Advocate - Journal of Consumer Attorneys Associations for Southern California, September 2016 Issue
Robert S. Gianelli
To download this document in .pdf format [Click Here]
So you have just filed an insurance class action and you are very excited.
You have substantial evidence that the defendant insurer has engaged in
a practice of systematically denying benefits to thousands of policyholders
in violation of an Insurance Code provision. See, e.g.,
Kaiser Foundation Health Plan, Inc. (2010) 181 Cal.App.4th 471 and
Ticconi v. Blue Shield of California Life & Health Ins. Co. (2008) 160 Cal.App.4th 528. What’s more, the Department of Insurance
has filed an enforcement action charging that the insurer violated the
law to the detriment of policyholders as you allege.
But then in comes a demurrer. The insurer does not argue that there are
insufficient allegations of wrongdoing or of a certifiable class, indeed,
the insurer essentially concedes the validity of those allegations. Instead
the insurer contends that its systematic violation of policyholders’
rights cannot be resolved in court because the conduct implicates an obscure
“complex economic policy” or some undefined expertise that
is better left to whatever action the regulator may take. After doing
some research you realize that a court can decide to accept these arguments
by simply reviewing the pleadings and exercising its “discretion”
to have the matter dismissed or stayed pending possible review at some
point by the regulator. How can this be?
Enter the doctrines of abstention, primary jurisdiction and exclusive jurisdiction.
These related defenses focus on pubic policy considerations for allowing
an administrative body/regulator the exclusive or interim right to make
judgments on issues within their jurisdiction and expertise. Because insurance
class actions often concern issues that are the subject of an Insurance
Code provision, a regulation, a regulatory function or a regulatory proceeding,
one or more of these defenses is often raised.
In addressing these arguments, it is important to identify the particular
defense being raised as defendants often fail to spell out what particular
doctrine they are relying upon in an effort to secure a dismissal instead
of a stay. And, as the cases below demonstrate, courts often confuse the
doctrines when applying them. Once a particular defense is identified,
the public policy at issue can be addressed in light of the allegations
of the complaint. Because prevention is the best medicine, these defenses
should be understood and anticipated when drafting an insurance class
An abstention defense can present a serious obstacle to the prosecution
of a claim under Business & Professions Code section 17200 (the Unfair
Competition Law, “UCL”) because the doctrine: 1) is often
based on obscure public policy arguments; 2) is assessed by analyzing
the allegations of the complaint; 3) is determined under an abuse of discretion
standard; and 4) if determined to apply, ends the case.
The argument is that the UCL provides equitable remedies and that a court
should abstain from employing those remedies when doing so “would
drag a court of equity into an area of complex economic policy” (Desert Healthcare District v. PacifiCare, FHP, Inc. (2001) 94 Cal.App.4th 781, 795), “require a trial court to assume
the functions of an administrative agency” (Alvarado v. Selma Convalescent Hospital (2007) 153 Cal.App.4th 1292, 1298), or when granting injunctive relief
“would be unnecessarily burdensome for the trial court to monitor
and enforce given the availability of more effective means of redress.
Hambrick v. Healthcare Partners, LLC (2015) 238 Cal.App.4th 124, 147.
When a given issue will require a court to wade into “complex economic
policy” or “assume the functions of an administrative agency”
is not entirely clear. The cases on the subject appear to divide along
the line of whether resolving the liability issue will require a court
to delve into complicated financial issues typically performed under the
supervision of the regulator or, despite some level of regulatory overlay,
ask a court to decide contractual or statutory violations that are common
in a consumer class action.
Desert Healthcare District v. PacifiCare, FHP, Inc., supra, the economic policy at issue was the propriety of a health plan’s
patient capitation rates that resulted in the bankruptcy of a contracted
medical group and its nonpayment to a hospital. The hospital brought suit
alleging that the health plan’s transfer of risk to the medical
group violated the Knox-Keene Act and so the UCL. The court found abstention
to apply because in order to fashion an appropriate remedy for such a
claim, it would have to determine the appropriate levels of capitation
that would “pull the court deep into the thicket of the health care
finance industry, an economic arena that courts are ill-equipped to meddle
in.” 94 Cal.App.4th at 796.
