California Court Expands Policyholders’ Right to Sue Insurers

An uptick in consumer protection lawsuits against California insurance companies is widely expected in the wake of a state appellate decision allowing a policyholder to sue The Progressive Group of Insurance Companies over alleged unfair claims practices, legal observers said this week.

California courts had long held there is no private right of action for individuals to sue over alleged violations of the state’s Unfair Insurance Practices Act. Under a 1988 state Supreme Court decision, civil actions arising from unfair claims practices were left to the state insurance commissioner to litigate (Moradi-Shalal v. Fireman’s Fund Insurance Cos. (1988) 46 Cal.3d 287).

Still, state law forbids private enforcement of the California Insurance Code, thus precluding private claims under the Unfair Insurance Practices Act (UIPA).

That’s because the California Insurance Code affords the state insurance commissioner expressed statutory and regulatory powers to pursue insurance bad faith, such as making misrepresentations of coverage and benefits, delaying the claims process, engaging in efforts to effectuate unfair settlement of claims, and advising a claimant not to seek legal representation.

However, a June 15 decision by the California Court of Appeals created a new option for potential litigants aggrieved by an insurance company’s unfair business practices.

“[T]he Legislature intended the insurance commissioner’s authority to use UIPA enforcement powers to be cumulative, not exclusive,” Presiding Justice Dennis Perluss wrote for the panel.

A three-judge panel ruled that an insured was within his rights to sue Mayfield Village, Ohio-based Progressive, the fourth largest U.S. auto insurer, for alleged claims violations, so long as his claim was not under UIPA, codified at Ins. Code § 790 et seq.

Chris Hughes of Oakland filed his claim under California’s Unfair Competition Law (UCL), at Bus. & Prof. Code § 17200 et seq. Hughes sued Progressive Direct Insurance Co. over its failure to notify insureds of their right to select a repair shop. He filed the civil action as an individual and for a proposed class harmed by the failure.

A UIPA provision codified at Section 758.5 of the California Insurance Code bars insurers from requiring or recommending to insureds specific automotive repair shops unless policyholders is informed — in writing — of their state-afforded right to select a repair dealer.

“Even if there is no private right of action under Section 758.5, it does not expressly bar a UCL claim nonetheless,” Presiding Justice Dennis Perluss wrote for the panel.

The justices, additionally, agreed that Section 758.5 confers an implied cause of action. With that, the justices reinstated the 2009 lawsuit against Progressive for alleged Insurance Code violation.

On the appeals panel with Perluss, the presiding judge, were Associate Justice Fred Woods and Associate Justice Laurie Zelon.

‘Interpretive Approach’

“The Hughes court claims its decision is consistent with Moradi-Shalal and from a formalistic standpoint it is right,” said John Patrick Hunt, a law professor at the University of California-Davis School of Law.

The Hughes decision, he explained, is far from the narrow decision one should expect, since the case deals mostly with the state’s “fairly circumscribed” ban on steering insureds.

The justices’ majority decision takes the “interpretive approach” that any legal wrongdoing can be the predicate for a private action under UCL, “barring an expressed provision to the contrary,” said Hunt.

“If the majority’s approach to interpreting the UCL together with other California statutes is followed in other cases, there could be a noticeable increase in the volume of litigation,” Hunt said. “The majority does not seem concerned with the possibility that that approach could open the floodgates to additional litigation.”

What’s more, he added, the justices’ approach tends “to undermine” Moradi-Shalal, helping pave the way for an eventual reversal, just as Moradi-Shalal itself reversed Royal Globe Ins. Co. v. Superior Court from nine years before.

“Given that the court in Moradi-Shalal was very concerned with avoiding a flood of litigation, following Hughes’ approach would also tend to undermine Moradi-Shalal,” said Hunt, former director of the Law and Finance Program at the Berkeley Center for Law, Business and the Economy at U.C. Berkeley’s Boalt Hall School of Law.

Commissioner Hails

California Insurance Commissioner Dave Jones (D) said he believes the appellate court was correct to allow Hughes to pursue his case.

The appellate ruling is legally significant, said Department of Insurance spokeswoman Patricia McConahay.

“It gives an additional remedy to consumers independent of the [department’s] administrative process,” McConahay said.

