HECKART v. A-1 SELF STORAGE

Amicus Curiae Brief of Dave Jones

Cal.September 12, 2017

dn the Supreme Court of the State of California SAMUEL HECKART, Plaintiff-Appellant, Case No. S232322 vs SUPREME COURT A-1 SELF STORAGE,INC.,et al., FILED Defendants and SEP J 2 2017 Respondents. Jorge Navarrete Clerk Court of Appeal, Fourth Appellate District, Division One, Deput Case No. D066831 poy San Diego County Superior Court, Case No. 37-2013-00042315-CU-BT-CTL The Honorable John S. Meyer, Judge BRIEF OF THE INSURANCE COMMISSIONER OF THE STATE OF CALIFORNIA, INVITED AMICUS CURIAE XAVIER BECERRA Attorney General of California DIANES. SHAW Senior Assistant Attorney General *MOLLY K. MOSLEY Supervising Deputy Attorney General State Bar No. 185483 1300 I Street, Suite 125 P.O. Box 944255 Sacramento, CA 94244-2550 Telephone: (916) 210-7358 Email: Molly.Mosley@doj.ca.gov Attorneys for Amicus Curiae, Dave Jones, Insurance Commissionerofthe State of California TABLE OF CONTENTS Page Issues Presented ..........:cssssssssssseccescescsssscsesseseesesensesssctssseseessesesssssstsssscnseees 6 IMtrOCUCTION.........sescssseessscceseesseccoetsseseesessacsssseeessensnsaeessaeseesessusecsessasscseeseeses 6 Legal Background: Renters’ Insurance for Self-Service Storage............... 7 Factual and Procedural Background.............csscssccsscssesssesssscesssssssssscesssscereees 9 I. Deans & Homer’s MarketingofIts “Alternative Lease Program”to the Self-Service Storage Industry............c.0000 9 Il. A-1’s Storage Rental Agreement and “Customer Goods Protection Plan”...essssssssssesesssscssecssssssesssestececees 10 Ill. Department Staff's Letters to Deans & Homer.......e.ssesses00: 11 IV. Heckart’s Lawsuit and Decisions Below ...............ccccco0ee weeee 12 AIQUMEDL.......scescececssesssesseusssscssssesessescssectsnsssssessensassesnesecceusssssseasassssssecnsares 13 I. The Principal Object Inquiry Can Assist Courts in Determining Whether the Legislature Intended that a Transaction with Insurance Attributes Be Regulated.......... 13 I. Where, as Here, a Commercial Transaction Is Clearly Subject to Regulation Under the Insurance Laws, the Principal Object Inquiry Is Inappropriate..............0.ccseeee. 15 Ill. Even If the Principal Object Inquiry Applies, Proper Analysis Establishes that the Protection Plan Is Subject to Regulation as INSurance.........stsssssssssesessseseecsecessvsceseees 18 A. The non-regulated risk-shifting provisions in Jellins and its progeny are distinguishable............... 19 1. Transportation Guarantee Co.v. Jellins (1946) 29 Cal.2d 242 oo.ceseseceesssssssssesssess 19 2. Truta v. Avis RentA Car System, Inc. (1987) 193 Cal.App.3d 802 ........eccescseseee 20 3. Automotive Funding Group, Inc.v. Garamendi (2003) 114 Cal.App.4th 846....... 20 4. Title Ins. Co. v. State Bd. ofEqualization (1992) 4 Cal.4th 715 oo.esssesssesescssessstscesene 21 TABLE OF CONTENTS (continued) Page B. Theprincipal object inquiry supports regulation Of A-1’s Protection Plan 00...ccsesssecsensessssseeseeees 23 C. This arrangement implicates the very evils the insurance code was designed to address...............0+ 26 ~ CONCIUSION........ccsssscssesseecesecescsccecesceesssensseesseoessceasessseeseesasessesseserseesssteneneses 28 3 TABLE OF AUTHORITIES Page CASES Automotive Funding Group, Inc. v. Garamendi (2003) 114 CalApp.4th 846.0...esesesesesctseestsessssessesseseesrssessenes 20, 21 California Physicians’ Service v. Garrison (1946) 28 Cal.2d 790 uo.eccsssecsssceccessessceseessesesessersresetentseesesases 14,15 Jordan v. Group Health Assn. (1939) 107 F.2d 239............. sessveassenesesesessseesenennssecuseuseueeeescenssesecacasesssesseseseneens 14 Metropolitan Life Ins. Co. v. State Bd. ofEqualization (1982) 32 Cal.3d 649oeeescccecssesssccesssesscesssssesssseseeensesseeesssessesseas 13 Sweatmanv. Department of Veterans Affairs (2001) 25 Cal.4th 62............ wesseeessecssseseeessencessanecseseseuens 13, 15, 23, 24, 25 Title Ins. Co. v. State Bd. ofEqualization (1992) 4 Cal.4th 715ussesssceecsssessecsssesssssesecssssesseesseseeseses 21, 22, 23 Transportation Guarantee Co.v. Jellins (1946) 29 Cal.2d 242...sescsescessssesessesseesecesssesssessesessssersecseeeerees passim Truta v. Avis RentA Car System, Inc. _ (1987) 193 Cal-App.3d 802.oeceeesccesetsssssesssseesseeees 14, 20, 21, 24, 26 Waynev. Staples (2006) 135 Cal.App.4th 466... ccessssessssessesessesseesnees 14, 16, 24, 26, 27 Yamaha Corp. ofAmerica v. State Bd. ofEqualization (1998) 19 Cal.4th Looeeccsssnsersessssssssssssessssssssessssesessesssesensceceseres 18 STATUTES California Business & Professions Code § 17200 .0... ese eeceeseeessesseeeseeeees sesecaceesseseeessacosssecensonsensensesessesscesssssesseenes 12 California Civil Code of Procedure § 1750 oo. ecssescessessessscssessssescsesosesesesessoessesssseeesesssassasensarsseessesesssssssasene 12 TABLE OF AUTHORITIES (continued) Page California Insurance Code § 22 ....csesssssscssssncnsnsnsseecccsssseecessecesccescenseuscscsceessesssesscssssesssesessaecers 6, 13, 22 § 700, SubdS. (2)-(D)........eecssscsscessccssescsessseceesssssereceesscsersseesenceesacsesereces 7 § 1631...eessessssssscccsecsssscressstesecsessesseesccsessasesssrsesentesessssscescesecseaseseeceeecs 7 § 1635 .....esccsssssceeccccesesscsecsssuseceeusessusccscceessccssccsececesssseccseescateveecesseseceoes 16 § 1758.7 ..cscesssecscccccssesecesseecessccacccssasscesecsssserecssssesscssesevecseesenees 7, 8, 17, 18 § 1758.72 ......cssssssssssscccccesseccessrsesecsnsncseeecesceacaccssrsssessessssseacessssssecssecesses 27 § 1758.75 weccesesscssssssssscesserscscessscssecsssssssssssecsesecsesenssecenereesssnsseasenss passim § 1758.75, SUDA. (2) ......eessecsscssctsseccessscsssessecsessesesesseseesessssseessseessess 8, 18 § 1758.75, SuDAS. (€)-(D)......cecessessessestssessteesccssescensseessesstsseeessesetenseeeaes 8 § 1758.76 .......ssssssssssscccccssscescsssreccsssssaneaccensecssescsseseesssssonsesesessessssceseaees 27 § 1861.05 .........ccccsscsiessssssnssccssnsescsssssssscesvssecsesssssecssssccssssccesesssseescesens 7,27 § 2071... .esesssessnescesccescsssccccesscessecsscceccssccssussesssssecessessesoscsesesessscacenseceacs 17 § 12921.9 uucesescccccessceeesssnsecssssscseucssscccesscssessesessecsssecesesesesssensesass 18 California Military & Veterans Code § 987.54... scessessessnssssccescesteccesceesecsesssceacessesecesssscsessecsscecsessssessessanerssaacs 