The insurance industry is heavily regulated by the states and rightfully so. An effective regulatory framework governing the conduct of insurance companies serves to protect policyholders and the public at large. But what happens when insurers are alleged to have committed fraudulent or deceptive acts in the course of their dealings with consumers? Are there additional statutory protections available to those victimized consumers?
Nearly 50 percent of jurisdictions believe that the state insurance regulatory scheme is sufficient to ensure insurance companies will conduct business in a manner that comports with public policy. Consequently, these states do not permit policyholders to seek remedies under their consumer protection laws when a coverage dispute arises. The remaining jurisdictions do not recognize a conflict between the state consumer protection laws and the state insurance regulatory scheme. These states allow policyholders to raise claims under their consumer protection laws and seek recovery of extra-contractual damages.
This article explores this interplay by first addressing those states that have judicially or legislatively placed insurers beyond the scope of consumer protection statutes. This article next addresses those states that expressly allow such relief. Last, this article discusses a recent decision from the U.S. Court of Appeals for the Third Circuit that reaffirmed a policyholder’s right to pursue relief against an insurer under the New Jersey Consumer Fraud Act (CFA).
States That Exclude Insurers from the Scope of Consumer Protection Statutes
Twenty-four states completely immunize insurers from state consumer protection laws. Some states have done this through legislative acts. In Alabama, for example, the Deceptive Trade Practices Act provides that it does not apply to “[a]ny person or activity which is subject to the provisions of the Alabama Insurance Code.” Louisiana’s Unfair Trade Practices and Consumer Protection Law similarly provides that it does not apply to “[a]ctions or transactions subject to the jurisdiction of . . . the insurance commissioner[.]”
Other states have immunized insurers through case law. The Georgia Court of Appeals, for example, interpreted Georgia’s Uniform Deceptive Trade Practices Act (UDTPA) to specifically exclude insurance transactions. In that case, a health care facility alleged that Blue Cross & Blue Shield of Georgia, Inc., and Blue Cross and Blue Shield Healthcare Plan of Georgia, Inc., violated the Georgia UDTPA by refusing to allow its medical oncologists to participate in the health maintenance organization (HMO) network, by making false statements regarding the reason for the plaintiff’s lack of participation in the HMO network, and by making misleading statements regarding the availability of insurance coverage for services rendered by the plaintiff’s oncologists.
The trial court dismissed the plaintiff’s claims under Georgia’s consumer protection law and the court of appeals affirmed. In doing so, the court of appeals reasoned that application of Georgia’s consumer protection law was not warranted because the Georgia “Insurance Code contains its own statutory scheme that regulates unfair trade practices within the insurance industry and gives the Insurance Commissioner the power to investigate and act upon such claims against an insurer.” This line of reasoning, e.g., that the state’s insurance code contains its own comprehensive scheme to regulate insurer’s behavior, is seen throughout the case law in states that have prohibited policyholders from bringing claims under their consumer protection statutes.
States That Permit Application of Consumer Protection Statutes in a Coverage Dispute
The remaining 26 states permit policyholders to seek additional remedies under their respective consumer protection laws when litigating a coverage action. The method by which each of these states has concluded that consumer protection laws may apply to coverage disputes varies. Several states have held that the sale or purchase of insurance constitutes the sale or purchase of a “service” within the meaning of a consumer protection statute, while others have considered the sale or purchase of insurance to be the sale or purchase of “property” so as to fall within the statute.
Illinois is in the former category. Illinois has determined that the “sale of insurance is clearly a service and insureds are thus consumers and within the protection of the Consumer Fraud Act.” The Kentucky Supreme Court has likewise found that “[a]n insurance policy is nothing more and nothing less than a contract providing for the delivery of financial services[.] As such it is in the same class as other financial services. Our Consumer Protection Act has no exclusion for such services simply because insurance is involved. . . .”
Massachusetts, on the other hand, has determined that policyholders can assert claims under the Massachusetts consumer protection law because the “sales of motor vehicle insurance policies constitute sales of property and sales of services within the meaning of Massachusetts consumer protection law.” And the U.S. District Court for the District of Minnesota has adopted a similar approach when interpreting Minnesota’s Deceptive Trade Practices Act (MDTPA). Indeed, the district court has found an insurer’s promise that “out-of-pocket payments would ‘vanish’” and an insurer’s alleged misstatement regarding the replacement cost estimate of the policyholder’s home could both be actionable under the MDTPA. The district court reasoned that the MDTPA was a remedial statute that was intended to prevent an insurer from engaging in any “practice whereby it represents that a policy has characteristics it does not, or make other representations that create a likelihood of confusion or misunderstanding.”