Jurist Misgivings

In his concurring opinion, Woods said he had “considerable misgivings” around the decision, questioning whether the jurists were adding to a “growing list of problems,” including the “continued attack” on MICRA, California’s 34-year-old Medical Injury Compensation Reform Act that restricts allowable medical malpractice damages.

The justice also said he wondered if the opinion would encourage “unscrupulous counsel” to target businesses with meritless lawsuits in the hopes of obtaining settlements from companies afraid of litigation costs.

“High insurance policy rates are not a socially desirable thing in my opinion and perhaps our interpretation of Insurance Code section 758.6 when juxtapositioned next to the UIPA and its manifested policy will dampen most desires to bring marginal or superficially meritorious lawsuits,” Woods concluded.

At trial, lawyers for Progressive successfully argued that the case it should be tossed from court, citing a 1988 state Supreme Court ruling that bars claimants from suing an insurer over alleged unfair claims practice (Moradi-Shalal v. Fireman’s Fund Insurance Cos. (1988) 46 Cal.3d 287).

After siding with Progressive’s argument there is no private right of action under the UCL for violations of UIPA, Superior Court of California Judge Carolyn Kuhl dismissed Hughes’s complaint.

The appeals court’s finding for Hughes reversed the Los Angeles County judge’s order for dismissal. The justices ruled that Moradi-Shalal does not prohibit a UCL claim solely because the civil action alleges UIPA violations.

Effect on Insurers

The ruling could have “significant effects” for insurance companies that do business in California, said Robert Shives Jr., president of the Association of Corporate Counsel (ACC) for the San Francisco Bay Area.

“It seems rather significant with respect to the requirements that allow for a cause of action to proceed in certain circumstances,” Shives told the Insurance Journal. “Plaintiffs’ lawyers are probably happy about the ruling,” he added.

California’s UCL statute was “pretty broad” before the decision, noted Shives, associate general counsel for technology giant Fujitsu America Inc., based in Sunnyvale, Calif.

State High Court

The Hughes decision, however, might be short lived, since the state Supreme Court has agreed to review a similar UCL holding to Hughes. The state Supreme Court has granted review of a holding by the Fourth Appellate District, that an insured was not precluded from bringing a cause of action under UCL for alleged violation of state insurance regulation on truthful advertising.

The state high court granted the petition for review Feb. 10, superseding the Court of Appeal decision and depublishing Zhang v. Superior Court.

Insurance Groups

Three major insurance industry trade groups have urged justices on the state high court to overrule the Fourth Appellate decision in Zhang.

Doing so, the groups said, would not deny the petitioner in the case “availability of appropriate remedies” and would simultaneously “prevent many harmful outcomes” if the case is upheld.

The Association of California Insurance Companies, the Pacific Association of Domestic Insurance Companies and the Personal Insurance Federation of California, in August 2010, filed their application for leave to file the amicus curiae brief in support of the California Capitol Insurance Company, the respondent and the real party in interest.

The associations’ friend-of-the-court brief warned that allowing Zhang to stand would result in “serious adverse consequences” for the insurance industry.

“Because the allegations offered in support of petitioner’s UCL claims are so broad, upholding the Court of Appeal decision would allow claimants to state a UCL claim in virtually every insurance claim, effectively eliminating the current rule that a litigant may not ‘plead around’ Moradi-Shalal by restating a claim dispute as a UCL claim,” the insurance associations argued.

The case of Zhang v. Superior Court has been fully briefed since June 2010, but oral argument is not yet scheduled (Re Zhang v. Superior Court, 178 Cal. App. 4th 1081, Case No. E047207).

Dispute Over Repairs

Hughes’s dispute with Progressive stemmed from his efforts to have repairs made to his car after a wreck Aug. 15, 2005.

According to court papers, Hughes told his insurance company that he wanted the repairs done by a specific repair shop, not one that was not part of Progressive’s Direct Repair Program (DRP).

To dissuade Hughes from going to a nonparticipating body shop, an attendant allegedly promised the claim for repairs would be approved more easily and the work done more quickly if Hughes’s car were serviced at a DRP facility in nearby El Cajon, Calif.

Hughes said he went along with the clerk’s insistence, not knowing about the statutory prohibition against insurance companies steering insureds to favored automobile repair shops.

“Progressive uses its position of power over its insured, in the form of incentives and requirements to carry out its program of steering,” Hughes’s complaint alleged.

Topics Lawsuits California Carriers Legislation Claims