15 OTHERAUTHORITIES California Code Regulations,title 10, § 2194.9...cesssssesscsscsssseescens 8 ISSUES PRESENTED The issues presented for review, as stated in the petition, are: 1. Ifaself-service storage facility’s form storage rental agreements satisfy the elements of “insurance” under California Insurance Code, section 22, and satisfy all other elements of “insurance” under Codesection 1758.75, are those storage rental agreements regulated “insurance” under the Code? 2. Is “principal object” a necessary element of every insurance contract under the Insurance Code? 3. Is an informal Departmentof Insurance staff decision regarding alleged “insurance”entitled to judicial deference where there is no evidence that the Department saw the contracts in question? INTRODUCTION “Insurance is a contract whereby one undertakes to indemnify another against loss, damage,orliability arising from a contingent or unknown event.” (Ins. Code, § 22.) But, as this Court’s longstanding precedents make clear, the Legislature did not intend every commercial transaction technically meeting this broad definition to be regulated under the Code. When,on review ofthe relevant provisions of the Insurance Code,it is unclear whether a particular transactionis “insurance” subject to regulation, courts may inquire into the transaction’s “principal object.” This inquiry | helps to ensure that all commercial transactions are not made subjectto insurance regulation merely because they contain some elementsofrisk allocation in the service ofthe overall transaction’s non-insuring, primary purpose. Where, however, the Legislature has expressly determined that a particular type of transaction is to be regulated under the Insurance Code,it is inappropriate to engagein a principal object inquiry to create a court- made exception to such regulation, as occurred here. (Ins. Code, § 1758.75, see generally id. at § 1758.7, et seq.) The clearlegislative intent should control. | But even if the Court engagesin a principal object inquiry, that analysis does not allow defendants and respondents in this case to escape regulation. The principal object of the storage facility’s “protection plan”is to provide insurance. The storage facility has created an additional product—aninsurance product—tosell to the facility’s renters. That productandits sale are subject to the requirements of Article 16.3 of the Insurance Code, sections 1758.7 et seq., governing self-service storage facilities’ sale of insurance. The Commissioner respectfully requests the Court give weightto his official, considered viewsof the law,as set forth in this brief, to the extent the Court finds those views reasonable and persuasive. LEGAL BACKGROUND: RENTERS’ INSURANCE FOR SELF-SERVICE STORAGE Selling insurance without a license from the Department is against the law. (Ins. Code, § 700, subds.(a)-(b); id., § 1631 [requiring valid license to solicit, negotiate, or effect insurance contracts]; see, e.g., id., § 1861.05 [requiring approval of insurance rates and prohibiting excessive or inadequate rates].) In this state, certain licensed insurers that are notin the self-service storage businesswrite and sell renters insurance directly to renters; to comply with the law, their rates must be approved by the Department. (See 1 CT 209, 1 40.) In 2004, the Legislature recognizedthat self-service storage facilities had beenselling insurance to their renters for many years without a license, in violation of the Insurance Code. (Department’s Request for Judicial Notice (“RJN”), Ex. A [Sen. Comm.on Ins., Assem. Bill No. 2520 (2003- 2004 Reg. Sess.) as amended. Apr. 27, 2004,pp. 3-4].) In response, the Legislature acted to create a licensing procedure (Ins. Code, § 1758.7et seq.) that prescribed the authorized sale of insurancebyself-service storage facilities to renters of storage units. (RJN, Ex. B [Sen. Rules Com., Off. of Sen. Floor Analyses, 3dreading analysis of Assem. Bill No. 2520 (2003- 2004 Reg. Sess.) as amended Jul. 22, 2004, p. 4].) Although described in the legislative history as creating “a new limited line of insurance category” (id. at p. 2), the purpose of the new law was“[t]o create a limited agent license for self-service storage facilities to sell hazard insuranceto renters of storage units”(id. at p. 4). Like any other entity, self-service storage facilities may notsell insurance in this state unless they do so in compliance with the insurance laws. Article 16.3 of the Insurance Code, sections 1758.7 et seq., and implementing regulations (Cal. Code Regs.,tit. 10, § 2194.9 et seq.) provide a streamlined licensing scheme under which self-service storage facilities, acting as agents for authorized insurers, may offer or sell only certain “types of insurance and only in connection with, and incidentalto, self-service storage rental agreements.” (Ins. Code, § 1758.75,italics added.) The “types of insurance” self-service storage facilities may be licensedto offer or sell as agents for an authorized insurer already exist and are written and sold by standard insurance companies: “hazard insurance coverage to renters for the loss of, or damage to, tangible personal property in storage or in transit during the rental period” and “any other coverage the commissioner may approveas ... appropriate in connection with the rental of storage space.” (Ins. Code, § 1758.75, subds. (a)-(b); see id., §§ 100-120 [describing various broadly described classes, including “Miscellaneous”}.) Similar kinds of insurance may occur within different classes but “classification of similar insurance may vary with the subject matter, risk, and connected insurances.” (Id., § 121.) Accordingly,a self-service storage facility could be licensed either as a Fire and Casualty Broker-Agentor as a Self-Service Storage Insurance Agent. (1 CT 101.)