Ninth Circuit Forbids Insurer from Paying a Retailer’s Legal Fees, Could Your Dealership Be Next?

Arent Fox
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Arent Fox

The Ninth Circuit ruled on Thursday that a California retailer must pay its own legal fees in a state consumer protection lawsuit brought against it by the California Attorney General, despite its insurer’s agreement to cover defense fees for false advertising or unfair competition claims in the insured’s policy. The retailer was also forced to pay its insurer Two Million Dollars as reimbursement for fees already expended by the insurer as the case was pending.
 

The three-judge panel in Adir International, LLC v. Starr Indemnity and Liability Co. (9th Cir. Apr. 15, 2021), based their decision on California Insurance Code § 533.5, which provides that insurance policies may not cover any fines or fees arising from criminal actions or lawsuits brought by state or local authorities pursuant to California’s False Advertising Law and Unfair Competition Law. The law also prohibits insurers from defending or indemnifying an insured against such claims, even where the insurer’s duty to defend “is expressly stated in the policy.” The retailer, Adir International, argued that this prohibition strips it of due process and contract rights since it should be entitled to retain the legal counsel of its choosing (including the insurer’s counsel). But the Court found that California’s insurance code nullified the insurer’s duty to defend, which did not violate the Due Process Clause since parties have no constitutional right to civil counsel and courts have long recognized only limited civil due process rights, such as in “extreme scenarios” where the government substantially interferes with a party’s ability to communicate with its attorney or prevents a party from obtaining any civil counsel. Since the retailer’s “limited right to retain counsel” did not include a right to fund and retain counsel through its insurance policy, the Court forbid the insurer from paying Adir International’s legal fees.

Although this case is an alarming example of a court voiding a commercial insurance policy’s agreed-upon terms, California dealerships, and other retailers should note that the decision’s scope is limited: California law does not prohibit insurers from covering civil damages and related legal expenses arising from consumer lawsuits brought under the same false advertising and unfair competition laws. The best way to avoid claims under either set of laws is to ensure that your business’ advertising and sales policies are compliant, updated regularly, and followed by employees, especially since government actions often focus on repeat violators.  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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