Administrative entanglement and the complexity of the relief were at issue in
Alvarado v. Selma Convalescent Hospital, supra. There the plaintiff brought a class action under the UCL to compel skilled
nursing facilities to comply with the nursing hour requirements of Health
& Safety Code section 1276.5(a). The lower court sustained a demurrer
without leave to amend based upon an abstention defense. The appellate
court stated that although it would treat the demurrer as admitting all
material facts properly pled, the standard of review was abuse of discretion
given the equitable nature of the UCL remedies sought.
Id., 153 Cal.App.4th at 1297. In affirming, the appellate court determined
that the Department of Health Services was to enforce the statute and
that to fashion relief the court would have to calculate on class-wide
basis numerous nursing work factors, a “task better accomplished
by and administrative agency that by trial courts.”
Id. at 1305-1306.
InWolfe v. State Farm Fire & Casualty Ins. Co. (1996) 46 Cal.App.4th 544, there was a mix of public policy and administrative
detail that caused the court to abstain. The plaintiff brought a UCL action
against 17 residential real property insurers. He alleged that the insurers
committed an unfair business practice by refusing to write policies in
California in order to avoid issuing earthquake coverage following the
Northridge earthquake. The insurers argued that their actions were necessary
to comply with laws requiring they maintain adequate reserves to pay claims.
The court affirmed the sustaining of a demurrer because “[d]etermining
the validity of respondents’ defense would necessarily involve the
court in evaluating the potential risk being undertaken [by each insurer]
and analyzing their respective financial conditions[.]”
Id. at 568.
Samura v. Kaiser Foundation Health Plan, Inc. (1993) 17 Cal.App.4th 1284 presented a scenario where the ordered injunctive
relief usurped the functions of the regulator. The plaintiff brought a
UCL action seeking to enjoin a health plan’s enforcement of a third
party reimbursement provision. The trial court required the provision
re-written to include a pro rata reduction of the lien amount for attorney
fees expended in achieving the third party recovery. The appellate court
reversed determining that the content of the policy form was subject to
review by the health plan’s regulator and “courts cannot assume
general regulatory powers over health maintenance organizations through
the guise of enforcing the [UCL].”
Id. at 1301-1302.
The public policies proclaimed in these cases create a clear tension with
the UCL, a broad remedial statute that is cumulative to all other California
laws. “[E]ven were we to conclude [that other laws] are a comprehensive
scheme for combating teen smoking, we would still confront the fact that
in neither of these provisions is it “expressly provided”
that remedies under the UCL and those statutes are not cumulative to each
Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553, 573. The existence of parallel enforcement
mechanisms with regulatory oversight should not trump the UCL when it
is being utilized to address specific wrongs against consumers that can
be adjudicated like any other dispute.
For instance, in
Blue Cross of California v. Superior Court (2009) 180 Cal.App.4th 1237 the issue was whether a court should abstain
from addressing the city attorney’s UCL action against a health
plan alleging that the plan had engaged in the unlawful rescission of
consumer contracts in violation of statute. The health plan argued that
the abstention doctrine applied because its practices had come under scrutiny
from its regulator that, pursuant to its enforcement authority, entered
into a settlement with the health plan. The court noted the breadth of
the UCL and the cumulative nature of its remedies, citing
Stop Youth Addiction, Inc. v. Lucky Stores,
supra. The court then determined that the city attorney’s action was not
seeking to interfere with actions of the regulator but “asking the
court to perform an ordinary judicial function, namely to grant relief
under the UCL and the FAL for business practices that are made unlawful
by the statute.”
Id. at 1258.
This rationale was also applied in
Kaiser Foundation Health Plan, Inc. (2010) 181 Cal.App.4th 471. The plaintiff brought a class action against
Kaiser alleging that it had breached members’ contracts and violated
the UCL by failing to provide certain types of treatment for children
with autism in conformity with the Mental Health Parity Act, Health &
Safety Code section 1374.72. The trial court dismissed the UCL claim because
it concluded that relief sought would require it to engage in complex
medical issues by determining which treatments were medically necessary.
The appellate court rejected this argument finding that resolution of
the case merely required the trial court “to perform the basic judicial
functions of contractual and statutory interpretation.”
