Tuesday, 28 June 2011 22:19

California Appeals Court Rules Consumers Can Recover Damages For Steering

In a potentially far-reaching decision, the California Court of Appeals has decided that there is a Private Right of Action Against California Insurers who Violate California Insurance Code Section 758.5. This ruling appears to allow for insurance companies to be sued for violations of the state's anti-steering law, Insurance Code section 758.5. In this specific case, the insured was awarded at least his legal costs in bringing the case against Progressive.

However one of the Justices (Woods), while agreeing with the decision, says he sees "storm warnings on the horizon," saying it may enable superficial lawsuits.
The California Court of Appeal, Second Appellate District, published its decision on June 15 which reversed a dismissal in favor of an insurer of a claim filed under California’s Unfair Competition Law (UCL). The UCL claim was based solely on the insurer’s alleged violation of Insurance Code, section 758.5, which prohibits an insurer from steering (requiring or even suggesting its insured use certain automobile repair shops).
In Hughes v. Progressive Direct Insurance Company (2011), the Second Appellate Court reversed the trial court’s order and instead held that the appellant may maintain an unfair competition law (UCL) cause of action because Insurance Code section 758.5 does not expressly bar UCL claims.
The appeal hinged on whether or not a 1988 California Supreme Court decision, Moradi-Shalal v Fireman's Fund Insurance Companies, which reversed a Court of Appeal decision in the same case, prohibited a private cause of action against an insurer in this case, Hughes v. Progressive Direct Insurance. The Court of Appeals has determined that it does not, i.e., a private party can sue for cumulative remedies (more than one form of compensation at a time) under a UCL claim referencing Insurance Code section 758.5.
Section 758.5 was enacted to prevent insurance companies from using coercive tactics to steer consumers to particular automobile repair shops or dissuade consumers from using a repair shop of their own choosing. California’s UCL comprehensively prohibits any practices forbidden by law, be it civil or criminal, federal, state, or municipal, statutory, regulatory, or court-made. It is not necessary that the predicate law provide for private civil enforcement. The Court of Appeal concluded that: “Given the breadth of the UCL, absent some competing principle of law, a violation of section 758.5 should be a proper basis for Hughes’s UCL claim."
The basis: Progressive Direct provides automobile insurance to California drivers and Progressive Direct‟s Direct Repair Program (DRP) certifies certain approved repair facilities that have agreed to repair vehicles referred by Progressive Direct under strict conditions set by the insurer.
In this trial court action, California resident Chris Hughes, while insured by Progressive Direct, was involved in an accident on August 15, 2005. Hughes advised Progressive Direct of the accident and informed the company that he wanted his vehicle repaired by a specific repair shop that was not a DRP facility.
Progressive Direct responded to Hughes' claim by telling him he should take his automobile to Champion Collision & Paint (Champion) in El Cajon, California, which participated in Progressive's DRP, explaining that his claim would be approved and the repairs on his car completed more quickly there. Progressive Direct did not inform Hughes of his right under section 758.5 to select the facility that would repair his vehicle.
Hughes alleged in the suit that although he informed Progressive of his preference for a certain repair shop, Progressive recommended Hughes take his car to Champion, which belonged to Progressive’s Direct Repair Program. Hughes further alleged that Progressive failed to inform him of his right under Section 758.5 to select his own shop.

Without knowing he had a right to use the shop he preferred, Hughes took his car to Champion for repairs. Champion repaired Hughes's car and returned it to him on November 21, 2005, but Hughes was dissatisfied with Champion's work, believing that not all repairs necessary to restore the vehicle to its pre-accident condition had been completed and that substandard or used parts had been used.

On November 23, 2009, Hughes filed suit against Progressive Direct for violation of Business and Professions Code section 17200 on behalf of himself and a proposed class of persons (1) who are or were a residents of California, (2) who had claims covered by Progressive automobile insurance policies, and (3) who had their vehicles repaired by shops belonging to Progressive’s DRP.
Hughes asserted a single cause of action against Progressive for allegedly violating the UCL (California’s Business and Profession Code section 17200). Hughes alleged that while Progressive assures its insureds that DRP facilities “are carefully selected to provide only the highest quality of work, those shops are actually selected based on their agreement to Progressive’s demands to reduce the costs to repairs.”
The complaint further alleged Progressive Direct has a company-wide policy and practice of steering its insureds to its DRP shops:  “Progressive uses its position of power over its insured, in the form of incentives and requirements to carry out its program of steering. The tactics employed include telling insureds:  that it does not do business with non-DRP shops;  that a claim may not get paid if done at another shop;  it is ‘easier’ to have the car repaired at DRP shops;  that the insured can receive free towing if the vehicle is brought to a DRP shop;  that the insured can receive a discount off of his or her deductible by using a DRP shop;  that it will not guarantee work done at a non-DRP shop, but will guarantee the work at its DRP shops for the life of the vehicle;  and that payment of their claims and the repair of their vehicles will be delayed if take[n] to a non-DRP shop.”
Progressive demurred to Hughes’ complaint, meaning they filed a document objecting to or challenging the pleading filed by Hughes. (Lawyers informally define a demurrer as a document saying "so what?" to the pleading.) Progressive argued that Hughes did not state facts sufficient to constitute a cause of action, meaning the facts were insufficient to justify a right to sue to obtain money, property, or the enforcement of a right against another party.
Specifically, Progressive alleged that the 1988 case, Moradi-Shalal v. Fireman’s Fund Ins. Co., prohibits private actions (the right of a private party to sue) to enforce provisions of the Unfair Insurance Practices Act (UIPA), under Insurance Code section 790 including claims under the UCL. Progressive argued this could not support a UCL claim even if Hughes proved Progressive violated Section 758.5. The California Unfair Practices Act was derived from the National Association of Insurance Commissioners' Model Unfair Claims Practices Act, which has been adopted by 48 states.
There is no express private right of action for a violation of Ca. Insurance Code section 758.5. The trial court emphasized that section 758.5, subdivision (f), grants the Insurance Commissioner the power to enforce the section in the same manner (that is, primarily the issuance of administrative cease-and-desist orders and the imposition of civil penalties) as UIPA violations.

