Denial of Class Action Certification Motion Improper in Class Action Case Against Insurer Alleging Violations of State Unfair Competition Law (UCL) because Equitable Defenses of Fraud and Unclean Hands cannot be used to Defeat UCL Claims so Individual Issues Related to such Defenses will not Predominate over Common Issues California Appellate Court Holds
Plaintiff filed a putative class action complaint against his health insurer, Blue Shield of California, alleging inter alia that Blue Shield violated California’s unfair competition law (UCL) and state insurance code “by failing to attach his application to or endorse it on the insurance policy when issued, and later rescinding the policy on the ground he had made misrepresentations in that application.” Ticconi v. Blue Shield of Cal. Life & Health Ins. Co., 157 Cal.App.4th 707, 68 Cal.Rptr.3d 785, 788-89 (Cal.App. 2007). Plaintiff moved the trial court for class action treatment; defense attorneys opposed the class action certification motion on the ground the individual issues related to Blue Shield’s fraud and unclean hands defenses would predominate over common issues. Id., at 789. The trial court agreed with defense counsel and refused to grant class action status. Id. The Court of Appeal reversed, holding that the trial court abused its discretion in denying the class action certification motion because “[e]quitable defenses cannot be used to defeat a UCL cause of action and Blue Shield Life may not raise the defense of fraud based on statements that insureds made in an application for insurance where the application had been neither attached to nor endorsed on the policy when issued,” id. (citations omitted).
According to the class action complaint, plaintiff applied for a short-term health and accidental death insurance policy from Blue Shield. Ticconi, at 789. The application completed by plaintiff “was neither attached to the policy nor endorsed onto it when the policy was issued.” Id. Blue Shield issued the policy, and plaintiff paid the premiums as required, id. During the policy period, plaintiff’s health care bills exceeded $100,000, but upon receiving the bills Blue Shield refused payment and rescinded the policy on the ground that plaintiff “made material misrepresentations in his application for insurance about the condition of his health.” Id. Plaintiff denied this claim, insisting that he “answered truthfully all health questions posed on the policy application” and that “a reasonable investigation would have shown this.” Id. The class action further alleged that Blue Shield violated California law because it failed to attach or endorse a copy of his application to the policy, and Insurance Code section 10113 forbids incorporation of the application by reference, and that even if his statements were false, plaintiff “not bound by any statement made therein because that document had not been attached to or endorsed on the policy when issued.” Id., at 789-90. Plaintiff filed his lawsuit as a class action alleging that Blue Shield similarly “had rescinded a large number of policies that did not have the applications attached to or endorsed on the policies” in violation of Insurance Code sections 10113 and 10381.5, and that as such the rescissions represented an unlawful business practice under the UCL. Id., at 790.
Plaintiff filed a motion to have the lawsuit certified as a class action. Ticconi, at 790. Defense attorneys opposed class action treatment, arguing that the insurance policies at issue are “wholly underwritten through the questions on the application” and that applicants will not qualify for medical coverage unless they can truthfully answer “no” to each question on the application. Id. The defense also argued that of the quarter-million policies issued between January 1, 2000, and June 30, 2005, Blue Shield had rescinded only 207 for misrepresentation. Id. In essence, the defense argued that class action certification should be denied because the lawsuit “lacked the community-of-interest element required” for class treatment in that the putative class consisted of individuals who had defrauded Blue Shield and whose act of fraud caused the rescissions for which damages now were being sought. Id., at 790-91. Defense attorneys also argued that various individual factors would predominate, including the “varying degrees of unclean hands” and whether any particular putative class member had suffered any injury. Id., at 791.
The trial court denied plaintiff’s motion: “It ruled that the remedy each class member sought, i.e., voiding the rescission of their insurance policies, was of no benefit to each class member without a separate trial on the merits as to each plaintiff because each individual’s case would turn on its own unique circumstances.” Ticconi, at 791. The court further explained that under the UCL the court would be required to “litigat[e] individual issues of fraud and unclean hands before policies could be reinstated” so “common questions of fact did not predominate.” Id. The appellate court reversed.
We do not discuss here the Court of Appeal’s holding that the class action complaint adequately alleged a UCL claim. See Ticconi, at 792-796. We note only the court’s holding at page 796 that “[t]he factual and legal issues that go to liability are universal to all class members, with the result that common issues of law and fact would predominate.” Of more importance to our discuss is the appellate court’s holding that Blue Shield could not assert fraud or unclean hands in defense of the UCL claims in the class action complaint: as the appellate court explained at page 796, “Courts have long held that the equitable defense of unclean hands is not a defense to an unfair trade or business practices claim based on violation of a statute. To allow such a defense would be to judicially sanction the defendant for engaging in an act declared by statute to be void or against public policy.” Similarly, the defense of fraud may not be used to defeat plaintiff’s claims. See id., at 798-99. From this, the Court of Appeal concluded that the trial court abused its discretion in denying class certification because “the diverse facts making up Blue Shield Life’s fraud and unclean hands defenses are not to be factored in when determining whether the community of interest requirement is met.” Id., at 798. Accordingly, the Court of Appeal reversed the court order denying class certification and remanded the matter for further proceedings. Id., at 800.
NOTE: Defense attorneys also had opposed class action certification on the ground that plaintiff was not a typical or adequate class representative because it had reinstated his insurance policy and paid all outstanding medical bills; the trial court did not reach this issue. Ticconi, at 791, 799. Te appellate court instructed the trial court to address this issue on remand, but for guidance held that the factors identified by the defense – while factors to be considered by the trial court – did not automatically disqualify plaintiff from serving as a class representative. See id., at 799-800.