Opinion
SILLS, P. J.
Pedro Medina brought this unfair competition law or UCL (Bus. & Prof. Code, § 17200 et seq.) action based on the fact he had purchased a vehicle service contract, which is allegedly an insurance contract,
from a company not licensed to sell insurance in California. (See Ins. Code, § 700 [requiring licenses of insurers].) On a demurrer to the second amended complaint, the trial court reasoned that Medina did not meet the requirement set forth in Business and Professions Code section 17204, as amended by Proposition 64, that a UCL plaintiff have suffered “injury in fact and has lost money or property as a result” of the unfair competition.
The irony is that Medina’s class action is predicated on the idea that he bought an absolutely void contract and cannot enforce it (hence he is out the money he paid for the contract, having received nothing for it).
That raises the problem of just exactly what are the consequences to a consumer who buys an insurance contract from an unlicensed, out-of-state insurer. Is the consumer really without insurance? We are unaware of any California authority addressing the question, hence we publish our answer to it in this opinion. As readers might readily intuit, California law most certainly does not leave consumers in the lurch when they inadvertently purchase an insurance policy from an unlicensed insurer.
I
Other kinds of contracts might be different, of course, and in appropriate cases an “illegal” contract might not be enforceable
at all,
by either party.
(E.g.,
Berka v. Woodward
(1899) 125 Cal. 119 [57 P. 777] [self-dealing by city council member who sold lumber and materials to city].)
But when it comes to
insurance
contracts, there can be no doubt that the text of the licensing statute, and the policy behind that statute, require that a consumer who innocently purchased a policy from a company unlicensed in California may still enforce that insurance contract.
(Lewis & Queen
v.
N. M. Ball Sons
(1957) 48 Cal.2d 141, 151 [308 P.2d 713] [whether illegal contract is void or voidable depends on “how the aims of policy can best be achieved”].)
A
We begin with the text of the licensing statute itself. Insurance Code section 700 requires every person transacting any class of insurance business in California to have a license from the state Insurance Commissioner.
(See also Croskey, et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2007) f 1:125, p. 1-30 (rev. # 1, 2007) [“Insurance companies are required to obtain licenses and certificates from the Department of Insurance in order to transact insurance business in California.”].)
Willful violation of the statute can be punished either as a felony or a misdemeanor (commonly called a “wobbler”)
as well as by a monetary fine of up to $100,000, or both by fine and imprisonment. (See Ins. Code, § 700, subd. (b) [“. . . a public offense punishable by imprisonment in the state prison, or in a county jail not exceeding one year, or by fine not exceeding one hundred thousand dollars ($100,000), or by both that fine and imprisonment . . . .”].) Also, the violator can be “enjoined by a court of competent jurisdiction on petition of the [Insurance] commissioner.”
{Ibid.)
Conspicuously missing, however, from the listed penalties and remedies in the statute is the automatic voiding of any insurance contracts already issued by the unlicensed insurer. As a general rule, as our high court said in
City Lincoln-Mercury Co. v. Lindsey
(1959) 52 Cal.2d 267, 276 [339 P.2d 851], “The courts will not impose penalties for noncompliance with statutory provisions in addition to those that are provided expressly or by necessary implication.” (Reiterated in
People ex rel. Van de Kamp
v.
American Art Enterprises, Inc.
(1983) 33 Cal.3d 328, 334 [188 Cal.Rptr. 740, 656 P.2d 1170] [“However, it is well settled that ‘ “[c]ourts will not impose penalties for noncompliance with statutory provisions in addition to those that are provided expressly or by necessary implication.” ’ ”].) The rule applies with much greater force in cases where the “penalty” of totally voiding the contract would be felt most by an
innocent
party, such as a consumer who contracted with an out-of-state and unlicensed insurer not knowing that the company possessed no California license.
B
Second, and in that regard, the courts have recognized that there are circumstances when the innocence of a party to an illegal contract must be taken into account in what is called the “in pari delicto” exception. As
McIntosh
v.
Mills
(2004) 121 Cal.App.4th 333, 347 [17 Cal.Rptr.3d 66] recently observed: “Because of the harsh results that might be visited on innocent parties to a contract when their agreement is voided for illegality, courts have fashioned exceptions [to a rule of invalidity]. . . . HQ • • • ffi Perhaps the most common exception to the rule of invalidity ... is the in pari delicto exception. At its most fundamental level, the exception allows an illegal contract to be enforced ‘so long as
the party seeking its enforcement is less morally blameworthy
than the party against whom the contract is being asserted, and there is no overriding public interest to be served by voiding the agreement.’ ” (Italics added.) And obviously an innocent consumer who buys an insurance contract from an unlicensed insurance company is far “less morally blameworthy” than the company that does not disclose its unlicensed status prior to contracting.
