by Harvey Rosenfield, Founder of Consumer Watchdog, author of Proposition 103
Yesterday’s oral argument before the California Supreme Court considered the question of whether the Consumers Legal Remedies Act (CLRA), one of the state’s two principal consumer protection laws, applies to the sale of an insurance policy. The fate of the other major consumer protection law – the Unfair Competition Law – will be determined by the Supreme Court in the Tobacco II case, which was heard a day earlier. The decisions in these two cases will determine the extent of California consumers’ access to the judicial branch to challenge abuses that are endemic to the California marketplace.
The Opening Argument
Robert Gerstein began his argument for the plaintiffs by posing the issue before the court as “whether California consumers should be denied the protection of the CLRA” when they sue for unfair and deceptive practices by an insurance company.
Justice Kennard, who proved to be an avid questioner, jumped in to suggest that the analysis had to begin with “the plain language” of the CLRA, which prohibits unfair practices in any transaction involving “goods or services,” in this case, “selling an insurance policy.” She asked Gerstein to “acknowledge that an insurance policy is not a good.” Securing his assent, Kennard said this left the court to the task of determining whether insurance fell within the “rubric of providing a service.” The Legislature, she noted, defined service as “labor.” Gerstein supplied the balance of the statutory language: “work, labor and services for other than for a commercial or business use...”
Gerstein responded by noting a decision issued Monday by the Second DCA (Broberg v Guardian Life Ins. Co.). It followed the Fairbanks opinion, describing an insurance policy as a “contract of indemnity” and concluding that it is not a service for purposes of the CLRA. Gerstein explained that the description of insurance policies as “simply agreements to pay if and when an identifiable event occurs” ignored the analyses in treatises and decisions of federal and California courts. These authorities, he said, revealed that an insurance policy provides two distinct services: the first is the “shifting of risk” from the consumer to the insurance company; the second is the “spreading of risk” among consumers.
But Gerstein wasn’t able to further explain his reasoning (he returned to it later) before Justice Kennard moved to a different issue: the Supreme Court’s dictum in the 1978 case, Civil Service Employees Ins. Co. v. Superior Court, 22 Cal.3d 362, 376, where the court made this statement: “insurance is technically neither a ‘good’ nor a ‘service.’” Justice Kennard asked Gerstein his view of the dictum, upon which the Court of Appeal in this case had relied. The dictum was “offhand and erroneous,” Gerstein replied. Kennard said that the federal courts had adopted the dictum, seeming to suggest that that in itself reinforced the validity of the dictum. Gerstein responded that federal courts had “gone both ways” on the issue and that those courts were in the position of trying to predict how the California Supreme Court would answer the question. The dictum, Gerstein suggested, was simply picked up by the federal courts as a clue, but without more analysis – which brought the issue back to the task and forum at hand.
During the colloquy with Justice Kennard, the Chief Justice had interjected a question about the legislative history, and Justice Chin asked Gerstein to return to it. Chief Justice George pointed to the Model National Consumer Act, drafted by the National Consumer Law Center in 1969, and upon which the California Legislature based the CLRA. (The Model Act explicitly included insurance in its definition of services: it defined “Services” to “include” privileges with respect to transportation, hotel and restaurant accommodations, education, entertainment, recreation, physical culture, hospital accommodations, funerals, cemetery “and insurance.”) But the California Legislature had “remodeled the definition of services entirely,” the Chief said, and the CLRA as enacted does not contain the language defining “services” to “include” insurance. This led the Chief Justice to conclude that the Legislature’s alteration of the Model Act was an affirmative expression of intent to exclude insurance. Further, he said, the Legislature expressly included “insurance” in the Unruh Act. This “conveyed some idea that the Legislature did not intend to include insurance,” he proposed.
Gerstein seemed to agree with the Chief that the California Legislature had taken an entirely different approach to the definitions section of the CLRA. But from that fact he drew the opposite conclusion. While the Model Act employed an expansive list of examples (“services…include (a) work, labor and other personal services…(c) insurance”) to help define its scope, the California Legislature proceeded a different way. The Legislature omitted, Gerstein pointed out, the list of examples set forth in the Model Act as being “include[ed]” within the definition of services. Instead, it opted for a one sentence definition: “services means….” Gerstein noted that no one has suggested that any of the other items enumerated in the Model Act are not “services” under the CLRA. Gerstein’s point was that the CLRA’s shorter definition is broad enough to cover insurance and other related services without having to itemize them – and that the Legislature’s decision not to include a detailed definition ought not to be construed as an intention to exclude.
