Insurance Litigation Law Blog | Regulatory Law | Bad Faith | California | Lawyer | Attorney | Barger & Wolen

The purpose of this alert is twofold: (1) to remind our clients that both federal and state law requires financial institutions and most businesses to safeguard their customers’ information; and (2) to advise of new requirements for security breach notification letters.

by Timothy Moroney and Dawn Valentine

In 2002, California adopted a first-in-the-nation security breach notification statute (AB 700, Simitian) (the “Security Breach Notification Law”).

The Security Breach Notification Law requires companies that do business in California and retain their customer’s personal information to notify individuals when there has been a data breach involving their personal information. 

Background

Since 2002, 45 other states, as well as the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, have also enacted security breach notification laws that are modeled upon California’s Security Breach Notification Law. Only Alabama, Kentucky, New Mexico and South Dakota do not have security breach notification laws.

Moreover, 14 states (Hawaii, Iowa, Maryland, Massachusetts, Minnesota, New Hampshire, New York, North Carolina, Oregon, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming) and Puerto Rico have built upon California’s model and added more detailed requirements for security breach notifications to include certain types of information.  

Further, the federal government has weighed in. As of February 19, 2009, for breaches of personal medical information, individuals have to be notified and those notifications must contain certain specified content.

Still further, most of these states require a business that suffers a security breach to notify a state regulator, such as the Attorney General, in addition to the affected individuals (Alaska, Hawaii, Louisiana, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, South Carolina, Vermont, and Virginia).  

SB 24 Data Breach Notification

Accordingly, not to be outdone as the leader in consumer protection, effective January 1, 2012, California adopted new requirements (SB 24 – amending Civil Code sections 1798.29 and 1798.82) for what information must be put in a security breach notification letter. 

The purpose underlying these new requirements is to close a gap that has been identified – the old requirements simply required data holders to notify individuals when there had been a data breach involving personal information but were silent on what information should be contained in the notification.

As a result, security breach notification letters varied greatly in the information provided leaving consumers confused and not providing answers to the questions of what information was breached, when did the breach occur, and what consumers should do to protect themselves.

Moreover, businesses were left exposed and uncertain of what was expected of them in the event of a breach.  

The new requirements fill this gap by establishing standard, core content for the notification letters. Specifically, the new law requires that security breach notification letters, at a minimum, contain the following information:

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On January 18, 2012, California Secretary of State Debra Bowen announced that an initiative on automobile insurance rates has qualified for the November 6, 2012 ballot.

The initiative, named the “2012 Automobile Insurance Discount Act,” would allow insurers to use continuous automobile insurance coverage with any admitted insurer or insurers as a rating factor for private passenger automobile insurance. We previously reported on this topic last summer, when the initiative was being circulated for signatures.

Under an existing California Department of Insurance regulation, an insurer may use continuous coverage as a rating factor when an individual is currently insured for automobile insurance with the insurer.

The existing regulation prohibits an insurer from basing the continuous coverage rating factor on coverage provided by another non-affiliated insurer. The initiative would override this existing prohibition.

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We recently blogged here about the California Supreme Court’s decision in Howell v. Hamilton Meats.

In a long-awaited, and nearly unanimous decision, the California Supreme Court has held that an injured plaintiff whose medical expenses are paid through private health insurance may recover as economic damages no more than the amounts paid by the plaintiff’s insurer for those medical services, and that this discounted amount does not fall within the collateral source rule.

Dan Walters in a recent Sacramento Bee post, 'Tort war' could hit the California Capitol is wondering if the trial attorneys will take this loss lying down:

The issue in the case (Howell v. Hamilton Meats) was whether the injured party could collect the full medical bills imposed by doctors, hospitals and other medical care providers, or would be limited to the amounts actually paid by insurers, which are often pennies on the dollar.

The case, stemming from a 2005 collision in San Diego County, involved $200,000 in medical bills that were whittled down to $60,000 before payment.

The trial judge decreed that only the smaller amount need be paid, while an appellate court said it should be the full amount, and several other pending cases had conflicting appellate court decisions, so the issue was kicked upstairs to the Supreme Court.

Its widely watched ruling hit personal injury lawyers in their wallets but elated insurers, who had said an adverse outcome would have cost them, and their policyholders, another $3 billion a year. (emphasis added)

The legislature has just returned to Sacramento, and, according to Mr. Walters, the “Consumer Attorneys of California, the lobbying arm of personal injury lawyers, has made no secret that it wants legislation to counteract the Supreme Court decree.”

We’ll keep you posted if and when legislation is introduced.

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On August 12, 2011, California Secretary of State Debra Bowen announced that supporters of a proposed initiative on automobile insurance rates may begin to collect signatures to put the measure before California voters. Supporters of the initiative have until January 9, 2012, to submit the 504,760 valid signatures needed to put the initiative on the June 5, 2012, statewide ballot.

The initiative, named the “2012 Automobile Insurance Discount Act,” would allow insurers to use continuous automobile insurance coverage with any admitted insurer or insurers as a rating factor for private passenger automobile insurance.

Under existing California Department of Insurance regulation 2632.5(d)(11), an insurer may use continuous coverage as a rating factor when an individual is currently insured for automobile insurance with his or her insurer or an affiliate insurer. The existing regulation prohibits an insurer from basing the continuous coverage rating factor on coverage provided by another non-affiliated insurer. The proposed initiative would override this existing regulatory prohibition.

Background

Actuarial analyses indicate that, in general, drivers who maintain continuous automobile insurance coverage have a lower risk of future insured losses. Over the past several years, there has been controversy in California over how this lower risk should be considered as a rating factor for private passenger automobile insurance.

Proposition 103

Proposition 103, which was passed by California voters in 1988, enacted Insurance Code Section 1861.02.

Section 1861.02(a) provides that private passenger automobile insurance rates must be determined, in decreasing order of importance, by 1) driving record; 2) number of miles driven; 3) years of driving experience; and 4) optional factors that the insurance commissioner may adopt by regulation. 

Section 1861.02(c) provides that the absence of automobile insurance, in and of itself, shall not be a criterion for determining automobile insurance rates. Proposition 103 declared that its provisions “shall not be amended by the Legislature except to further its purposes.”  

Quackenbush Regulation

In 1996, Insurance Commissioner Chuck Quackenbush exercised his power to adopt optional rating factors under Section 1861.02(a) and adopted a regulation that allowed insurers to use “persistency” as a rating factor.

The regulation did not define “persistency.” The term was interpreted differently by various insurers. Some insurers interpreted “persistency” to mean the number of years a customer has continued insurance coverage with his or her current insurer. Other insurers defined “persistency” more broadly to include continuous coverage with any insurer.

