2011-00106129-CU-FR

Genesis Specialty Tile vs. Amerus Life Insurance

Nature of Proceeding: Hearing on Demurrer to Second Amended Complaint (Marshall

Filed By: Anderson, Connie M.

*** If oral argument is requested, the parties shall at the time of the request
notify both the clerk and opposing counsel of the specific causes of action that
will be addressed at the hearing. ***

Defendant Marshall Katzman’s (“Defendant”) demurrer to Plaintiffs Genesis Specialty
Tile & Accessories (“GSTA”), Eleftherios Efstratis (“Efstratis”), Eleftherios D. Efstratis,
Patricia E, Efstratis, Jessica N. Efstratis, and Nora E. Rundell’s (“Rundell”) (collectively
“Plaintiffs”) Second Amended Complaint is ruled upon as follows.
Both parties’ requests for judicial notice are GRANTED. In taking judicial notice of
these documents, the court accepts the fact of their existence, not the truth of their
th
contents. (See Professional Engineers v. Dep’t of Transp. (1997) 15 Cal.4 543, 590
[judicial notice of findings of fact does not mean that those findings of fact are true];
Steed v. Department of Consumer Affairs (2012) 204 Cal.App.4th 112, 120-121.)

This action involves the purchase of life insurance and certain representations made
by co-Defendant Raymond F. Olmo (“Olmo”), Efstratis’ financial advisor, business
partner, and insurance agent. Efstratis is the founder and owner of GSTA. Plaintiffs
allege that in 2002, Efstratis was interested in making an investment to provide a
secure retirement for himself and his family. (SAC ¶19.) Plaintiffs allege that in the
later part of 2002, Olmo made certain misrepresentations and omissions to Efstratis
regarding the proposed life insurance policies. (SAC ¶20-21.)

Plaintiffs further allege that Olmo advised that if GSTA set up an employee benefits
plan under IRC §419 (the “Plan”) and used the Plan as a vehicle to purchase and hold
the life insurance, GSTA would receive significant tax benefits. (SAC ¶24.) Olmo told
Efstratis that FSTA would also need to purchase insurance policies for two non-family
employees. (SAC ¶26.) Efstratis selected Rundell, GSTA’s controller, and another
employee. (Id.) Rundell thereafter met with Olmo to discuss the insurance policies
and the proposed Plan. (Id. ¶ 27.) Plaintiffs allege that Olmo made certain
misrepresentations to Rundell regarding the policies. (Id.)

GSTA purchased whole life insurance policies issued by Aviva life and Annuity
Company’s, through Olmo as an agent at Amerus Life Insurance Company, which
were issued between December 23, 2002 and January 23, 2003. (Id. ¶ 29.) GSTA paid
$1,200,000 to purchase the policies. (Id.) Plaintiffs further allege that Olmo made
certain representations regarding paying the premiums and fees for the policies. (Id.
¶¶31-34.) In February 2007, GSTA received a letter indicating that coverage had been
terminating for failure to pay premiums. (Id. ¶37.) Olmo stated that the letter was sent
in error and that none of the policies had lapsed. (Id.) GSTA received a similar letter
in September 2007. (Id.) In late 2007, Efstratis informed Olmo that he wanted to cash
out the policies. (Id. ¶39.) Olmo advised him to take out a policy loan instead. (Id.)
Between December 2007 and November 2008, GSTA received additional invoices for
premiums, which Olmo advised did not need to be paid. (Id. ¶¶40-42.) In March 2009,
Plaintiffs learned that all of the policies, except Rundell’s, had been terminated for
failure to pay premiums. (Id. ¶ 44.) In April 2009, Rundell learned that her policy had
been terminated. (Id.)

In February 2011, Plaintiffs received 1099s for tax year 2010 for $1,500,000 in
phantom capital gains and/or income received on the policies. (Id. ¶ 45.) This
shocked Plaintiffs because Olmo had represented that the policies would not be
subject to taxes. (Id.) Plaintiffs thereafter learned that Olmo, and others, received
commissions from the policies. (Id. ¶ 46.) In early 2011, Plaintiffs consulted with an
attorney and discovered that the insurance policies, from day one, never qualified for
the tax deductions and tax benefits because the Plan was never a legitimate employee
welfare benefit plan. (Id. ¶ 47.)

Plaintiffs allege that Defendant was an authorized and apparent agent of Amerus and
Aviva, as acting as agent of Amerus and Aviva, within the scope and course of such
agency. (Id. 12.) Plaintiffs further allege that Defendant was the writing agent and
servicing agent for the life insurance policies. (Id. 14.) Plaintiffs allege that Defendant
provided advice and guidance to Olmo and that Olmo was an authorized and apparent
agent of Defendant, who was acting as agent of Defendants, within the scope and
course of such agency. (Id.) Plaintiffs allege that Defendant was aware of, consented
to, and ratified Olmo’s acts and received substantial financial benefits in the form of
commission. (Id.)

