People ex rel. Gillespie v. Neu

• Decision Date: 20 April 1989
• Docket Number: No. B036751,B036751
• Citation: 209 Cal.App.3d 1066,257 Cal.Rptr. 778
• Court: California Court of Appeals Court of Appeals
• Parties: The PEOPLE ex rel. Roxani M. GILLESPIE, as the Insurance Commissioner of the State of California, Plaintiff and Respondent, v. Nicholas NEU and Michael Gershuny, Defendants and Appellants.

Page 778

257 Cal.Rptr. 778

209 Cal.App.3d 1066

The PEOPLE ex rel. Roxani M. GILLESPIE, as the Insurance Commissioner of the State of California, Plaintiff and Respondent, v. Nicholas NEU and Michael Gershuny, Defendants and Appellants.

No. B036751.

Court of Appeal, Second District, Division 4, California.

April 20, 1989.

Miller & Daar & Newman, and David Daar, Los Angeles, for defendants and appellants.

John K. Van de Kamp, Atty. Gen., Edmond B. Mamer, Supervising Deputy Atty. Gen., and Richard W. Bakke, Deputy Atty. Gen., for plaintiff and respondent.

GOERTZEN, Associate Justice.

Plaintiff/respondent the People of the State of California, acting by and through the Insurance Commissioner (Commissioner) petitioned the superior court for a preliminary injunction, preventing defendants/appellants Nicholas Neu and Michael Gershuny from violating Insurance Code sections 700 (transacting insurance business without a certificate of authority) and 703 (acting for a nonadmitted insurer.) ¹ The superior court granted the preliminary injunction; and appellants Neu and Gershuny appeal, asserting that the court abused its discretion because there was no evidence of a present or threatened violation of the pertinent Insurance Code sections; and the preliminary injunction prohibits appellants from engaging in a lawful business, not regulated by the Commissioner.

FACTS

Automobile Maintenance Contracts, Inc., (AMC) is a Delaware corporation with its principal place of business in the City of Inglewood. Appellant Neu was a vice-president of AMC, at least until about March 1987; appellant Gershuny also was a vice-president and operational manager of AMC.

On or about March 1, 1986, AMC began selling auto repair contracts. As of March, 1987, AMC had sold approximately 8000 of such contracts in California. The documents which comprised this contract included an Application, a Prepaid Automobile Service Agreement and Membership Enrollment Plan, Membership Enrollment Guidelines, a rating work sheet, a brochure entitled "If You Have An Accident And If Towing Is Required," a form for inventory of a car's condition and equipment, and an undated letter addressed "Dear Broker."

The Application requested operator and vehicle information. It included, among other things, a requirement for burglar alarms on specified vehicles; a request that the applicant list accidents or violations during the previous three-year period, and the names, dates of birth, marital status, years driving and drivers licenses of all licensed drivers of the vehicle; a provision voiding the contract upon suspension or revocation of driver's license or vehicle registration; and a list of the service charge choices, ranging from $250 to $1000, and payment terms.

The AMC Agreement provided that the purchaser pay a membership fee/prepayment to AMC. Graduated payment plans were offered, and the amount of the membership fee was determined, in part, by whether the driver was under or over the age of 25. AMC agreed to repair the purchaser's car at facilities it owned or with which it had contracted. Such repair was limited to body damage, and mechanical and electrical parts. Damage must have resulted from collision, fire, vandalism, malicious mischief or theft. If repair costs exceeded the service charge (a deductible) and prepayment, AMC paid the additional costs using "Membership and prepayment fees, accrued in any three year period" and subrogation. If these two sources were inadequate, the payment of the additional cost was made to AMC by the insurance company "who insure[d] that risk." The Agreement further provided that "All total loss coverage from collision, fire or theft, is provided for by the insurance company who insures AMC for that contingency." The Agreement was cancelable, with refunds on pro rata and short rate basis.

AMC sold these contracts through regular insurance agents, who were signed up by AMC marketing representatives. Before enrolling a member, the insurance agent was required to complete a premembership photo inspection form which described in detail the present state of the vehicle.