Low Regulation

In 2002, Insurance Commissioner Harry Low adopted a regulation that limited the scope of the persistency rating factor. The Low regulation, which is incorporated in the Department of Insurance’s existing regulatory section 2632.5(d)(11), requires that in applying the persistency rating factor, an insurer may consider only the length of time a driver has been continuously covered with his or her current insurance company or an affiliate of that company. 

SB 841

In 2003, the Legislature sought to override the Low regulation by expanding the scope of the persistency rating factor.

The Legislature passed SB 841, which amended Insurance Code Section 1861.02(c) to provide that an insurer may use continuous coverage with a driver’s current insurer or another insurer as an optional rating factor to determine the driver’s insurance premium. In passing SB 841, the Legislature declared that the bill “furthers the purpose of Proposition 103 to encourage competition among carriers so that coverage overall will be priced competitively.” Governor Gray Davis signed SB 841 into law on August 2, 2003.

In September 2005, the California Court of Appeal ruled in Foundation for Taxpayer & Consumer Rights v. Garamendi (2005) 132 Cal.App.4th 1354 that SB 841 was invalid because it did not further the purposes of Proposition 103. The ruling was based on two points.

1. SB 841’s application of continuous coverage as a rating factor violated the proposition’s provision in Insurance Code Section 1861.02(c) prohibiting the use of the absence of prior insurance “in and of itself” as a criterion for determining rates. 
2. The Legislature’s attempt to specify an optional rating factor was inconsistent with the proposition’s provision in Insurance Code Section 1861.02(a)(4) delegating the exclusive authority to adopt optional rating factors to the insurance commissioner. 

The court disregarded the Legislature’s declaration that SB 841 furthered Proposition 103’s purpose of encouraging competition.

The Court of Appeal’s ruling preserved the Low regulation which limits the application of the continuous coverage rating factor to coverage with a driver’s current insurer or an affiliate of the current insurer. That regulation remains in effect today.

Proposition 17

In 2010 there was an unsuccessful attempt to override the existing regulation with a voter initiative. Proposition 17 would have allowed a driver to demonstrate continuity of coverage by providing proof of coverage from his or her prior insurer or insurers. Proposition 17 failed to gain voter approval at the June 8, 2010, statewide primary election. 

Proposed Initiative

The proposed initiative, which was approved for signature gathering on August 12, 2011, also seeks to override the existing regulation but does not use the same language that was contained in Proposition 17. 

The proposed initiative would enact a new Insurance Code section that expressly allows a private passenger automobile insurer to use continuous coverage as an optional rating factor. 

The initiative defines “continuous coverage” to mean “uninterrupted automobile insurance coverage with any insurer or insurers, including coverage provided pursuant to the California Automobile Assigned Risk Program or the California Low Cost Automobile Program.”

The initiative specifies certain circumstances that qualify for continuous coverage, including a lapse in coverage due to an insured’s active military service or a lapse in coverage of up to 18 months in the last five years due to loss of employment resulting from a layoff or furlough.

The initiative grants a proportional discount to a driver who is unable to demonstrate continuous coverage; the discount reflects the number of years in the immediately preceding five years for which the driver was insured.

Barger & Wolen will continue to report on the state of this new initiative.

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By John M. LeBlanc and Jason C. Love

On June 1, 2011, the California State Assembly passed AB 52, which was initially introduced in December 2010.

Beginning January 1, 2012, the bill would require health care service plans and health insurers in California to obtain prior approval from the Department of Managed Health Care or the Department of Insurance for all proposed rate increases.

Under the proposed legislation, the Department of Managed Health Care and the Department of Insurance would be prohibited from approving any rate or rate change that is excessive, inadequate, or unfairly discriminatory. 

In addition, the bill calls for an examination by the Department of Managed Health Care and the Department of Insurance of all rate increases that become effective between January 1, 2011 and December 31, 2011, to ensure that those rates are not excessive, inadequate, or unfairly discriminatory, and to order the refund of any payments made pursuant to any such rate.

The bill must still be approved by the California Senate and signed into law by the Governor in order to become legally operative.

Originally posted on Barger & Wolen's Life, Health and Disability Insurance Law Blog.

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Robert Hogeboom Testifies on California Restitution Remedy Bill

On April 28, 2011, Barger & Wolen Senior Regulatory Counsel, Robert W. Hogeboom, testified before the Senate Insurance Committee as an industry expert opposing Senate Bill 631. 

SB 631, as drafted, would give the Insurance Commissioner additional remedies of restitution and reimbursement of attorney’s fees and costs in California Department of Insurance enforcement actions brought on behalf of consumers claiming wrongful conduct by insurers or other licensees, including producers. For more details, please see New Restitution Remedy Proposed for Insurers and Licensees in California.

Immediately before the Senate Insurance Committee hearing, author Senator Noreen Evans (D-District 2) announced her decision to make SB 631 a two-year bill. Her decision is presumed to be the result of the Legislative Counsel’s opinion to the Senate Insurance Committee raising California constitutional issues that the legislation may give the Commissioner remedies only available to the courts. 

At the hearing, Hogeboom testified that the legislation would violate the separation of powers clause in the California Constitution. Restitution is only given to quasi-judicial entities such as the California Workers’ Compensation Appeals Board. Further, reimbursement of attorney’s fees and costs would exceed even the power of the courts in most cases. 

Hogeboom also testified that because the legislation would extend payment of restitution for violations of Proposition 103’s rating law, the bill would likely require a two-thirds vote of the Legislature to pass.

Based on his lengthy experience as an enforcement regulatory lawyer, Hogeboom testified that the measure would actually hinder due process rights from licensees because many producer licensees would not be able to afford an administrative hearing when they face the risk of having to pay both restitution and reimbursement of attorney’s fees and costs. This would give the CDI more leverage in forcing licensees into settlements. 

Following the April 28, 2011 hearing, the bill was put over for another year in order to more fully explore its legal issues.

For more information, contact Robert Hogeboom at (213) 614-7304 or rhogeboom@bargerwolen.com.

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The California Department of Insurance (“CDI”) published, on March 11, 2011, proposed regulations containing suitability requirements to govern the sale of annuities (see Insurance Commissioner Jones' press release). This represents an attempt by the CDI to accomplish by regulation what it failed to accomplish several times by statute in the past decade.

The proposed regulations are based on the NAIC Suitability in Annuity Transactions Model Regulations, as revised by the NAIC in 2010, but include some revisions.

It is important to note that for many years the CDI has held the position that the prior versions of the NAIC Suitability Model did not go far enough in protecting consumers. The CDI supported unsuccessful legislation in California at least three times in the mid-2000s that sought to impose suitability requirements that were more onerous than the then current NAIC Suitability Model.