Id. at 499. The court also determined that section 1374.72 is not strictly
a regulatory statute but also makes it unlawful to deny necessary treatment
for autism and private parties can bring an action to enforce statutory
The abstention doctrine appears to be more readily applied when the relief
sought is less a matter of individual redress (albeit on a class basis)
for some violation of contract or law and more of a broad based attack
on a public policy or a financial system where any remedy would be extremely
difficult to assess or manage. Accordingly, an insurance class action
complaint should anticipate these arguments and allege a UCL violation
and remedies that will cause a court to conclude that it is being asked
“to perform an ordinary judicial function, namely to grant relief
under the UCL” in ordering specific restitution and/or issuing a
Blue Cross of California v. Superior Court, supra,180 Cal.App.4th at 1258.
III. Primary Jurisdiction
Primary jurisdiction is often confused with the doctrine of exhaustion.
Exhaustion comes into play when a dispute must first be presented to an
administrative body before it can be presented in court. “[J]udicial
interference is withheld until the administrative process has run its
Farmers Ins. Exchange v. Superior Court (1992) 2 Cal.4th 377, 390 quoting
United States v. Pac. R. Co. (1956) 352 U.S. 59, 63-64. In other words, it is jurisdictional in the
sense that the administrative action is a prerequisite to a civil action.
Primary jurisdiction, on the other hand, arises when a dispute may be
filed in court but any action by the court should be suspended pending
a decision by an administrative body.
Farmers Ins. Exchange, supra, at 390.
Several primary jurisdiction cases in the insurance area concern disputes
over compliance with the provisions of Proposition 103, the landmark legislation
requiring prior approval of property and casualty insurance rates. Perhaps
the leading primary jurisdiction case in California is one such case,
Farmers Ins. Exchange. v. Superior Court, supra. There the Attorney General brought an action on behalf of the People
alleging that the insurer had violated Proposition 103’s “Good
Driver Discount” as set forth in Insurance Code section 1861.02
and the “discriminatory rates” provision of Insurance Code
section 1861.05(a). The insurer argued that the allegations of impropriety
in the insurer’s rating practices were subject to an exhaustion
of administrative remedies available under he Insurance Code.
After determining that exhaustion did not apply, the court turned to the
issue of primary jurisdiction. It stated that application of the doctrine
advances two related policies: “it enhances court decisionmaking
by allowing courts to take advantage of administrative expertise, and
it helps assure uniform application of regulatory laws.”
Farmers Ins. Exchange, supra, 2 Cal.4th at 391. There is no rigid formula for applying these policies
and, like the abstention defense, application of these policies to a given
case is within the court’s discretion absent a law stating otherwise.
The court determined that the UCL action was subject to the primary jurisdiction
of the Insurance Commissioner because it alleged that the insurer had
violated the provisions of Insurance Code sections 1861.02 and 1861.05(a) and that:
The resolution of these questions mandates exercise of expertise presumably
possessed by the Insurance Commissioner, and poses a risk of inconsistent
application of the regulatory statutes if courts are forced to rule on
such matters without benefit of the views of the agency charged with regulating
the insurance industry.
Farmers Ins. Exchange, supra, 2 Cal.4th at 398.
Noteworthy is that the court rejected the Attorney General’s attempt
to re-characterize the allegations of the complaint (“the complaint
does not on its face allege the factual claim that the People now advance”).
Farmers Ins. Exchange, supra, 2 Cal.4th at 397. As with the abstention defense, the nature of the violation
alleged and the specificity of the relief sought will be paramount in
defeating a primary jurisdiction defense.
The progression of a case through the primary jurisdiction process is displayed in
Donabedian v. Superior Court (2004) 116 Cal.App.4th 968. An individual brought a UCL action alleging
that the insurer used the absence of prior insurance in and of itself
in determining entitlement to a Good Driver Discount in violation of Insurance
Code section 1861.02. The trial court stayed the matter so the plaintiff
could present it to the Insurance Commissioner. The Commissioner declined
jurisdiction but expressed his agreement with the plaintiff’s position.
The trial court then dismissed the case based upon exclusive jurisdiction.
