Life InsuranceIn an action over the marketing and sales of insurance products, a plaintiff IMO (“independent marketing organization”) sought to strike the defendant insurance company’s expert witness. In their motion, Plaintiffs, inter alia, asserted that the insurance expert didn’t set out verifiable standards for his analysis, identify who created these standards, or explain their relevance.

Defendant contracted with IMO to market and sell its insurance products. The agreement stipulated that IMO would recruit sales personnel. In addition, IMO agreed to “cause and require” all of its representatives to “comply with the Terms of this Agreement and all applicable state and federal laws.” IMO also agreed it would “make best efforts” to ensure its representatives were aware of their obligation to ensure all sales were “appropriate and suitable for the needs of the insured” at the time of the sale in accordance with applicable law governing suitability of insurance products.

Defendant entered into a sales representative agreement with a Minnesota licensed insurance agent to sell its products in the state on commissions. Defendant claims that the agent became one of IMO’s representatives—requiring it to ensure he complied with applicable laws and ensure that all sales were suitable to customer needs. IMO conceded that it received commissions on the agent’s sales but contended that it relied upon Defendant to vet the agent’s sales for compliance and suitability. The Minnesota Attorney General started investigating the agent based on consumer complaints concerning his annuity sales practices.

The State Commissioner of Commerce issued a Cease and Desist Order, finding that the agent misrepresented the terms, benefits, or advantages of Defendant’s annuity products; made improper and unsuitable sales to Minnesota clients; and engaged in “fraudulent coercive or dishonest practices.” The State revoked his license, and pursuant to a court-approved settlement agreement, Defendant agreed to rescind 200+ annuities sold by the agent. Defendant then demanded that IMO repay the commissions on the rescinded sales. Instead, IMO filed suit alleging that Defendant was negligent in the way it handled the sales of its products in Minnesota.

IMO also sought a declaratory judgment that Defendant wasn’t entitled to the return of any of the commissions paid to IMO or the commissions paid to any of its representatives. In the action, Defendant designated its insurance expert to testify on industry standards related to independent marketing organizations, as well as whether IMO here complied with those standards. IMO moved to strike Defendants’ insurance expert.

Judge Elizabeth S. (“Betsy”) Chestney of the U.S. District Court for the Western District of Texas wrote in her opinion that in Daubert, the Supreme Court held that trial judges must ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable. The judge went on to reason that because the Daubert test focuses on the underlying theory upon which the opinion is based, the proponent of expert testimony need not prove the expert’s testimony is correct, but that the testimony is attempted. So, based on this reason alone, the judge said she could deny the motion without considering its merits. Nevertheless, Judge Chestney addressed the merits of Plaintiffs’ motion. Pursuant to Daubert, this determination of reliability includes a preliminary determination of “whether the reasoning or methodology underlying the testimony is scientifically valid and of whether that reasoning or methodology properly can be applied to the facts in issue.”

IMO argued that all of the insurance expert’s opinions (including specifically his conclusion that IMO didn’t comply with industry standards) weren’t reliable because he failed to identify the industry standards, and “most importantly, who created them and why they should be relied upon by this court or a jury.” However, the judge found that the expert in his report identified several industry standards upon which he relied. The expert expressly provided the source of these industry standards in his report…his personal experiences in the financial services industry. He explained he gained a further understanding of “industry best standards” from his education and years serving on committees for the Life Insurance Marketing and Research Association (“LIMRA”). That organization adopts standards of performance and best practices to ensure that consumers are protected and insurance companies are compliant.

The judge noted that Kumho Tire Co. held that an expert’s testimony is often based upon scientific testing, but that the testimony can be based on personal experience as long as the expert “employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.”

Defendants’ insurance expert’s testimony, in this case, was sufficiently reliable, the judge said. As to the extent in which IMO disputed the accuracy or applicability of the industry standards described by the expert, the judge said it could attack that testimony through cross-examination or rebut it with its own expert.

Further, the expert’s testimony regarding IMO industry standards would assist the trier of fact in determining whether the IMO failed to “cause and require” the Minnesota agent to comply with the parties’ agreement and all applicable laws, including whether IMO failed to ensure that all sales were “appropriate and suitable to the needs of the insured.” As such, the expert’s conclusion that IMO didn’t comply with industry standards with regard to its diligence and supervision of the agent was admissible. However, he wasn’t permitted to testify regarding any opinion as to whether IMO breached the parties’ agreement.

IMO also tried to preclude the testimony of the expert’s conclusions, by arguing that they didn’t address the alleged standards, but merely provided his unsupported opinions on the actions of the agent (who wasn’t yet a party in the case) and on an ultimate issue of fact and law. But Judge Chestney held that the expert’s conclusions constituted his application of the industry standards to the facts drawn from documents such as the findings from the Minnesota Commissioner of Commerce Cease and Desist Order and the Minnesota Attorney General’s Complaint against the agent.

Judge Chestney reasoned that IMO could disagree with the facts upon which the insurance expert based his analysis, and could challenge his opinion on cross-examination. Finally, specific opinions by the expert didn’t contain legal conclusions and, contrary to IMO’s contentions, an expert’s opinion isn’t inadmissible simply because it embraces an ultimate issue of fact, the judge held.

Thus, Plaintiff’s Motion to Strike Defendants’ Expert Witness was denied except for limited relief. The expert was generally permitted to testify as to the conclusions in his report and the basis for those conclusions. However, he wasn’t allowed to testify as to the meaning of legal terms; he couldn’t opine whether IMO breached the parties’ agreement or violated any applicable laws, and he couldn’t testify regarding any third party’s state of mind. In effect, Judge Chestney held that testimony on IMO’s compliance or lack of compliance with industry standards was both relevant to this suit and reliable.