[00:00:00] Speaker 00:
Our first case is 23-1326, PHT Holding versus Security Life of Denver.

[00:00:07] Speaker 00:
Mr. Savage, you may proceed.

[00:00:08] Speaker 00:
Good morning, Your Honor.

[00:00:09] Speaker 00:
I may please the court.

[00:00:11] Speaker 00:
My name is Zach Savage and I represent the appellant PHT Holding and I would like to reserve three minutes for a bottle.

[00:00:18] Speaker 00:
This court should reverse the summary judgment below for two central reasons.

[00:00:23] Speaker 00:
First, under Arizona law, this court must consider the extrinsic evidence on the meaning of non-participating.

[00:00:31] Speaker 00:
And it must do so because there's nowhere in the policy where it expressly says that non-participating means only non-participation in SLD's gains.

[00:00:41] Speaker 00:
And the extrinsic evidence, including but not limited to the board memo, where SLD adopted the very interpretation that we're advocating for here, is dispositive.

[00:00:52] Speaker 00:
Second, even within the four corners of the policy that SLD wrote, the language comes nowhere near the level of clarity that's needed to support summary judgment for SLD.

[00:01:04] Speaker 00:
Instead, the language indicates, and as I believe SLD and the district court both acknowledged below, the term non-participating is intended to take on a technical meaning.

[00:01:15] Speaker 00:
And where that's the case, under the United States versus Continental Oil case that we cite in our brief,

[00:01:21] Speaker 00:
summary judgment should have been denied because there was competing technical evidence on both sides.

[00:01:28] Speaker 00:
And so I'll start with the text of the policy, which simply starts by saying, this policy is non-participating.

[00:01:36] Speaker 00:
And again, with respect to the term in dispute, which is non-participating, I don't think there's even a dispute as to whether this is a technical term.

[00:01:44] Speaker 00:
Below, SLD conceded that it was a technical term, saying in its reply brief,

[00:01:50] Speaker 00:
The term non-participating is a familiar term of art in the insurance context.

[00:01:54] Speaker 01:
The district court said, at least for purposes of this policy, that I don't know if you'd call it a definition.

[00:02:02] Speaker 01:
I think you'd dispute that.

[00:02:03] Speaker 01:
But it makes a reference to surplus earnings.

[00:02:09] Speaker 01:
So why isn't that as close as we get to a definition of what non-participating means here?

[00:02:17] Speaker 00:
So we don't think, I think you're talking about the second part of the policy, the second appearance of the word non-participating.

[00:02:26] Speaker 00:
But again, the term in dispute is non-participating.

[00:02:29] Speaker 00:
And that second portion of the policy where it says it does not participate in surplus earnings, I don't believe functions as an all-encompassing definition as the district court and SLD believed it did.

[00:02:42] Speaker 00:
And there's a number of textual indicators in the policy itself

[00:02:46] Speaker 00:
that indicate that, in fact, that second appearance of non-participating in the policy could simply be an illustration of the way in which the policy is non-participating and not an all-encompassing definition of the term.

[00:02:59] Speaker 01:
I would have thought it would say that, if that were true, it would say the policy does not participate in our surplus earnings or losses.

[00:03:07] Speaker 01:
Wouldn't that, that's what I expect to see if, you know, the drafter of the contract was envisioning

[00:03:16] Speaker 01:
position that you're taking?

[00:03:18] Speaker 00:
Well, the position that we're taking is that the term in dispute is non-participating, which is a technical term.

[00:03:23] Speaker 00:
And even the district court, when it was talking about surplus earnings and what that meant, it referred back to the industry evidence on what the term non-participating itself means.

[00:03:35] Speaker 00:
It looked at the definition of the term from couch.

[00:03:38] Speaker 02:
Oh, counsel, are you saying that we're supposed to ignore the word surplus earnings or ignore the evidence?

[00:03:45] Speaker 00:
I'm not saying the court should ignore the word surplus earnings or dividends and we believe that the term surplus earnings or dividends are simply, we agree, assuming that you believe that surplus earnings is only referring to SLD's gains, we believe that a component of the way that the policy is non-participating is that it doesn't share in surplus earnings.

