National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

In Fairbanks v. Superior Court of Los Angeles County (Farmers New World Life Insurance Co.) 46 Cal.4th 56 [2009 WL 1035264] (2009), the California Supreme Court held life insurance is not a service subject to the protections of California’s Consumer Legal Remedies Act (“CLRA”). The decision provides life insurance companies with a solid defense against CLRA lawsuits alleging unfair or deceptive acts and practices in the marketing or sale of life insurance policies.

The CLRA (Calif. Civ. Code § 1750 et seq.) provides a nonexclusive statutory remedy for unfair methods of competition and unfair or deceptive acts undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer.  The Act provided a means to recover damages, punitive damages, and attorneys fees.

Absence of this remedy does not preclude other causes of action, namely under California’s Business & Professions Code Section 17200 for unfair competition (limited to injunctive relief and restitution), or a “bad faith” claim (if there has been a breach of contract).

In reaching its decision in Fairbanks, the California Court rejected decisions from other jurisdictions (namely Texas and Colorado), which held life insurance does come within the meaning of services under similar consumer protection statutes. The California Court determined that, unlike the broadly worded statutes in other states, the CLRA “contains a restrictive definition of ‘services’ that excludes life insurance.”

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The California appellate court (Los Angeles County) held the trial court was correct in granting summary judgment in State Farm’s favor in a class action that sought to question decisions made as to the amount of dividends paid to policyholders. Hill v. State Farm Mut. Auto. Ins. Co. (2008) __ Cal.App.4^th __ (08 C.D.O.S. 12449). The policyholders claimed State Farm breached a duty to pay billions of dollars as dividends, which created an excessive surplus.

This decision in the case comes after ten years of litigation. Initially the case was dismissed on demurrer, but the appellate court reversed that decision, ruling plaintiffs had plead enough to proceed with their lawsuit for breach of contract, breach of the covenant of good faith, and unfair business practices. Thereafter a nationwide class of 50 million present and former policyholders was certified. The court, after reversal by the appellate court, determined Illinois law applied since State Farm’s corporate business was handled in Illinois.

In 2005, State Farm filed a motion for summary judgment/adjudication. The trial court granted the motion on the basis that policyholders could not question the decisions of the board of directors of State Farm. California’s appellate court affirmed, ruling that while policyholders of this mutual insurance company do not have a right to a dividend, State Farm “was obligated to consider from time to time whether dividends should be declared.” (Emphasis by court.)  In its considerations, State Farm “was bound by a duty of care, requiring the Board to make decisions in a prudent manner.” The policyholders argued that State Farm failed to act prudently, failed to deliberate, and merely rubberstamped management’s decisions.

State Farm relied in part on the business judgment rule, which (under Illinois law) presumes that directors of a corporation make business decisions on “an informed basis, in good faith, and with the honest belief that the course taken was in the best interests of the corporation.” This is a rebuttable presumption. Exceptions to the rule exist where, in the process, there is evidence of fraud, oppression, dishonesty, total lack of merit, illegality, or failure of the board to become sufficiently informed to make an independent decision. The business judgment rule does not focus on the merits of the board’s decision.

The court found State Farm’s decisions were protected by the business judgment rule and no exception applied. The evidence presented showed the board was involved, considered various factors, and made its own decisions on whether dividends would be paid.

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