CA prohibition of insurance coverage for certain consumer protection cases is constitutional

Adir Int’l,
LLC v. Starr Indemnity & Liability Co., 994 F.3d 1032 (9th Cir.
Apr. 15, 2021)

California’s
AG sued Adir for violating state consumer protection laws based on conduct at
its retail stores that allegedly exploited its mainly low-income,
Spanish-speaking customer base. Adir asked its insurance carrier to pay its
legal defense fees. Though the insurer agreed, the AG warned that the California
Insurance Code forbade it from providing coverage in certain consumer
protection cases brought by the state. The insurer reversed itself and Adir
challenged the law’s constitutionality, arguing that the state unfairly
stripped it of insurance defense coverage based on unproven allegations in the
complaint. This, the court of appeals held, didn’t facially violate Adir’s due
process right to retain counsel. “In civil cases, courts have recognized a
denial of due process only if the government actively thwarts a party from
obtaining a lawyer or prevents it from communicating with counsel. … While it
cannot tap into its insurance coverage, Adir has managed to obtain and
communicate with counsel.”

California’s
law provides:

(a)
No policy of insurance shall provide, or be construed to provide, any coverage
or indemnity for the payment of any fine, penalty, or restitution in any
criminal action or proceeding or in any action or proceeding brought pursuant
to [the UCL or FAL] by the Attorney General … notwithstanding whether the
exclusion or exception regarding this type of coverage or indemnity is
expressly stated in the policy.

(b)
No policy of insurance shall provide, or be construed to provide, any duty to
defend … any claim in any criminal action or proceeding or in any action or
proceeding brought pursuant to [the UCL or FAL] in which the recovery of a
fine, penalty, or restitution is sought by the Attorney General …
notwithstanding whether the exclusion or exception regarding the duty to defend
this type of claim is expressly stated in the policy.

True,
“California has stacked the deck against defendants facing these lawsuits filed
by the state: Although the Attorney General has yet to prove any of the
allegations in his lawsuit, he has invoked the power of the state to deny
insurance coverage that Adir paid for to defend itself.” But that wasn’t enough
of an interference to deny due process, especially given that there was no
allegation that Adir cannot afford competent counsel absent coverage under the
policy.  For comparison, “the right to
retain counsel does not require the release of frozen assets so that a civil
defendant can hire an attorney or otherwise defend his claim.” There was no “indirect
right to fund and retain the counsel through an insurance contract.”

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