Thus, while most states have adopted laws that follow the NAIC Suitability Model, California currently lacks laws that provide specific suitability requirements that pertain to the sale of annuities.

Given the lack of express suitability requirements, the CDI has sought to regulate suitability in connection with the sale of annuities using other tools such as:

1. general legal concepts of principal-agent responsibility;
2. requirements relating to replacements; and,
3. California Insurance Code Section 785(a)’s imposition of a duty of good faith and fair dealing in connection with the sale on an insurance product to a senior.

The regulations proposed by the CDI include a provision that would make them applicable only to sales of annuities to purchasers aged 65 and older. This is in contrast to the NAIC Suitability Model which applies to all sales of annuities.

Another important distinction between the CDI’s proposed regulations and the NAIC Suitability Model is that the CDI proposal does not include the “FINRA Safe Harbor” provisions which were some of the primary revisions made by the NAIC to the Suitability Model last year. A public hearing will be held on the CDI’s proposed regulations on April 25, 2011. 

It is interesting to note that the The National Conference of Insurance Legislators recently endorsed the NAIC Suitability Model. Also, the Senate Insurance Committee of the California Legislature introduced legislation, SB 715, on February 18, 2011, that seeks to codify the NAIC Suitability Model. SB 715’s draft language is the same as the NAIC Suitability Model that was revised by the NAIC last year. 

It is not clear at this point in time why the CDI has proposed the NAIC Suitability Model in the form of regulations when the Model is pending as a proposed statute. One thought is that the CDI is hedging its bets. One problem that the CDI may have is that it is unclear whether there is sufficient statutory authority for the CDI to promulgate the NAIC Suitability Model as a regulation.

For more information, please contact Randall Doctor.

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By Robert W. Hogeboom and Larry M. Golub

On March 1, 2011, California State Senator Noreen Evans introduced Senate Bill 361 as spot bill legislation. The legislation was at the request of California Insurance Commissioner Dave Jones who seeks to enable consumers to obtain their out-of-pocket costs associated with claimed wrongful conduct by insurers or other licensees, which would include producers. 

As explained in Senator Evans’ press release, the bill grants explicit authority to the California Department of Insurance (CDI) to “order restitution as part of an administrative enforcement action.” 

Because the legislation is a spot bill, the next version of the bill will provide the details discussed in the press release. Senator Evans’ office also issued an SB 631 Fact Sheet that provides further information on the proposed legislation.

The press release and fact sheet acknowledge that the CDI presently does not have the authority to order insurers or other licensees to restore out-of-pocket expenses or money wrongfully obtained.   

The fact sheet provides examples of the types of monetary losses that are sought to be dealt with by SB 631:

1. health insurance rescissions for out-of-pocket costs for medical treatment that the CDI alleges should be covered under the policy;
2. the charging of a premium that is higher than allowed; and,
3. the effect of the recent court decision in MacKay v. Superior Court.  MacKay held that consumers cannot sue an insurer directly for rating activities that were subject to the CDI’s approval in the rate application process. 

The effect of this bill would likely result in the CDI initiating administrative actions based on consumer complaints as well as market conduct rating and underwriting and claims examinations for the primary purpose of ordering restitution to consumers.  

The press release advises that SB 631 would allow insurers to challenge the CDI’s determination in court, and it also states that the bill would preserve the ability of consumers to sue their insurer in court over the claimed wrongful conduct.

Perhaps just as important, the legislation allows the CDI to seek reimbursement for all of its costs in bringing the enforcement action.  Currently, the CDI has no authority to seek reimbursement for the costs it incurs in administrative actions.

Proponents of SB 631 may face an uphill battle with the aspect of this legislation that amends Proposition 103’s penalties relating to rating and underwriting matters. 

It is our preliminary analysis that Proposition 103 and California Insurance Code (CIC) § 1861.14 specify that violations of Article 10 “Reduction and Control of Insurance Rates” are subject to the penalties set forth in CIC §§ 1859.1 and 1858.07 (i.e., $5,000 for each act and $10,000 if willful). 

Because this legislation would have the effect of amending CIC § 1861.14 to provide restitution, it would require a two-thirds vote of the legislature.

For more information, contact Robert Hogeboom at (213) 614-7304 | rhogeboom@bargerwolen.com, or Larry Golub at (213) 614-7312 | lgolub@bargerwolen.com.

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On February 4, 2011, California Insurance Commissioner Dave Jones released draft guidelines for implementing SB 1163 (“Guidance 1163:2”).

SB 1163, signed by former Governor Schwarzenegger on September 30, 2010, responds to the federal Patient Protection and Affordable Care Act (“PPACA”), which requires the United States Secretary of Health and Human Services to establish a process for the annual review of “unreasonable” increases in premiums for health insurance coverage.

Under the federal act, health insurers must submit to the secretary, and the relevant state, a justification for an “unreasonable” premium increase prior to implementation of the increase.

SB 1163, effective January 1, 2011, requires health insurers to file with the California Department of Managed Health Care or the California Department of Insurance detailed rate information regarding proposed premium increases and requires that the rate information be certified by an independent actuary. 

The bill authorizes the departments to review these filings and issue guidance regarding compliance. It also requires the departments to consult with each other regarding specified actions as well as post certain findings on their Internet Web sites.

In his draft guidelines (“Guidance 1163:2”), Commissioner Jones lists several factors that will be used by the Department to determine if a rate is “unreasonable.”

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California Supreme Court Rejects Requests to Depublish MacKay

by Kent R. Keller

On October 6, 2010, Division Three of the Second Appellate District issued a landmark decision in MacKay v. Superior Court, 188 Cal. App. 4th 1427 (2010), declaring that approved insurance rates subject to Proposition 103 cannot thereafter be collaterally attacked in a civil action.

In brief, MacKay was a certified Unfair Competition Law (UCL) class action involving more than 500,000 class members who contended that 21st Century Insurance Company had used two illegal “rating factors” in developing automobile insurance premiums. The two factors had been included in rate and class plan filings approved on multiple occasions by the Insurance Commissioner. 

The issue, as the Court explained, was:

whether the approval of a rating factor by the DOI [Department of Insurance] precludes a civil action against the insurer challenging the use of that rating factor.” MacKay, supra at 1434. 

In a detailed opinion, authored by Justice H. Walter Croskey, the Court concluded that approval did preclude a collateral attack in a civil action. 

This decision is of critical importance to insurers and consumers subject to rate approval pursuant to Proposition 103. 

Prior to MacKay, it was not clear whether approval precluded civil actions. As a result, many insurers were sued, virtually always in class actions, by parties challenging approved rates on one basis or another. 

