Los Angeles Daily Journal
A leading activist says consumer protections for Californians are being eroded in a way not seen since the 1980s, and warns of a potential backlash at the ballot box if the trend continues.
The comments, from Foundation for Taxpayer and Consumer Rights founder Harvey Rosenfield, followed an appellate court ruling handed down Wednesday that concluded a landmark consumer protection law does not apply to the sale of insurance in California.
The 2nd District Court of Appeal concluded a plaintiff couldn’t seek redress under the state’s Consumers Legal Remedies Act for an allegedly fraudulent insurance policy because insurance is neither a “good” nor a “service” as defined in the statute.
“This decision places the insurance industry in some kind of legal twilight zone where they get to operate with impunity and violate state consumer protection statutes without being held accountable in the courts,” Rosenfield said.
The ruling, when taken in tandem with limits on lawsuits put in place by voter-approved Proposition 64 and an unfavorable decision on Rosenfield’s own Proposition 103 handed down last year by the same court, is part of a sustained attack on the right of consumers to take their grievances to court, Rosenfield said.
“The last time that there was a gang attack on consumers that got my personal attention like this was in the 1980s, and that led me to write 103,” said Rosenfield, referring to his ballot measure regulating insurance rates in California.
“Unless the Supreme Court takes review of this, it could be the match that ignited a wholesale revision of consumer rights at the ballot box.”
The case, Fairbanks v. Farmers New World Insurance Co., involves the sale of a “flexible” life insurance policy to Pauline Fairbanks and potentially dozens of others across 30 states.
Under the policy, the insured is required to make variable, or flexible, premium payments into an account. The amount of each payment is set by the insured on the advice of a company agent. At the end of the year, Farmers calculates whether the accumulated payments and interest are sufficient to cover the cost of the insurance. If not, the insured must make up the difference or risk losing the policy.
Fairbanks alleges that Farmers misrepresented the nature of the policy, intentionally set the premium payments too low and then failed to warn her of the possibility that her insurance would lapse before it reached maturity.
“The argument is that these policies are underfunded – and intentionally so,” said Robert S. Gerstein, attorney for Fairbanks. He said he plans to ask the California Supreme Court to review the case.
Peter Mason, the attorney for Farmers, declined to comment on the underlying case because it is still pending. However, he defended the appellate court decision.
“We believe that there are limits to the reach of the Consumer Legal Remedies Act and the court of appeals correctly applied those limits in determining that the CLRA does not apply to insurance,” Mason said in a statement.
Gerstein is seeking class action certification in the case. He said the consumer remedies act contains provisions, such as the right to recover damages and attorney fees, which are specifically designed to support consumer class actions in response to fraudulent or unlawful business practices.
The only question, he added, was whether insurance counts as a service. “I think most people would understand that their insurance company does a service for them,” Gerstein said.
A state appellate court had previously ruled credit cards are excluded from the Consumer Legal Remedies Act. Seizing on this, attorneys for Farmers filed a pre-trial motion that argued insurance sales also fell outside the act. The trial judge agreed and Gerstein appealed.
In an opinion written by Justice H. Walter Croskey, the appellate court unanimously upheld the trial court, ruling that the California Legislature intended for other regulatory laws to apply to the insurance industry and therefore had intentionally removed the word “insurance” from the Consumer Legal Remedies Act when it was passed in 1970.
“This case presents a difficult issue of first impression; plausible arguments can be made on both sides of the issue,” Croskey states. “We ultimately conclude, however, that the more persuasive and better reasoned argument requires that we hold that insurance is neither a ‘good’ nor ‘service’ within the meaning of the CLRA.”
Although Gerstein can fall back on common law causes of action against Farmers, Rosenfield said the protections are far short of what is needed to keep the insurance industry in line.
“Are consumers still protected by 19th century laws? Yes,” Rosenfield said. “But they are much more difficult to deploy against 21st century rip offs.”