[00:04:07] Speaker 00:
But we do not believe that that is the full extent of the definition.

[00:04:11] Speaker 02:
Could you clarify whether you think dividends and surplus earnings are the same thing or are they different?

[00:04:20] Speaker 00:
So we think that surplus earnings itself is an ambiguous term.

[00:04:24] Speaker 00:
And so if you accept that that second appearance of the word non-participating

[00:04:30] Speaker 00:
Is dividends an ambiguous term?

[00:04:33] Speaker 00:
We don't believe that the term dividends is ambiguous.

[00:04:36] Speaker 02:
So how's surplus earnings different from dividends?

[00:04:38] Speaker 00:
So surplus earnings is not a well accepted term, either as a lay term or even within the industry, the insurance industry.

[00:04:48] Speaker 00:
So we believe that surplus earnings could be understood to mean gains or losses.

[00:04:54] Speaker 00:
But the real term in question is non-participating, which

[00:05:00] Speaker 00:
is an accepted term in the insurance industry as the district court seemed to acknowledge.

[00:05:04] Speaker 00:
But the fundamental problem with the district court's analysis and the most straightforward reason to reverse is that the district court simply ignored the fact that there was a lot of extrinsic evidence on our side regarding the meaning of the word non-participating.

[00:05:18] Speaker 02:
Well, before you leave the terminology, when a policy provides for participation, in other

[00:05:27] Speaker 02:
a participation policy as opposed to a non-participation policy.

[00:05:31] Speaker 02:
Doesn't that just mean that the policy holder receives dividends when they occur?

[00:05:37] Speaker 00:
When a policy is participating, it means that it participates in full in the insurance company's financial performance.

[00:05:44] Speaker 00:
And so that could mean that when the insurance company does well, it receives dividends or that those dividends that were promised could go up.

[00:05:52] Speaker 00:
But it also means that when the insurance company does poorly, that the insurance company could pass on losses to the policy holder.

[00:05:59] Speaker 00:
This policy is the opposite.

[00:06:01] Speaker 02:
It is a non-participating.

[00:06:03] Speaker 02:
Well, I want to make sure I understand that answer.

[00:06:06] Speaker 02:
So in a participation policy, if there are dividends, the policyholder shares in the dividends, correct?

[00:06:18] Speaker 00:
If there is a participating policy, the policyholder may receive dividends and those dividends may increase if the insurer does better than was expected.

[00:06:30] Speaker 02:
Right.

[00:06:31] Speaker 00:
Correct.

[00:06:31] Speaker 02:
That was my question.

[00:06:32] Speaker 00:
Correct.

[00:06:32] Speaker 00:
But another component of a participating policy

[00:06:35] Speaker 00:
is that the insurance company is able to also share its losses with the policyholder if it does poorly.

[00:06:42] Speaker 00:
This here is the opposite.

[00:06:44] Speaker 00:
This is a non-participating policy, and it's a two-way street in which the insurance company neither shares with the policyholder the gains when the insurer does well,

[00:06:56] Speaker 00:
nor is it permitted to saddle the insurer insured with its losses in the event that it does poorly.

[00:07:01] Speaker 04:
The best you have is that it's silent on losses, right?

[00:07:07] Speaker 04:
I mean it says nothing if we interpret it as the when it says and not eligible for dividends or does not participate in their surplus earnings.

[00:07:20] Speaker 04:
and we limit that to just talking about surplus earnings and dividends, the policy then would be silent on losses.

[00:07:31] Speaker 00:
We don't believe the policy is silent on losses because we believe that the term non-participating itself is a technical industry term that means does not share in gains and losses.

[00:07:42] Speaker 04:
But aside from that... Well, I'm not looking at it as... I'm looking at it as what a purchaser, a reasonable purchaser of the insurance would understand from reading the policy.

[00:07:53] Speaker 00:
Yeah, so Judge Miku, I'll say two things in response to that.

[00:07:56] Speaker 00:
First of all, we cite in our briefs cases that talk about what a reasonable insurer insured would expect when purchasing a policy, just as a general matter, not looking at the particular terms of the policy.

