United States: Recent Ninth Circuit Rulings Uphold Plaintiffs' Efforts To Predicate Claims On Alleged Insurance Code Violations — Likely More To Come

Last Updated: July 4 2017
Article by Shaunda Patterson-Strachan

Recent rulings suggest insurers face increased risk of suits predicating breach of contract and state unfair trade practices claims on alleged violation of state insurance laws, notwithstanding the lack of an express private right of action. In no jurisdiction is this more a concern than California, as illustrated by two recent Ninth Circuit opinions involving claims under California's Unfair Competition Law (UCL).

Most recently, in May, the Ninth Circuit reversed a California federal district court's dismissal of putative class action UCL claims in Friedman v. AARP, Inc., an action by a Medicare beneficiary and purchaser of UnitedHealth supplemental health insurance coverage bought through a group Medigap policy, for which AARP was the policyholder. The suit names as defendants multiple affiliated AARP and UnitedHealth entities but, for ease of reference, those sets of defendants are referred to collectively as "AARP" and "UnitedHealth." The plaintiff alleges that, by soliciting insurance and accepting a commission, AARP unlawfully transacted insurance business without a license in violation of California Insurance Code § 1631, which prohibits persons subject to the Code from "solicit[ing], negotiat[ing], or effect[ing] contracts of insurance" without "a valid license from the commissioner."

At the heart of the dispute is AARP's and UnitedHealth's Medigap arrangement, which the Ninth Circuit describes as governed by a joint agreement requiring, inter alia, that purchases of UnitedHealth's Medigap coverage be made through AARP's group policy, and that AARP manage certain program elements, including a requirement that AARP solicit its members' participation in the Medigap plan. In connection with the same, AARP is allowed to collect insurance premiums from members and, after first investing the collected payments and deducting and retaining 4.95 percent of each dollar paid by the enrollees, forwarding the appropriate payment to UnitedHealth. While AARP argued the 4.95 percent retention is a permissible "royalty," the plaintiff contends it is an undisclosed commission on the sale of insurance, resulting in the payment by insureds of "an artificially inflated insurance price."

For the Ninth Circuit, the inquiry was straightforward: "At issue therefore is whether Friedman has adequately pled that AARP has engaged in any of those ... activities [listed in § 1631]. ... We conclude that he has." Along the way, the court rejected AARP's effort to rely on the method of calculation of the fee it receives — calculated as a percentage of all premiums paid in connection with the program, regardless of the source — as evidence the fee does not qualify as a "commission." As the court explained, "[r]egardless of the nominal form of the arrangement called for by the AARP-United Agreement, the complaint alleges that AARP receives a 4.95% fee for every member that enrolls in UnitedHealth's Medigap program." Also key to the court's analysis were AARP's marketing materials. The court noted, for example, pieces that "expressly state in bold font: 'This is a solicitation of insurance.'" Indeed, the Ninth Circuit also found that the plaintiff adequately pled that AARP violated the UCL's other two prongs, the "unfair" and "fraudulent" prongs, which claims are based on allegations of misrepresentation as to the nature of the payments.

Friedman, though, is not the first action to allow a plaintiff to state a UCL claim based on an alleged violation of § 1631's licensing requirements. It is a reaffirmation of the ability.

Two months before issuing Friedman, however, in Walker v. Life Insurance Company of the Southwest, a certified class action involving the sale of indexed universal life insurance policies, the Ninth Circuit issued a ruling representing an expansion of the recognition of a plaintiff's ability to pursue certain California Insurance Code violations via the UCL. In particular, the court reversed a California federal district court's May 2011 dismissal of claims that the defendant insurer violated the UCL's unlawful prong, which had been predicated on the insurer's alleged violation of California's illustration statute, California Insurance Code § 10509.950 et seq. As we previously discussed (see Expect Focus, Vol. I, 2017), in Walker, which also featured a jury verdict for the insurer on the plaintiff's fraudulent concealment claim and the district court judge's subsequent ruling for the insurer on the plaintiff's remaining UCL claims, the dismissal of the illustration statute-based UCL claim was but one of several elements of the Ninth Circuit's review of the trial court proceedings. Given the potential exposure, however, this aspect of the ruling is worth revisiting.

As set forth in the code itself, California's illustration statute was enacted to "ensure that illustrations do not mislead purchasers of life insurance and to make illustrations more understandable by providing illustration formats, prescribing standards to be followed when illustrations are used, and specifying the disclosures that are required in connection with illustrations." According to the plaintiff, inter alia, the insurer failed to "specifically disclose and identify the cost of buying and maintaining the policies" and, instead, embedded them in the illustrations so policyholders could not make informed decisions. After noting there is no private right of action under California Insurance Code § 10509.950, the district court ruled that the plaintiff's claims under California's UCL could not be based on the illustration statute because claims under the UCL's "unlawful" prong cannot be based on violations of any statute lacking a private cause of action. In its March 2017 reversal of this aspect of the trial court proceedings, however, the Ninth Circuit found that the lack of a private right of action was not in fact dispositive. Instead, citing the California Supreme Court, the federal appellate court ruled that "private UCL claims are barred only when the underlying statute either actually bars private rights of action or provides a 'safe harbor' that renders the alleged conduct lawful." These circumstances are not present as to the illustration statute.

While these rulings might portend the furtherance of a trend, the use of state insurance laws as a predicate for claims in civil litigation is far from a new phenomenon. Consider plaintiffs' continued focus on California's senior notice statutes, California Insurance Code §§ 10127.13 and 10127.10, which, collectively, are intended to protect seniors through mandatory language regarding the surrender charge period as well as what are termed "associated penalties." A California federal district court's September 2010 ruling in Rand v. American National remains an instructive illustration of a plaintiff's effort to predicate UCL claims on an alleged failure to comply with these statutes, in part because the opinion continues to stand as one of the strictest readings by a court of these provisions. More specifically, the Rand court read the senior notice provisions strictly to require disclosure about policy elements the company — and perhaps the regulator — clearly never contemplated to be covered by the statutes, forcing companies to think critically about the real possibility that disclosures that appear consistent with the statutes' requirements may nevertheless fail to satisfy the stricter obligations a court might impose in its interpretation of those provisions.

Of course, plaintiffs' efforts in this regard are not limited to suits that assert UCL claims. Plaintiffs also continue to point to alleged violations of insurance code provisions to bolster breach of express and implied contractual requirements. For example, in recent suits, policyholders have brought contract and UCL claims based on alleged noncompliance with California Insurance Code §§ 10113.71 and 10113.72 — enacted in 2013 — which, generally, require that insurers notify insureds of their right to designate a third party to whom notice of a nonpayment of premium or potential policy lapse or termination may be sent, prior to any termination.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions