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The Court of Appeal, Second District, Division 3, upheld a dismissal of a cause of action for unfair and deceptive practices under the Consumer Legal Remedies Act ("CLRA") set forth in Civil Code section 1750, et seq. in a class action lawsuit filed against Farmers New World Life Insurance Company ("Farmers") for allegedly engaging in such practices in designing and marketing interest-sensitive universal life insurance policies.
The class action plaintiffs purchased Farmers policies which were allegedly "permanent" life insurance, which would be kept in full force indefinitely by paying a stated premium amount. The complaint allegations were that, in reality, the stated premium amount was insufficient to keep the policy in force until maturity. The policies were allegedly systematically under funded so that they would lapse before maturity, and Farmers fraudulently failed to warn policyholders of this possibility. Plaintiffs alleged Farmers' guidelines were deceptively designed because they did not advise insureds of the consequences of not paying the higher premiums necessary to keep the policy in force until maturity.
Among various causes of action was a cause of action for unfair and deceptive practices under the CLRA. Farmers moved for a dismissal of the CLRA cause of action, arguing it had no merit because insurance is neither a "good" nor a "service" as required for the CLRA to apply. The superior court granted the motion. The representative plaintiffs petitioned the Court of Appeal for a writ of mandate.
In denying the petition for writ of mandate, the Court of Appeal first compared the CLRA to the Insurance Code sections which explicitly regulate unfair and deceptive practices in insurance, the Unfair Insurance Practices Act ("UIPA"). See Ins. Code § 790, et seq. Unlike the UIPA, which only provides for administrative enforcement against insurers violating its provisions, the CLRA, which is stated in Civil Code section 1750, et seq., allows for a private right of action. It allows a court to grant restitution and injunctive relief, compensatory and punitive damages, and attorney's fees.
The Court of Appeal held that the generally-applicable provisions of the CLRA did not override the insurance-specific provisions of the UIPA. "Indeed, interpreting the CLRA to apply to insurance would, in effect, swallow the UIPA whole by allowing a private right of action where the courts have explicitly held that a private right of action under that statute was never intended."
In reaching its conclusion, the Court first looked to the plain language of the CLRA and held that insurance was not a "good" or "service" as defined under the statute. The Court held that insurance is a "contract," defined under Ins. Code § 22 as where one indemnifies another against "loss, damage, or liability arising from contingent or unknown event." The Court cited to Berry v. American Express Publ'g, Inc. (2007) 147 Cal.App.4th 224, which held that issuance of a credit card is not a "service" under the CLRA, and reasoned that insurance is similar, an essentially financial transaction unrelated to the sale or lease of any identifiable consumer good or service. The Court also cited to Civil Service Employees Ins. Co. v. Superior Court (1978) 22 Cal.3d 362, which commented in dicta that the CLRA "does not directly apply to the present case because insurance is technically neither a 'good' nor a 'service' within the meaning of the [CLRA]." Id. at 376.
The Court then analyzed the legislative history of the CLRA and concluded that although "insurance" was a part of the model rule on which the CLRA was based, it was not included in the final draft of the statute. The Court explained that the CLRA was enacted in 1970, at a time when the only remedy available to low-income consumers harmed by unfair business practices was an expensive and often difficult to prove action for fraud. The statute was meant to provide a simpler remedy, particularly in cases where there was a history of repression by merchants in low-income areas.
In contrast, the Court noted that insurance was already highly regulated in 1970. The UIPA already prohibited unfair and deceptive practices in the business of insurance, and provided for the Insurance Commissioner to enjoin such practices and to impose civil penalties. On this basis, the Court concluded that the Legislature did not have insurance in mind when it enacted the CLRA, and therefore did not feel the need to include insurance as a "service" under the definition of goods and services protected under the CLRA.
The Court also found support for its holding in policy considerations. "[A]llowing for a CLRA remedy for insurance fraud would wreak havoc on the established code and decades of case history." The Court explained that if insurance were considered a "service" under the CLRA, many of the unfair and deceptive practices prohibited by the UIPA would also constitute proscribed practices under the CLRA. Allowing a private right of action under the CLRA would therefore, in effect, undermine the California Supreme Court's prohibition against a private right of action for UIPA violations. See Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287. Specifically, it would also allow the insured to seek punitive and compensatory damages against an insurer, which the UIPA does not allow.
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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