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March 2012

M&F Fishing, Inc. v. Sea-Pac Insurance Managers, Inc. ? Insured Is Not Entitled To Restitution For Lawfully-Placed Insurance Coverage

Insured May Be Entitled to Limited Restitution of Broker Fees/Commissions for Non-Admitted Coverage

(2012) ___ Cal.App.4th ___; 12 C.D.O.S. 1262

This appeal arises out of alleged violations of the Unfair Competition Law ("UCL") rooted in Insurance Code violations.  M&F Fishing, Inc. and C&F Fishing, Ltd. (collectively, "Respondents") owned and operated commercial tuna fisheries.  Between 1996 and 2003, Respondents purchased commercial marine insurance from brokers Sea-Pac Insurance Managers ("Sea-Pac"), Raleigh, Schwartz & Powell, Inc., Brown & Brown of Washington, Inc., and Sharon Edmonson (collectively, "Appellants"). 

In 1998, two seamen were physically injured while working on a tuna seiner. Claims were filed against the Respondents' nonadmitted insurance companies, FAI, an Australian insurer, and Lloyds Underwriters. As nonadmitted insurers, both companies were not licensed to transact insurance in California. FAI  became insolvent and stopped paying out on the seamen's claims after three years. Subsequently, both seamen, independently, sued Respondents and settled. Respondents, in turn, sued Appellants for professional negligence. Both professional negligence suits resulted in partial releases among the parties.

In 2004, Respondents sued Appellants for violating the following Insurance Code provisions: 1760.5 (selling nonadmitted insurance coverage without a surplus lines brokers license); 382 (failure to deliver policies within 90 days); 1764.1 (failure to disclose that a nonadmitted insurer is not licensed or subject to California's solvency regulations); and 1764.4 (failure to deliver the underwriter's signature authentication). Respondents alleged that violations of these Insurance Code sections resulted in violation of UCL § 17200. The trial court awarded Respondents $3.5 million in restitution, representing premiums and commissions paid for admitted and non-admitted insurance coverage from 1996 to 2003. The trial court denied a motion for new trial and request for prejudgment interest in excess of $5 million. The Appellants appealed and appellate court reversed the judgment and remanded the case.

The court held that Appellants cannot be held liable for restitution under UCL § 17200 for insurance that was lawfully placed between 1996-2003. The court's reasoning was predicated on the meaning of restitution and equity. Pursuant to UCL § 17203, restitution means the "offending party must have obtained something to which it was not entitled and the victim must have given up something which he or she was entitled to keep." Day v. AT&T (1998) 63 Cal. App.4th 325. Further, it was not the legislature's intent to provide courts with unlimited equitable powers in UCL § 17203. Korea Supply Co. v. Lockheed Martin (2003) 29 Cal.4th 1134. The court held that because the Respondents reaped the benefit of coverage with the admitted carriers, it would be unfair for Respondents to be entitled to restitution for lawfully placed insurance with admitted carriers. Further, the Appellants were properly licensed to broker admitted coverage.

Also, the court held that the Respondents are not entitled to restitution of $3.5 million if it was based on damages for unpaid losses arising out of the seamen's claims. Under UCL §17200, a plaintiff may recover restitution but not damages. Korea Supply, supra, 29 Cal.4th at 1144.

Furthermore, the court held that Respondents are not entitled to restitution of premiums paid for nonadmitted coverage because the premiums belonged to the insurer, not the broker or the insured, and for public policy reasons of upholding the contract of insurance. However, the Respondents are entitled to restitution of broker fees charged for placement of insurance with nonadmitted carriers that did not comply with the disclosure requirements of Insurance Code 1764.1. The court declined to rule on the issue of whether the releases signed by parties in the prior professional negligence actions were intended to release the broker fees paid for nonadmitted coverage. Further, pursuant to UCL §17208, which provides the statute of limitations for UCL §17200 claims, the court held that Respondents are barred from recovering restitution of broker fees before March 10, 2000 because the statute of limitations commences at the time of accepting an application for an insurance policy issued by a nonadmitted insurer.

Lastly, the court concluded that the trial court erred in denying the motion for nonsuit, upheld the trial court's decision to deny Respondents' motions to amend to add new parties, and held that the trial court should decide whether Respondents are entitled, if any, to prejudgment interest on broker fees for nonadmitted coverage on or after March 10, 2000.

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This opinion is not final. The Court of Appeal may modify it on rehearing or the California Supreme Court may order it depublished or grant review. The latter two events would render the opinion unavailable as legal authority in California courts.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.

 

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