The result was that, while insurers were required to obtain rate approval before putting a rate into effect and once approval was obtained could had to use the approved rate, they did so at the peril of a class action lawsuit. 

Whether such lawsuits benefited insureds or simply increased premiums in the future is a continuing debate. What, however, was clear was that such actions often produced large attorneys’ fees awards.

Given the value of these class actions to the plaintiffs’ bar, it was not surprising that requests to depublish MacKay were numerous. 

In addition to a request from counsel for the plaintiffs in MacKay, requests were filed by Consumer Watchdog, the City and County of San Francisco, the Consumer Attorneys of California, Public Advocates, the Mexican American Legal Defense & Education Fund, the Southern Christian Leadership Conference of Greater Los Angeles, United Policyholders, the California State Insurance Commissioner, and others. 

Indeed, by a letter dated January 10, 2011, new Commissioner Dave Jones advised the California Supreme Court that he, like his predecessor, supported depublication.

Despite this tsunami of support for depublication, on January 12, 2011 the Supreme Court denied all requests and declared the case closed. 

While the reasons for denying or granting depublication are never certain, we have to believe that the Supreme Court recognized the correctness of Justice Crokey’s decision. As a result of the Supreme Court’s action, MacKay remains valid and precedential authority.

21st Century Insurance Company was represented in this case by Kent R. Keller, Steven H. Weinstein, Marina M. Karvelas and Peter Sindhuphak of Barger & Wolen.

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On November 30, 2010, California Insurance Commissioner Steve Poizner issued a Notice to all California Residential Property Insurers attaching the revised California Residential Property Disclosure Form and Bill of Rights.

Pursuant to AB 2022, which was written about in detail here, California insurers must implement the new notice and revised bill of rights on July 1, 2011.

On October 27, 2010, Commissioner Poizner invited public comment with respect to changes recently made to his proposed regulations setting forth "Standards and Training for Estimating Replacement Value on Homeowners’ Insurance.” (Amended Text of Regulation). The deadline for comments was November 12, 2010.

Personal Insurance Federation of California submitted comments addressing, among other issues, whether the amended regulation meets the requirements of California Government Code section 11349.1 in that it appears to exceed the authority of the enabling statute; whether the regulations would apply to manufactured homes; as well as problems with the broad definition of "estimate of replacement cost" and new obligations imposed on insurance licensees.

As of this date, the proposed regulations have not been adopted.

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On September 30, 2010, Governor Schwarzenegger signed AB 2022 into law (Chaptered copy).

Introduced by Assembly Member Ted Gaines (R), AB 2022 revamps California’s Residential Property Disclosure Form (current page 3; new page 10) and the accompanied California Residential Property Insurance Bill of Rights (current page 13; new page 15). The new disclosure form, drafted in plain and simple language, significantly improves the current form and makes understandable the differences in residential insurance coverages available to California insurance consumers. The changes, however, are much more than stylistic.

Commissioner Poizner, whose office helped craft AB 2022, has also drafted comprehensive regulations in an effort to respond to the under-insurance problems caused by the 2003, 2007 and 2008 California wildfires.

The Proposed Regulations establish standards for accurate replacement cost estimating, broker agent training on replacement cost estimating, and new record keeping requirements. The Proposed Regulations place the burden of accurately estimating replacement value of a home squarely on the insurance industry. The new disclosure form, the first step towards this regulatory reform, removes critical language found in the current disclosure form that obligates the consumer to determine and maintain the proper policy limits on their home. 

PART 1

California Residential Property Disclosure Form (July 1, 2011)

Effective July 1, 2011, insurance companies must use the new disclosure form. The new form eliminates the legalese that plagues the current form and presents the different coverage levels in a reader friendly manner. The new form calls specific attention to the fact that “actual cash value” coverage is “the most limited level of coverage listed,” while “guaranteed replacement cost” coverage is “the broadest level of coverage.” The new coverage definitions are as follows:

• ACTUAL CASH VALUE COVERAGE pays the costs to repair the damaged dwelling minus a deduction for physical depreciation. If the dwelling is completely destroyed, this coverage pays the fair market value of the dwelling at the time of loss. In either case, coverage only pays for costs up to the limits specified in your policy.
• REPLACEMENT COST COVERAGE is intended to provide for the cost to repair or replace the damaged or destroyed dwelling, without a deduction for physical depreciation. Many policies pay only the dwelling’s actual cash value until the insured has actually begun or completed repairs or reconstruction on the dwelling. Coverage only pays for replacement costs up to the limits specified in your policy.
• EXTENDED REPLACEMENT COST COVERAGE is intended to provide for the cost to repair or replace the damaged or destroyed dwelling without a deduction for physical depreciation. Many policies pay only the dwelling’s actual cash value until the insured has actually begun or completed repairs or reconstruction on the dwelling. Extended Replacement Cost provides additional coverage above the dwelling limits up to a stated percentage or specific dollar amount. See your policy for the additional coverage that applies.
• GUARANTEED REPLACEMENT COST COVERAGE covers the full cost to repair or replace the damaged or destroyed dwelling for a covered peril regardless of the dwelling limits shown on the policy declarations page.
• BUILDING CODE UPGRADE COVERAGE, also called Ordinance and Law coverage, is an important option that covers additional costs to repair or replace a dwelling to comply with the building codes and zoning laws in effect at the time of loss or rebuilding. These costs may otherwise be excluded by your policy. Meeting current building code requirements can add significant costs to rebuilding your home. Refer to your policy or endorsement for the specific coverage provided and coverage limits that apply.

In addition, the new disclosure form removes the following statements from the replacement cost coverage definitions in the current disclosure form:

To be eligible for [this coverage], you must insure the dwelling to its full replacement cost at the time the policy is issued, with possible periodic increases in the amount of coverage to adjust for inflation and increases in building costs; you must permit inspections of the dwelling by the insurance company; and you must notify the insurance company about any alterations that increase the value of the insured dwelling by a certain amount (see your policy for that amount).”

To be eligible to recover this benefit, you must insure the dwelling to [company shall denote percentage] [ ] percent of its replacement cost at the time of loss.”

California Residential Property Insurance Bill of Rights (July 1, 2011)

The revised bill of rights that must accompany the new disclosure form eliminates the first 16 lines of the current disclosure form. The omitted lines include statements concerning the applicant’s/policyholder’s burden to determine and maintain proper policy limits such as: “Take time to determine the cost to rebuild or replace your property in today’s market.” “Once the policy is in force, contact your agent or insurance company immediately if you believe your policy limits may be inadequate.” 

