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The Court of Appeal, Second District, reversed an order of the Los Angeles County Superior Court denying a motion to certify a class under Proposition 64, holding that equitable defenses cannot be used to defeat a claim under the Unfair Competition Law (Bus. & Prof. Code, § 17200 (the "UCL")) and that the carrier could not raise the defense of fraud based on statements that insureds made in an application for insurance where the application had been neither attached to nor endorsed on the policy when issued.
Plaintiff Augusto Ticconi ("Ticconi") alleged that he applied for a policy of short term health and accidental death insurance from Blue Shield of California Life and Health Insurance Company ("Blue Shield") and truthfully answered all health questions on the policy application. Thereafter, Blue Shield issued an insurance policy to Ticconi effective January 1, 2004 with a one year duration (the "Policy"). Ticconi's application was neither attached to the Policy nor endorsed onto it when the Policy was issued.
Ticconi alleged he required "significant health care services" during the policy period that totaled over $100,000. After Ticconi submitted his bills for payment, Blue Shield rescinded the Policy stating that Ticconi has made material misrepresentations in the application and that a reasonable investigation would have shown this.
Ticconi filed a complaint, alleging that Blue Shield issued the policy without attaching a copy of his application to, or endorsing a copy upon, the Policy in violation of Insurance Code section 10113 which forbids incorporation of an application by reference. Ticconi further alleged that Blue Shield's rescission of the Policy was an unfair and unlawful business practice in violation of the UCL and that Blue Shield had rescinded numerous policies that did not have the application attached to or endorsed on the Policies in violation of Insurance Code section 10113 and 10381.5 in the past four years.
Ticconi moved for class certification of a class defined as "[a]ll California residents who were issued a policy of heal insurance by Blue Shield Life . . . and who thereafter had the policy rescinded by Blue Shield Life since March 28, 2001, based upon alleged misrepresentations contained in the policy application." Blue Shield opposed the motion. The trial court denied Ticconi's motion for class certification because Blue Shield's defenses of fraud and unclean hands raised individual factual issues such that adjudication on a class wide basis would not be beneficial. Plaintiff timely appealed.
In reversing the trial court's decision, the Court of Appeal first stated that unfair competition under the UCL is broadly defined to include "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any at prohibited [by section 17500, the false advertising law." The Court of Appeal then stated that the unlawful conduct alleged by Ticconi was "postclaims underwriting by rescinding disability insurance policies based on alleged misrepresentations in the application, which applications were incorporated by reference but neither endorsed on nor attached to the insureds' applications in violation of Insurance Code sections 10113 and 10381.5."
The Court of Appeal stated that the practice of postclaims underwriting is "categorically prohibited" by Insurance Code section 10384. The Court also stated that the consequence for failing to comply with Insurance Code section 10113 is that the insured is not bound by statements made in that application and the insurer may not invoke the defense of misrepresentation in or omission for the unattached and unendorsed application.
The Court of Appeal held that conduct in contravention of Insurance Code sections 10113, 10381.5 and 10384, including the failure to attach applications to or endorse them on the policies when issued and later engaging in postclaims underwriting by holding the insured to statements in those unattached and unendorsed applications as grounds for voiding policies, clearly constitutes a predicate unlawful practice sufficient to raise a UCL cause of action.
The Court of Appeal also rejected Blue Shields' reliance upon Samura v. Kaiser Foundation Health Plan, Inc. (1993) 17 Cal.App.4th 1284, for asserting that Insurance Code sections 10113 and 10381.5 are regulatory in nature and do not provide a basis for a UCL action because they do not proscribe any conduct. The Court of Appeal stated that Samura involved provisions of the Knox-Keene Act (Health & Saf. Code, §§ 1242,1363,1367) that did not define an unlawful act and entrusted regulatory power exclusively to the Department of Corporations. By comparison, the Court of Appeal noted that Insurance Code section 10384 explicitly makes postclaims underwriting unlawful and provides a basis for injunctive relief.
The Court of Appeal further stated that under Code of Civil Procedure section 382, the party seeking class certification has the burden of establishing the existence of both an ascertainable class and a well-defined community of interest among class members. The Court of Appeal held that if Ticconi's allegations are true, Blue Shield's conduct would constitute a blatant violation of the Insurance Code and an unfair business practice that can be enjoined under the UCL. The Court of Appeal further stated that Ticconi's defined class raised factual and legal issues that would go to Blue Shield's liability and would be universal to all class members. Accordingly, the Court of Appeal held that common issues of law and fact would predominate.
The Court of Appeal stated that the trial court's sole rationale for denying class certification was based upon the flawed assumption that the legal and factual issues concerning Blue Shield's defenses of fraud and unclean hands outweighed the common issues of law and fact related to Blue Shield's liability. Specifically, the Court of Appeal stated that the equitable defense of unclean hands was not available in a UCL action that is based on the violation of a statute, because allowing such a defense would "sanction the defendant for engaging in an act declared by statute to be void or against public policy." The Court of Appeal also relied upon the California Supreme Court's ruling in Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal. 4th 163, 179, for the principle that equitable defenses may not be used to defeat a cause of action under the UCL.
The Court of Appeal also stated that fraud was not available to Blue Shield as a defense to the UCL cause of action because Blue Shield had failed to attach the insureds' application to, or endorse them on, the policies. As a result, the insureds were not bound by any statements made in those applications pursuant to Insurance Code section 10381.5. Additionally, the Court of Appeal stated that allowing such a defense would violate the anti-waiver provision of Insurance Code section 10113, which provides that "[a]ny waiver of the provisions of this section shall be void." Finally, the Court of Appeal noted that Blue Shield was specifically precluded from relying upon the application as a defense by the California Supreme Court decision in Telford v. New York Life Ins. Co. (1937) 9 Cal.2d 103, 106 (holding that the insured was not bound by certain statement contained in the portion of the application that had not been attached to the policy and that such statements could not afford a basis for a defense by the defendant).
The Court of Appeal noted that the trial court could consider the insureds' non-disclosures or misrepresentations in fashioning equitable remedies authorized by the UCL, but stated that such individualized considerations at the remedy state did not preclude class treatment of liability. Accordingly, the Court of Appeal held that since Blue Shield was precluded from raising the defenses of fraud and unclean hands, it was error for the trial court to weigh the legal and factual issues associated with such defenses in denying Ticconi's motion for class certification.
The Court of Appeal remanded the matter and instructed the district court to consider whether Ticconi's claims were typical and whether he could adequately represent the class.
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This opinion is not final. Though it has been certified for publication, it may be withdrawn from publication, modified on rehearing, or granted review by the California Supreme Court. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.
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