! FACTUAL AND PROCEDURAL BACKGROUND The factual and procedural backgroundis set out in detail in the court of appeal’s decision and the parties’ briefs. The Commissioner provides this brief summary for the Court’s convenience.” I. DEANS & HOMER'S MARKETINGOF ITS “ALTERNATIVE LEASE PROGRAM”TO THE SELF-SERVICE STORAGE INDUSTRY Respondent Deans & Homer, a licensed broker-agent, sells self- service storage renters’ insurance directly to consumersin California. (1 CT 204, 119; 1 CT 209, 1 40.) Sometimein or around 2003, Deans & Homer developed a new modelforselling personal property protection to self- service storage unit rentersthat would enlist the facility owneras theselling agent. (2 CT 267-271; 1 CT 205-207.) The proposed model was described as an “alternative lease program.” (2 CT 286, J 2.) Respondents A-1 Self- Storage Inc. and the Caster companies(collectively, A-1)own, operate, and manage more than 40 self-service storage facilities in California. (1 CT 203, 1 13-17.) Deans & Homer marketedits alternative lease program to A-1, providing it with templates and guidanceto usein selling limited liability coverageto renters for their stored personal property. (1 CT 205-207.) A-1’s “Customer Goods Protection Plan” (“Protection Plan”) is comparable to an insurance policy offered by Deans & Homerdirectly to self-service storage unit renters (a “Customer Storage Insurance Policy”); the rates for ' The “Fire and Casualty” Broker-Agentlicense is now referred to as Property Broker-Agent and Casualty Broker-Agentlicenses. ? Becausethis case wasdismissed at the pleadings stage, on appeal, plaintiffs’ well-pled allegations of fact are taken as true. The statementof facts in this brief reflects that procedural posture. such policy are required to be, and have been, approved by the Department. (1 CT 209-211.) Concurrently, Deans & Homersold insurance policies to A-1 to cover losses A-1 incurred covering renters’ claims made underthe Protection Plan for a premium of 74 cents per renter per month. (1 CT 206, § 28.) | Underthe insurance policy sold by Deans & Homer, A-1 is covered for almostall of its liability under the Protection Plan. (/bid.) II. A-1’S STORAGE RENTALAGREEMENT AND “CUSTOMER GOODS PROTECTION PLAN” A-1’s Storage Rental Agreement requires the renter to provide written proof of insurance for the actual cash value of the stored property or to purchase the Protection Plan from A-1. (2 CT 312, 9 12.) Ifa renter declines the Protection Plan, but fails to provide proof of insurance within 30 days, the renter is automatically enrolled in the Protection Plan. (2 CT 313.) Purchase of the Protection Plan satisfies the Rental Agreement’s insurance requirement. (2 CT 314.) The Protection Plan is characterized as an “addendum”to the Rental Agreementandprovidesthatit is a “limitedacceptance of liability”that modifies “the [landlord’s] waiverofliability” that would otherwise apply. (2 CT 314; but see 2 CT 312, 9 13 [broad exculpatory clause unmodified by Protection Plan].) For $10 a month,the Protection Plan provides that A-1 “retain[s] liability for loss of or damage to Tenant’s property while stored” of up to $2,500 for losses caused by specified hazards, includingfire, theft, roof leak, windstorm or the collapse of the building where the propertyis stored. (2 CT 314, 1 2.) The Protection Plan excludes coverage of other specified hazards, such as flood, sewer overflow, insects or vermin, mold, earthquake, etc. (2 CT 315, 13.) It also identifies certain types of property it will not cover. (2 CT 315, 14.) The Protection Plan requires A-1 to pay 10 12 a r o s e , oa t the actual amountthe renter pays to repair the covered property or to replace it with property of similar quality, whicheveris less, but does not prescribe a claims procedure. (2 CT 315, 15.) The Protection Plan prominently disclaims in two placesthatit is a contract of insurance. (2 CT 314-315.) While A-1’s Protection Plan is comparableto the self-service storage renters’ insurance policy offered by Deans & Homer, it offers less coverage at a higher cost. (1 CT 209-211.) A-I has more “than 15,000 California renters enrolled in the Protection — Plan at any given time.” (1 CT 206, { 28.) During the five-year period precedingthis action, A-1 netted about $1.6 million per year from Protection Plan sales, and paid out about $25,000 in claims per year. (1 CT 213, 17 49-51.) Ill. DEPARTMENT STAFF’S LETTERS TO DEANS & HOMER In 2003, counsel for Deans & Homer wrote to the Department inquiring whether a “modified lease” Deans & Homerproposedto offer underits “alternative lease program”for the self-service storage industry would be considered an insurance contract subject to regulation underthe Insurance Code. (2 CT 286, 17 2-3; 2 CT 267-271.) There is no evidence in the record that the Department received any other materials with the original letter. (2 CT 330-332.) Department staff counsel responded by a one-page letter, summarily stating that “the proposedalternative lease provisions” would not be insurance andciting Truta v. Avis RentA Car System, Inc. (1987) 193 Cal.App.3d 802. (2 CT 286, 13; 2 CT 273.) In 2008, counsel for Deans & Homer in some unknownform again communicated with the same staff counsel aboutthe alternative lease program and Deans & Homer’ssale of insurance policies covering risks assumedbythe self-service storage facility owners. (2 CT 286, 95.) There is no allegation that Deans & Homersent any additional written materials 11 to the Departmentat that time. (/bid.) By an even shorterletter, the Departmentstaff counsel reconfirmedhis prior statementthat the arrangement would not constitute insurance. (2 CT 286-287, 11 6, 2 CT 275.) There is no evidencein the record (or in the Department’s files) regarding what materials staff counsel reviewed,if any, before issuing the 2008letter. (2 CT 275; Declaration of Lynell N. Wise, {16 [Department Custodian of Records].) IV. HECKART’S LAWSUIT AND DECISIONS BELOW Appellant Heckart, an A-1 renter, filed a class action lawsuit, alleging that the unlicensed sale of an insurance product by A-1 and Deans & Homerwasunfair, unlawful and deceptive, and done in a manner specifically structured to avoid the costs of legal compliance andrate limitations imposedunderthe insurance laws. (1 CT 199, 1 1.) On that basis, Heckart alleged causes of action for unlawful and deceptive business acts and practices in violation of California Business & Professions Code section 17200 et seq. and the Consumer Legal Remedies Act (CLRA)(Civ. Code, § 1750 et seq.), as well as for negligent misrepresentation and civil conspiracy.a CT 198-230.) Thetrial court sustained defendants’ demurrer to Heckart’s first amended complaint without leave to amend, and the court of appeal affirmed.