[00:08:10] Speaker 00:
And we have cases that find like the North American and the Lincoln National case that we cite in our briefs that suggest that this one way interpretation, this one way ratchet

[00:08:20] Speaker 00:
that SLD is positing in which it is permitted to saddle its insurance with losses but not share the gains is not what a reasonable policyholder would expect when they're buying a policy.

[00:08:31] Speaker 00:
But the other thing, I'll say actually two other points.

[00:08:35] Speaker 00:
Go ahead if you got a question.

[00:08:37] Speaker 00:
So first of all, the first appearance of the term on the first page of the policy says that the policy is non-participating

[00:08:46] Speaker 00:
and is not eligible for dividends.

[00:08:49] Speaker 01:
I'm sorry to interrupt, but your position is that non-participation is inherently ambiguous, as I understand it.

[00:08:58] Speaker 01:
And a reasonable purchaser of this policy would look at the terms here, and it would be ambiguous.

[00:09:07] Speaker 01:
Any reasonable person would find it's ambiguous, I think, according to your position.

[00:09:11] Speaker 01:
And so the purchaser of this product would assume

[00:09:16] Speaker 01:
I guess the purchaser could go either way.

[00:09:19] Speaker 01:
Assume that the language says it only applies to earnings and not losses or read in an omitted term, which would be losses.

[00:09:26] Speaker 00:
That's right, Judge Inkovich.

[00:09:28] Speaker 00:
Our position is that it is at least ambiguous.

[00:09:31] Speaker 00:
And if the policy, if the meaning of the term non-participating is ambiguous, then summary judgment should have been denied.

[00:09:37] Speaker 00:
And the appropriate thing to do in that situation once summary judgment has been denied.

[00:09:42] Speaker 01:
And that term is ambiguous really as a matter of law.

[00:09:45] Speaker 01:
unless specifically defined otherwise in a policy, like some other policies that do define non-participation.

[00:09:53] Speaker 00:
That's right, the policy could have set out a very clear definition of the word non-participating and it could have said what SLD is positing that it says here, but we don't believe that the policy does that.

[00:10:06] Speaker 04:
The policy doesn't include non-participating in the definitional section.

[00:10:11] Speaker 00:
That's right.

[00:10:11] Speaker 00:
So there is a separate definition section in the policy and the word non participating does not appear in that separate in that definitional section.

[00:10:20] Speaker 04:
There are other terms that don't appear in the definitions appear also in the body of the policy.

[00:10:28] Speaker 04:
But they tend to say

[00:10:30] Speaker 04:
definitive definition, like a segment is a block of death benefit coverage.

[00:10:38] Speaker 04:
There's nothing here in the policy like that with respect to non-participating, is there?

[00:10:43] Speaker 00:
That's exactly right, Judge Miku.

[00:10:45] Speaker 00:
So our position is not simply that a policy

[00:10:48] Speaker 00:
cannot define a term somewhere other than in the definitional section, but there needs to be some language that makes it clear that what the policy is doing is actually defining the term in question.

[00:11:00] Speaker 02:
Is your ambiguity argument separate from your technical meaning argument?

[00:11:07] Speaker 00:
They are related, Judge Matheson.

[00:11:10] Speaker 00:
The fact that this is a technical term and there is not

[00:11:15] Speaker 00:
and there is competing evidence on both sides renders the term ambiguous.

[00:11:21] Speaker 02:
So in a different world... It seems so that your technical meaning argument is that this word has a technical meaning that's not ambiguous.

[00:11:30] Speaker 02:
It just has a technical meaning.

[00:11:32] Speaker 00:
Well, our position is that the technical meaning is the one that SLD wrote in its board memorandum, which is that non-participating means that the insurance company

[00:11:41] Speaker 00:
doesn't give the policyholder its gains, and doesn't recoup past losses.

[00:11:45] Speaker 00:
But at a minimum, it's ambiguous.

[00:11:47] Speaker 00:
And the district court instead took only a couple of pieces of technical evidence, the ones that SLD favored, put it in the opinion, and ignored all of the extrinsic evidence that was on the other side.

[00:11:58] Speaker 00:
And in that situation, the term is ambiguous.

