Certain homeowners policies issued to California insureds by Farmers Group, Inc., contained the following cancellation terms: “(1) If you cancel this policy, we shall return the short rate unused share of the premium. (2) If we cancel this policy, we shall return the prorated unused share of the premium.” While indicating in this way that cancelling homeowners would receive something other than a “prorated” share, the policies did not state what the “short rate” share would be. (Spoiler alert: The short rate share was less.)
In 2010, California amended Section 481 of its Insurance Code to require that disclosure. In December 2012, in an unpublished opinion, a California Court of Appeal reversed the dismissal of a putative class action asserting that the return of short rate premiums before 2010 violated other provisions of California law.
In Streit v. Farmers Group, Inc., No. B231285 (Cal. App. 2 Dist. Dec. 20, 2012), the insured plaintiffs alleged that Farmers’s short rate practices violated several provisions of the California Insurance Code, as well as the state’s Unfair Competition Law, Business and Professions Code §§ 17200 et seq. The trial court granted Farmers’ demurrer, concluding that use of a “short rate” premium calculation was authorized by the Insurance Code.
On appeal, the Court affirmed the trial court’s holding that failing to specify the “short rate” penalty did not violate the premium disclosure requirements of Section 381(f) of the Insurance Code. However, the Court noted a distinction between the issue of whether collection of a “short penalty” is lawful and the question of whether Farmers’ alleged nondisclosure of its practice was actionable. Noting that “[t]he words in an insurance policy must be interpreted ‘according to the plain meaning which a layman would ordinarily attach to them[,]’ and not as a lawyer or an insurance expert would read them,” the court concluded that plaintiffs had stated a claim for violation of several other statutes, including laws governing “concealment” in insurance transactions and “constructive fraud.”
Those alleged violations, the court ruled, supported an action under the Unfair Competition Law. The Court also found that the plaintiffs had a viable claim for breach of the implied covenant of good faith and fair dealing, on the ground that, if the policy does not specify the method for calculating unearned premium refunds, the insurer is bound by that covenant to use an “objectively reasonable method.”