(Slip op., p. 3.) The court of appeal held that the Protection Plan _ wasnot insurance subject to regulation under the Insurance Code because the “principal object” of the “entire transaction between the parties” was the rental of storage space. (Slip op., p. 10.) For that reason, the court held, the licensing requirements of Insurance Code section 1758.75 et seq. did not apply. . Consequently, the court of appeal held that the trial court properly sustained the demurrer to Heckart’s unfair compctition, negligent 12 misrepresentation, and civil conspiracy causes of action, because all were premisedonthe allegation that the Protection Plan wasinsurance.(Slip op., pp. 13-14.) The courtalso affirmed that the CLRA doesnotapply to the sale of insurance orthe lease of real property. (Slip op., pp. 14-15.) ARGUMENT I. THE PRINCIPAL OBJECT INQUIRY CAN ASSIST COURTSIN DETERMINING WHETHER THE LEGISLATURE INTENDED THAT A TRANSACTION WITH INSURANCE ATTRIBUTES BE REGULATED Onits face and read in isolation, the definition of “insurance”in the Insurance Codeis quite broad. Again, “[i]nsurance is a contract whereby one undertakes to indemnify another against loss, damage,orliability arising from a contingent or unknown event.” (Ins. Code, § 22.) This Court has construed this provision to require two elements: “(1) a risk ofloss to which oneparty is subject and a shifting of that risk to another party; and (2) distribution of risk amongsimilarly situated persons.” (Metropolitan Life Ins. Co. v. State Bd. ofEqualization (1982) 32 Cal.3d 649, 654.) Many common businessventures, however, entail some element of risk distribution or assumption. To prevent an overbroadreading inconsistent with the Legislature’s intent, this Court has clarified that the shifting and distribution of the risk of loss “‘does not necessarily mean that the agreementconstitutes an insurance contract forpurposes of statutory regulation.’” (Sweatman v. Department of Veterans Affairs (2001) 25 Cal.4th 62, 74 (Sweatman), citing Title Ins. Co. v. State Ba. ofEqualization (1992) 4 Cal.4th 715, 726, italics added by Sweatman.) “‘That view would cause . . . [the insurance statutes] to engulf practically all contracts, particularly conditional sales and contingent service agreements.’” (Transportation Guarantee Co. v. Jellins (1946) 29 Cal.2d 242, 249 13 (VJellins) quoting Jordan v. Group Health Assn. (1939) 107 F.2d 239, 247 (VJordan).) This Court has identified factors that can assist courts in determining whetherthe Legislature intended that a particular risk-shifting and risk- distribution arrangementbe regulated as insurance. Courts consider the extent to which ““‘the specific transactions or the generalline of businessat issue involve one or moreof the evils at which the regulatory statutes were aimed.’” (Truta v. Avis RentA Car System, Inc. (1987) 193 Cal.App.3d 802, 812 quoting Keeton, Insurance Law (1971) § 8.2(c), p. 552.) The 66Insurance Code is designed to protect the insured, ““particularly those [regulations] relating to the maintenanceofreserves andto the regulation of investments and financial operations. . . . Such regulations become important only if the insurer has assumed definite obligations.’” (Truta, supra, at p. 813 quoting California Physicians’ Service v. Garrison (1946) 28 Cal.2d 790, 810 (Garrison).) The insurance laws“are not intended to apply where no risk is assumed andno default can exist . . . .” Ibid.) Relevant to this case, courts may also ask whether addressing the risk involved “or something else to which it is related in the particular plan is its principal object and purpose.’” VJellins, supra, 29 Cal.2d at p. 249, quoting Jordan, supra, 107 F.2d at p. 247.) “The question, more broadly, is whether, looking at the plan of operation as a whole, ‘service’ rather than ‘indemnity’ is its principal object and purpose.” (Garrison, supra, 28 Cal.2d at p. 809.) While this inquiry is sometimereferred to asa “test,”it is perhapsbetter understood as an aid to courts in discerning legislative intent to regulate under the Insurance Code. (See Waynev. Staples (2006) 135 Cal.App.4th 466, 475 (Wayne) [describing the principal object inquiry as an “analytic tool”].) 14 II. WHERE, AS HERE, A COMMERCIAL TRANSACTIONIS CLEARLY SUBJECT TO REGULATION UNDER THE INSURANCE LAWS, THE PRINCIPAL OBJECT INQUIRY IS INAPPROPRIATE Whenit is clear that a specific type of risk shifting and allocation arrangementis subject to regulation under the Insurance Code, engaging in an additional, separate principal object inquiry is unnecessary and—if used to contradict legislative intent—inappropriate. For example, in Sweatman,this Court considered whether insurance coverages offered under the Cal-Vet home protection plan fell within the purview of the Insurance Code. (Sweatman, supra, 25 Cal.4th at pp. 68-75.) The court of appeal ruled that certain disability coverage required as part of a Cal-Vet home loan program was merely “an incidental benefit under the Cal-Vet loan contract,” the principal object and purpose of which wasthe financing of a home purchase, and therefore such coverage wasnot regulated as insurance. (Sweatman, supra, 25 Cal.4th at p. 67; see alsoid. at p. 73.) While this Court upheld the judgment,it rejected the “principal object” reasoning as support. (/d. at pp. 73-74.) What controlled, the Court held, wasthat “the Insurance Code appears to include an exception for the program oflife and disability insurance underthe Cal-Vet program.”(Id. at p. 72,citing Ins. Code § 770.30.) And it was clear that “the Legislature has expressly vested administration of the Cal-Vet program ‘solely in the DepartmentofVeteran’s Affairs.’ (Mil. & Vet. Code, § 987.54.)” (Id. at p. 74,italics original.) The Supreme Court held that “requiring the overlapping authority of the Departmentof Insurancein this specialized area, would appear inconsistent with the legislative mandate.” (/bid.; accord, Garrison, supra, 28 Cal.2d at p. 810 [statutes expressly providing for limited regulation of nonprofit physicians’ service corporation necessarily exempted such organization from insurance laws].) 15 Similarly, in Wayne, the Court of Appeal for the Second District held that engagingin a principal object inquiry was inappropriate because it was undisputed that the defendant, an office supply store, was offering shipping customers regulated inland marine insurance in connection with its package shipping services. (Wayne, supra, 135 Cal.App.4th at p. 475, fn. 3.) The trial court held that because the principal object ofthe parties’ transaction wasto ship a package, the store’s charge for “declared value coverage”fell out of regulation under the Insurance Code.