C
And then there is common sense, given that the policy of the law requiring insurers to be licensed is obviously to protect consumers,
not
hurt them. In that regard, we observe that insurance contracts are legally unique: The reason that insurance contracts may be enforced by tort (bad faith) as well as ordinary contract damages is that, unlike all other contracts, a policyholder who is wrongfully denied a claim cannot, by definition, obtain a substitute in the marketplace. Once it is known that the insurable loss has occurred, the insured will not be able to obtain insurance for that loss.
(Cates Construction, Inc. v. Talbot Partners
(1999) 21 Cal.4th 28, 44 [86 Cal.Rptr.2d 855, 980 P.2d 407
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Opinion
SILLS, P. J.
Pedro Medina brought this unfair competition law or UCL (Bus. & Prof. Code, § 17200 et seq.) action based on the fact he had purchased a vehicle service contract, which is allegedly an insurance contract,
from a company not licensed to sell insurance in California. (See Ins. Code, § 700 [requiring licenses of insurers].) On a demurrer to the second amended complaint, the trial court reasoned that Medina did not meet the requirement set forth in Business and Professions Code section 17204, as amended by Proposition 64, that a UCL plaintiff have suffered “injury in fact and has lost money or property as a result” of the unfair competition.
The irony is that Medina’s class action is predicated on the idea that he bought an absolutely void contract and cannot enforce it (hence he is out the money he paid for the contract, having received nothing for it).
That raises the problem of just exactly what are the consequences to a consumer who buys an insurance contract from an unlicensed, out-of-state insurer. Is the consumer really without insurance? We are unaware of any California authority addressing the question, hence we publish our answer to it in this opinion. As readers might readily intuit, California law most certainly does not leave consumers in the lurch when they inadvertently purchase an insurance policy from an unlicensed insurer.
I
Other kinds of contracts might be different, of course, and in appropriate cases an “illegal” contract might not be enforceable
at all,
by either party.
(E.g.,
Berka v. Woodward
(1899) 125 Cal. 119 [57 P. 777] [self-dealing by city council member who sold lumber and materials to city].)
But when it comes to
insurance
contracts, there can be no doubt that the text of the licensing statute, and the policy behind that statute, require that a consumer who innocently purchased a policy from a company unlicensed in California may still enforce that insurance contract.
(Lewis & Queen
v.
N. M. Ball Sons
(1957) 48 Cal.2d 141, 151 [308 P.2d 713] [whether illegal contract is void or voidable depends on “how the aims of policy can best be achieved”].)
A
We begin with the text of the licensing statute itself. Insurance Code section 700 requires every person transacting any class of insurance business in California to have a license from the state Insurance Commissioner.
(See also Croskey, et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2007) f 1:125, p. 1-30 (rev. # 1, 2007) [“Insurance companies are required to obtain licenses and certificates from the Department of Insurance in order to transact insurance business in California.”].)
Willful violation of the statute can be punished either as a felony or a misdemeanor (commonly called a “wobbler”)
as well as by a monetary fine of up to $100,000, or both by fine and imprisonment. (See Ins. Code, § 700, subd. (b) [“. . . a public offense punishable by imprisonment in the state prison, or in a county jail not exceeding one year, or by fine not exceeding one hundred thousand dollars ($100,000), or by both that fine and imprisonment . . . .”].) Also, the violator can be “enjoined by a court of competent jurisdiction on petition of the [Insurance] commissioner.”
{Ibid.)
Conspicuously missing, however, from the listed penalties and remedies in the statute is the automatic voiding of any insurance contracts already issued by the unlicensed insurer. As a general rule, as our high court said in
City Lincoln-Mercury Co. v. Lindsey
(1959) 52 Cal.2d 267, 276 [339 P.2d 851], “The courts will not impose penalties for noncompliance with statutory provisions in addition to those that are provided expressly or by necessary implication.” (Reiterated in
People ex rel. Van de Kamp
v.
American Art Enterprises, Inc.
(1983) 33 Cal.3d 328, 334 [188 Cal.Rptr. 740, 656 P.2d 1170] [“However, it is well settled that ‘ “[c]ourts will not impose penalties for noncompliance with statutory provisions in addition to those that are provided expressly or by necessary implication.” ’ ”].) The rule applies with much greater force in cases where the “penalty” of totally voiding the contract would be felt most by an
innocent
party, such as a consumer who contracted with an out-of-state and unlicensed insurer not knowing that the company possessed no California license.
B
Second, and in that regard, the courts have recognized that there are circumstances when the innocence of a party to an illegal contract must be taken into account in what is called the “in pari delicto” exception. As
McIntosh
v.
