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The California Court of Appeal, Second Appellate District, Division 8, affirmed the trial court's granting of judgment on the pleadings in favor of an insurer on the ground Insurance Code section 1871.7 was not designed to prohibit fraud on the part of insurers. Rather, section 1871.7 was designed to prohibit the submission of fraudulent claims to insurers.
The appellant, Metz, filed a qui tam action on behalf of the State of California against Farmers Group, Inc. under section 1871.7(b) arising from the settlement of Metz's insurance claim under a Farmers policy following an accident in which his automobile suffered a total loss. Metz sought to impose civil penalties and assessments against Farmers for alleged violations of Section 1871.7(b) and to enjoin Farmers from future violations of this statute.
In his second amended complaint, Metz alleged Farmers violated section 1871.7(b) by (1) using "arbitrary discounts" from list prices of comparable replacement vehicles, based on the unsubstantiated assumption that insurance claimants would be able to negotiate a discounted price for replacement vehicles, (2) collecting price quotations for comparable vehicles but selecting those "from the low end of the price spectrum of the comparables" in determining the fair market value of a comparable vehicle, and (3) making statements containing false or misleading information about facts material to insurance claims, while concealing their unlawful valuation methods, during the marketing of their insurance policies, during the claims process and prior to claims settlement.
While this action was pending in the trial court, Division 5 of the Second Appellate District issued an opinion in State of California ex rel. Nee v. Unumprovident Corp. (2006) 140 Cal.App.4th 442, in which the appellant there also sought to assert a section 1871.7 claim against a disability insurer arising from the insurer's handling of a claim. There, the court held that an insurer is not subject to a qui tam action under section 1871.7 based on the insurer's marketing and claims handling practices.
Relying on Unumprovident, Farmers moved for judgment on the pleadings on the ground Metz's second amended complaint did not state facts sufficient to constitute a cause of action against Farmers. The trial court granted Farmers' motion without leave to amend and dismissed the case.
The Court of Appeal affirmed the trial court's ruling. Also relying on Unumprovident, the court held section 1871.7 is found within Article 1 of the Insurance Fraud Prevention Act. The "clear import of the legislation is to reduce fraud against insurers in order to benefit policyholders." As such, sections 1871, et seq., taken as a whole, are "specifically tailored toward preventing and punishing the making of fraudulent claims to insurance companies." (Unumprovident, supra., at 448-9 (emphasis added).)
The appellate court, like the Unumprovident court, rejected Metz's argument section 1871.7 should apply to insurers because the statute applies to every "person," which is defined to include a corporation. The meaning of a statute "may not be determined from a single word or sentence," but "must be construed in context … (Id. at 449.) In doing so, the statute is applicable only to those persons who violate Penal Code sections 549 and 550 by submitting false or fraudulent claims to insurers. Indeed, insurers do not "support" or "oppose" claims, nor do they submit statements as part of a claim for payment. (Id. at 450.)
The Court of Appeal also rejected Metz's argument Farmers made "fraudulent claims" to insurance companies by "assist[ing], and conspir[ing] with one another to knowingly engage in unfair valuation schemes related to total vehicle losses." The court concluded, in context of section 1871.7(b), "every person" must be interpreted to exclude the insurers who receive and handle insurance claims, as well as their agents and affiliates aiding in the processing of the claim.
This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.
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