The language deleted from the current versions of the disclosure form and bill of rights marks a significant change in California public policy. In Everett v. State Farm General Ins. Co., 162 Cal. App. 4th 649 (2008), the court held that the homeowner, rather than the property insurer, had the duty to maintain insurance policy limits equal to replacement costs. In reaching this conclusion, the court relied on the current version of the residential property disclosure which places the burden of determining whether a higher policy limit is needed on the homeowner.

AB 2022 and Commissioner Poizner’s proposed regulations effectively nullify Everett.

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Barger & Wolen is proud to join JVP Partners in sponsoring the 14th Annual Insurance Forum on November 9th, 2010 in Chicago. This complimentary event is open to all.

14th Annual Insurance Forum
Tuesday, November 9, 2010
7:30 a.m. - 5:30 p.m.
The Union League Club
65 West Jackson
Chicago, IL

What is the Insurance Forum? The Forum is an event presented by the Insurance Forum Committee, chaired by Kenneth M. Weine. This is an executive level program designed for insurance and risk management professionals, accountants, attorneys, corporate officers, financial examiners, and regulators.

Can I Earn Continuing Education Credit? Continuing Education credit is available for attorneys, AIRs, CPAs, CFEs, CIRs and other insurance designations. (Certain restrictions apply, so please verify that your designation is approved in the state(s) you require).

To register for this complimentary event, click here

For more information, click here

Panels & Speakers (order subject to change)

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By Larry M. Golub and Misty A. Murray

On March 23, 2010, President Obama signed the Patient Protection and Affordable Health Care Act of 2009 (“PPACA”) into law. (After the amendments made March 30, 2010, the law is referred to as The Affordable Care Act.) 

While Republicans in Congress vow to repeal such enactment, key aspects of the PPACA went into effect on September 23, 2010, which marks the six-month anniversary of the legislation. 

Although the following list is not exhaustive, here are some of the more notable changes in the health care reform law (effective September 23, 2010) that will apply to individual and group health plans:

Coverage Changes

No Lifetime or Annual Limits on Essential Benefits:

Health plans may not contain lifetime limits on the amount of benefits that will be provided for essential benefits. No regulations have yet been issued regarding the definition of “essential benefits, which in general include, but are not limited to, ambulatory patient services, emergency services, hospitalization, maternity and newborn care, prescription drugs, laboratory services, preventive and wellness services, and chronic disease management.  As for annual limits, for plan years beginning before January 1, 2014, the Department of Health and Human Services’ (“HHS”) interim regulations adopt a three-year phase-in approach of removing annual limits on essential health benefits. For more information, click here.

Anti-Rescission Rules:

Health plans may not rescind, i.e., retroactively cancel coverage, except in cases of fraud or intentional misrepresentations of material fact. These rules do not apply to prospective cancellations or any cancellation due to failure to timely pay premiums.

Mandatory Preventative Health Care Services:

Health plans must provide benefits without cost sharing (i.e., no co-payments, deductibles or co-insurance) for certain preventative services, including, but not limited to, immunizations recommended by the CDC, as well as preventative care and screening for infants, children and adolescents and for women as recommended by the Health Resources and Services Administration. Grandfathered health plans are exempt. (A grandfathered health plan is a group health plan that was created – or an individual health insurance policy that was purchased – on or before March 23, 2010, and a health plan must disclose in its plan materials whether it considers itself to be a grandfathered plan.) 

Extension of Adult Dependents Coverage:

For health plans that elect to provide dependent coverage, such coverage must be extended to adult children up to age 26.

No Pre-existing Condition Exclusions for Children:

Health plans may not impose any preexisting condition exclusions for children 19 and under. (Grandfathered plans are exempt.).

Patient Protection Changes

Right to Choose Primary Care Provider (“PCP”):

For health plans that require designation of a PCP, the patient must be allowed to designate any participating PCP accepting new patients. For children, any participating physician specializing in pediatrics can be designated as the child’s PCP and, for women, any participating OB-GYN can be designated as a PCP.

Coverage for Emergency Services:

For health plans that provide coverage for emergency services, such plans must do so without requiring prior authorization and regardless of whether the provider of emergency services is a participating provider. Emergency services provided by a non-participating provider must also be provided at the same level of cost-sharing as would apply to a participating provider.

Appeals Process:

Group plans must provide for an internal appeals process that complies with the U.S. Department of Labor regulations and individual plans must provide an internal appeals process that comports with the standards established by the Secretary of Health and Human Services. Both group and individual plans must also provide for an external appeals process that complies with applicable law or at a minimum with the NAIC Uniform External Review Model Act.

Additional health care reform changes will continue to take effect in 2010 and as late as 2018. More information about the PPACA can be found on the National Association of Insurance Commissioners (NAIC) website here.

For additional information on ERISA plans and the PPACA, the U.S. Department of Labor has posted information on its website here.

For additional information on the PPACA and individual policies and nonfederal governmental plans, the HHS has posted information on its websites here and here.

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by Robert W. Hogeboom

The California Department of Insurance (CDI) Rate Regulation Division has recently issued a first round of letters to insurers requesting that they submit rate decrease applications. All Proposition 103 lines are affected. 

Because many insurers have not recently filed rate applications, the California Rate Division suspects that due to a trend of lower loss ratios, that many insurers may be charging excessive rates.

The CDI is requesting insurers to submit rate filings and advise them of the time frame to submit the filing and threatens that if the insurer does not comply, the CDI will issue an Order to Show Cause or a mandatory request for the filing.

We have questioned the CDI's authority to mandate the submission of rate application filings. 

For more information, please view the full client alert here (pdf).

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The much-touted and recently signed Financial Reform Bill includes a provision that prevents the public from obtaining any documents relating to SEC investigations (past or present, open or closed) pursuant to the Freedom of Information Act. 

As discussed in an article by Barger & Wolen partner Michael A.S. Newman in the Los Angeles and San Francisco Daily Journals, the law flies in the face of well-established notions in this country that the workings of the government must remain visible to the general public. 

Click here to read the full article (pdf).

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Yesterday, the California Supreme Court issued its unanimous opinion in Lu v. Hawaiian Gardens Casino, Inc., in which the high court found that a specific Labor Code provision could not be enforced by private litigants. This opinion is important in that it reiterates important cases and analyses that can be used to defeat a plaintiff’s attempt to set forth a private cause of action where no such right was intended by the legislature. Unfortunately, however, the Supreme Court declined to further address the question of whether a statute that cannot independently confer a private cause of action can still be utilized as a predicate for a cause of action under the “unlawful” prong of the Unfair Competition Laws (“UCL”).

Louie Lu (“Lu”) was a card dealer at the Hawaiian Islands Casino in Southern California. As a dealer, he was provided tips. However, not all of the tips were his to keep. Instead, he was required to provide 15% to 20% of his tips to a community fund that was then split among other employees who were offering services to the card players, but were not as routinely tipped as the dealers (i.e., floormen, poker tournament coordinators, concierges, etc.)

