premium payments, return on
Midland’s investments, reserve requirements, capital requirements, lapse rates,
surrender rates at different policy durations, taxes, administrative costs, and overhead
costs; and (c) inputs specified by Midland to cover such costs as sales commission rates.
Adjustments are also made, as various models are run, to account for Midland’s profit
goals and for the market competitiveness of rates in particular cells of a table. Thao
contends that this process amounts to a violation of the policy’s “based on” language,
1
There is no suggestion that the rates as calculated exceed those set forth in the
Table of Guaranteed Monthly Cost of Insurance Rates included in the Schedule of
Policy Benefits.
Nos. 13-1272 & 13-2366 Page 4
because in fact Midland is basing the cost of insurance rate on factors other than those
identified in the policy.
Our opinion today in Norem v. Lincoln Benefit Life Co., No. 12-1816, slip op. (7th
Cir. Dec. 13, 2013), resolves this issue. Norem, which involves policy language materially
identical to that found in Midland’s policy, holds that when the policy says that the
monthly cost of insurance rate will be “based on” specified factors, it does not mean
that the rate will be based exclusively on those factors. Norem, slip op at 7-8, 9-10, 12-13.
Rather, it signifies that the named factors will have a significant, foundational role in
determining the rate. Id. at 7-8.2 And, in fact, they do. As mentioned, it is these factors
around which the rate tables that Midland prepares are organized and it is these factors
which identify the particular rate in a table that will apply to an individual insured. Put
another way, it is these named factors which serve to both differentiate one insured
from another and insure that similarly situated insureds will be treated alike in the
amounts they are charged for the cost of insurance. By contrast, the other, unidentified
factors that Midland considers in setting the cost of insurance rate have less to do with
the characteristics of the individual insured and much more to do with the broader
financial risks, performance, and goals of Midland’s business as a for-profit life
insurance company and with the type of policy the insured has chosen. When the policy
states that the rate used to calculate the cost of insurance charge that will be assessed to
the insured will be based on the five specified factors, it therefore accurately describes
the way in which these named factors are essential in determining a particular insured’s
cost of insurance rate.
We add that this non-exclusive understanding of the term “based on” is
consistent with section 7.8 of the Midland policy.
DECLARED RATES AND CHARGES – We may declare Cost of
Insurance Rates, Expense Amount, Premium Loads and Interest Rates
that differ from those stated in the Policy. Changes in the Cost of
Insurance Rates, Expense Amount, Premium Loads, and Interest Rates
will be based upon changes in future expectations for such elements as
investment earnings, mortality, persistency, and expenses. Changes in
2
Although Norem applies Illinois law in construing the policy language, there is
no material difference between Wisconsin law and Illinois law as to the basic rules of
contract interpretation.
Nos. 13-1272 & 13-2366 Page 5
the declared Cost of Insurance Rates and Expense Amount will vary by
the Issue Age, Policy Anniversary, Sex, Specified Amount, and Premium
Class of the Insured.
R. 1 at 32. This language, beyond confirming Midland’s authority to change the cost of
insurance rate, reinforces the points we have been making about the role of the
specified factors. By naming some of the other factors that changes in the cost of
insurance rate will be “based upon,” section 7.8 makes clear that the factors identified in
section 7.7 are not the sole factors that affect calculation of the cost of insurance rate. At
the same time, section 7.8, in stating that changes in the cost of insurance rate will vary
with such factors as the issue age, sex, policy amount, and premium class of the
insured, reinforces the way in which the factors that differentiate one insured from
another play a determinative role in quantifying costs for an individual insured.
In short, the district court properly granted summary judgment to Midland on
Thao’s breach of contract claim. For all of the reasons set forth in Norem and that we
have added here, the policy language did not limit Midland’s calculation of the cost of
insurance rate to the factors expressly identified in section 7.7. To the extent that Thao
challenges the district court’s denial of leave to amend her complaint in order to re-cast
her breach of contract claim, the challenge necessarily fails, as any amendment would
have been futile.
II.
Thao has also challenged the district court’s refusal to certify a class. In its
opinion denying the second of Thao’s two motions for class certification, the court
acknowledged that there was a legal question common to all putative class
members—the meaning of the policy’s “based on” language—but nonetheless
concluded that Thao did not have a claim that was common to all class members. The
court noted that although Thao’s theory of how the cost of insurance rate should be
calculated would lower rates for policyholders in initial policy years, it would
potentially raise them for policyholders in later years; and many policyholders might
prefer to pay higher rates in early years in exchange for lower rates later in their lives.
Consequently, “the class that Thao seeks to represent does not comprise policyholders
with a common grievance against Midland.” 2012 WL 1900114, at *10.
Although Thao has appealed the district court’s adverse class-certification
decision, we assume that she intended her appeal on this point to be conditional on her
Nos. 13-1272 & 13-2366 Page 6
success on the merits of her breach of contract claim. Because Thao has lost on the
merits, reversal of the district court’s class certification decision would only work to the
disadvantage of other class members. For its part, Midland has expressed no interest in
class certification and instead has defended the district court’s decision not to certify a
class. The issue of class certification is therefore moot for all intents and purposes, and
we need not address it. See Brengettsy v. LTV Steel (Republic) Hourly Pension Plan, 241
F.3d 609, 612 (7th Cir. 2001) (citing Aiello v. Providian Fin. Corp., 239 F.3d 876, 881 (7th
Cir. 2001), and Amati v. City of Woodstock, 176 F.3d 952, 957 (7th Cir. 1999)).
