California Supreme Court to Review Fairbanks Decision re: Applicability of CLRA to Insurance

On November 14, 2007, the California Supreme Court granted petition for review of the decision in Fairbanks v. Superior Court, 154 Cal. App. 4th 435 (2007), in which it was determined by Division Three of the Second Appellate District (Los Angeles) that insurance was neither a "good" nor a "service" within the meaning of California's Consumer Legal Remedies Act (the "CLRA").  The Fairbanks decision is a significant decision to the industry in that it finally definitively settled the question of whether lawsuits could be brought against insurance companies under this body of statutory law. 

CLRA claims appear to have become used more aggressively by the plaintiff's bar due to the passage of Proposition 64 that imposed a new injury-in-fact standing requirement to bring unfair business practice challenges under the Unfair Competition Act (the "UCA"), Cal. Bus. & Prof. Code sections 17200.   Given a plaintiff bringing such a challenge against a company must now be injured under either the UCA or the CLRA, plaintiffs are now tacking on CLRA claims as well to take advantage of the broader remedies provided under that statute.

One of the main issues raised by the application of the CLRA to insurance is its circumvention of the bar imposed by the California Supreme Court against private right of actions based upon the Unfair Insurance Practices Act (the "UIPA").  In Moradi-Shalal v. Fireman's Fund Ins. Cos., 46 Cal. 3d 287 (1988), the California Supreme Court held that the UIPA did not create a private right of action and that its enforcement was limited to the administrative sanctions of the Insurance Commissioner.  If it were the case, however, that insurance can be regulated under the CLRA, many of the acts or practices proscribed by the UIPA, but not directly subject to a private right of action, could now be directly challenged in the courts under the CLRA.  Essentially, as held by the Fairbanks court, to allow claims against insurers under the CLRA would "undermine the holding in Moradi-Shalal and allow a private right of action for UIPA violations."

The better argument is that "insurance" is not a "good" or "service."  In the common sense meaning of those terms, insurance is neither a "good" nor a "service."  It is a financial arrangement.  If it is the case that a financial arrangement should be considered a "good" or "service," it raises the question of what type of arrangement is not a "good" or "service."