Justice Moreno asked if Gerstein could cite any “counter authorities from California” for the proposition that the CLRA applied to insurance. Gerstein pointed out a trilogy of cases, including the Supreme Court’s decision in Broughton v. Cigna Healthplans of California (1999), that “made the assumption” that the CLRA applied, but did not discuss the question. Further, he said that of the many states that considered the question, only one determined that “insurance” was not covered in their version of the Model Act.
Justice Chin then urged Gerstein to “enlighten us” as to how insurance might be considered a good or service, a question that would have allowed Gerstein to amplify on his initial point about risk sharing and shifting “services” – had not Justice Chin proceeded to raise once again the dictum in Civil Service Employees. Gerstein picked up on the dictum’s use of the word “technically.” Gerstein contrasted that term with the CLRA’s requirement that its language be “interpreted liberally in favor of the consumer,” which, he said, argued that the Court eschew a “technical” approach. Further, he said, Civil Service Employees was not a CLRA case and the issue was not before the court.
Justice Corrigan entered the discussion here, asking Gerstein to explain why insurance was a service. This gave Gerstein the opportunity, at last, to expand upon his analysis. Emphasizing the liberal construction mandate, Gerstein began by suggesting that the court utilize a common interpretation of the word “service.” He then said that when an insurance company agrees to “shift risk” from the consumer to itself, it is “performing a service to each individual insured,” i.e., “making that person secure.”
Justice Corrigan asked Gerstein to address his second argument that spreading the risk among insureds was a form of “service” provided by an insurance company. He replied that to “spread and socialize risk that would otherwise fall onto the individual” was the quintessential service provided by insurance, i.e., the pooling mechanism.
Justice Moreno queried whether that argument could be applied to render the CLRA applicable to all “intangible goods.” Gerstein disagreed, noting that such intangibles as copyrights and stock shares could not be said to involve “service” in the same sense that insurance companies provide the services people rely upon. What about advice provided by stockholders? That would be a service, Gerstein replied.
Justice Corrigan went back to Gerstein’s explication of the “services” provided by an insurance company that sells a policy. She suggested that to the average consumer, it is “a matter of indifference” if the carrier has a contract with other consumers in order to pool risk. Spreading risk, she posited, is “not an inherent part of the contract” with the consumer; a consumer would have no right to rescind the contract if the company failed to spread the risk, for example.
Spreading the risk is the “business of insurance,” Gerstein responded. Consumers are “made secure” by an insurance policy; that’s the “service” that he argued the insurance companies provide.
Justice Werdegar interjected that she thought the discussion had gone far “afield” from the court’s task, which was to construe the statute. The Legislature’s excision of the term “insurance” in the Model Act was, she said, “one indication of legislative intent.” Another was the Legislature’s express use of the term “insurance” in the Unruh Act. Given these indicia of legislative intent, she said, “this Court would appear to be supplying something the Legislature did not include” were it to rule that the CLRA applied to insurance. This was an “argument better made to the Legislature,” she suggested. As he did before, Gerstein challenged the inference of intent from the omission of the Model Act’s language. Restaurant accommodations, education and entertainment were itemized in the Model Act but aren’t mentioned in the CLRA, he said, but no one has inferred they were not intended to be covered by the CLRA.
At this point, Justice Chin turned the discussion to a different subject: the role of insurance regulation.
[A personal aside: the Court of Appeal had concluded that the presence of a regulatory framework was a strong policy argument against the application of the CLRA to insurance. In fact, the panel below went so far as to suggest the CLRA would conflict with and undermine the power of the Insurance Commissioner under the Unfair Insurance Practices Act. It was this argument – potential fodder for mischief in the hands of insurance companies in the Proposition 103 context - that led Consumer Watchdog to submit an extensive amicus brief before the Supreme Court.]
Gerstein responded to Justice Chin by noting that Consumer Watchdog had submitted for judicial notice a number of briefs written by Insurance Commissioners since the early 1990s, each of which welcomed private enforcement of Proposition 103’s provisions in the civil courts as a “valuable complement to the regulatory scheme administered by the Commissioner.”
And with that comment, Mr. Gerstein turned the lectern over to Peter Mason, of the firm Fulbright and Jaworski, counsel for the defendants/respondents.