[00:12:01] Speaker 00:
Summary judgment should be denied, and those questions should be reserved for a backwinder.

[00:12:06] Speaker 00:
Does the record show whether there were actual losses here by security life?

[00:12:10] Speaker 00:
Yes, absolutely.

[00:12:11] Speaker 00:
I see my time is about up, but I'll answer the question.

[00:12:15] Speaker 00:
The record shows that there were losses.

[00:12:19] Speaker 00:
This is in our expert report by Howard Zale.

[00:12:22] Speaker 00:
And I can give you the site.

[00:12:26] Speaker 00:
But the record shows that literally what SLD did was take the losses that it suffered on these reinsurance treaties.

[00:12:33] Speaker 00:
Were these losses just

[00:12:34] Speaker 00:
They didn't earn as much as they hoped to.

[00:12:36] Speaker 00:
No, these are actual losses that SLV suffered, that it recorded on its books, and then it literally plugged those losses into the model that came up with the COI increase that it imposed on policyholders.

[00:12:48] Speaker 01:
Thank you.

[00:12:52] Speaker 01:
Mr. Johnson, you may proceed.

[00:13:01] Speaker 03:
May it please the court, Clark Johnson on behalf of Defendant Appley Security Life of Denver Insurance Company.

[00:13:19] Speaker 03:
As the panel's questions have already acknowledged, PHT's theory of breach year, which was never asserted in any pleading,

[00:13:25] Speaker 03:
requires the court to add words to the complaint.

[00:13:29] Speaker 03:
It's not just the words that Judge McHugh pointed out that the provision that states the policy does not participate in our surplus earnings or losses.

[00:13:41] Speaker 03:
PhD asked you to also understand the word losses to mean a specific cost or expense in a transaction associated with this policy, not

[00:13:52] Speaker 03:
earnings like a profit set a given year.

[00:13:55] Speaker 03:
Those two layers of additional words are not supported under even Arizona law, which I think the parties acknowledge is more liberal in terms of consideration of ambiguous evidence.

[00:14:04] Speaker 04:
Well, under Arizona law, wouldn't the court have to look at the extrinsic evidence before making a determination as to ambiguity?

[00:14:14] Speaker 03:
Which is exactly what the district court did here.

[00:14:16] Speaker 03:
The district court looked at their purported extrinsic evidence, the board memo,

[00:14:20] Speaker 03:
and concluded that it would contradict the plain language of the contract and therefore rendered it inadmissible in consideration of the meaning of that provision.

[00:14:32] Speaker 04:
Can you point me to the plain language in the contract where it informs and ensures that they will be participating in the company's losses?

[00:14:44] Speaker 03:
The critical point here, Your Honor, is that this, we're talking here about the... Well, can you answer my question first?

[00:14:48] Speaker 03:
Yes.

[00:14:49] Speaker 03:
The cost of insurance provision, which is what's implicated by the cost of insurance increase, imposes only two limits on the company's decision to increase COI rates.

[00:14:58] Speaker 03:
Number one, there's a maximum rate that can be charged.

[00:15:00] Speaker 03:
And number two, mortality must be in consideration.

[00:15:03] Speaker 04:
So you're using that list and saying it's not inclusive, that there are other things that could be included.

[00:15:10] Speaker 04:
That's exactly what the district... So why can't we look at the, when it says the policy does not participate in our surplus earnings, look at that as saying that that's not inclusive either.

[00:15:23] Speaker 04:
That it might also, there might also be other things that the policy holder doesn't participate in.

[00:15:28] Speaker 03:
Well, the critical language in the CLI provision is that the company will refer to certain factors.

[00:15:34] Speaker 03:
That is not, as the district court concluded in granting summary of judgment on the only pled theory of liability here that the COI provision was breached, limit the consideration of other factors.

[00:15:45] Speaker 03:
And there's a vast amount of surrogate case law to that very effect.

[00:15:50] Speaker 04:
Going back to my first question that never was answered, there is no language in this policy that expressly states

[00:15:57] Speaker 04:
you will not share in our losses or you will share in our losses.

[00:16:02] Speaker 03:
The policy is silent on the issue of losses.

[00:16:05] Speaker 03:
I agree with that.

