While fire crews continue to battle the fires ravaging Southern California, focus has begun to shift towards rebuilding communities lost to the flames. Property insurance has taken the spotlight, and frustration is mounting with insurers that decided last year not to renew policies in communities needing them the most.1 Homeowners affected by the reduction in coverage may find themselves looking for restitution under California's Unfair Competition Law.2
Like the recent fires, the 1994 Northridge earthquake devastated the community, leaving thousands displaced and turning to their homeowners' policies. Insurance companies paid a reported $15.3 billion in the aftermath of the quake.3 However, many homeowners were surprised to learn that their earthquake endorsements had been terminated. Still others were unable to obtain home coverage of any kind after the quake.
A pair of lawsuits brought in the 1990s under the UCL, challenging these reductions in insurance coverage, are instructive as to the types of scope of liability insurers may ' and may not ' face for their decisions to reduce coverage.
Insurers may be Liable for Inadequately Communicating Reductions in Coverage
About a decade before the 1994 Northridge earthquake, State Farm eliminated its earthquake endorsement in certain homeowners' policies, instead making the coverage available only through a separate earthquake policy. Rather than notifying policyholders of this fact, the insurer allegedly lulled customers into remaining underinsured for earthquake risk. State Farm executives at that time wrote in an internal memorandum that informing policyholders of the change in coverage would be "inconsistent with our marketing philosophy since we don't want to sell the coverage."4
A group of over 100 homeowners affected by the Northridge quake, led by Irene Allegro, sued under the Unfair Competition Law.5 They alleged their earthquake coverage was reduced without their consent or adequate notice ' a scheme they claimed State Farm devised to reduce its exposure to earthquake liability. The Court of Appeal affirmed the plaintiffs' ability to proceed on their UCL claim. The UCL permits claims based on business practices that are either unlawful, unfair or fraudulent.6 The court acknowledged that certain violations of Insurance Code cannot support a UCL claim under the unlawful prong.7 But, the court went on to hold, the alleged scheme to defraud Californians out of earthquake insurance was actionable...