The Defendant’s Argument
The Chief Justice asked Mr. Mason to explain how the plain meaning of the CLRA was fleshed out by the legislative history. Mason explained that the legislation as first introduced in Sacramento would have applied to the “conduct of any trade,” but the ultimate legislation, he said, limited and narrowed the CLRA’s application – to exclude insurance.
Justice Kennard wondered whether Mason considered it important that the California Legislature had looked to the Model Act as a source for its drafting, yet did not refer to insurance in the CLRA. Mason easily handled this softball, first asserting that it wasn’t even necessary to look at the legislative history: on the plain meaning of the statute alone, the CLRA does not apply to insurance, he said. But if the legislative history is consulted, the absence of the Model Act language would be an important and relevant fact, he said. Next Kennard asked whether the Legislature’s decision to expressly apply the Unruh Act to insurance, in distinction its omission in the CLRA, supported his position. Finally, Justice Kennard made this observation: when the CLRA was about to be enacted, “it became a topic of enormous interest by various groups” of special interests. “All wanted a say,” she said. The Justice read a list of lobbying groups and corporations including General Motors, lenders, oil companies, household finance and the American Bankers Association that participated in the legislative process. But, she said, insurance interests were not on that list. “What inference do you draw” from their absence, she asked.
Mason played out the argument. It was unimaginable that the insurance industry would not have been interested, he said. Citing the legislative history recited in Berry v. American Express Publishing, Inc. (2007) 147 Cal.App.4th 224, Mason said that the legislature’s decision not to apply the CLRA to intangible products was the result of a grand “compromise.”
The Chief Justice asked Mason whether the inclusion of “insurance” in the Unruh Act and the Unfair Insurance Practices Act (UIPA) suggested that the Legislature was relying on those statutory schemes to regulate the insurance industry, and thus supported the inference that the Legislature intended to exclude insurance from the application of the CLRA. (This was the closest any justice got to the Court of Appeal’s argument that the CLRA would undermine UIPA.)
Mason responded by reinforcing an argument made by the Court of Appeal: UIPA was already in effect when the CLRA was enacted, so the Legislature decided that UIPA was all the oversight the industry required.
Justice Chin asked Mason to address Gerstein’s argument that “risk spreading” was a service. Mason rejected the notion that the “aggregation of risk” could be “elevated” to the level of a service to consumers.
Justice Moreno brought up an issue Consumer Watchdog raised in its amicus brief: the provision of Proposition 103 (Ins. Code section 1861.03(a)) that states that “the business of insurance shall be subject to the laws of California applicable to any other business, including, but not limited to, the Unruh Civil Rights Act [citation], and the antitrust and unfair business practices laws [citation].” Consumer Watchdog contended that if the there was some dispute as to whether the CLRA on its face applied to insurance, the 1988 voters’ desire to have the benefit of all state consumer protection laws would weigh in favor of the CLRA’s application to insurance. Justice Moreno queried Mason on this point.
Mason responded by noting that by its terms, Proposition 103 does not apply to life insurance, the subject of this case. He also cited the Supreme Court’s decision in Manufacturers Life Ins. Co. v. Superior Court (1995) 10 Cal.4th 257, in which the Court concluded that because Proposition 103 did not apply to life insurance, it was not authority for the application of the antitrust laws to the defendants in that case. Finally, Mason said, Proposition 103 would not require application of the CLRA because the issue here is not whether insurance is exempted from the CLRA but whether “intangibles” are exempted from the CLRA. The argument he seemed to be making is that the CLRA is not a law “applicable to any other business” for purposes of Proposition 103, because, he contends, it does not apply to certain “intangible goods” across the board.
In his first question (by my reckoning), Justice Baxter raised an issue of profound importance. He asked whether “independent insurance brokers provide a service.” He elaborated: assume a consumer asks an insurance broker to secure a policy that provided certain benefits; the broker conducts an investigation and then sells the consumer an insurance policy. Is that a service?
Mason, who had obviously anticipated the question, first tried to distinguish this case from the one posited by Justice Baxter: here, he said, it was an agent of Farmers that sold the deceptive policy to the plaintiff, not an independent broker. Then Mason tried to draw a careful line that would still protect his insurance company client. If the “objective” of the transaction was advice, that might be “close to a service,” he ventured. But if the transaction is tied to the “securing of an intangible product,” then the entire transaction is not a service. Trying to further articulate a rule, Mason asserted that services that are “attendant to” the sale of a product cannot convert the sale of an “intangible good” to a service. Finally, he offered this hypothetical application of his rule: if a consumer goes into store to buy a flat screen TV (the objective) and gets advice from a salesperson, the consumer is paying for the flat screen, not the advice, so the transaction would not involve a service. (I’ll have more to say about this below.)
