California Supreme Court Says "No" to Insureds Trying to Recover Under California's Consumer Legal Remedies Act

Fairbanks v. Superior Court, __ Cal. 4th __, 2009 WL 1035264 (April 20, 2009). 

California has long been known to insurance bad faith practitioners for its consumer-friendly insurance bad faith laws. But seemingly not content with their common law bad faith remedies, bad faith plaintiffs’ lawyers have periodically attempted to sue insurers for claims based on California’s Consumers Legal Remedies Act (Cal. Civ. Code sections 1750 et seq.) (the “CLRA”). The advantages in doing so arguably include a slightly different definition of wrongful conduct and an independent basis on which to seek an award of attorneys’ fees. Regardless, the issue is now moot: On April 20, 2009, the California Supreme Court issued its decision in Fairbanks v. Superior Court, __ Cal. 4th __, 2009 WL 1035264 (April 20, 2009). There, the Court definitively ruled that the sale of life insurance is not a service that is subject to the CLRA’s remedial provisions.

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Quarter-Way Through 2009, Still No Signs Of STOLI Legislation For California

Like most other states, California has experienced a spike in stranger-originated life insurance transactions, a relatively recent and emerging phenomenon commonly known as “STOLI.” As the name suggests, STOLI transactions are initiated by a third-party investor who does not have an insurable interest in the insured’s life. The policy’s premiums are funded by the investor, and the insured – usually a wealthy and elderly individual – receives a large cash payment up front in exchange for an agreement to transfer full ownership of the policy to the investor within a short period of time after the policy’s issuance or, in some cases, at the expiration of the policy’s two-year contestability period.

The insureds in a STOLI scheme usually are unaware that the large policy may reduce, if not eliminate, their ability to obtain other life insurance coverage for the benefit of their loved ones. And according to some, one of the problems STOLI transactions present for life insurers is that most insurers’ premium rates are based in part on statistical lapse rates – considerations that do not apply when a policy is secretly funded by an investor, as is the case with STOLI transactions.

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