The tip pool policy specifically prohibited managers and supervisors from receiving any money from the pool. This exclusion of managerial persons from sharing in the tips is important, as Labor Code Section 351 prohibits an employer from taking, collecting or receiving employees’ tips. However, California courts have long-held that the pooling of tips to be split amongst like-situated employees, such as waiters and waitresses on the same shift, is not a violation of Section 351. Similarly, courts have held that the pooling of tips in the casino setting when those tips are spread among the non-managerial staff is perfectly acceptable and not a violation of Section 351. Lu contended that “agents” of the casino (presumably managerial employees) were improperly sharing in the pooled tips, and set forth causes of action for violation of Section 351 and Section 17200 of the UCL. 

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On July 15, 2010, the United States. Senate passed the Restoring American Financial Stability Act of 2010. The bill now goes to President Obama for his signature, which is expected in the coming days.

The bill, which is over 1,600 pages, establishes new regulations designed to prevent the repeat of the recent financial crisis and end the prospect of future government bailouts. Oversight is established through the creation of the Financial Stability Oversight Council (“Council”).

Members of the Council consist of the heads of several Federal financial regulatory agencies and departments (including the Treasury Secretary who is to act as the Chairman of the Council) and an independent member having insurance expertise who will be appointed by the President subject to Senate confirmation. 

Article V of the bill covers insurance and creates within the Treasury Department a new Office of National Insurance (“Office”). The Office will monitor the insurance industry, coordinate international insurance issues, and provide a study with recommendations to Congress on ways to modernize insurance regulation.        

Various duties that the Office will oversee include:

1. Monitoring all aspects of the insurance industry and identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or U.S. financial system.
2. Identifying entities that could become subject to regulation by the Council.
3. Coordinating federal efforts on prudent aspects of international insurance matters.
4. Consulting with state regulators on insurance matters of national and international importance.
5. Advising the Secretary of Treasury on major domestic and international insurance policy issues.
6. Providing ability to collect financial information from certain insurers (smaller insurers may be exempt).

Robert W. Hogeboom, Senior Regulatory Attorney with Barger & Wolen, along with several insurance executive members of the Pacific Association of Domestic Insurance Companies (PADIC) were escorted by staff of the National Association of Mutual Insurance Companies (NAMIC) in late June to meet with key legislators from the California House of Representatives and U.S. Senate in Washington D.C. to discuss the legislation and its effect on California insurers. 

Most important to the insurance industry is the fact that within 18 months the Office must conduct a study and issue a report to Congress providing recommendations on how to modernize and improve the system of insurance regulation in the United States.

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While not yet approved by the United States Senate, the Federal Insurance Office (FIO) – the first time an entity in the federal government has been created to specifically address the insurance industry – moved that much closer to reality when the House of Representatives on June 30 passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173.  The bill passed the House by a vote of 237-192.

The Senate is expected to vote on the bill when it returns from its July 4 recess on July 12.

The FIO will be housed under the U.S. Treasury Department, though it will not have any regulatory authority. Among other things, the FIO will gather information regarding the insurance industry, will monitor the industry for systemic risks, and will serve as a negotiator for international insurance treaties. The bill contains a provision that will modernize and streamline the surplus lines and non-admitted markets. As explained by the National Underwriter, the “surplus lines provisions in the bill dictate that in any multi-state placement of surplus lines, the only state whose rules govern access to the products is the state in which the insurance is placed—the ‘principal place of business’ for the insured.”

Just prior to passage in the House, the bill dropped a tax on financial institutions to raise $19 billion to pay for implementation of the bill over five years, a provision strongly opposed by the insurance industry.

Speaking for the National Association of Insurance Commissioners (NAIC), its President and West Virginia Insurance Commissioner Jane L. Cline thanked the congressional negotiators for essentially preserving the role of state insurance regulators in protecting consumers and ensuring the viability of the insurance industry, stating, “We were pleased to see that the Federal Insurance Office (FIO) set up under the bill is narrowly designed to carry out its mission while not unnecessarily undermining strong state regulation.”  NAIC President Cline also stated: 

“The package provides senior investment protection grants for annuity suitability, an area where the NAIC and the states have a solid track record,” and “The bill also provides important clarification in regulatory authority for indexed annuities, ensuring that these guaranteed products are under the clear authority of state insurance regulators.”

While the bill will allow federal regulators to wind down troubled large institutions, the NAIC further stated that the bill made “clear that state insurance regulators will continue to have the ability to ‘wall off’ insurance companies from troubled holding companies, protecting insurance policyholders from other risks in the financial system” and that state regulators “will also retain their role to monitor consumer protections in the insurance sector.”

When the Obama administration first proposed a national insurance office last year, California Insurance Commissioner Steve Poizner stated at the time that such plan “appropriately acknowledges the primary role the states play in regulating the insurance business to benefit consumers. State oversight of insurance companies, coordinated among all state regulators, is the reason that, among all the financial players in this country, it is the insurers who are and remain the most stable and the least in need of federal assistance.”

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Efforts in Sacramento to put a cap on the recovery of punitive damages were stomped out on May 4, 2010, as a party-line vote killed pending tort reform legislation in the Assembly’s Judiciary Committee.

As reported previously, Assembly Bill 2740, authored by Assemblyman Roger Niello (R-Fair Oaks) sought to limit punitive damages to three times the amount of compensatory damages. Because plaintiff’s attorneys routinely work on a contingency basis, this legislation was strongly opposed by plaintiff’s attorneys – arguing it was unnecessary. The bill would have also capped “pain and suffering” awards to $250,000.

Kim Stone, Vice President of the Civil Justice Association of California, testified that these “common-sense reforms would go a really long way towards making California more friendly to business while at the same time protecting the truly injured to make sure they receive their just compensation.”

Niello, a strong-backer of business interests in California, argued that tort reform is necessary to reinvigorate the state as a place for businesses to make their home.

“It's been stated by (the trial lawyers) that there’s no need, there isn’t a problem. There is a need, there is a problem. The problem is the reputation of California as a place to do business in is in the tank, and part of the reason for that is our civil justice system,” Niello told the committee.

Unfortunately, these justifications were not persuasive – or perhaps more pessimistically, not considered – as the bill was defeated on a party-line vote. Democrats unanimously voted against the reform, Republicans unanimously voted for reform. Given the toxicity and divisiveness of California state politics, perhaps little less should have been expected.

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In United Steel et al. v. Shell Oil Co., et al., the Ninth Circuit Court of Appeals held that putative class action lawsuits properly removed to federal court under the Class Action Fairness Act of 2005 ("CAFA") [28 USC 1332(d), 1453 ] may remain in federal court even after the court denies class certification.

