Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-04200/USCOURTS-cand-3_06-cv-04200-1/pdf.json

Parties Involved:
Liberty Life Assurance Company of Boston
Defendant
Mia Pepp-Zotter
Plaintiff

Document Text:

United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

MIA PEPP-ZOTTER,

Plaintiff,

 v.

LIBERTY LIFE ASSURANCE CO. OF

BOSTON,

Defendant. /

No. C 06-04200 WHA

ORDER GRANTING 

MOTION TO DISMISS

INTRODUCTION

In this action alleging failure to pay insurance benefits, defendant Liberty Life

Assurance Company of Boston moves to dismiss the complaint for failure to state a claim. 

Plaintiff Mia Pepp-Zotter failed to exhaust her administrative remedies. The motion to dismiss

is therefore GRANTED.

STATEMENT

Plaintiff Mia Pepp-Zotter began work for the University of California as a hospital

laboratory technician at the San Francisco Medical Center on or about February 17, 2004. She

enrolled in the university’s Supplemental Disability Insurance Plan, paid all premiums that

came due and otherwise did everything required to remain enrolled and eligible for benefits if

she should become disabled (Compl. ¶¶ 5–6). For purposes of the instant motion, all plaintiff’s

well-pled allegations must be treated as true. 

Case 3:06-cv-04200-WHA Document 18 Filed 09/05/06 Page 1 of 7
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

The policy provided that if an accident rendered her unable to perform her duties as a

technician, defendant would pay her, after twelve months of receiving benefits, the lesser of (i)

50 percent of her base salary, including shift differentials, (ii) 70 percent of that pay less

amounts received for other work or from other government, retirement or insurance benefits or

(iii) $10,000 per month. The policy provided that, if the insurer terminated benefits, the worker

could appeal that decision:

You, the claimant, or your authorized representative, may appeal a

denied claim within 60 days after you receive Liberty’s notice of

denial [of benefits]. You have the right to:

1. submit a request for review, in writing, to Liberty;

2. review pertinent documents; and 

3. submit issues and comments in writing to Liberty.

Liberty will make a full and fair review of the claim . . . . A final

decision on the review shall be made not later than 60 days

following receipt of the written request for review. [That period

could be doubled under certain circumstances.] The final decision

on review shall be furnished in writing and shall include the

reasons for the decision with reference . . . to those policy

provisions upon which the final decision is based

 (Compl. ¶ 7; Curry Decl., Exh. A (Supplemental Disability Insurance Plan (“Plan”) 12, 26–27,

46, 50–51)). 

Plaintiff later was injured. She was placed on disability leave just before completing her

second month of work for the university. Defendant paid disability-insurance benefits from

May 12, 2004, through July 15, 2005. On the latter date, defendant terminated her benefits. On

or about August 3, 2005, the university “medically separated” plaintiff because she was unable

to return to work (Compl. ¶¶ 8–10). 

Without appealing defendant’s decision to terminate her benefits, plaintiff filed a

complaint in California state court alleging that defendant breached a contract, breached the

attendant covenant of good faith and fair dealing, and violated the Unfair Competition Act, Cal.

Bus. & Prof. Code § 17200, by failing to pay benefits to her under the disability insurance plan

(Compl. ¶¶ 18, 21, 32). The case was removed to federal court pursuant to the parties’ diversity

Case 3:06-cv-04200-WHA Document 18 Filed 09/05/06 Page 2 of 7
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

of citizenship (Pet. For Removal ¶ 3). See 28 U.S.C. 1441(b). This action is not covered by the

Employee Retirement Insurance Security Act. 

ANALYSIS

A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged

in the complaint. A complaint should not be dismissed “unless it appears beyond doubt that the

plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” 

Conley v. Gibson, 355 U.S. 41, 45–46 (1957). However, “conclusory allegations of law and

unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a

claim.” Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996). 

Defendant argues that the complaint must be dismissed because plaintiff did not use the

internal appeal procedure provided by the university and administered by defendant (Br. 1). 

The California Constitution gives the University of California “full powers of organization and

government, subject only to such legislative control as may be necessary to insure the security

of its funds and compliance with the terms of the endowments . . . and such competitive bidding

procedures as may be made applicable to the university by statute . . . .” Cal. Const. Art. 9, § 9. 