Mills
(2004) 121 Cal.App.4th 333, 347 [17 Cal.Rptr.3d 66] recently observed: “Because of the harsh results that might be visited on innocent parties to a contract when their agreement is voided for illegality, courts have fashioned exceptions [to a rule of invalidity]. . . . HQ • • • ffi Perhaps the most common exception to the rule of invalidity ... is the in pari delicto exception. At its most fundamental level, the exception allows an illegal contract to be enforced ‘so long as
the party seeking its enforcement is less morally blameworthy
than the party against whom the contract is being asserted, and there is no overriding public interest to be served by voiding the agreement.’ ” (Italics added.) And obviously an innocent consumer who buys an insurance contract from an unlicensed insurance company is far “less morally blameworthy” than the company that does not disclose its unlicensed status prior to contracting.
C
And then there is common sense, given that the policy of the law requiring insurers to be licensed is obviously to protect consumers,
not
hurt them. In that regard, we observe that insurance contracts are legally unique: The reason that insurance contracts may be enforced by tort (bad faith) as well as ordinary contract damages is that, unlike all other contracts, a policyholder who is wrongfully denied a claim cannot, by definition, obtain a substitute in the marketplace. Once it is known that the insurable loss has occurred, the insured will not be able to obtain insurance for that loss.
(Cates Construction, Inc. v. Talbot Partners
(1999) 21 Cal.4th 28, 44 [86 Cal.Rptr.2d 855, 980 P.2d 407] [“Unlike other parties in contract who typically may seek recourse in the marketplace in the event of a breach, an insured will not be able to find another insurance company willing to pay for a loss already incurred.”].) If the contract were void, then the consumer would bear the entirety of a loss he or she would otherwise have avoided by the payment of a relatively small premium.
Indeed, holding an insurance contract
void
because the insurer was not licensed is about the worst possible remedy for the illegality of the insurer’s unlicensed status. To do so would be incredibly harmful to consumers who unknowingly purchased insurance from unlicensed insurers, and who, all of a sudden, would find themselves stuck with a loss which they thought they validly insured against. (See
McIntosh
v.
Mills, supra,
121 Cal.App.4th at p. 347 [noting “the harsh results that might be visited on innocent parties to a contract when their agreement is voided for illegality”].)
The appellant in this case cites three general Civil Code provisions, sections 1550, 1598, 1667, to argue that an insurance contract made with an unlicensed insurer is flat out void. Of the three, however, only 1598 suggests such a possibility (the other two are essentially definitional).
Civil Code section 1598 provides that where a “contract has but a single object, and such object is unlawful, whether in whole or in part ... the entire contract is void.”
However, as shown in, e.g.,
Marathon Entertainment, Inc. v. Blasi
(2008) 42 Cal.4th 974, 991 [70 Cal.Rptr.3d 727, 174 P.3d 741], Civil Code section 1598 must be read in conjunction with Civil Code section 1599,
which embodies a “companion” principle of severability. Said the
Marathon Entertainment
court: “On the other hand, the text of Civil Code section 1599 is clear. Adopted in 1872, it codifies the common law doctrine of severability of contracts .... By its terms, it applies even—indeed, only—when the parties have contracted, in part, for something illegal. Notwithstanding any such illegality, it preserves and enforces any lawful portion of a parties’ contract that
feasibly
may be severed.” (Italics added.) Civil Code section 1599 provides: “Where a contract has several distinct objects, of which one at least is lawful, and one at least is unlawful, in whole or in part, the contract is void as to the latter and valid as to the rest.”
In the case of a contract issued by an unlicensed insurer, where the
only
taint of illegality is the unlicensed status of the insurer itself, and the Legislature has already provided a scheme of penalties against that insurer, the contract is readily severable as to any claims that the innocent consumer might present.
The “object” of the contract is to provide a consumer with insurance; the consumer never entered into it with the idea of rewarding a company for its unlicensed status. Indeed, as we have said, in the insurance context,
not
to enforce the contract would be to
reward
the violation of law.
II
Part I of this opinion is all by way of saying that the plaintiff and appellant here, Pedro Medina, has no reason to fear that the insurance contract he obtained from Safe-Guard Products International will not be enforceable as to any valid claims he might present to it. It will be enforceable, despite Safe-Guard’s unlicensed status.
But the case is a little more complicated than that, because it is
Medina
who, in this litigation, actually does not want the contract to be enforceable by him. He’d rather be a class action plaintiff whose case depends on the idea that the insurance contract is
not
enforceable.
Medina purchased a new 2006 BMW from Crevier Motors and also bought a tire and wheel service contract from Safe-Guard Products International as part of the deal. Safe-Guard has never denied any claim Medina brought to it under the tire and wheel service contract, or given Medina inferior service or products as a result of the contract. However, vehicle service contracts are governed by a series of statutes in the Insurance Code (Ins. Code, § 12800 et seq.), one of which is that providers of vehicle service contracts must be licensed by the state Insurance Commissioner. (§ 12815, subd. (a).) At the time Medina bought his contract, Safe-Guard was not so licensed. Also, Safe-Guard had not, as also required by statute, filed with the Insurance Commissioner specimen contracts (§ 12820, subd. (a)) or an insurance policy backing up 100 percent of its vehicle service contract obligations (§ 12830, subd. (a)). In short, Safe-Guard was not a licensed insurer at the time Medina bought the tire and wheel service (insurance) contract.
