On November 14, 2019, the California Supreme Court (CSC) issued an important decision producing a significant victory for the insurance industry. In a case litigated by The Northwestern Mutual Life Insurance Company (Northwestern Mutual) and assisted by several amici, the CSC rejected claims in a putative consumer class action based on an obscure, century-old provision of California’s usury law. The CSC unanimously held that lenders such as insurers who are exempt from the usury restrictions of Article XV of the California Constitution are also exempt from a provision of a voter-approved usury initiative enacted in 1918 (1918 Initiative) requiring that a lender may not charge compound interest on a loan “unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith.”
In Wishnev v. Northwestern Mut. Life Ins. Co., 8 Cal. 5th 199, 451 P.3d 777, 254 Cal.Rptr.3d 638 (2019), the putative class alleged that Northwestern Mutual violated the 1918 Initiative by charging compound interest on their life insurance policy and premium loans without obtaining their signed agreement to that effect. The putative class conceded that the policy disclosed the charging of compound interest, but argued that they had never signed the policy, only the application for the policy. The 1918 Initiative carries severe penalties for violations, including prohibiting the lender from charging any interest on non-compliant loans and authorizing treble damages for interest paid on non-compliant loans. The putative class also asserted claims for unjust enrichment and violation of California’s Unfair Competition Law arising from the alleged violations.
Plaintiff filed his lawsuit in 2015, and Northwestern Mutual removed the lawsuit from California state court to the Northern District of California. It then moved to dismiss on two main grounds.
First, Northwestern Mutual argued it was exempt from the compound interest restriction of the 1918 Initiative pursuant to a 1934 amendment to Article XV, a 1979 amendment and a 1981 statute. The 1934 amendment changed the allowable maximum interest rate that had been set by the 1918 Initiative; exempted certain classes of lenders from its restrictions; vested in the California State Legislature the exclusive authority to set maximum rates and “in any manner fix, regulate or limit, the fees, bonuses, commissions, discounts or other compensation” that exempt lenders may charge borrowers; and expressly provided that it superseded all conflicting provisions of law. The 1979 amendment gave the Legislature the power to expand the classes of exempt lenders by statute. And the 1981 statute exercised that authority by establishing insurers as exempt lenders. Northwestern Mutual argued that the compound interest restriction of the 1918 Initiative conflicted with (and was therefore superseded by) Article XV’s vesting the Legislature with the exclusive authority to “in any manner…regulate…the…compensation” that exempt lenders such as insurers may charge borrowers — the restriction being a quintessential manner of regulation.
Second, Northwestern Mutual argued that there was no violation of the compound interest restriction of the 1918 Initiative in any event, because plaintiff did sign an agreement that interest on policy and premium loans would be compounded — the life insurance contract, which under well-settled California law consists of both the signed application and the attached insurance policy.
Motion to Dismiss Ruling, Interlocutory Appeal and California Supreme Court Ruling
A judge of the Northern District of California denied Northwestern Mutual’s motion to dismiss, and Northwestern Mutual successfully petitioned the Ninth Circuit for an interlocutory appeal. In January 2018, after briefing and oral argument, the Ninth Circuit certified to the CSC both questions of law raised by Northwestern Mutual, stating that “conflicting interpretations of state law create uncertainty around policy loans” and “resolution of both questions is essential to the more than 300 California insurers and millions of policyholders who have outstanding policy loans.”
In November 2019, after briefing and oral argument, the CSC issued its lengthy, highly detailed and well-reasoned decision. While stating that “California’s usury laws…are far from a model of clarity,” the CSC ruled in Northwestern Mutual’s favor on the first question, holding that the 1934 amendment “impliedly repealed” the compound interest restriction of the 1918 Initiative as to exempt lenders. Having ruled in Northwestern Mutual’s favor on the first question, the CSC found it unnecessary to rule on the second question.
The Ninth Circuit thereafter vacated the district court judge’s decision, and in February 2020, plaintiff voluntarily dismissed his lawsuit with prejudice.
Notably, plaintiff’s counsel had also filed essentially identical class action lawsuits against three other life insurers, two of which also were on appeal to the Ninth Circuit and consolidated with the Northwestern Mutual case for purposes of argument. Only the case against Northwestern Mutual was certified to the CSC, but the CSC’s disposition of the exemption issue ended the other cases as well — along with any threat of prospective lawsuits against insurers (or any other exempt lenders) based on an alleged violation of the compound interest restriction of the 1918 Initiative.
Conclusion: A Win for Insurers and Policyholders
The decision is good news for life insurers doing business in California — and for the millions of California life insurance policyholders who can now rest assured that their ease of access to consumer-friendly policy and premium loans will not be disrupted.
Amicus briefs supporting Northwestern Mutual were submitted to both the Ninth Circuit and the CSC by The American Council of Life Insurers and the Association of California Life and Health Insurance Companies, and to the CSC by Metropolitan Life Insurance Company.
Northwestern Mutual was represented by Timothy J. O’Driscoll, Alan J. Lazarus and Matthew J. Adler of Faegre Drinker.