Expert Commentary

Surprise: Insurance Is Not a Service

Every person who works in insurance appropriately believes that they provide a service to those who purchase insurance by helping to protect against the risk of loss and providing the indemnity promised by the policy of insurance.


Claims Practices
May 2008

Insurance is a highly regulated business in California, as in most states, with sanctions against insurers who fail to fairly provide the services and indemnity promised by insurance policies issued by the insurer. Litigation against insurers is limited to actions for breach of contract or related torts by the person insured against that person's insurer. There is no right of action against an insurer for failure to comply with an insurance statute.

Imaginative lawyers, attempting to avoid the California Supreme Court's conclusion that California insurance statutes do not provide a private right of action against insurers who are regulated stringently by the Department of insurance, brought an action under the Consumer Legal Remedies Act (CLRA) which allows private rights of action by consumers against providers of goods and services.

Fairbanks v. Superior Court

The California Court of Appeal, in Fairbanks v. Superior Ct. of Los Angeles County, 154 Cal. App. 4th 435, 64 Cal. Rptr. 3d 623 (Cal. App. Dist. 2, Aug. 22, 2007), concluded that insurance is neither a good nor a service, but only for the purposes of the Consumer Legal Remedies Act (California Civil Code §§1750 et seq.). Insurers are still required to provide the service promised by the contract of insurance in the event that the person insured incurs a loss that the insurer promised to indemnify. Although Fairbanks concludes that insurance is not a "service," for purposes of the CLRA, it is limited to preventing suits under that statute. The person insured still has the right to file suit against the insurer for breach of contract and any available tort causes of action. The person insured is, however, prevented from bringing an action under the CLRA that is, by definition, easier to prove.

The case arose after Pauline Fairbanks purchased a life insurance policy from Farmers New World Life Insurance Company and was told she could keep the policy in full force indefinitely by paying a stated premium amount. In fact, that amount was insufficient to maintain the policy in force to maturity. Fairbanks sued Farmers on behalf of herself and others similarly situated, alleging unfair and deceptive practices under the CLRA. Farmers successfully caused that part of the suit to be dismissed because it did not, as defined by the statute, provide a "good" or "service" to Ms. Fairbanks.

The California Court of Appeal Decision

Agreeing with Farmers, the Court of Appeal noted that the CLRA was enacted in 1970. It was designed to protect low-income consumers from deceptive or unfair business practices. The statute prohibits specific deceptive or unfair acts in the sale or lease of goods and services.

Insurance, the court found, is a contract involving indemnification against loss. Insurance contracts are not deemed work or labor, and therefore, do not qualify as service under the CLRA, a pro-consumer statute intended to protect low-income consumers from deceptive or unfair business practices. It prohibits specific deceptive or unfair acts in the sale or lease of goods and services.

Farmers is a provider of interest-sensitive universal life insurance policies. Pauline Fairbanks purchased a Farmers Flexible Premium Universal Life policy. The Flexible Premium Universal Life policies sold by Farmers were represented to be permanent insurance. When she was sold such a policy, Fairbanks was informed that she could keep the policy in full force indefinitely by paying a stated premium amount. In reality, this premium amount was insufficient to keep the policy in force to maturity. Fairbanks alleged in her complaint that Farmers' policies were misrepresented and that Farmers engaged in deceptive and unfair practices in the design and marketing of the policies. The operative complaint alleged six different causes of action, including a cause of action for unfair and deceptive practices under the CLRA.

The court noted that the "plain language of the CLRA indicates that insurance is not a 'good.'" The statute defines "goods" as tangible chattels bought or leased for personal, family, or household use. Since insurance is merely a promise to do something in the future, it is not a tangible item and cannot fit within the definition of "good."

The CLRA defines "services" as "work, labor, and services for other than a commercial or business use, including services furnished in connection with the sale or repair of goods." (California Civil Code, § 1761, subd. (b)). Insurance, in contrast, is defined by the Insurance Code as "a contract, whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event." (California Insurance Code, § 22).

In light of the statutory definitions, the court concluded:

Obviously, insurance contracts are not work or labor. Nor can these indemnification agreements easily be described as personal services or services "furnished in connection with the sale or repair of goods." An insurance contract is not something akin to a haircut, a plumbing repair, or a 2-year warranty on a microwave oven—it is simply an agreement to pay if and when an identifiable event occurs … [I]nsurance, … is an essentially financial transaction, completely unrelated to the sale or lease of any identifiable consumer good or service. Thus, insurance does not appear to be a service under the plain meaning of the language of the CLRA.

The Legislative History

The legislative history of the CLRA indicates that it was adapted in large part from provisions contained in the National Consumer Act (NCA), a model rule proposed by the National Consumer Law Center at Boston College. The NCA's definition of "services" specifically includes insurance. Yet, when the California Legislature adapted the NCA to enact the CLRA, it omitted insurance from the definition of "services."

While the NCA includes insurance explicitly as a part of the definition of services and even provides an entire section regulating insurance, the CLRA does neither. The legislative history indicates that one of the prime concerns of the Legislature at the time of the CLRA's enactment was that the only remedy available to low-income consumers harmed by unfair business practices was a costly and often difficult-to-prove action for fraud. The CLRA was intended to provide a simpler remedy where there was none, particularly in cases where there was an unchecked history of repression by merchants in lower-income areas. In contrast, at the time of the CLRA's enactment in 1970, insurance was already highly regulated.

The court concluded, that:

In a practical sense, allowing for a CLRA remedy for insurance fraud would wreak havoc on the established code and decades of case history. Although, at one time, private actions were considered permissible under Insurance Code section 790.03, subdivision (h) (Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal. 3d 880), the California Supreme Court held in 1988 that the enforcement of section 790.03(h) was limited to administrative sanctions by the Insurance Commissioner, and that the Legislature had never intended, by its enactment of the UIPA, to create a private right of action. (Moradi-Shalal v. Fireman's Fund Ins. Cos. (1988) 46 Cal. 3d 287, 303-304.) The majority in Moradi-Shalal adopted the Royal Globe dissent's argument that had the Legislature intended for the UIPA to grant third parties a private cause of action, then it would have said so in "clear, understandable, unmistakable terms, as it has done in numerous other statutes." (Emphasis added.)

Conclusion

If insurance were considered a "service" under the CLRA, many of the unfair and deceptive practices prohibited by the Unfair Insurance Practices Act (UIPA) would also constitute "proscribed practices" under the CLRA giving consumers redundant and contradictory remedies. For example, any violation of the UIPA prohibition against misrepresenting the pertinent facts or policy provisions relating to coverage would also be a violation of the CLRA's prohibitions on representations regarding the quality of services provided. Allowing a private right of action under the CLRA would, in effect, undermine the holding in Moradi-Shalal and allow a private right of action for UIPA violations.


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