These powers may give university policies “established by the Regents as matters of internal

regulation . . . a status equivalent to that of state statutes.” When the policies have such status

and provide an administrative remedy, “relief must be sought from the administrative body and

this remedy exhausted before the courts will act.” The exhaustion rule “has important benefits:

(1) it serves the salutary function of mitigating damages; (2) it recognizes the quasi-judicial

tribunal’s expertise; and (3) it promotes judicial economy by unearthing the relevant evidence

and by providing a record should there be a review of the case.” Campbell v. Regents of Univ.

of Cal., 35 Cal. 4th 311, 320–22 (2005). 

In Campbell, the California Supreme Court held that a former employee of the

University of California, San Francisco could pursue a civil action alleging retaliatory

termination for whistleblower activities only if she had exhausted university grievance

procedures. Those procedures were set forth in internal regulations providing that “[a]ny UC

employee . . . may file a written complaint against a University employee alleging threatened or

Case 3:06-cv-04200-WHA Document 18 Filed 09/05/06 Page 3 of 7
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

actual interference or retaliation resulting from the reporting of improper activities.” Id. at

317–18, 321. 

Defendant contends that the appeals process set forth in the disability-insurance plan

should be treated the same as the procedures in Campbell, and that plaintiff was required to use

that process before she could bring the instant action (Br. 6). There are differences between the

appeal provision at issue in the instant action and the policy at issue in Campbell. The policy in

Campbell apparently involved a procedure conducted exclusively and directly by the university. 

35 Cal. 4th at 318. In the instant case, a private company, Liberty Life Assurance, provided the

actual insurance policy in a contract with the University of California, and adjudicated appeals

itself (Plan 46–47). 

There are, however, more similarities than differences between Campbell and the

provisions at issue here. The insurance plan ultimately was controlled and administered by the

university, subject to university group-insurance regulations and its contract with Liberty. The

university reserved the right to terminate the plan or amend it “at any time” (id. 47-48). The

policies and procedures in Campbell also were controlled by the university. 35 Cal. 4th at 318. 

The adjudicative provisions in both policies are framed in permissive terms. In the instant case,

the claimant “may appeal” (Plan 46) (emphasis added). In Campbell, “[a]ny UC employee

. . . may file a written complaint . . . .” 35 Cal. 4th at 318. Both procedures are applicable to

employment-related issues at the same university campus. See id. (policy was for UCSF) (see

also Compl. ¶ 5) (plaintiff worked at UCSF). Both policies were governed by university

regulations (see Plan 1, 48–49).

The purposes of Campbell’s exhaustion rule would be well-served by its application to

the instant action. Use of the internal appeal procedure would give Liberty a better opportunity

to correct any mistake it made before expensive and time-consuming litigation. The

requirement would recognize that Liberty has particular expertise in construing plaintiff’s

entitlement to benefits and would promote “judicial economy by unearthing the relevant

evidence and by providing a record . . . ,” Campbell, 35 Cal. 4th at 322 (see Plan 43 (“Liberty

shall possess the authority, in its sole discretion, to construe the terms of this plan and to

Case 3:06-cv-04200-WHA Document 18 Filed 09/05/06 Page 4 of 7
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

determine benefit eligibility thereunder. Liberty’s decisions regarding . . . benefit eligibility

shall be conclusive and binding.”)). 

Given the similarities between the instant action and Campbell, plaintiff was required to

exhaust the appeals process before bringing suit. She did not do so. This action must therefore

be dismissed. All three of her claims could have been addressed in the appeals procedure. All

counts therefore must be dismissed. Exhaustion, however, is not an absolute requirement. For

example, it can be dispensed with when such an attempt would be futile. Amato v. Bernard,

618 F.2d 559, 568 (9th Cir. 1980). 

Plaintiff claims that the exhaustion doctrine does not apply to this action because

defendant is not a governmental entity, because it “has never been vested with quasi-judicial

authority to resolve the claims that [she] has presented,” and because two of her claims are nonstatutory (Opp. 2–3). It is true that defendant is not a government agency. It was, however,

acting as an agent for a plan administered by the University of California, i.e., by a

governmental agency. The plan rules were established by the university, subject to a contract

with Liberty. The mere fact that a private rather than governmental entity is being sued does

not eviscerate the exhaustion requirement. Plaintiff cites no authority in support of such a rule. 