Hughes opposed the demurrer, arguing Section 758.5, while part of the Insurance Code, is not part of the UIPA. Hughes contended that Moradi-Shalal and the cases that followed it have never been extended to preclude a UCL claim based on violations of a non-UIPA provision. Progressive responded by analyzing the legislative history of Section 758.5 and argued this history demonstrated that the Legislature did not intend to create a private right of action, but only a right of action for the California insurance commission. The trial court agreed and sustained Progressive’s demurrer, meaning there was not sufficient cause of action. Hughes appealed in a timely manner.

The Court of Appeal examined the scope of the UCL and Moradi-Shalal. It recognized the breadth of the UCL, noting that parallel actions for unfair competition under the UCL are proper even though a specific statutory enforcement scheme exists. UCL claims are barred only where the statutory scheme precludes cumulative remedies.
(Most courts today recognize that remedies are cumulative (in the absence of contrary contract language). “Cumulative” means that the non-breaching party is permitted to simultaneously pursue all available remedies (contract remedies, monetary damages, equitable relief, etc.) against the breaching party. This is the legal equivalent of throwing everything against the wall and seeing what sticks. In contract litigation, the court generally isn’t going to allow the plaintiff to be made “more than whole”, so sometime during the proceedings it will pick or require the claimant to pick its remedy.
In contract law, an exclusive remedy, is intended by the parties to be the only remedy to compensate an aggrieved party for a particular type of breach, along the lines of: "if you breach this provision, pay me X dollars, and we'll call it even.")
The Court found that Moradi-Shalal, and the cases following it, stand for the proposition that the UIPA was not “intended to create a private civil cause of action against an insurer that commits one of the various acts listed.” Thus, violations of the UIPA alone cannot give rise to claims under the UCL.
Although section 758.5 is not part of the UIPA, section 758.5, subdivision (f), provides the powers of the Insurance Commissioner to enforce the section include those granted by the UIPA.
The question then became: Does Moradi-Shalal bar a cause of action by an insured against its insurer under the UCL based solely on allegations the insurer violated section 758.5? The court concluded section 758.5 does not expressly bar such a claim, and the Legislature intended the Insurance Commissioner‟s authority to use UIPA enforcement powers to be cumulative, not
exclusive, meaning multiple remedies could be considered.
The Court of Appeal then evaluated the intent and language of Section 758.5. It noted this statute was enacted to prevent insurance companies from using coercive tactics to steer consumers to particular auto body repair shops. No private right of action is provided under Section 758.5. But Section 758.5 grants the Insurance Commissioner the power to enforce the section in the same manner as UIPA violations.

Given the breadth of the UCL, and the absence of any “express” language repealing the cumulative remedies generally made available by the Legislature under the UCL or any intent to transform Section 758.5 into simply another unlawful practice under the UIPA, the Court of Appeal concluded an alleged violation of Section 758.5 may serve as the predicate for a UCL claim.
The Court of Appeal confirmed a plaintiff may not rely on conduct that violates the UIPA, but which is not otherwise prohibited, as a predicate for a UCL claim. However, alleged violation of other statutes applicable to insurers, whether part of the Insurance Code or otherwise, may serve as the predicate for a UCL claim absent an express legislative direction to the contrary.

Accordingly, the Court concluded Hughes’s allegations that Progressive violated Section 758.5 properly stated a cause of action for unfair competition. It therefore reversed the trial court’s order dismissing the action.
Legislative History
As originally introduced by then-California-Senator Jackie Speier, Senate Bill No. 551-- the “Auto Body Repair Consumer Choice Act of 2003”-- was intended to add a new section 758.5 to the Insurance Code, which would have prohibited steering and added a private cause of action (the right of a private party to sue) to enforce the new law: “An insurer that violates this section shall be liable for any damages suffered by the claimant or auto body repair shop, including compensatory, special and exemplary damages..." However, subsequent amendments removed all reference to enforcement (either by the Commissioner or by private cause of action).

In 2009, Insurance Code section 758.5, subdivision (b), was amended to authorize an insurer to provide a claimant with “specific truthful and nondeceptive information regarding the services and benefits available during the claims process,” including “information about the repair warranties offered, the type of replacement parts to be used . . .” and other information about the repair process.
Therefore, until this ruling, it was up to the Insurance Commissioner to enforce the state's anti-steering regulation as state law had always been interpreted to insulate insurance companies from lawsuits arising from Insurance Code violations such as section 758.5.

One of the appellate justices, J. Woods, expressed his reservations about the decision saying that while he agreed with the decision "my concurrence in the opinion is accompanied by a desire to report storm warnings on the horizon." Woods called the decision dependent on the single word "express," saying that the Business and Professions Code may predicate a UCL claim absent an “express” legislative direction to the contrary. Woods expressed concern that this decision may impact future insurance rates, referencing the case of Royal Globe, in which the court stated that the case has "reportedly caused multiple litigation or coerced settlements and has generated confusion and uncertainty. No doubt Royal Globe had a profound impact on the cost of insurance in California, and which raised a storm of adverse comments throughout California and the nation."
Woods noted "High insurance policy rates are not a socially desirable thing in my opinion and perhaps our interpretation of Insurance Code section 758.6, when juxtapositioned next to the UIPA and its manifested policy, will dampen most desires to bring marginal or superficially meritorious lawsuits."

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