[00:16:06] Speaker 03:
But the question here is whether the non-participation provision, which says the policy does not participate in our surplus earnings, could also mean that there's no participation in any losses.

[00:16:19] Speaker 03:
And again, that would require the addition of words, which is not acceptable, certainly under the Four Corner States or even under the Arizona law here.

[00:16:27] Speaker 02:
So counsel, am I understanding correctly that the district court granted summary judgment to Security Life on the breach of contract claim based on the cost of insurance provision?

[00:16:42] Speaker 02:
That's correct.

[00:16:43] Speaker 02:
And that hasn't been appealed?

[00:16:44] Speaker 02:
Correct.

[00:16:45] Speaker 02:
How does the district court's ruling, given that it hasn't been appealed,

[00:16:51] Speaker 02:
Well, is that relevant to the issue that we're looking at today?

[00:16:57] Speaker 03:
I think it is to this extent, Your Honor.

[00:16:59] Speaker 03:
The challenge conduct here is the COI increase.

[00:17:03] Speaker 03:
That's what plaintiffs complained about.

[00:17:05] Speaker 03:
In fact, if you go back and look at the complaint here, the complaint is there was a breach of the COI provision when these rates were increased.

[00:17:13] Speaker 03:
There was no reference to the COI increase being a breach of the non-participation provision.

[00:17:18] Speaker 03:
That claim was not raised until exactly one week before the close effect discovery in this case, as the wheels were falling off the only pled theory in the complaint.

[00:17:28] Speaker 03:
And so if you step back and look at what are plaintiffs really complaining about, it's the COI increase and the COI provisions really govern the company's obligations in that regard.

[00:17:39] Speaker 03:
This non-participation provision really has no bearing on cost of insurance increases.

[00:17:46] Speaker 01:
I'm not quite sure I followed the answer to his question.

[00:17:51] Speaker 01:
How does it affect this appeal?

[00:17:53] Speaker 03:
Well, I think it should inform the court's consideration of what provisions of this contract really should apply to the challenge conduct.

[00:18:00] Speaker 03:
And again, as the district court ruled, the provision that governs cost of insurance increases

[00:18:07] Speaker 03:
was plainly not breached and there's been no appeal of that.

[00:18:10] Speaker 03:
I think the court should consider each of the provisions of the contract in context and ask itself how the nonparticipation provision could limit the company's rights in connection with increasing cost of insurance rates.

[00:18:26] Speaker 04:
Well, as I understand the argument, it is that

[00:18:30] Speaker 04:
The increase in the cost of insurance was based on losses incurred by the company.

[00:18:38] Speaker 04:
I think the experts said 97% of the cost of insurance was directly related to the company's losses.

[00:18:47] Speaker 04:
And so as I understand the argument is if non-participating means

[00:18:52] Speaker 04:
that we can't be charged with your losses, they're saying that the calculation of the cost of insurance was contrary to the policy.

[00:19:04] Speaker 04:
I think I'm understanding.

[00:19:06] Speaker 03:
I think I understand the exact same way I judged with you.

[00:19:08] Speaker 03:
But I think here's the critical point.

[00:19:10] Speaker 03:
We're looking at the language surplus earnings, right?

[00:19:14] Speaker 03:
And asking yourselves, could surplus earnings mean

[00:19:19] Speaker 03:
negative surplus earnings or negative financial results.

[00:19:24] Speaker 03:
There is no evidence that Security Life of Denver had negative earnings in 2011, 2012, 2013, or 2014.

[00:19:32] Speaker 03:
There were costs associated with certain transactions, but that is not the same thing as negative earnings.

[00:19:39] Speaker 03:
In fact, if you look at the complaint, one of the principal allegations is that Security Life was paying dividends to its parent company, its shareholder,

[00:19:48] Speaker 03:
during this point in time.

[00:19:49] Speaker 03:
By definition, then, it was not experiencing any negative earnings.

[00:19:54] Speaker 03:
It was profiting.

[00:19:55] Speaker 02:
Would you make the same argument in response to PHT's contention about the technical meaning of non-participation?

[00:20:07] Speaker 02:
In other words, under a technical reading, could surplus earnings or dividends have both positive and negative value?