Her citation to Lopez v. Civil Service Commission, 283 Cal. Rptr. 447, 451 (Cal. Ct. App. 1991),

does not support such a rule. Lopez held that the exhaustion requirement was applicable when

an administrative procedure was required by a regulation, not only when it was prescribed by

statute. Ibid. Furthermore, the exhaustion requirement is applicable even to lawsuits against

private organizations that have internal-claims procedures. See Westlake Cmty. Hosp. v. Super.

Ct. of L.A. County, 17 Cal. 3d. 465, 474 (1976) (“From the earliest decisions reviewing actions

of voluntary private associations, in which judicial review typically focused on the actions of

fraternal or benevolent societies, our courts have recognized the applicability of the exhaustion

of remedies doctrine in this context.”) (citing Supreme Court decisions from 1895 and 1897).

Plaintiff claims that defendant was “never . . . vested with quasi-judicial authority to

resolve the claims” that she presents, i.e., breach of contract, breach of the covenant of good

faith and fair dealing, and violation of the Unfair Competition Act. That is true. However,

Case 3:06-cv-04200-WHA Document 18 Filed 09/05/06 Page 5 of 7
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

most decision-makers in internal appeals and claims procedures are not empowered to hear

common-law or statutory claims. Instead, they hear administrative claims that are precursors to

more traditional remedies. For example, the internal adjudicator in Campbell was empowered

to hear grievances under the appeals procedure, not the plaintiff’s statuary claim for retaliatory

termination in violation of Government Code Section 12653, which could only be adjudicated

in superior court. 35 Cal. 4th at 319; Cal. Gov’t Code §12653(c). The inability of the internal

adjudicator to hear the claims asserted in the complaint was not enough to eliminate the

exhaustion requirement in Campbell. Neither is it here.

The fact that two of the plaintiff’s claims are non-statutory also does not save her from

the exhaustion requirement. In support of this proposition, she cites a decision holding that a

plaintiff need not exhaust administrative remedies under the Fair Employment and Housing Act

before bringing non-statutory employment claims. Rojo v. Kliger, 52 Cal. 3d 65, 88 (1990). 

That decision does not control here. Rojo focused on whether to extend the statutory and

regulatory scheme provided by FEHA to common-law employment claims. Here, no such issue

is presented. Instead, the issue is whether an insurance beneficiary can skip an administrative

procedure set up to deal with just the type of grievance she has. Plaintiff’s citation to Lance

Camper Manufacturing Corp. v. Republic Indemnity Company of America, 51 Cal.Rptr.2d 622

(Cal. Ct. App. 1996), also does not support the proposition that a plaintiff can escape the

exhaustion requirement merely because he or she is pursing non-statutory claims. In 

Lance Camper, the court held that a company need not go before the state insurance

commissioner before pursuing common-law remedies for breach of contract against its insurer. 

The court came to that conclusion because the insurance commissioner had no authority or

process to adjudicate such disputes. Id. at 626. Here, by contrast, defendant has authority

under the plan to adjudicate such disputes and has a process for doing so (Plan 46).

Plaintiff also claims that she should not have to exhaust internal appeals because the

plan does not require an internal appeal and nowhere sets forth the exhaustion requirement. In

the absence of the exhaustion doctrine, that interpretation might be correct. But the exhaustion

doctrine trumps this argument.

Case 3:06-cv-04200-WHA Document 18 Filed 09/05/06 Page 6 of 7
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

CONCLUSION

For the reasons stated, the motion to dismiss is GRANTED WITHOUT PREJUDICE

to plaintiff. Defendant has represented that it will not contend that plaintiff’s time to appeal the

denial of her claim has expired, and that defendant will consider plaintiff’s appeal on the merits. 

If that representation is not honored, plaintiff will be allowed to file a new action.

IT IS SO ORDERED.

Dated: September 5, 2006 WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

Case 3:06-cv-04200-WHA Document 18 Filed 09/05/06 Page 7 of 7