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Courts Restrict Suits Against Insurers under Consumer Rights Laws

By Effie Silva, Litigation News Associate Editor – August 19, 2009

Recent decisions by both California and Colorado’s Supreme Courts are limiting some of the avenues consumers tried to use to sue their insurers for alleged unfair competition or unfair business practices.

California’s Victory for Life Insurers
In Fairbanks v. Superior Court of Los Angeles County (Farmers New World Life Ins. Co.), plaintiffs alleged that Farmers engaged in various deceptive and unfair practices in the marketing and administration of its universal life insurance and flexible premium universal life insurance policies.

Among the causes of action, plaintiffs asserted a claim for violation of California’s Consumer Legal Remedies Act (CLRA). Farmers moved for a judgment on the pleadings, arguing that the CLRA did not apply because the life insurance policies were neither “goods” nor “services.” The California Supreme Court agreed, holding that life insurance is not a “good” or a “service” subject to the provisions of the CLRA.

Even though the state high court explicitly limited its opinion to life insurance and stated that its holding did not apply to insurance in general, some class action attorneys are calling the ruling “a significant limitation on the CLRA, to the detriment of the consumer.” Insurance counsel, on the other hand, say the decision provides life insurance companies with a “solid defense” against CLRA actions.

Some consumer advocates view the ruling as “effectively eliminating” consumer protection laws as an avenue to hold insurance companies accountable for alleged unfair and deceptive practices. However, the California Supreme Court opinion does not prevent consumers from pursuing unfair and deceptive practices under the state’s Unfair Competition Law.

Coverage counsel are not surprised by the court’s decision. “The consumer acts that plaintiffs’ attorneys are trying to use in these suits are not designed to address insurance issues,” explains Laura A. Foggan, Washington, D.C., cochair of the ABA Section of Litigation’s Insurance Coverage Litigation Committee.

“The California court made this point, recognizing that insurance unambiguously did not fit within the definitions of good or service under the Consumers’ Legal Remedies Act,” says Foggan.

The “California decision reflects the court’s take on specific statutory language and legislative history,” notes Scott L. Nelson, Washington, D.C., former cochair of the ABA Section of Litigation’s Consumer and Personal Rights Litigation Committee and current member of the Section’s Special Committee on the Future of Civil Litigation.

The decision “appears to reach a result that is probably different from that in most states because those states do not exclude insurance transactions from the coverage of their general consumer protection or unfair trade practices statutes,” Nelson says.

“Insurance is, in general, more heavily regulated at the state level than many other consumer services,” says Nelson.

“Most states, like California, have some statutory scheme applicable to unfair or deceptive insurance practices,” he says. “The availability of general consumer protection statutes is important because they typically provide more in the way of private remedies than the insurance statutes,” he says.

Colorado Rejects Fraud-on-the-Market Theory
The recent Colorado Supreme Court decision in Farmers Insurance Exchange v. Benzing, is also being seen by some consumer groups as limiting their avenues of relief, and making it more difficult to file class action suits against insurance companies.

Plaintiffs had filed a class action suit, alleging that Farmers had committed “fraud on the market” by allegedly not notifying customers that purchasing uninsured motorist coverage for one vehicle covered all additional vehicles on the policy. Essentially, they alleged that this was a material misrepresentation, which affected the price.

The Colorado Supreme Court held that a “fraud-on-the-market” theory cannot be applied to maintain an insurance class action brought under the Colorado Consumer Protection Act.

The court also held that the trial court had discretion to decertify a previously certified class, as part of the court’s “continuing obligation to review whether proceeding as a class action is appropriate,” despite the court of appeals’ finding that the facts and arguments presented in connection with the decertification motion could have been raised at the initial certification stage.

In reaching its decision, the Colorado Supreme Court clarified that the “fraud-on-the-market theory is a judicially created presumption typically employed by plaintiffs in securities class actions to prove the reliance element of a section 10(b) and rule 10b-5 securities fraud claim.”

The court found the theory to fail in Benzing because the class plaintiffs relied on the defendant’s alleged omissions in face-to-face transactions, not on the market price of the insurance policies.

While consumer groups are voicing concern about the restrictive nature of the decision, Nelson notes that “the Colorado court did not actually rule out the availability of ‘fraud on the market’ in an appropriate consumer case.”

Instead, the court “pointed out some powerful reasons specific to this case why the theory was particularly ill-suited to the nature of the claims,” Nelson says.

“Among others, the information allegedly withheld from the market was in fact publicly available, so that if there were an efficient market—which is one of the preconditions for the theory—it would have already taken that information into account,” says Nelson.

Moreover, Nelson emphasizes that “the court carefully reserved the possibility that in a consumer case, reliance might be presumed when there was a misrepresentation or omission common to the class.”

Consumer Laws Used for Claims Against Insurers
“Insurance is already highly regulated by state insurance departments and commissioners, who are charged with, inter alia, protecting the public and the insurance market in the state,” opines Foggan.

“Imposing a further layer of regulation by a different set of laws or regulators could be inefficient and burdensome and could interfere with the balance of interests overseen by the insurance department,” Foggan says.

Despite this burden, “many states allow plaintiffs to use consumer protection statutes to pursue deceptive acts and practices by insurers,” Nelson says.

Nelson expects these states to continue that practice “notwithstanding the California and Colorado decisions.”

Keywords: California law, Colorado law, class actions, CLRA, consumer rights, unfair business practices, Fairbanks v. Superior Court of Los Angeles County, Farmers Insurance Exchange v. Benzing


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