[00:20:17] Speaker 03:
No, I don't believe it could.

[00:20:18] Speaker 03:
I mean, look at the plain language of the words in the dictionary, surplus and earnings.

[00:20:24] Speaker 02:
Those are both... Well, but I switched over not to the dictionary definition, but to their technical meaning argument based on, I guess, their expert.

[00:20:39] Speaker 03:
Well, as I understand it, Judge Matheson,

[00:20:43] Speaker 03:
The technical term is non-participation, not surplus earnings.

[00:20:47] Speaker 03:
But, and this gets to a question Judge McHugh asked my opposing counsel.

[00:20:53] Speaker 03:
Does it matter that this is not in the definition section or that it doesn't say non-participation means something?

[00:21:00] Speaker 03:
Well, the term isn't used elsewhere in the policy, which is why there's no reason to put it in the definition section.

[00:21:06] Speaker 03:
But I think the simple question for the court is,

[00:21:10] Speaker 03:
in this general provision section of the policy, there's a heading that says not participating and then the next text is the policy does not participate in our surplus earnings.

[00:21:23] Speaker 03:
What is the relationship between the title and that sentence if it's not basically advice to the policyholder that there will be no sharing in profits or dividends paid, period.

[00:21:35] Speaker 03:
There's no promise that losses will not be taken into account when considering cost insurance rates?

[00:21:41] Speaker 04:
There's no promise that they won't be, but there's no warning that they will be.

[00:21:46] Speaker 04:
says nothing about losses.

[00:21:48] Speaker 03:
There is no limit in the CLI provision.

[00:21:50] Speaker 04:
Assuming of course that surplus earnings doesn't include losses, which is I think the argument on the other side.

[00:21:58] Speaker 03:
That's one argument and also that losses means particular costs or expenses associated with certain transactions as opposed to earnings that could yield the payment of a dividend.

[00:22:11] Speaker 04:
So this was a question Judge Matheson asked earlier and I'm not sure there was ever a good answer to it, but are surplus earnings necessarily dividends or are dividends something different than surplus earnings?

[00:22:28] Speaker 03:
As I understand it, in participating policies, surplus earnings are the basis for which dividends are paid so that there is a

[00:22:37] Speaker 03:
a financial result that's more positive than expected and then that is then shared through the payment of dividends.

[00:22:43] Speaker 03:
And here, again, this provision that supposedly is breached cannot possibly be read to mean we are not going to pay dividends from surplus earnings, nor will we impose costs due to losses.

[00:22:59] Speaker 03:
The language does not allow for that contortion.

[00:23:02] Speaker 04:
But it also doesn't allow for, but you will be responsible for paying our losses, covering our losses.

[00:23:13] Speaker 04:
My problem with this is it says nothing about losses.

[00:23:16] Speaker 03:
Well, I would refer, Your Honor, to the other non-participation provisions and other contracts that we've referred the court to that expressly say

[00:23:25] Speaker 03:
that the company will not share surplus earnings and will not recoup past losses.

[00:23:36] Speaker 04:
with knowledge about how other policies in the industry are written?

[00:23:41] Speaker 03:
Well, you know, the negative implication canon, whether an insured, is it familiar with those canons, I don't think is the question.

[00:23:49] Speaker 03:
The exclusion of language that exists in other similar policies, I think, is a relevant consideration as you consider this.

[00:23:56] Speaker 04:
Was that extrinsic evidence?

[00:23:59] Speaker 03:
I don't think the fact that there are other contracts out there constitute extrinsic evidence.

[00:24:04] Speaker 01:
Aren't there non-participating contracts that are silent that companies interpret to prohibit sharing and losses and there are non-participating contracts that are more explicit?

[00:24:21] Speaker 01:
It sounds to me that there's

[00:24:26] Speaker 01:
know, a couple different industry standards on what nonparticipation means, doesn't that

[00:24:31] Speaker 01:
take us to the land of ambiguity?

[00:24:33] Speaker 03:
You know, I think the first question is what does the text require or permit?

[00:24:38] Speaker 03:
And again, as the trial court here concluded, this language unambiguously bars the suggestion that there's been a breach by the imposition of a cost associated with the reinsurance recapture.