(/d.at p. 475.) The court of appealheld this to be error, because “all insurance contracts, even if sold as a secondaryor incidental facet of a transaction with another, primary commercial purpose, are regulated by the Insurance Commissioner and the Departmentof Insurance unless they fall within a specific regulatory exemption.” (Id. at pp. 476-477.) A contrary rule would, for example, permit a real estate broker to sell homeowners insurance without being subject to regulation under the Insurance Code becausethe sale of insurance would be “incidental” to the purchase of a house. (Wayne, supra, 135 Cal.App.4th at p. 477.) The Wayne court notedthat using the principal object test to exempt the inland marine insurance contract from regulation was “particularly inappropriate” becausethis class of coverage is expressly regulated by the Insurance Code andlikely to be offered “in connection with, and incidental to, the customer’s primary purpose of shipping his or her goods.” (Wayne, supra, 135 Cal.App.4th at p. 477; see Ins. Code, § 1635.) The “determinative question” was not whether the “customer’s principal purpose is shipping his or her package, rather than obtaining insurance against loss or damage”but rather whether the facts of the case allowed the store to “enjoy[] the exemption from insurance licensing requirements contained”in Insurance Codesection 1635. (Wayne, supra, 135 Cal.App.4th at p. 478.) In other words, the statute controlled. 16 In this case, the court of appeal’s use of the principal object inquiry in disregard of legislative intent is similarly inappropriate. Taking the plaintiffs allegations as true, the Legislature has clearly expressedits intent to regulate the self-service storage industry’ssale ofthe very type of coverage A-1 is offering. The Protection Plan creates an obligation for one party—A-1—to compensate another party—the renter—forspecified loss or damage to the renter’s personal property, regardless of whetherthe loss or damage would be attributable to A-1. Contrary to the Protection Plan terms, A-1 is not agreeing to “retain” liability. A-1 would not haveliability for damageto the renter ’s property unless and until a court of law so ruled. For a profit, A-1 carves out and assumeslimited liability for loss or damage to the renter’s stored personal property resulting from specified hazards or perils, including fire, theft, roof leak, windstorm or building collapse (CT 314,92 [Protection Plan]; CT 213 [first amended complaint, alleging approximately $8 million in profit over five years].) Under the Protection Plan, A-1 agrees to pay the renter’s cost to repair or to replace the property, up to a capped amount. (CT 315, 15). This type of coverage is directly comparable to property and casualty insurance policies offered by licensed insurers. (See, e.g., Ins. Code, § 2071 [California Standard Form Fire Insurance Policy, allowing for other perils to be insured against by added written endorsement].) Indeed, other insurers, including those represented by Deans & Homer,offer substantially similar—butbetter and less costly—insurance products directly to renters. (CT 209-211, 11 40-42.) Whether something is insurance does not depend on whois offeringit. If the Protection Plan sold by A-1 is not “hazard insurance”becauseit may be considered incidental to the Rental Agreement, thenit is unclear whattransactions would be subject to licensing under Insurance Code section 1758.7 et seq., given that every transaction other than the Rental 17 Agreementis in a sense subsidiary or secondary to the Rental Agreement. That construction must be rejected. The form of the Protection Plan reflects only the parties’ drafting choices and appears to be designed to avoid regulation under the Insurance Code. (CT 205-206, 1 22-27.) The parties should notbe able to unilaterally avoid the law through manipulations of form. A-1 is selling, without a license, “hazard insurance coverage to renters for the loss of, or damageto, tangible personal property in storage... during the rental period.” (Ins. Code, § 1758.75, subd. (a).) The offering or sale of this type of insurance “in connection with, and incidental to”a self- service storage agreement, is expressly regulated. (Ins. Code, § 1758.75, subd.(a).)3 | Ill. EVEN IF THE PRINCIPAL OBJECT INQUIRY APPLIES, PROPER ANALYSIS ESTABLISHES THAT THE PROTECTION PLAN IS SUBJECT TO REGULATION AS INSURANCE In light of the express provisions of Article 16.3 of the Insurance Code, engaging in a separate principal object inquiry is inappropriate. But, properly applied, the inquiry supports the conclusion that the Protection Plansatissuein this case are subject to regulation. Below, the Commissioner attempts to clarify and organize the law surrounding the 3 The 2003 and 2008staff letters suggesting otherwiseare not the result of “careful consideration by senior agency officials” but rather reflect an interpretation prepared “in an adviceletter by a single staff member. . . .” (Yamaha Corp. ofAmerica v. State Bd. ofEqualization (1998) 19 Cal.4th 1, 13.) Theletters are addressed only to Deans & Homer, a single stakeholder with an obvious interest in the outcome, and are based solely on Deans & Homer’s description of the proposed program, with no input from other interested parties as would have occurred in a quasi- adjudicatory proceeding or in a rulemaking that is subject to notice and comment. Norare the letters public opinion letters within the meaning of Insurance Code section 12921.9, signed by the Commissioneror the Chief Counsel of the Department. 18 principal object inquiry, and explains why,in his view, A-1is selling insurance withouta license. A. The Non-Regulated Risk-Shifting Provisions in Jellins and Its Progeny Are Distinguishable The Protection Plan’s provisions are distinguishable from the risk- shifting provisions that were found notto be subject to regulation underthe insurance lawsin Jellins and its progeny. 