Supreme Court of California Exempts Life Insurance Products from Scope of California’s Consumers Legal Remedies Act

April 27, 2009

On April 20, 2009, the Supreme Court of California narrowed the scope of California’s Consumers Legal Remedies Act ("CLRA") by holding in a unanimous opinion that life insurance is not a "good" or "service" subject to the CLRA.  Fairbanks v. Superior Court (Farmers New World Life Ins. Co.), Case No. S157001.

The plaintiffs in Fairbanks sought to bring a class action challenging the marketing and administration of Farmers’ New World Life Insurance Company’s ("FNWL") life insurance policies.  The trial court granted FNWL’s motion for judgment on the pleadings and ruled that the life insurance policies FNWL issued to the plaintiffs were neither "goods" nor "services," as those terms are defined in the CLRA.  The Court of Appeal agreed and affirmed the judgment.  The Supreme Court granted the plaintiffs’ petition for review to consider whether life insurance is a "good" or "service" under the CLRA.  The Court expressly declined to consider whether insurance, generally, may be within the scope of the CLRA, and its opinion "narrowed the issue to focus only on life insurance."  

The Court began its analysis with the "unambiguous" statutory language of the CLRA.  Because life insurance "is a contract of indemnity" and not a "tangible chattel," the Court held that life insurance is not a "good" pursuant to the CLRA.  It also held that life insurance is not a "service" under the CLRA, because "[a]n insurer’s contractual obligation to pay money under a life insurance policy is not work or labor, nor is it related to the sale or repair of any tangible chattel." 

While a thorough examination of the CLRA’s legislative history was unnecessary given this "unambiguous" statutory language that compelled affirmance, the Court explained that the legislative history "confirms our conclusion" that the CLRA "does not apply to life insurance."  The California Legislature based the CLRA on a model law (the National Consumer Act) that "expressly applied to insurance."  But because the California Legislature "omitted the reference to insurance in the definition of ‘services,’" this reflected "its intent not to treat all insurance as a service" as the CLRA uses that term.  Similarly, the Unruh Act, California Civil Code § 1801 et seq., which was in effect at the time the Legislature drafted the CLRA, defines "services" to include insurance.  The Legislature’s choice of a different definition for the term "service" in the CLRA is significant, the Court held, and this "supports an inference that a difference of meaning was intended." 

The Court then rejected each of the plaintiffs’ arguments that the CLRA’s definition of "services" includes life insurance.  First, the Court rejected the plaintiffs’ reliance on a "broad dictionary definition of ‘service’" that would include life insurance, because the Legislature provided a specific definition that excluded life insurance.  Second, the Court dismissed the plaintiffs’ reliance on decisions from other jurisdictions, either because their statutory schemes differ from the CLRA or because the plaintiffs attempted to rely on dicta in those opinions.  Third, the Court held that Civil Code Section 1760’s command that the CLRA’s provisions "shall be liberally construed" only applies where "the statutory language is ambiguous and the intent of the enacting body is in doubt," but neither of these conditions applied here.  Fourth, the Court rejected the plaintiffs’ reliance on Insurance Code Section 1861.03(a), a law that voters enacted through Proposition 103 and that states that the "business of insurance" shall not be exempted from laws of general applicability.  The Court held that Proposition 103 does not apply to life insurance, and the CLRA is not a law of general applicability but rather a specifically and narrowly defined statute that "applies only to transactions for the sale or lease of consumer ‘goods’ or ‘services’ as those terms are defined in the [CLRA]." 

Finally, and perhaps most significantly in terms of future litigation over the scope of the CLRA, the Court rejected the plaintiffs’ argument that the mere fact that FNWL’s agents and other employees provided "ancillary services" to policyholders somehow brought FNWL’s life insurance policies within the reach of the CLRA.  As the Court explained, "ancillary services are provided by the sellers of virtually all intangible goods," and to use "the existence of these ancillary services to bring intangible goods within the coverage of the [CLRA] would defeat the apparent legislative intent in limiting the definition of ‘goods’ to include only ‘tangible chattels.’"

Aside from its specific discussion of the plaintiffs’ arguments regarding Proposition 103 (as noted above), there is nothing in the Fairbanks opinion to suggest that its reasoning should not apply to other forms of insurance.  In addition, the Court’s determination that ancillary services are insufficient to convert the life insurance policies into "goods" or "services" may have broader impact on other products such as securities, loans, and other intangible items.  At the very least, this decision represents another significant limitation on the CLRA, following the Court’s opinion earlier this year in Meyer v. Sprint Spectrum, Case No. S153846, in which it held that the plaintiff could not bring a "preemptive suit" to challenge allegedly unconscionable terms in a cellular phone agreement that the defendant service provider had not attempted to enforce.

© 2009 Gibson, Dunn & Crutcher LLP

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