[00:24:53] Speaker 01:
And I want to highlight... Should I go to the dictionary for nonparticipation?

[00:24:58] Speaker 01:
Is that where we should start?

[00:25:00] Speaker 03:
You may do that, but I think the key is surplus earnings, which, again, and I think Judge McHugh recognized this in a question to my opposite counsel.

[00:25:11] Speaker 03:
The question is, what does a consumer understand?

[00:25:14] Speaker 03:
And here's what the record lacks after six years of litigation, evidence that any actual consumer shares PhD's meaning.

[00:25:26] Speaker 03:
And remember, PhD didn't buy this contract from Security Life of Denver.

[00:25:31] Speaker 03:
They bought it in the secondary market.

[00:25:32] Speaker 03:
There are three natural person human beings who purchased this contract.

[00:25:37] Speaker 03:
There's zero evidence that they would buy into PhD's proposed meaning now.

[00:25:42] Speaker 01:
And so... They would say the authors of the board memo accepted their interpretation.

[00:25:50] Speaker 03:
Yeah, they would say that, but the board memo does not address this language in this specific contract.

[00:25:55] Speaker 03:
It's a general statement as to 29 policies written, in fact, by multiple companies over a long period of time.

[00:26:04] Speaker 03:
And so the board memo statement, which, by the way, the board memo goes on to say there's been no violation of any of these provisions.

[00:26:12] Speaker 03:
And so... Doesn't the board memo sweep in this insurance contract?

[00:26:17] Speaker 03:
It does not speak to this insurance contract.

[00:26:19] Speaker 03:
It speaks as a general matter to a number of different contracts issued by Security Life of Denver over time.

[00:26:26] Speaker 04:
Well, including this one?

[00:26:28] Speaker 03:
This is one of the 29 contracts.

[00:26:30] Speaker 03:
That is correct.

[00:26:31] Speaker 02:
Can I ask your opposing counsel this question?

[00:26:36] Speaker 02:
It's sort of a compare and contrast question, and it has to do with when the policy is a participation policy.

[00:26:46] Speaker 02:
As a general matter, does the policyholder share in dividends and surplus in a participation policy?

[00:26:57] Speaker 02:
That's generally accurate.

[00:26:59] Speaker 03:
What about losses?

[00:27:01] Speaker 03:
In a participating policy, the policyholder is akin to a shareholder in the company.

[00:27:07] Speaker 03:
And so the policyholder in a participating policy does, whether through added premium or otherwise, experience the losses with the company akin to the way a shareholder would.

[00:27:23] Speaker 03:
So it would be a lesser dividend or no dividend in those instances.

[00:27:28] Speaker 03:
I want to touch last on the issue of the disgorgement theory of damages, which was the sole theory of damages that security life, excuse me, that the PHD raised at the trial court.

[00:27:39] Speaker 01:
Just to finish up on that last question, in a participating policy, could the company make a capital call on policyholders?

[00:27:47] Speaker 03:
I think it would depend on the terms of the policy at issue in those cases.

[00:27:50] Speaker 03:
So it's possible?

[00:27:51] Speaker 03:
I just couldn't say.

[00:27:52] Speaker 03:
I guess it's possible that that's... Do you know if some policies are written that way?

[00:27:57] Speaker 03:
I honestly, number one, I would say the record here doesn't have any information in that regard.

[00:28:02] Speaker 03:
And I can think of my Northwestern mutual policy doesn't allow for capital calls.

[00:28:07] Speaker 03:
I would say that.

[00:28:08] Speaker 01:
Okay.

[00:28:08] Speaker 01:
Thank you very much.

[00:28:09] Speaker 01:
Time has expired.

[00:28:10] Speaker 01:
Mr. Savage, you have some time left.

[00:28:17] Speaker 00:
Thank you, Your Honor.

[00:28:18] Speaker 00:
Just a few points briefly.

[00:28:20] Speaker 00:
I should lower this.

[00:28:22] Speaker 00:
So just to follow up on Judge Simkovich's question from the end.