1. Transportation Guarantee Co. v. Jellins (1946) 29 Cal.2d 242 _ Underthe motor truck maintenance contracts at issue in Jellins, plaintiff contractor agreed to maintain the trucks in mechanicalrepair, to garage and fuel them, and to cause each motorvehicle to be insured “for | Ownerin an authorized insurance company selected by Contractor. .. .” (VJellins, supra, 29 Cal.2d at p. 246.) This Court found that the contracts, on their face, were not unlawful because they did not support aninterpretation that plaintiff itself was acting as the insurer. (/d. at p. 248.) “[T]he major part of Contractor’s service is the supplying of labor’” and that purpose— service—wasthe “controlling object of each contract,” not insurance. (Id. at pp. 252 & 249.) The plaintiff contractor’s breach ofits obligation to maintain collision insurance might, in the eventof a collision, make plaintiff liable for the loss, “but such liability would not transmuteits truck maintenance business intoan insurance business.” (Id. at pp. 252-253.) The fact that the maintenance contractor agreed to insure the vehicles with an authorized insurer, not to act as the insurer, was key. (Id. at pp. 248 & 254.) Unlike the maintenance contractor, A-1 is not agreeing to obtain insurance from an authorized insurer to cover damageto the renter’s property. Rather, on its face, the Protection Plan is compatible with an interpretation that A-1 is acting as the insurer. 19 2. Trutav. Avis RentA Car System, Inc. (1987) 193 Cal.App.3d 802 The collision damage waiverin Truta is also distinguishable. Truta addressed whethera car rental company’scollision damage waiveroffering to assumeliability for damageorloss to the rental car in an amount up to $1,000 for an additional fee wasanillegal contract of insurance. (Truta, supra, 193 Cal.App.3d at p. 807.) The court held that the renter’s option, for an additional consideration, to allocate the risk of loss to the car rental company wasonly “peripheral”to the car rental agreement’s “principal object and purpose”—the rental of an automobile. (/d. at p. 814.) Keyto the decision wasthe fact that—unlike A-1—thecarrental company wasnot agreeing to pay anyliabilities or costs incurred by the renter; it was releasing the renter from responsibility for damageto the rental company’s car during the course ofthe lease, and agreeing to take the property back in a damaged condition. The car rental company wasnot agreeing ““to pay anybody anything’” so regulation under the insurance laws regarding such things as the accumulation of reserves and the solvency or insolvency of the rental company was unnecessary. (Truta, supra, 193 Cal.App.3d at p. 815 [quoting Department’s analysis].) Unlike the collision damage waiver in Truta, the Protection Plan obligates A-1 to pay the renter for loss or damageto the renter’s property. The Protection Plan shifts the renter’s risk ofproperty damage to A-1, providing coverage for the renter’s property and paying claimsto the renter up to a capped amount. 3. Automotive Funding Group, Inc. v. Garamendi (2003) 114 Cal.App.4th 846 For the same reasons, the loss damage waiver program at issue in Automotive Funding Group, Inc. v. Garamendi (2003) 114 Cal.App.4th 846 (Garamendi)is distinguishable from the Protection Plan. Garamendi was a 20 debt cancellation program wherebythe lenderheld a lien on the used car as security for the car loan and required the car buyerto obtain insurance for physical damage andtheft, or to participate in the lender’s loss damage ‘waiver program. (Garamendi, 114 Cal.App.4th at pp. 849-850.) Under the program,no liability coverage was provided;rather, the lender could- declare the car a loss, repossess the car, and cancel the debt, orat its sole discretion, repair the car, paying the costs of repair directly to the body shop. (/d. at p. 850.) Presumably, the lender would not agree to pay repair costs if they made the loan unprofitable. ~The court determined that the purpose of the debt cancellation program wasto protect the lender’s security interest in the cars it finances. (Garamendi, 114 Cal.App.4th, p. 855.) That purpose—protecting the lender’s security interest—wasa “secondary objective”effectuated through either third-party insurance or the loss damage waiver program;the program wasin furtherance of the “primary objective of [the lender’s] transactions”—.e., the lender’s financing of a used car purchase. (Ibid.) Keyto its decision, however, wasthe lack of any risk-shifting: the court foundthatthe arrangement could not be insurance because the lender did not agree to shift the buyer’s risk to itself or anyoneelse; no risk was shifted from one party to another by the program. (Garamendi, 114 Cal.App.4th, pp. 856-857.) Accordingly, Garamendiis distinguishable on the same grounds as Truta. Unlike the loss damage waiver program in Garamendi, the Protection Plan provides property coverage andshifts the renter’s risk of property damageto A-1. 4. Title Ins. Co. v. State Bd. ofEqualization (1992) 4 Cal.4th 715 Wherethe decisions in Jellins, Truta, and Garamendi turned on the lack of any risk assumptionorrisk shifting within insurance concepts, the 21 underwritten title companiesin Title Ins. Co. v. State Bd. ofEqualization (1992) 4 Cal.4th 715 were not in the business of insurance because the agreements lacked the elementofriskdistribution amongsimilarly situated persons. (Jd. at p. 726; but see id. at pp. 739-740 [insurers,nottitle companies, “are primarily and ultimately liable” under the insurance policy for the paymentof claims, so no risk transferred] (dis. opn. of Kennard, J.).) Through an underwriting agreement, the title insurer and the underwritten title company “agreed to allocate the labor, risk, liability, and premium involved in the preparation and issuance of a contractoftitle insurance.” (Jd. at p. 725.) Under the agreement withthe title insurer, the underwrittentitle company wasobligated to pay some portion of claims made underthetitle insurance agreements betweenthetitle insurer and insuredparties. (Id. at p. 720.) The underwritten title company wasnota partyto the insurance contract and only the licensedtitle insurer was authorizedto issuetitle insurance. (/d. at p. 725.) Analyzing the principal object of the underwriting agreement with respect to the title companies’ assumption ofrisk, the Supreme Court determined the main function of the agreements wasnotto requirethetitle company to provide insurance, “but instead to require the underwrittentitle companyto perform title search and examination carefully and diligently as well as to carry out the formalities involved in the issuanceoftitle insurance policy.”