Bank of the West v. Superior Court

Decision Date30 July 1992
Docket NumberNo. S019556,S019556
Citation10 Cal.Rptr.2d 538,2 Cal.4th 1254,833 P.2d 545
CourtCalifornia Supreme Court
Parties, 833 P.2d 545, 61 USLW 2102 BANK OF THE WEST, Petitioner v. THE SUPERIOR COURT of CONTRA Costa COUNTY, Respondent. INDUSTRIAL INDEMNITY COMPANY, et al., Real Parties in Interest.

[2 Cal.4th 1257] [833 P.2d 546] Severson & Werson, Jan T. Chilton and William L. Stern, San Francisco, for petitioner.

[833 P.2d 547] Martha Churchill, Royal Oak, Mich., Thomas & Porrazzo, Michael H. Porrazzo, San Jose, Anderson, Kill, Olick & Oshinsky, Eugene R. Anderson, William G. Passannante, New York City, Cotchett, Illston & Pitre, Joseph W. Cotchett, Susan Illston, Marie Seth Weiner, Burlingame, Morgan, Ruby, Schofield, Franich & Fredkin, Allen J. Ruby, Lexie D. Schroeder, San Jose, Thomas T. Anderson, Indio, Sherry N. Bass, Newport Beach, David A. Beck, Morrison & Hecker, P. John Owen, Phoenix, Ariz., Ann S. DuRoss, Richard J. Osterman, Jr., Joan E. Smiley, Washington, D.C., Nossaman, Guthner, Knox & Elliott, Kurt W. Melchior, Jared E. Peterson, Alison S. Hightower, Patricia Lee Connors, San Francisco, Wilson, Sonsini, Goodrich & Rosati, Denise M. Amantea, Richard F. Cauley, Palo Alto, Howard, Rice, Nemerovski, Canady, Robertson & Falk, Denis T. Rice, Helane L. Morrison, Kathryn M. Nelson, H. Joseph Escher, III, San Francisco, Alan T. Foster, Mountain View, as amici curiae on behalf of petitioner.

No appearance for respondent.

Lawrence O. Monin, Michael A. Mathews, Andre Hassid, San Francisco, Crosby, Heafy, Roach & May, Raoul D. Kennedy, Peter W. Davis, Richard de Saint Phalle, Dolores A. Dalton, Oakland, Paul H. Breslin, Walnut Creek, Frank Gilbert, Jesse I. Santana, James C. Martin and James H. Kallianis, Jr., Oakland, for real parties in interest.

Baker, Hostetler, McCutchen & Black, Philip K. Verleger, Donna R. Black, Martin J. McTigue, Jr., Los Angeles, Proskauer, Rose, Goetz & Mendelsohn, Phyllis E. Andelin, San Francisco, McCormick, Barstow, Sheppard, Wayte & Carruth, James P. Wagoner, James H. Wilkins, Robert K. Landen, Fresno, Morton, Lulofs & Allen, Michael Charles Comyns, Oakland, Horvitz & Levy, Ellis J. Horvitz, Peter Abrahams, Lisa Perrochet, Encino, Alan I. Widiss, Iowa City, Iowa, Cummins & White, James D. Otto, Kent M. Bridwell, Los Angeles, Haight, Brown & Bonesteel, Roy G. Weatherup, Lawrence A. [2 Cal.4th 1258] Tabb, Santa Monica, Greines, Martin, Stein & Richland, Irving H. Greines and Feris M. Greenberger, Beverly Hills, as amici curiae on behalf of real parties in interest.

PANELLI, Associate Justice.

Comprehensive general liability (CGL) insurance policies generally include coverage for "advertising injury." This coverage, as ordinarily written, applies to "damages" the insured must pay for injury arising out of "unfair competition" occurring in the course of the insured's "advertising activities." We granted review to consider questions regarding the scope of coverage afforded by this standard policy language. As we shall explain, we hold that the CGL policy does not cover claims for advertising injury that arose under the Unfair Business Practices Act. (Bus. & Prof.Code, § 17200 et seq. 1 )


Plaintiffs Industrial Indemnity Company and Industrial Insurance Company of Hawaii, Ltd. (collectively Industrial) have sued for a declaratory judgment determining their obligations under a CGL policy issued to Central Bank. Defendant Bank of the West is Central Bank's successor in interest. (This opinion refers to both entities collectively as the Bank.) Judgment has not been entered. However, by granting Industrial's motion for summary adjudication of issues the trial court has decided that language in the Bank's CGL policy relating to "advertising injury" does not give rise to coverage for the particular claims involved in this case. It is this order that we are reviewing. We are not called upon to decide any other coverage issues or any issues involving the duty to defend.