If the putative class action was properly removed to begin with, the subsequent denial of Rule 23 class certification does not divest the district court of jurisdiction. The case remains removed and is not to be remanded to state court."

Congress intended that a properly removed class action be remanded if a class is not eventually certified, it could have said so." 

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Typically, tort reform efforts are premised on the belief that the court systems are overly filled with unworthy cases and the awards in those cases are unnecessarily excessive. Surely, many insurers and other defendants would agree with that presupposition. Many plaintiff attorneys would vehemently disagree. If you are the former, Assembly Bill 2740, authored by Assemblyman Roger Niello (R-Fair Oaks), might be of great interest. Indeed, if it survives the gauntlet of the California legislature, AB 2740 would eliminate what many insurers and other defendants view as unpredictable jackpot awards that only drive up premiums for insureds and the cost of doing business for all companies operating in California.   

Most importantly for insurers, the bill would limit punitive damages to three times the amount of compensatory damages, and would be applicable to claims for breach of the implied covenant of good faith and fair dealing (colloquially known as “bad faith”). While Supreme Court decisions have recently sought to limit the ratio of punitive to compensatory damages, the decisions have not been evenly applied by trial and appellate courts; AB 2740 would effectively resolve and limit the ratio component.  

In addition, the bill also would limit non-economic damages, i.e., damages for pain and suffering, to $250,000 in all civil cases. (This $250,000 cap on non-economic damages has been the law in California for medical malpractice claims since the passage of the Medical Injury Compensation Reform Act of 1975.)

While it is currently unclear if AB 2740 will gain any momentum in the California legislature, insurers can hold hope for – or at least keep watchful eyes on – this promising legislation. We expect that Governor Schwarzenegger would sign the bill if it passed in the legislature.  We will keep you updated on its progress. The next hearing is in the Assembly’s Judiciary Committee on May 4, 2010.

The full text of the proposed legislation can be found here.

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by Richard De La Mora

Having unsuccessfully urged Congress to impose a national freeze on health insurance rates, Harvey Rosenfield has refocused his efforts on the California legislature and AB 2578.

Who is Harvey Rosenfield? He is, in his own words, the “author of California’s landmark property-casualty insurance rate regulation Proposition 103 – recognized as the most successful rate regulation in the country.” In fact, AB 2578, which cleared Assembly Health Committee earlier this week, includes the following provisions modeled closely on Proposition 103:

• A requirement that all rates and rate changes be filed with and approved by the Department of Insurance or Department of Managed Health Care before they go into effect;

• A prohibition on the use or approval of rates that are “excessive, inadequate, or unfairly discriminatory”;

• A right for consumer advocates to request a hearing on a rate application, and a requirement that a hearing be granted whenever the rate increase sought exceeds 7%.

Finally, Mr. Rosenfield has made sure that he and his friends in the consumer advocacy industry are taken care of by advocating a provision requiring health plans to pay the consumer advocacy fees associated with fighting the health plan’s rate application.    

We have seen this played out before, as our firm has represented property-casualty insurers in administrative and judicial matters involving insurance rates regulated under Proposition 103 since 1989.

While property-casualty insurers have had plenty of time to adjust to the dictates of rate regulation, health plans will face a steep learning curve if AB 2578 becomes law. 

We are hopeful that this legislation will not become law. Even if it does, AB 2578 will likely face legal challenges and hurdles as did Proposition 103.

From our experience, we learned some of those challenges will be more successful than others. Nevertheless, if rate regulation comes to pass, a company’s goals can still be achieved provided that it has a complete understanding of the proposed regulatory system, plans ahead, has input into the development of regulations, and prepares itself for life after the system is implemented.

Barger & Wolen will continue to keep our clients and friends apprised on new issues pertaining to AB 2578 via the firm’s Insurance Litigation & Regulatory Law Blog and the Life, Health & Disability Law Blog. If you would like to be notified about upcoming events and seminars pertaining to AB 2578 and other issues, please subscribe to our blog via the RSS feed or add your e-mail in the left column.

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In an article appearing in today's Los Angeles and San Francisco Daily Journals (pdf), I discuss H.R. 4115, which, if passed, will overturn the Supreme Court's recent rulings in Bell Atlantic Corporation v. Twombly and Ashcroft v. Iqbal. Twombly and Iqbal held that a complaint filed in federal court could be dismissed if it does not contain sufficient factual matter to state a claim for relief that is plausible on its face.  

H.R. 4115 (called "The Open Access To Courts Act of 2009"), by contrast, would prohibit a federal district judge from dismissing a complaint unless it appears

beyond doubt that plaintiff can prove no set of facts in support of their claim which would entitle plaintiff to relief.

A judge would also be prohibited from dismissing a complaint based on the determination that the factual contents of the complaint do not show their claim to be plausible or do not warrant a reasonable inference that the defendant is laible for the misconduct alleged.  

The exact effect of this legislation is unclear, but, if passed, it is certain to invite the argument from plaintiff's lawyers that all they need to do to get a complaint past the pleading stage is to include as few facts as possible. Vagueness may become the order of the day, and it will certainly become more difficult to dismiss a case under Federal Rules of Civil Procedure Rule 12.  

This law may mean that we will soon see complaints in federal court containing fewer and vaguer allegations. For the insurance industry, this may mean rethinking the generally accepted practice of invariably removing state court actions to federal court on diversity grounds. If a motion to dismiss is being contemplated, it may see more success as a state court demurrer. 

Please feel free to contact me directly for more information.

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The California legislature passed a number of new insurance-related bills that Governor Schwarzenegger signed into law. These include new laws regulating the rescission of health insurance coverage (AB 108), life settlement transactions (SB 98) and electronic transactions (AB 328). 

Several of the laws are summarized briefly below. Our summary is intended to give you a broad overview only and does not include all new provisions enacted by the legislation. These summaries should not be relied upon as a substitute for legal advice.

If you would like additional information on any of the laws discussed herein, please contact Stuart Soldate at (213) 614-7306 or ssoldate@bargerwolen.com, Michael Rosenfield at (213) 614-7321 or mrosenfield@bargerwolen.com, Chris Burusco at (213) 614-7332 or cburusco@bargerwolen.com, or your regular Barger & Wolen attorney. 

LIFE, HEALTH AND DISABILITY INSURANCE

1. AB 23: Cal-COBRA Premium Assistance

• Establishes notice requirements that must be provided to eligible qualified beneficiaries regarding the availability of premium assistance under the American Recovery and Reinvestment Act of 2009 (ARRA).
• Qualified beneficiaries eligible for federal assistance may elect coverage under Cal-COBRA, and those enrolled in Cal-COBRA as of February 17, 2009 may request the federal premium assistance.