(Title Ins. Co. v. State Bd. ofEqualization, supra, 4 Cal.4th at p. 726.) The underwriting agreement was not a contract of insurance because it did not “distribute the risk ofliability for claims among similarly situated persons” as required under Insurance Code section 22. (Title Ins. Co.v. State Bd. ofEqualization, supra, 4 Cal.4th at p. 726.) “Under the contract, the underwritten title company agrees to indemnify the insurer for a portion 22 of its liability. There is no indication that the underwriting agreements distribute the risk among similarly situated title insurers.” ([bid.) Unlike the indemnification provisions in the underwriting agreement, the Protection Plan allows A-1 to assumea risk of claims paymentthatis distributed amongall similarly situated renters, who number more than 15,000 at any given time. (CT 206, 1 28.) B. The Principal Object Inquiry Supports Regulation of A-1’s Protection Plan The court of appeal reasoned that the Protection Plan was not insurance subject to regulation under the Insurance Code because the “principal object” of the “entire transaction between the parties” was the rental of storage space. (Slip op., p. 10.) Because the Protection Plan was an “addendum”to the Rental Agreement and “would not exist and would have no purpose” without the Rental Agreement, the court of appeal looked “at the Rental Agreement and Protection Plan as a whole” and determinedthat the principal object of the entire transaction wasthe rental of storage space. (Slip op., p. 10.) Because,in its view, the primary objective of the Rental | Agreement wasstoragerental, the court reasonedthat the fact that the parties also contracted to allocate risk—whether through the indemnification clause or the Protection Plan—did not make the Protection Plan insurance. (Slip op., p. 10.) And because the Protection Plan wasnot insurance, the Insurance Code provisions barring unlicensed storage facilities from offering or selling insurance “in connection with, and incidental to, self-service storage rental agreements” (Ins. Code, § 1758.75) were inapplicable. (Slip op., p. 10.) The court of appeal erred in its application of the principal object inquiry. While this Court in Sweatmandecidedthat case based onstatute,it also discussed the elements of the principal object inquiry in the course of 23 distinguishing the collision damage waiverprovision held not to be regulated as insurance in Truta. As articulated by this Court in Sweatman, a court may consider, for example, whether the arrangementor transaction is comparable to existing types of insurance specifically regulated by the Insurance Code in determining whether the arrangement represents “merely ‘a tangential risk allocation’” between the twocontracting parties or, instead, “a spreading ofthe risk within insurance concepts.” (Sweatman, supra, 25 Cal.4th at pp. 73-74.) In this case, the relevant factors weigh in favor of regulation. First and foremost, the court allowed form to prevail over substance. Comparable insurance policies do exist and are sold separately to renters by authorized insurers. (CT 204, 119; CT 209, 1 40.) Whoisselling the insurance should not. determine whetherit is insurance. As demonstrated in Sweatman and Wayne,the principal object inquiry does not operate to exempt a contract “sold as a secondary or incidental facet of a transaction with another, primary commercial purpose” from regulation under the Insurance Codeif that contract represents the spreading of risk within insurance concepts. (Wayne, supra, 135 Cal.App.4th at p. 476; see Sweatman, supra, 25 Cal.4th at pp. 65 & 73-74 [distinguishing Truta, even though disability coverage waspart of home loan program andacted as addedsecurity for the loan].) Contractual provisions can be insurance even when offered as “incidental” to a commercial transaction such as a package shipping agreementor a storage lease. A-1’s assumption ofliability for loss or damageto the renter’s personalproperty is not in furtherance of, or incidental to, any “service” under the Rental Agreement. A-1 is not servicing, renting, or buying the renter’s personal property under the Rental Agreement. The Rental Agreementis a lease of A-1’s real property, not a sale of goods or services. (See Slip op., pp. 14-15.) The subject of the Protection Plan is the renter’s 24 personal property, not A-1’s real property. The Protection Plan makes no promises regarding improved security services or anything else respecting A-1’s obligations under the Rental Agreementto provide a storage unit; a renter who successfully declines enrollment in the Protection Planstill receives the same storage unit. Nor does the Protection Plan decrease the likelihood of disputes underthe lease, for its claims process (or lack — thereof) is morelikely to lead to disputes than the standard disclaimers in the unmodified lease agreement. As demonstrated in Jellins and its progeny, the key to the analysis is whether the arrangementrepresents the transfer and spreading ofrisk within insurance concepts. Here, the court of appeal mistakenly considered the Rental Agreement’s indemnification clause to be the equivalent of the Protection Plan’s provisions, characterizing both as methodsforthe parties to the Rental Agreementto allocate the risks incidental to their contractual relationship. (Slip op., p. 10.) They are not comparable. The indemnification clause in the Rental Agreement merely absolves A-1 from any liability to the renter arising out of the contractual relationship.It is merely an allocation of risk by contractual agreement, and is not governed by the insurance laws. (Jellins, supra, 29 Cal.2d at p. 248 [providing comparable examples,including “[t]he lessee whoagreesto hold his lessor harmless”].) In contrast, the Protection Plan obligates A-1 to act as an insurer. Itshifts the renter’s risk of property damage to A-1, obligating A-1 to pay costs incurred by the renter for loss or damageto the renter’s property. The Protection Plan represents the transfer and spreadingofrisk within insurance concepts. Sweatmanalso consideredrelevant the fact that the disability insurance coverage was offered separately, was required, and wasnot a simple matter of checking the box. (Sweatman, supra, 25 Cal.4th at pp. 73- 74.) But “[e]ach contract must be tested by its own termsas they are 25 written, as