AMC claimed its exclusive fire, theft, and collision protection was "the best insurance alternative" and promised, among other things, that total losses were fully insured and all service contracts were insured for performance by an international insurance company. ²

The contractual liability policy used by AMC in its operation is a comprehensive/physical/damage and/or a stop loss contractual liability policy which names AMC "and its members." Between May 1, 1986 and December 31, 1986, AMC contracted with Lloyd's U.S. of Dallas, Texas, nonadmitted as an insurer in the State of California; from November 1, 1986 onwards, AMC contracted with First National Life & Casualty Assurance Company Ltd. of Barbados, West Indies, nonadmitted as an insurer in the State of California.

AMC is not in the business of selling or leasing automobiles, and its contracts are not incidental to a business of selling or leasing automobiles. AMC has received no certificate of authority from the Commissioner to transact automobile insurance business in California. AMC provided lending institutions with membership certificates as evidence of insurance for a borrower/member. ³

The Albert E. Jaeger Insurance Agency of Hayward, California, sent an AMC contract and schedule of rates to the Department of Insurance. In response to the Jaeger Agency inquiry, on December 31, 1986, the Department's senior counsel, John M. Fogg, opined that the AMC contracts were service contracts. However, by sworn declaration, Mr. Fogg later explained that after offering this opinion, he learned that AMC was giving loss payee endorsements to lenders, the AMC contracts were being used as if they were insurance contracts, and AMC was not itself repairing cars but having body shops perform this work. He concluded that, "Giving ... loss payee endorsements to lenders has nothing to do with a service function and everything to do with an insurance function."

Richard J. Roth, Jr., the Assistant Commissioner and Chief Property/Casualty Actuary for the California Department of Insurance, also submitted a sworn declaration. He related that he had met with the manager of AMC in June, 1987. After listing the characteristics of the AMC contract, he opined that it was a form of insurance. ⁴

After leaving the AMC Southern California operation, appellants moved to northern California and maintained an office in Hayward. The following automobile repair service companies operated out of this same Hayward office: (1) American Fire, Theft & Collision Managers, Inc., a California corporation, listing appellant Neu as the chief executive officer, secretary, chief financial officer and only director. (2) American Maintenance Contracts, Inc. (AMC-2), a California corporation (distinct from AMC in southern California which is a Delaware corporation). Appellant Neu is a director of AMC-2. (3) National Auto Plan (National). Jeffrey Jacobs is specified as the incorporator of American Fire, AMC-2, and National. Appellant Gershuny admits to being an officer, shareholder and director of National. A George Neu is listed on National's Statement of Domestic Stock Corporation, and the listed purpose is "automobile service contracts." (4) American Pacific Autoplan (APA) is a dba of American Fire.

The contracts offered in northern California by AMC-2 and by APA were the same, or virtually the same, as those offered by AMC in southern California. The application forms, mandatory photo inspections forms, the membership certificate, the certificate of insurance, and the lienholder's certificate of insurance were all identical. The membership certificate includes the following statement: "Claims will be paid according to actual policy provisions. The policy is on file with the policy holder-insured, and may be viewed during regular business hours. [p] Automobile Maintenance Contracts, Inc. certifies that it has purchased an Insurance Policy from an International Insurance Company. The following is a summary of coverages: A. Contractual Liability Insurance. B. Total Loss Insurance. C. Excess Cost of Repairs Insurance. D. Fire & Theft Insurance."

As was AMC's practice in southern California, AMC-2 and APA in northern California recruited insurance agents to sell their plan and sent certificates of insurance to various lienholders as proof of coverage for a member/borrower.

PROCEDURAL HISTORY

The Commissioner filed the complaint for injunction on March 22, 1988. Pursuant to Insurance Code section 12928.6, ⁵ the Commissioner sought to enjoin appellants from violating section 700 (transacting insurance business without first being admitted and obtaining a certificate of authority from the Commissioner) and section 703 (acting as an agent for a nonadmitted insurer, advertising a nonadmitted insurer, and aiding a nonadmitted insurer to transact insurance business in this State.)

Seeking immediate relief, the Commissioner filed a motion for a preliminary injunction on April 8, 1988. AMC and defendant Brown stipulated to the preliminary injunction. As against appellants Neu and Gershuny, the hearing on this motion was held on May 18, 1988. In opposition, appellants argued that the violating contracts were used by AMC after they each had departed the company, and the expert opinion determining that the AMC contracts were insurance was based upon analysis of these newer contracts. Pointing to Mr. Fogg's first opinion that the AMC contracts, sold while they were with AMC, were not insurance, they asserted that the...