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June 2013

Insured Who Was Never Denied Benefits Did Not Have Standing to Sue Disability Insurers Under Unfair Competition Law

On May 21, the California Court of Appeal, First Appellate District, held that an insured who alleged deceptive claims handling practices in violation of the unfair competition law (UCL) but was never denied benefits, lacked standing to pursue a UCL cause of action.

In Schwartz v. Provident Life and Accident Insurance Co., et al., defendants Provident Life and related companies (collectively “insurers”) sold disability insurance that provided monetary benefits to individuals who, due to injury or illness, were unable to work in their chosen occupations. Plaintiff Rick Schwartz was an insured under a policy he purchased in 1988 and maintained to date. Schwartz paid a fixed monthly premium of $371.44 in exchange for the insurer’s promise to pay a monthly benefit of $11,220 in the event of disability. Schwartz has never become disabled and has never filed a claim for benefits.

In 2005, the commissioner of the California Department of Insurance entered into a settlement agreement with the insurers resolving allegations that they wrongly denied benefits to certain insureds who had filed claims. Without admitting fault, the insurers paid an $8 million civil penalty and agreed to revaluate the claims they had previously denied and to modify their claims handling practices going forward.

Soon after the settlement, Schwartz filed this action against the commissioner and insurers on behalf of insureds who had not been denied benefits and therefore received no direct benefit from the settlement. Schwartz alleged the insurers operated a “systematic scheme” from 1994 to 2005 of improperly denying and terminating policyholders’ legitimate disability claims. Schwartz and the class he purported to represent alleged the value of their insurance was diminished by the insurers’ improper claims procedures and wrongful denial of benefits to other insureds. Schwartz sought a writ of mandate to compel the commissioner to reopen his investigation and pursue relief for policyholders who, like Schwartz, had not been denied benefits but who allegedly suffered economic injury. Schwartz alleged several causes of action including a claim that the insurers’ alleged deceptive claims handling practices violated the UCL.

The trial court dismissed the mandamus cause of action against the commissioner and the Court of Appeal affirmed that order, finding that even assuming Schwartz and the purported class suffered economic harm as a result of the insurers’ claims practices that have now been corrected, the commissioner’s decision not to pursue any remedy on their behalf was not an abuse of discretion.

In July 2011, the trial court granted the insurers’ motion for summary adjudication on the UCL cause of action based on Schwartz and the purported class’ lack of standing. The trial court noted the UCL provides no relief to a person who has not suffered injury as a result of the alleged unfair competition. Schwartz voluntarily dismissed all of his causes of action and judgment was entered in favor of the insurers. Schwartz appealed.

On appeal, Schwartz based his argument of purported harm on the report of an economics expert who concluded that the insurers’ improper claims practices lowered the value of all of the policies. The Court of Appeal found that at most, the expert’s analysis posited potential, not actual harm, to the purported class of policyholders. The court also noted that the economist’s theory of group harm disregarded the UCL’s requirement of individual harm.

The court found that Schwartz’s argument ignored the fact that the insurers’ practices had now been modified. The court explained, “Whatever financial loss [Schwartz] would have suffered had he become disabled and been denied benefits in the past, he in fact did not become disabled, and should he suffer a disability in the future he presumably will receive the benefits to which he is entitled.” The Court of Appeal therefore affirmed the trial court’s order, finding that the harm to Schwartz and the purported class was no more than a potentiality and entirely speculative, which was insufficient to confer standing.

To read the opinion in Schwartz v. Provident Life and Accident Insurance Co., et al. (May 21, 2013) 2013 Cal. App. LEXIS 400, click here.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.

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David L. Jones
Laura G. Ryan