they are understood bythe parties, and as they are applied under the particular circumstances involved.” VJellins, supra, 29 Cal.2dat p. 248.) An arrangement or transaction may be subject to regulation as insurance even ifit is as “simple” as the Protection Plan and offered in connection with, and incidental to, some other commercial transaction. (Ins. Code, § 1758.75; see Wayne, supra, 135 Cal.App.4th at pp. 471-472 & 475,fn. 3 [insurance offered in connection with package shipping services].) C. This Arrangement Implicates the Very Evils the Insurance Code WasDesigned to Address Evenif this Court were to determinethatthe principal object inquiry leads to inconclusive results, the Protection Plan should be regulated under the Insurance Code becausethe Protection Plan directly implicatesthe evils at which the regulatory insurance statutes were aimed. Here, A-1 is agreeing to shift the renter’s risk of lossto itself for an additional, allegedly excessive consideration, implicating the need to ensure that the storage facility charges fair rates and will have sufficient reserves to meetits obligations. (Compare Truta, supra, 193 Cal.App.3d at p. 815 [no need for reserves when lessor simply agreesnotto hold lesseeliable].) A-1is in the businessofselling insurance, and its customers should be protected by the laws that govern that business. During the five-year period preceding the lawsuit, A-1 netted about $1.6 million per year in Protection Plan premiums, while paying out only about $25,000 in Protection Plan claimsperyear. (1 CT 213, 11 49-51.) While A-1 has contracted for insurance with Deans & Homer,it need not have. And Deans & Homer claims it owes no duty to Heckart. (2 CT 302:22 — 303:3.) An insurer covers A-1 for claims made underthe Protection Plan for a premium of 74 cents per renter per month, while a renter pays A-1 $10 per month. (1 CT 206, 128; 1 CT 207, 130.) Accordingly, renters are paying a rate that is 26 more than 13 and half times higher. (Ins. Code, § 1861.05 [requiring approvalof insurancerates and prohibiting excessive or inadequate rates].) Although it would be required under the Insurance Code(Ins. Code, § 1758.72 [setting forth training requirements]; id., § 1758.76 [requiring numerousdisclosures]), A-1 employeesare not given instruction regarding ethical sales practices and A-1 does not inform its renters that the Protection Plan may duplicate coverage already provided under some other source of insurance coverage. (CT 213-214, 152.) A-1 argues the Protection Plan presents no potential for abuse because it is comparable to a vendor who “makes promises reasonably addressing risks inherent in the [sales] relationship and over which the vendorhas some control—like a shipper agreeing to pay up to a certain sum for damageto goodsin its possession—the agreementis reasonably related to a non-insurance principal object.” (A-1’s Answer Brief on the Merits, p. 48.) Ironically, A-1 is describing an inland marine insurance contractlike the one in Wayne. That insurance contract, like the insurance coverage A-1 is selling, is governed by the Insurance Code. //l 27 CONCLUSION The Commissioner respectfully requests that the Court clarify that the principal object inquiry does not create an exception to regulation expressly intended by the Legislature. Where the principal object inquiry is applied,it mustserve, and not undermine,legislative intent. Dated: September 11,2017 Respectfully submitted, XAVIER BECERRA Attorney General of California DIANE S. SHAW Senior Assistant Attorney General Supervising Deputy Attorney General Attorneysfor Amicus Curiae, Dave Jones, Insurance Commissionerofthe State of California $A2017901432 33040363.doc 28 CERTIFICATE OF COMPLIANCE I certify thatthe attached BRIEF OF THE INSURANCE COMMISSIONEROFTHE STATE OF CALIFORNIA, INVITED AMICUS CURIAE usesa 13 point Times New Romanfontand contains 6771 words. Dated: September 11,2017 XAVIER BECERRA Attorney General of California MOLLY K. MOSLEY YS Supervising Deputy Attorney General Attorneys for Amicus Curiae, Dave Jones, Insurance Commissionerofthe State of California 29 DECLARATION OF SERVICE BY OVERNIGHT COURIER Case Name: Samuel Heckartv. A-1 Self Storage, Inc.etal. No.: $232322 I declare: I am employed in the Office of the Attorney General, which is the office of a memberof the California State Bar, at which member’s direction this service is made. I am 18 years of age or older and nota party to this matter; my business address is: 1300 I Street, Suite 125, P.O. Box 944255, Sacramento, CA 94244-2550. On September11, 2017,I served the attached BRIEF OF THE INSURANCE COMMISSIONEROF THE STATE OF CALIFORNIA, INVITED AMICUS CURIAE byplacing a true copy thereof enclosed in a sealed envelope with the GOLDEN STATE OVERNIGHT,addressed as follows: David J. Harris Trent Kashima ‘William Restis Finkelstein and Krinsk LLP 550 West "C" Street, Suite 1760 San Diego, CA 92101 Attorneysfor Samuel Heckart PlaintiffandAppellant John Tinley Brooks Sheppard Mullin Richter and Hampton LLP 501 West Broadway, 19th Floor San Diego, CA 92101 Attorney forA-1 SelfStorage, Inc. Defendant and Responden John R. Clifford David Aveni Wilson Elser Moskowitz Edelman and Dicker LLP 655 West Broadway, Suite 900 San Diego, CA 92101 Attorney for Deans & Homer Defendant and Respondent Brad N. Baker ' Baker Burton and Lundy PC 515 Pier Avenue Hermosa Beach, CA 90254 Attorneyfor Baker Burton andLundy PC’ Amicus curiae Raymond Zakari Zakari Law 301 East Colorado Boulevard, Suite 407 Pasadena, CA 91101 Attorneyfor Zakari Law Amicus curiae Dale Washington Attorney at Law 5942 Edinger Avenue 113/1325 Huntington Beach, CA 92649 Attorneyfor Dale E. Washington, Esq. Amicus curiae California Court of Appeal | San Diego County Superior Court Fourth Appellate District, Division One Central - Hall of Justice 750 B Street, Suite 300 330 West Broadway San Diego, CA 92101 Department 61 San Diego, CA 92101 Charles A. Bird Dentons US LLP 4655 Executive Drive, Suite 700 San Diego, CA 92121 Attorneyfor California SelfStorage Association, Amicus curiae I declare under penalty of perjury under the laws of the State of California the foregoing is true and correct and that this declaration was executed on September 11, 2017, at Sacramento, California. Nickell T. Mosely Plex Lett Poteet Declarant Signature Uf $A2017901432 33041074.docx33041074.DOCX