Justice Kennard asked Mason about the dictum in Civil Service Employees. Disagreeing with the plaintiffs’ position, Mason said that in fact the dictum was essential to resolving that case.
Mason concluded his argument by paraphrasing Berry to suggest that insurance was excluded as part of a legislative “compromise between consumers and business groups,” and that the Supreme Court was not the proper forum to “undo that compromise.”
In his rebuttal for the plaintiffs, Robert Gerstein again challenged the suggestion that the Legislature’s intent to exclude insurance could be inferred from the changes it made to the Model Act. He also pointed out that, contrary to some comments by the Court and counsel for the defendant, there is no express exclusion for “intangible goods.”
Justice Werdegar returned to the argument that “spreading the risk” is a service. She asked Gerstein if “peace of mind” was a service provided by an insurance policy. With Justice Baxter’s earlier query seemingly in mind, Gerstein explained that “insurance policies are bundles of services,” citing Mass Mutual and Hitz v. Interstate Bank (1995) 38 Cal.App.4th 274. A consumer would emphatically “need the services of an insurance agent to help ensure that insurance will be there when needed,” he told the Court. Gerstein also noted that insurance policies provide for “claims” services.
He then returned to the CLRA’s mandate that it be “liberally construed in favor of the consumer.” “If there is any plausible argument…any doubt…if it is a question of reading the tea leaves as to legislative intent….that doubt must be resolved in favor of the insured,” he said.
Gerstein then turned to the Proposition 103 question Justice Moreno put to Peter Mason. Manufacturers Life, he said, left open the question of whether section 1861.03(a) applied only to the lines of insurance regulated by Proposition 103, or across the board. “This Court should apply it to all lines of insurance,” Gerstein stated. In a closing note, he reiterated that the Insurance Commissioner has long been supportive of dual civil and administrative enforcement of the Insurance Code.
Some Concluding Comments
Having attended only a handful of Supreme Court arguments, I can make no claim to being able to “read the tea leaves.” However, I heard very little support from the bench for the position of the consumer plaintiffs. And where the Court could have found support for application of the CLRA here, it did not do so.
For example, it seemed to me that the legislative history and the “liberal construction” mandate together would dictate that the CLRA applies. But the analyses seemingly adopted by the Court in the course of reviewing the legislative history – the inference of intent to exclude, for example – might be viewed as a departure from existing jurisprudence. Having spent a lot of time in Sacramento, I can say definitively that the absence of insurance industry letters of opposition in the historical file could just as easily reflect (a) the very scattershot filing systems used by legislative committees to this day, or (b) a preference by the insurance industry to communicate through lobbyists (and campaign donations) rather than correspondence, or (c) a strategic decision to preserve the legal argument that came to fruition today, decades later, by not confirming, in written opposition to the legislation, that the CLRA would apply to insurance.
Justice Baxter asked Peter Mason what I thought was the most important question of the day: don’t insurance companies and their agents and brokers provide a variety of services in connection with the sale of insurance policies? Given the amount of deception, misrepresentation and fraud we are only now uncovering in the financial marketplace, are all such abuses beyond the reach of the CLRA because the “objective of the transaction” is the sale of an insurance policy or other financial product? If so, the deterrent effect of the CLRA will be gravely undermined, and an awful lot of wrongdoing will evade accountability in the courts.
And the issue that really got our attention at Consumer Watchdog – the Court of Appeal’s hostility toward dual, private and public enforcement mechanisms – got almost no notice. Not a word was said about Justice Croskey’s view that Moradi-Shalal erected a shield around the insurance industry that bars most challenges to insurer misconduct in the civil courts. The oral argument made clear that the Court doesn’t need to expand Moradi-Shalal or engage in policy engineering to reach the conclusion that the CLRA does not apply here. As we explained in our amicus brief, whichever way the Court rules on Fairbanks, much mischief could result unless the Court rejects the Court of Appeal’s discussion of Moradi-Shalal and its other policy assertions.
A final caveat: your scrivener has done his best to describe the arguments and the questions from the Court. If I’ve erred, please let me know.
[Harvey, thanks so much for spending hours writing up this fantastic report! – KAK]