The Insurance Commissioner has already proceeded against Safe-Guard for its sin of omission. In 2006 the commissioner’s office sought a cease and
desist , order against Safe-Guard (see Ins. Code, § 12921.8 [authority of commissioner to proceed against persons who needed a license but have acted without it]).
The result was that in 2007 Safe-Guard paid a penalty of $200,000 to the state Insurance Commissioner for its violations.
It also paid $5,000 to the Department of Insurance. to reimburse it for its costs of investigation and prosecution.
Medina soon brought this action. As noted already, though, the trial court reasoned that'Medina had not suffered “injury in fact and has lost money or property as a result” of the unfair competition. Medina has timely appealed from the ensuing judgment of dismissal, asserting that the fact of his payment for the contract,
by itself,
is sufficient to show “injury in fact.”
Ill
In
Hall
v.
Time Inc.
(2008) 158 Cal.App.4th 847 [70 Cal.Rptr.3d 466], this court had recent occasion to explore the “injury in fact and has lost money or property as a result of the unfair competition” language from Business and Professions Code section 17204. In
Hall,
a customer agreed to try a book from a publisher for a “free trial period,” and eventually paid for the book after the matter was turned over to a collections agency (and long after the free trial period was over). The customer eventually brought a UCL action, alleging that the publisher used misleading and deceitful tactics to fool customers into- thinking that, despite the so-called “free” trial period, they were automatically under the obligation to pay for the book. This court held that there was no injury in fact,
despite
the customer’s eventual parting with the consideration for the book ($29.51), because the customer did not allege that he didn’t want the book in the first place (he did), or that the book was unsatisfactory (it wasn’t), or that it was “worth less than what he paid for it.” (158 Cal.App.4th at p. 855.)
The same may be said here. Medina has not alleged that he didn’t want wheel and tire coverage in the first place, or that he was given unsatisfactory service or has had a claim denied, or that he paid more for the coverage than what it was worth because of the unlicensed status of Safe-Guard. He hasn’t suffered any loss
because
of Safe-Guard’s unlicensed status.
In supplemental briefing, Medina posits that
Hall
is distinguishable because it involved a defendant that, on its face, was lawfully doing business, and the alleged violation of the UCL centered on a subsequent fraudulent or unfair or unlawful conduct, while here, the very fact that Safe-Guard was doing business
at all
was
“per se”
and
“ipso facto”
unlawful. That is, Medina casts
Hall
into the category where the defendant “was engaged in a lawful economic enterprise but ran afoul of the UCL because of fraudulent or unfair business practices” it had “committed,” while here he posits that the very enterprise itself (not being licensed) is unlawful.
This attempted distinction of
Hall,
however, is not persuasive because it treats Proposition 64’s amendment of Business and Professions Code section 17204—specifically the addition of the language necessitating that the plaintiff have “suffered injury in fact and ha[ve] lost money or property as a result of the unfair competition”—as identical to the “unlawful, unfair or fraudulent business act or practice” that is actionable under section 17200. The point of the Proposition 64 amendment was to -impose
additional
requirements on plaintiffs beyond merely having suffered an “unlawful, unfair or fraudulent business act or practice,”
namely, having lost money or property' as a result of the act or practice.*
This court in
Hall
also stated, that even if there was injury in fact by virtue of payment for the book, the “as a result” language imports a
reliance or causation
element into Business and Professions Code section 17204. (See
Hall, supra,
158 Cal.App.4th at p. 856, citing.
Brown
v.
Bank of America, N.A.
(D.Mass. 2006) 457 F.Supp.2d 82, 89;
Laster v. T-Mobile USA, Inc.
(S.D.Cal. 2005) 407 F.Supp.2d 1181, 1194;
Cattie v. Wal-Mart Stores, Inc.
(S.D.Cal. 2007) 504 F.Supp.2d 939, 948.) Here, there is no allegation that Medina
relied
on Safe-Guard’s having a license as required by the vehicle service contract statutes, or that Safe-Guard’s unlicensed status
caused
him to part with the money he paid for the tire and wheel contract.
The judgment of dismissal is affirmed. Respondents are to recover their costs on appeal.
Moore, J., and Aronson, J., concurred.
On July 11, 2008, the opinion was modified to read as printed above. Appellant’s petition for review by the Supreme Court was denied September 24, 2008, S165525. Corrigan, J., did not participate therein.