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 (9^th 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.”