The appellate court reversed determining that the issue was one of primary
jurisdiction and the referral to the Commissioner had satisfied the requirement
of the regulator’s initial assessment.
The doctrines of exhaustion and primary jurisdiction in the context of
an individual lawsuit alleging common law claims were addressed in
Jonathan Neil & Associates, Inc. v. Jones (2004) 33 Cal.4th 917. There the issue was whether exhaustion or primary
jurisdiction applied to a trucking company’s premium dispute with
its insurer. The insurance was provided through an assigned risk program
run under rules promulgated by the Insurance Commissioner. The court determined
that exhaustion did not apply because the Insurance Commissioner did not
have the authority to decide the common law claims “but can only
make a determination regarding some of the issues in the case.”
Id. at 933. The court, however, did find that “the case for the primary
jurisdiction of the Insurance Commissioner is compelling” because
an interpretation of the assigned risk program premium rules was at the
heart of the controversy.
Id. at 934.
Unlike abstention, primary jurisdiction is not a death-blow to a UCL claim
because it calls for a referral to the regulator for input while the court
action is stayed. If there is a pending regulatory proceeding, the court
action is stayed until the proceeding is completed.
Wise v. Pacific Gas & Electric Co. (1999) 77 Cal.App.4th 287, 296. If there is no pending proceeding, the
stay may accompany a “referral” calling for the regulator to act.
Farmers Ins. Exchange, supra, 2 Cal.4th at 378. If, however, the regulator renders an opinion, the
trial court will be guided by that decision.
Jonathan Neil & Associates, Inc. v. Jones. supra, 33 Cal.4th at 937.
IV. Exclusive Jurisdiction
A successful exclusive jurisdiction defense is, like abstention, fatal
to a case but should be limited to the infrequent circumstance where the
Insurance Commissioner has been expressly given exclusive authority to
resolve an issue.
For instance, in
State of California v. Altus Finance, S.A. (2005) 36 Cal. 4th 1284 the Attorney General sought restitution, injunctive
relief and penalties under the UCL against an entity it alleged acted
as a front for other businesses in the takeover of an insolvent insurer.
The court determined that Insurance Code section 1037(f) gave the Insurance
Commissioner the exclusive authority to recover lost property on behalf
of creditors and policyholders of an insolvent insurer precluding any
claim for restitution. The court also found that the Attorney General
could pursue penalties as well as injunctive relief to the extent that
relief implicates core law enforcement functions as opposed to duplicating
the role played by the Commissioner as conservator of the insolvent company.
McKay v. Superior Court (2010) 188 Cal.App.4th 1427 an issue was again raised regarding the propriety
of an insurer’s reliance on an insured’s lack of prior insurance
in calculating premiums in compliance with Insurance Code section 1861.02.
The insurer moved for summary judgment on the basis the Department of
Insurance had approved the rate. The court determined that Insurance Code
section 1860.1 exempts from other California laws acts done and actions
taken pursuant to the ratemaking authority
conferred by the ratemaking chapter, “including the charging of a preapproved rate” Id. at 1443 (emphasis in original). Accordingly, the court granted summary judgment for the insurer.
On the other hand, in
Bell v Blue Cross of California (2005) 131 Cal.App.4th 211 the appellate court rejected an exclusive jurisdiction
defense where the regulator (the Department of Managed Health Care) was
authorized to enforce the statutory scheme at issue (the Knox-Keene Act)
with no parallel authorization for suits brought by individuals. The court
determined that a class action brought by emergency room physicians seeking
full reimbursement from a health plan under a law requiring physicians
to provide emergency services could proceed as a UCL unlawful claim. Nothing
in the Knox-Keene Act granted the regulator exclusive jurisdiction to
enforce its provisions or precluded a UCL action.
The defenses of abstention, primary jurisdiction and exclusive jurisdiction
can defeat or delay an insurance class action when the case implicates
insurance statutes, regulations or functions of the regulator. Care must
be taken to plead the violations and relief requested with enough specificity
to support arguments that the claims concern the type of issues regularly
decided in court. In particular, UCL remedies that would infringe on an
existing compliance system or will require a court to resolve complex
issues best reserved for a regulator will likely result in a court exercising
its discretion to dismiss or stay the case for regulatory review.