III.
Finally, we turn to the district court’s denial of Thao’s motion to compel and the
imposition of sanctions pursuant to Federal Rule of Civil Procedure 37(a)(5)(B). As we
have noted, Thao sought to compel Midland to produce two categories of documents:
(a) those reflecting Midland’s mortality expectations, which it used in calculating cost of
insurance rates; and (b) those showing Midland’s actual, historical mortality experience.
The district court denied the motion to compel, reasoning as to the first category that
Midland had, as it contended, already produced to Thao its mortality expectations, 2012
WL 2924047, at *1, and reasoning as to the second category that Midland’s historical
mortality experience was irrelevant to the issues raised in the case and was unlikely to
lead to the discovery of any material evidence, id., at *2. Because the court found Thao’s
motion to compel was not substantially justified, it ordered Thao to compensate
Midland for the costs it had incurred in opposing the motion, including its attorney
fees. Id. We review both the denial of the motion to compel and the decision to impose
Rule 37 sanctions for abuse of discretion. See Scott v. Chuhak & Tecson, P.C., 725 F.3d 772,
784 (7th Cir. 2013) (denial of motion to compel); Wellness Int’l Network, Ltd. v. Sharif, 727
F.3d 751, 778-79 (7th Cir. 2013) (Rule 37 sanctions)(citing, inter alia, Nat’l Hockey League v.
Metro. Hockey Club, Inc., 427 U.S. 639, 642, 96 S. Ct. 2778, 2780 (1976)).
The district court did not abuse its discretion here. What Thao principally sought
by way of her motion to compel was documentation reflecting Midland’s estimates of
future death rates among particular groups of people over a given period of time; these
estimated death rates are referred to as pricing-mortality rates. These rates naturally
play a role in Midland’s calculation of the cost of insurance rate. As Thao construed the
life insurance policy, the mortality estimates, as correlated with the factors named in
section 7.7, should exclusively determine the cost of insurance charge. She wanted
Midland to produce its mortality estimates for purposes of showing that if these
estimates were used to the exclusion of other, unnamed factors in determining the cost
Nos. 13-1272 & 13-2366 Page 7
of insurance rate, the rate charged to policyholders would be lower. The district court
did not dispute the relevance of the estimates for this purpose, but instead concluded
that Midland had already produced them to Thao. Thao’s counsel asserted that they
had not been produced, citing the district court’s earlier observation that a column of
figures labeled “Pricing Mortality,” found in a set of Excel “COI Solver” spreadsheets
that Midland’s actuaries used to determine the cost of insurance rates resembled but
did not match Midland’s actual morality expectations; to that extent, the label in the
spreadsheets was misleading. See 2012 WL 1900114, at *6 & n.7. However, the court
found that Midland had separately produced, in addition to these spreadsheets, tables
containing the company’s actual pricing-mortality rates—in other words, rates
reflecting its true mortality expectations. Thao’s contention that Midland had not
produced its mortality estimates thus was “based on either a misunderstanding or a
deliberate distortion of the record.” 2012 WL 2924047, at *1.
Thao’s appeal fails to address the distinction that both Midland and the district
court drew between the spreadsheets, which admittedly did not contain Midland’s
actual mortality estimates, and the pricing-mortality tables which did contain those
estimates. She simply invokes, as she did below, the district court’s observation that the
column labeled “pricing mortality” in the spreadsheets did not actually reflect
Midland’s mortality estimates. This does not answer Midland’s representation that,
separately from the spreadsheets, it had already produced its actual mortality estimates,
nor does it demonstrate error in the district court’s finding that the estimates had been
produced. Thao therefore gives us no reason to disturb the decision to deny her motion
to compel.
As we have noted, Thao also asked the court to compel Midland to produce its
historical mortality data. Thao has not meaningfully addressed the district court’s
finding that these data were irrelevant to the claim she was making in this case. She has
therefore given us no reason to question the court’s rationale in this regard. Nor has she
demonstrated that her motion was “‘justified to a degree that would satisfy a reasonable
person,’” such that the district court clearly erred when it imposed Rule 37 sanctions.
See United States v. Pecore, 664 F.3d 1125, 1137 (7th Cir. 2011) (quoting Pierce v.
Underwood, 487 U.S. 552, 565, 108 S. Ct. 2541, 2550 (1988)).
For the sake of completeness, we note that apart from her challenge to the
imposition of Rule 37 sanctions, Thao has not challenged the amount of the costs and
fees that the court ultimately awarded to Midland. Because we find no abuse of
Nos. 13-1272 & 13-2366 Page 8
discretion in the district court’s decision to impose sanctions, the award therefore stands.
IV.
For the foregoing reasons, we AFFIRM the grant of summary judgment to
defendant-appellee Midland, the denial of plaintiff-appellant Thao’s motion to compel,
and the imposition of Rule 37 sanctions against Thao for pursuing the motion to
compel.