An additional consideration for practitioners in these 26 states is the interplay between the state’s consumer protection statute and the state’s insurance regulations. Some courts—the Washington Court of Appeals, for example—have concluded that “[v]iolation of an insurance regulation is an unfair trade practice, which may result in [Washington Consumer Protection Law] liability if the remaining elements of the five-part test are established.” California has taken a similarly expansive approach. In Zhang v. Superior Court, for example, the California Supreme Court held that the Unfair Insurance Practices Act’s bar against private actions for unfair insurance practices did not prevent an Unfair Competition Law claim based on false advertising regarding a promise to provide timely coverage.
Other states, like Pennsylvania, take a more restrictive approach and have determined that “an insurer can be held liable under the Unfair Trade Practices and Consumer Protection Law . . . only if there are fraudulent misrepresentations in order to sell a policy.” Practitioners must therefore be mindful of these limitations because they can effectively limit a policyholder’s remedies under the state’s consumer protection law.
Third Circuit Reaffirms That Policyholders in New Jersey May Bring Claims under the CFA
In November 2018, the U.S. Court of Appeals for the Third Circuit issued its opinion in Alpizar-Fallas v. Favero and reaffirmed its earlier decision in Weiss v. First Unum Life Insurance Co. that a New Jersey policyholder can assert a claim against an insurer under the CFA if it could show that the insurer committed a “fraud in the subsequent performance” of the insurance contract. In so ruling, the Third Circuit expanded on a line of cases in New Jersey that have grappled with the application of the CFA to insurers.
The most important state court decision regarding this question is the New Jersey Supreme Court’s decision in Lemelledo v. Beneficial Management Corp. In Lemelledo, the New Jersey Supreme Court was asked to apply the CFA to the practice of “loan packing,” a “practice on the part of commercial lenders that involves increasing the principal amount of a loan by combining the loan with loan-related services, such as credit insurance, that the borrower does not want.” In examining this issue, the court discussed whether permitting a CFA action would conflict with New Jersey’s insurance regulatory scheme, noting that “because lenders offering credit insurance are regulated by several State agencies, to subject them to CFA liability would run counter to our traditional reluctance to impose potentially inconsistent administrative obligations on regulated parties.”
The court concluded that application of the CFA would not conflict with the state’s regulatory insurance scheme and stated that in “the modern administrative state, regulation is frequently complementary, overlapping, and comprehensive. Absent a nearly irreconcilable conflict, to allow one remedial statute to preempt another or to co-opt a broad field of regulatory concern, simply because the two statutes regulate the same activity, would defeat the purposes giving rise to the need for regulation.”
In the course of its analysis, the New Jersey Supreme Court acknowledged a line of lower court decisions finding that the CFA did not apply when the claim was simply for the payment of benefits. Importantly, though, the Lemelledo court did not resolve whether the denial of insurance benefits could constitute an unlawful act under the CFA. Lemelledo thus set the stage for the Third Circuit in Weiss.
In Weiss, the plaintiff claimed that the defendant insurer discontinued payment of his disability benefits as part of a racketeering scheme under the Racketeer Influenced and Corrupt Organizations Act (RICO). The Third Circuit examined whether the plaintiff’s claim was covered by the CFA. Noting it did “not share the District Court’s conviction that the CFA and its treble damages provision are inapplicable to schemes to defraud insureds of their benefits,” the Third Circuit concluded “[t]he CFA covers fraud both in the initial sale (where the seller never intends to pay), and fraud in the subsequent performance (where the seller at some point elects not to fulfill its obligations).” The Third Circuit thus found that the CFA could apply to the plaintiff’s allegations of fraudulent discontinuation of previously authorized benefits.
The Third Circuit recently reaffirmed its holding in Weiss in Alpizar-Fallas. In Alpizar-Fallas, the defendant’s car struck the plaintiff’s car, causing the plaintiff serious injuries. The following day, a claims adjuster approached the plaintiff and presented her with a document that he “required” her to sign and that he “expressly represented would expedite the property damage claim of the accident.” Contrary to the claims adjuster’s assertions, “the document was, in fact, ‘a broadly written comprehensive general release of any and all claims,’ including claims against [the defendant] for ‘any and all known and unknown personal injuries resulting from the motor vehicle accident.’”