2. AB 76: Life and Annuity Consumer Protection Fund

• Extends the provision creating the Life and Annuity Consumer Protection Fund to January 1, 2015.
• Requires the California Insurance Commissioner (“Commissioner”) to publish an annual report on its Web site detailing certain protections for consumers of insurance products.

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By Robert W. Hogeboom

This Alert follows our Client Alert of September 4, 2009, Harvey Rosenfield Seeks Initiative to Prohibit Broker and Installment Fees.

Harvey Rosenfield’s proposed initiative, Stop Insurance Overcharges Act (pdf), of September 4, 2009, is intended to counter the July 2009 initiative, The Continuous Coverage Auto Insurance Discount Act, sponsored by CalFair and Mercury General Corp.

The historical background is as follows:

In 2004, Mercury sponsored SB 841, which codified the right to offer portable persistency discounts. In 2005, the Court of Appeal overturned SB 841, reasoning that the legislation did not further the purposes of Proposition 103. In July 2009, Mercury and CalFair sponsored an initiative for the 2010 ballot to permit insurers to offer portable persistency discounts, arguing that consumers benefit by this discount and that it encourages consumers to shop for the lowest rates.

Harvey Rosenfield argues that portable persistency punishes the uninsured. Smart’s California Insurance Report of July 15, 2009 refers to Michael Hiltzik’s July 2nd Los Angeles Times article, Mercury General using guise of benevolence to assault Prop. 103, that criticizes Mercury’s attempt to undermine Proposition 103’s ban on insurers from using the absence of prior coverage as a factor in rate setting. The article also asserts that previously uninsured motorists were charged higher premiums because they do not qualify for a discount, which, in turn, discourages them from purchasing insurance. 

The Stop Insurance Overcharges Act would also add other provisions to the Insurance Code that deal with installment fees, broker fees, the absence of prior insurance and precluding the use of claims experience. 

Proposed Section 1861.25 deals with installment fees and mandates that installment fees, including a fee for the time value of money, are premium. It further limits fees to the direct cost of collecting the installment payments. Comment: This would eliminate the ability to estimate a specific amount as the installment fee.

Proposed Section 1861.26(a) precludes the charging of a broker fee if the broker receives a commission from the insurer on the transaction.  It further requires that broker fees be fair and reasonable and not unfairly discriminatory. It requires the Commissioner to adopt regulations to establish broker fee limits. Comment: This section attempts to regulate broker fees that are not part of the rate and nullify AB 2956. AB 2956, which was unanimously passed by the legislature last year, clarifies the difference between agents and brokers by using the “totality of the circumstances” test coupled with the addition of disclosures to the consumer. 

Proposed Section 1861.27 establishes that any other amount that is billed to and paid by a policyholder constitutes premium and is subject to review and approval by the Commissioner. Comment: Harvey Rosenfield is expanding Proposition 103, which covers insurance rates, to cover all amounts paid by a policyholder. This would include all broker fees and fees charged when the broker does not receive a commission.

Proposed Section 1861.28 clarifies that the absence of prior insurance is not a criteria for auto and homeowners rates. Comment: This deals directly with the Mercury/CalFair initiative.

Finally, proposed Section 1861.29 maintains that except pursuant to Section 1861.02, an insurer may not include claims experience in determining rates, discounts or insurability. Comment: This is meant to address rating and insurability in homeowners insurance.

Contact Robert Hogeboom at (213) 614-7304 for more information.

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by Robert W. Hogeboom

On September 4, 2009, Harvey Rosenfield submitted the Stop Insurance Overcharges Act (pdf), a proposed state-wide ballot measure, to Attorney General Jerry Brown.

The initiative would:

• limit all insurance broker fees charged if brokers also receive a commission;
• mandate that all other fees, including installment fees billable to a policyholder, is premium subject to prior approval;
• seek to eliminate the absence of prior insurance as a criteria for automobile and homeowner rates or insurability;
• preclude use of claims experience in calculating discounts or surcharges for automobile insurance. 

We anticipate that insurers, managing general agents, brokers and trade associations will be establishing a strategy to contest the proposed initiative.

I look forward to your comments and/or thoughts regarding this significant issue as I will be coordinating our efforts to defeat this initiative. Please contact Robert W. Hogeboom at rhogeboom@bargerwolen.com and/or (213) 614-7304.

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In Kearns v. Ford Motor Company, --- F.3d ----, 2009 WL 1578535 (9thCir. June 8, 2009), plaintiff William Kearn sued Ford for alleged violations of California’s Consumers Legal Remedies Act (“CLRA”) and California’s Unfair Competition Law (“UCL”) arising out of Ford’s Certified Pre-Owned (“CPO”) vehicle program. Kearn’s complaint generically alleged that Ford had made false and misleading statements concerning the safety and reliability of its CPO vehicles (without identifying who made the statements, the specific content of the statements, or when and how Kearn was exposed to such statements), and failed to disclose to consumers Ford’s lack of actual oversight in determining whether used vehicles qualify for the CPO program.  Kearn alleged that he was harmed by the foregoing conduct because he had paid a higher price for a CPO vehicle then he would have paid for a non-CPO vehicle, even though there was no difference between the two. While Kearn alleged that Ford’s conduct constitutes an unfair business practice under California law, he did not assert any claims for fraud in the complaint.

In the district court, Ford brought a motion to dismiss Kearn’s complaint for failure to comply with the heightened pleading standards of Federal Rule of Civil Procedure 9(b). The district court granted the motion and Kearn appealed, principally arguing that Rule 9(b) does not apply to California’s consumer protection statutes because California courts have not applied Rule 9(b) to such statutes, and that Rule 9(b) does not apply to his CLRA and UCL claims because they are not grounded in fraud. 

In rejecting Kearn’s arguments, the Ninth Circuit held that it is well established that the Federal Rules of Civil Procedure – including Rule 9(b) – apply in federal court, “irrespective of the source of the subject matter jurisdiction, and irrespective of whether the substantive law at issue is state or federal.” The Court further noted that while a federal court examines state law to determine whether the elements of fraud have been sufficiently pled to state a cause of action, the Rule 9(b) requirement that fraud be pled with specificity is a federally imposed rule. The Court also held that, while fraud is not a necessary element of a claim under the CLRA or UCL, if the plaintiff nevertheless alleges a unified course of fraudulent conduct and relies entirely on that course of conduct as the basis of the CLRA or UCL claim, the CLRA or UCL claim is considered to be “grounded in fraud” or sounding in fraud such that the complaint as a whole must satisfy the particularity requirement of Rule 9(b).

Get a copy of the opinion here.

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