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Ninth Circuit:
California Law Barring Defense of Insured in UCL, FAL Actions by State Is Constitutional
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals yesterday upheld the constitutionality of a California statute which bars insurers from funding the defense of insureds in certain actions brought by the state under consumer protection statutes.
Judge Kenneth K. Lee authored the opinion which affirms a summary judgment granted by U.S. District Court Judge R. Gary Hastings of the Central District of California in favor of Starr Indemnity and Liability Company. Its insured, Adir International, LLC, is being sued by the state under California’s Unfair Competition Law and False Advertising Law.
Starr dropped its defense of Adir after the Office of Attorney General pointed out that payments to counsel for Adir is barred under a state statute.
Lee’s Opinion
Lee wrote:
“California Insurance Code § 533.5(b)—which nullifies an insurance company’s duty to defend—does not facially violate a party’s due process right to retain counsel. In civil cases, courts have recognized a denial of due process only if the government actively thwarts a party from obtaining a lawyer or prevents it from communicating with counsel. Adir has made no such allegation. While it cannot tap into its insurance coverage, Adir has managed to obtain and communicate with counsel.”
The jurist pointed out that the right to counsel in a civil case is far narrower than in criminal cases.
He went on to say:
“[T]he question then becomes: Is there any way to fit Adir’s proposed right—which really boils down to an indirect right to fund and retain the counsel through an insurance contract—into the existing due process right? We see no reason to enlarge the limited due process right to retain counsel to include a constitutional right to use insurance proceeds to pay for legal fees. While Adir complains that California Insurance Code § 533.5(b) is unfair, the statute does not actively prevent Adir from obtaining counsel or communicating with its lawyers.”
Adir argued that §533.5 only applies to actions in which monetary relief is sought.
“Under the plain text of the statute, it applies to actions that seek injunctive relief along with monetary relief,” Lee wrote.
The case is Adir International v. Starr Indemnity and Liability, 19-56320.
Underlying Action
Adir operates Curacao stores which sell electronics and appliances. Suit was brought 2017 by the Office of Attorney General alleging:
“For years, Defendant Adir International, LLC, dba Curacao, a retail store chain, and its co-founder Ron Azarkman, have preyed upon Curacao’s Latino customer base. While Curacao touts its commitment to the Latino community, the company actually takes advantage of its customers, many of whom are low-income, monolingual Spanish-speaking immigrants who lack access to traditional credit to purchase basic big-ticket household necessities from other retailers.”
The complaint continues:
“Curacao victimizes consumers through a variety of unlawful, unfair, and fraudulent business practices, including the following: misleading advertising; misleading discounts on merchandise; unwanted contract add-ons; charging illegal fees; illegal sale of warranties: illegal sales of insurance products; failure to honor warranties; failure to make legally required contract disclosures; failure to clearly post return policies; refusal to honor returns; illegal debt collection practices; violating consumers’ rights when suing them in small claims actions; and misusing the small claims court system.”
Adir on March 9 stipulated to partial judgment against it which provides that “Curacao shall make restitution to consumers in the amount of $10,000,000.00 in the aggregate” and “pay the People of the State of California a total of $500,000.00 as a civil penalty.”
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