The coverage dispute arises out of the Bank's settlement of a consumer class action entitled Fallat v. Central Bank (S.F.Super.Ct., No. 865597). To summarize the relevant facts, the Bank developed a program to finance automobile insurance premiums

[833 P.2d 548] for consumers who preferred to pay in installments. The Bank did not advertise the so-called "Coast Program" directly to consumers. Instead, the Bank informed insurance agents that it was willing to lend money to finance premiums and that it would pay fees to agents who referred such business to the Bank. Nor did consumers apply directly to the Bank for loans. Instead, when a consumer expressed a desire to extend payment the insurance agent would ask for a down payment of 20 to 30 percent, obtain the consumer's power of attorney, and apply for a loan [2 Cal.4th 1259] in the consumer's name. Sometime later, the consumer would receive notice of the loan's acceptance by the Bank and disclosure of its terms. Until receiving such notice, many consumers were unaware both of the Coast Program's existence and that loans had in fact been made. Many were also unaware of the terms of the loans, which included interest at rates of over 126 percent, as well as substantial fees and penalties. Some consumers, upon receiving notification, sought to cancel their loans by paying the balance due. However, the Bank did not permit cancellation

In their complaint against the Bank, the Fallat plaintiffs alleged violations of the federal Truth-in-Lending Act (15 U.S.C. § 1601 et seq.), the Unruh Act (Civ.Code, § 1801 et seq.), the Unfair Business Practices Act (§ 17200 et seq.), and a state statute that prohibits excessive liquidated damages (Civ.Code, § 1671). The Fallat plaintiffs also alleged that the loans were unconscionable and that the Bank had breached the covenant of good faith and fair dealing.

The case was removed to federal court, which remanded all but the federal claims. (Fallat v. Central Bank (N.D.Cal., No. C-86-6521 RFP).) On the Fallat plaintiffs' motion for partial summary judgment, the federal court held that the Bank had violated the Truth-in-Lending Act by miscalculating and misdisclosing the interest rate and by failing to give disclosures required by federal law before the loans were consummated. (See 15 U.S.C. § 1638.) In its order, the court explained that the Bank's miscalculation of interest "resulted in an understatement of an already astronomical APR by over 20 percentage points." The court also found that the additional "error" of untimely disclosure "was built into the incentives given to insurance agents responsible for recommending the Coast Program to their clients." As the court explained, "[t]o the extent insurance agents' compensation is tied to their level of policy sales, such agents have a strong incentive to 'sell' a loan program like the Coast Program without making the required [Truth-in-Lending Act] disclosures that could jeopardize a potential sale."

Several months after the federal court ruled, the state court in Fallat addressed the parties' motions for summary adjudication of issues related to the state law claims. The court's order disposing of these motions eliminated the plaintiffs' claims under the Unruh Act (Civ.Code, § 1801 et seq.) and the covenant of good faith and fair dealing but allowed the remaining claims to proceed.

The federal and state court rulings considerably narrowed the scope of the dispute between the Fallat plaintiffs and the Bank. Although the plaintiffs continued to seek injunctive and declaratory relief, the only remaining [2 Cal.4th 1260] claims under which plaintiffs sought to recover money were their claims under the Unfair Business Practices Act (§ 17203), the statute prohibiting excessive liquidated damages (Civ.Code, § 1671), and the Truth-in-Lending Act (15 U.S.C. § 1640). In their complaint, the Fallat plaintiffs incorporated each of their claims into their request for relief under the Unfair Business Practices Act. Indeed, the Fallat plaintiffs' only demand for money, other than for punitive damages and attorneys' fees, was for "restitution ... of any and all amounts collected by defendants through their unlawful and unfair business practices...." (Cf. § 17203 [authorizing such relief].)

It was in this posture that the Fallat case settled. Pursuant to a class-wide settlement agreement, the Bank paid the plaintiffs $500,000 and attorneys fees, and agreed to make several changes in the operation

[833 P.2d 549] of its Coast Program. The settlement agreement did not characterize the $500,000 payment as attributable to any particular claim. However, in the parties' joint motion for approval of the settlement the Fallat plaintiffs' counsel expressed the opinion that $500,000 represented the amount that could be recovered either as the return of unlawful liquidated damages (Civ.Code, § 1671) or as the maximum statutory recovery under the Truth-in-Lending Act (15 U.S.C. § 1640(a)(2)(B))

At some point before the Fallat parties agreed to settle, the Bank began to assert that its CGL policy covered the claims in that action. Industrial responded by filing a complaint for declaratory judgment, asking the court to declare that the policy did not provide coverage. The Bank cross-complained for breach of the insurance contract.

The ensuing litigation focused on a single theory of coverage: The Bank sought to prove that the amounts it had paid to the Fallat plaintiffs were "damages" for "unfair competition" that occurred in the course of the Bank's "advertising activities." To support its argument, the Bank looked to the statutory definition of "unfair competition" contained in the Unfair Business Practices Act. (§ 17200.) 2 Industrial, in contrast, sought to prove that the policy referred to the common law tort of unfair competition rather than to conduct prohibited by the act. Industrial also sought to prove that insurance was not available for restitutionary relief under the...

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