The plaintiff commenced an action in New Jersey state court, seeking damages for personal injuries sustained in the accident, and later amended her complaint to include a class action claim against her insurer under the CFA and New Jersey’s Unfair Claims Settlement Practices Regulations (UCSPR). The plaintiff’s insurer then moved to dismiss her class claims under the UCSPR, arguing, among other things, that the UCSPR does not provide a private right of action, the UCSPR precludes application of the CFA, and the CFA does not apply to schemes to defraud policyholders of their benefits and personal injury claims.
The district court agreed with the insurer and dismissed the plaintiff’s class action claim under the UCSPR because that set of regulations does not provide a private right of action. The district court also dismissed the plaintiff’s CFA claim, construing the CFA to apply only to the “sale or marketing” of insurance policies. In so ruling, the district court acknowledged the Third Circuit’s ruling in Weiss but followed a more recent decision of the Superior Court of New Jersey, Appellate Division, Myska v. New Jersey Manufacturers Insurance Co., which held that the CFA did not apply to an insurance company’s mere refusal to pay benefits.
The Third Circuit reversed the district court’s decision. Relying on the New Jersey Supreme Court’s decision in Lemelledo and its own prior decision in Weiss, the Third Circuit found that the plaintiff had alleged more than a mere failure to pay insurance benefits. Instead the court found, the plaintiff had alleged “fraud in connection with the subsequent performance of a consumer contract, a situation explicitly covered by the language of the CFA, sanctioned by this Court in Weiss, and supported by the New Jersey Supreme Court’s broad statements regarding the application of the CFA.”
As noted, whether policyholders will be able to assert additional claims under a state’s consumer protection law will largely depend on which state’s law governs. Insurers and insureds are thus well advised to carefully examine their state’s laws, as well as any choice-of-law provisions in their policies, and conduct an analysis of their specific needs and the risks to which they may be exposed.
 The authors are mindful that the term “consumer protection laws” can encompass a variety of laws covering everything from unfair competition to consumer fraud. This article does not attempt to discuss the various forms of consumer protection laws; rather, it provides a broad overview for practitioners litigating coverage actions.
 Carolyn L. Carter, Nat’l Consumer Law Ctr., Consumer Protection in the States: A 50-State Report on Unfair and Deceptive Acts and Practices Statutes 15 (Feb. 2009).
 Ne. Ga. Cancer Care, LLC v. Blue Cross & Blue Shield of Ga., Inc., 676 S.E.2d 428, 434 (Ga. 2009) (“we construe . . . the UDTPA to mean that insurance transactions are among those types of transactions which are exempt from the UDTPA”).
 See generally “Examining the Applicability of the Vermont Consumer Fraud Act to the Insurance Industry,” Vt. B. J., Winter 2011, at 28, 29; Britton v. Farmers Ins. Grp. (Truck Ins. Exch.), 721 P.2d 303, 324 (Mont. 1986) (“We therefore hold that the provisions of the Unfair Trade Practices and Consumer Protection Act, as relied on by Britton may not be applied with respect to insurance company practices[.]”).
 See Parkhill v. Minn. Mut. Life Ins. Co., 995 F.Supp. 983, 997–98 (D. Minn. 1998) (holding that insurance is “merchandise” under the MDTPA).
 Zhang v. Superior Court, 304 P.3d 163 (Cal. 2013). But see Fairbanks v. Superior Court, 46 Cal. 4th 56, 65 (2009) (holding that life insurance does not qualify as a “good” or “service” under the California Consumer Legal Remedies Act).
 See Lemelledo, 696 A.2d at 551. Those lower court decisions were Nikiper v. Motor Club of America, 557 A.2d 332 (N.J. Super. Ct. App. Div. 1989), and Pierzga v. Ohio Casualty Group of Insurance Cos., 504 A.2d 1200 (N.J. Super. Ct. App. Div. 1986).
 State consumer protection laws will often contain provisions that permit an award of attorney fees and treble damages. See, e.g., N.J. Stat. Ann. § 56:8-19. These laws thus present another tool for insureds seeking to gain coverage.
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