Plaintiffs filed the initial complaint on June 29, 2011. The SAC alleges the following
causes of action: (1) Fraud – Intentional Misrepresentation, (2) Negligent
Misrepresentation, (3) Fraud – Omissions, (4) Professional Negligent, (5) Breach of
Fiduciary Duty, (6) Restitution and Rescission, and (7) Money Had and Received.

Statute of Limitations

Defendant demurs to the first through fifth causes of action on the grounds that they
are barred by the applicable statute of limitations. Defendant contends that by at least
October 2007 and no later than Spring 2009, Plaintiffs should have been aware of the
misrepresentations.

The demurrer is OVERRULED. The Court notes that Plaintiffs have alleged one
representation made in February 2011 that is within the applicable statutes of
limitations. (See SAC ¶56D [“In February of 2011, OLMO orally represented to Mr.
Efstratis and Ms. Rundell that the 1099s that GSTA and the plaintiffs had received had
been in error.”].) Additionally, whether reasonable diligence would have led to
discovery of facts sufficient to cause a legal claim to accrue is generally a question of
fact the Court cannot resolve on demurrer. (See, e.g., Prudential-LMI Com. Ins. v.
Superior Court (1990) 51 Cal.3d 674, 687 [citation omitted].)

Agency Allegations

Defendant demurs to each cause of action on the grounds that Plaintiffs have failed to
allege facts that Olmo was an actual or apparent agent of Defendant.

At this stage of the proceedings, the Court finds Plaintiffs’ allegations are sufficient to
establish an agency relationship.

Accordingly, the demurrer is OVERRULED.

Intentional Misrepresentation, Negligent Misrepresentation and Omissions

Defendant demurs to the above three causes of action on the grounds that the SAC
does not plead an actionable misrepresentation and cannot establish reasonable
reliance.

Defendant contends that Olmo’s representations regarding viability/deductibility of the
Plan and the tax treatment to be given the Plan or the premiums and charges
associated with the policies are non-actionable statements of opinion or “puffing”. He
further contends that Olmo’s representations regarding the potential operation of the
insurance policies are barred by the terms of the policies. Defendant also argues that
Plaintiffs’ reliance on any alleged representation or omissions regarding the validity/tax
consequence of the Plan is not justified as a as a matter of law.

Plaintiffs, however, also allege that Olmo misrepresented that he would not receive, and had not received, any commissions from the sale of the policies or by taking out
policy loans. (SAC, ¶¶ 53F, 90.) Plaintiffs further allege that they reasonably relied on
these misrepresentations/omissions and purchased the insurance policies and took
out policy loans. (Id. ¶¶ 68, 101.) Thus, Plaintiffs have sufficiently alleged at least one
misrepresentation/omission. Accordingly, the demurrer is OVERRULED.

Breach of Fiduciary Duty

Defendant demurs to this cause of action on the grounds that no fiduciary relationship
exists between an insurer and its insured. An insurer does not have fiduciary duties to
its insured. (Vu v. Prudential Prop. & Cas. Ins. (2001) 26 Cal.4th 1142, 1150-1151.)

However, “an insurance broker does not breach its duty to clients to procure the
requested insurance policy unless ‘ . . . (c) the [broker] assumes an additional duty by
either express agreement or by ‘holding himself out’ as having expertise in a given
field of insurance being sought by the insured.” (Pacific Rim Mechanical Contractors,
Inc. v. Aon Risk Ins. Services West, Inc. (2012) 203 Cal. App. 4th 1278, 1283 [internal
citations omitted].) “The agent who assumes additional duties, by holding herself out
as having expertise in the insurance being sought by the insured, ‘may be liable to the
insured for losses which resulted as a breach of that special duty.’” (Williams v. Hilb,
Rogal & Hobbs Ins. Services of California, Inc. (2009) 177 Cal. App. 4th 624, 636.

Here, Plaintiffs allege that Olmo held himself out as an expert in the fields of financial
planning, investments, insurance, and employee benefits plans and the tax benefits
thereof. (SAC ¶¶107-108.) He also undertook the responsibility of setting up,
maintaining and administering the Plan. (Id.) Plaintiffs further allege Olmo was
Defendant’s agent.

Taking these allegations as true, the Court finds that these allegations are sufficient.
Accordingly, the demurrer is OVERRULED.

Defendant shall serve and file his answer by no later than October 21, 2013.

The minute order is effective immediately. No formal order pursuant to CRC Rule
3.1312 or further notice is required.