[00:28:26] Speaker 00:
So the fact is that the policies did, in fact, suffer losses that were embedded in the COI increase model.

[00:28:32] Speaker 00:
And you can see that at appendix page 413, page 77 of our expert's report where he shows that these losses that SLD suffered were embedded in the COI increase.

[00:28:45] Speaker 04:
Stepping back on that... Let me interrupt for just a minute.

[00:28:50] Speaker 04:
But you did not appeal the district court's decision with respect to the cost of insurance, right?

[00:28:57] Speaker 00:
So there were claims that this same COI increase reached multiple provisions of the policy.

[00:29:04] Speaker 00:
One was the cost of insurance provision that we did not appeal.

[00:29:08] Speaker 00:
The other was the non-participating provision that this appeal is about.

[00:29:14] Speaker 00:
And so whether or not the COI increase reached a separate provision is irrelevant to the question of whether the COI increase reached this provision, which is the non-participating provision of the policy.

[00:29:27] Speaker 00:
And the evidence in the record that we've cited shows that in fact it did.

[00:29:34] Speaker 02:
ultimately you're challenging a cost of insurance increase.

[00:29:39] Speaker 02:
That's right, and there are lots of... And that's really what the case is about, isn't it?

[00:29:43] Speaker 02:
Absolutely.

[00:29:44] Speaker 02:
And the district court said there was no breach of the cost of insurance provision.

[00:29:49] Speaker 00:
Well, it said there was no breach of that particular provision, but that is not the only provision that governs the manner in which the insurer can make its COI increases.

[00:29:58] Speaker 01:
But if they plugged in illegal losses into the

[00:30:03] Speaker 01:
into the cost of insurance determination, why doesn't that breach the contract?

[00:30:09] Speaker 00:
It does breach the contract, and it breaches the non-participating provision of the contract.

[00:30:13] Speaker 01:
And it also breaches the cost of insurance.

[00:30:14] Speaker 00:
Well, those provisions are... Because you're putting in an input that is prohibited under your theory.

[00:30:20] Speaker 00:
Well, we pressed that theory, we decided not to appeal it below, but the most straightforward reason that it did so is that it breached the non-participating provision, which the word non-participating is understood to mean that in COI increases, and this is what the board memo said, and this is what all the industry standard evidence that we've cited said, say that you cannot impose a COI increase, that recoups past losses, that is what SLD did, and that is the claim that we're asserting here.

[00:30:47] Speaker 04:
So by not appealing

[00:30:49] Speaker 04:
the cost of insurance, I mean, what are you entitled to if we agree with you on non-participating, a declaratory judgment?

[00:30:57] Speaker 04:
I mean, you can't now challenge the cost of insurance.

[00:31:01] Speaker 00:
No, so our damages model is the amount of the increase that SLD imposed because the increase... Imposed through the cost of insurance.

[00:31:12] Speaker 00:
That's right, so it raised the cost of insurance on the policies.

[00:31:17] Speaker 00:
In doing so, that breached the non-participating provision.

[00:31:21] Speaker 00:
And so the remedy for the breach of that provision is to put the policyholders in the position they would have been in had that breach not occurred, which is a refund of the cost of insurance increase.

[00:31:35] Speaker 04:
I'm a little confused on why you didn't appeal the cost of insurance.

[00:31:42] Speaker 00:
We appealed on this ground because we believe that this is the most straightforward basis for the recruitment of past losses being a violation of the policy.

[00:31:54] Speaker 01:
Anything else?

[00:31:54] Speaker 01:
Councilor, time's expired.

[00:31:55] Speaker 01:
We appreciate the arguments.

[00:31:56] Speaker 01:
Thank you, Your Honor.

[00:32:01] Speaker 00:
The case shall be submitted.

[00:32:03] Speaker 00:
We appealed on this ground because we believe that this is the most straightforward basis for the recoupment of past losses being a violation of the policy.

[00:32:15] Speaker 01:
Anything else?

[00:32:16] Speaker 01:
Councilor, time's expired.

[00:32:17] Speaker 01:
We appreciate the arguments.

[00:32:18] Speaker 00:
Thank you, Your Honor.

[00:32:22] Speaker 01:
Case shall be submitted.