Thursday, July 23, 2009

Insurer Escapes RICO Liability for Refusing to Replace Safety Belts

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

An individual could not proceed with a RICO claim against his automobile insurer, Allstate Indemnity Company, for refusing to inspect and replace, as a matter of policy, the collision-damaged safety belts in his automobile, the federal district court in Sacramento has ruled. Although the individual sufficiently alleged a RICO enterprise (Allstate Insurance Company), he failed to adequately allege the insurer's participation in the enterprise. Nor did he sufficiently allege mail and wire fraud as RICO predicate acts.


The insurer argued that the RICO enterprise (Allstate Insurance) was not distinct from the RICO “person” (Allstate Indemnity) because “a parent corporation is not distinct from its subsidiary for purposes of a RICO §1962(c) claim.” The court disagreed, however, and declared that a corporate parent was sufficiently distinct from its subsidiary. Although several federal appellate courts had ruled otherwise, neither the Ninth Circuit nor the U.S. Supreme Court had addressed the issue. In a similar case, however, the U.S. Supreme Court had ruled that a corporate owner or employee was distinct from the corporation itself because the corporation was a “legally different entity with different rights and responsibilities due to its different legal status.” In addition, the Ninth Circuit had ruled that the owner of a sole proprietorship was distinct from the proprietorship itself.

The ruling of a sister court from the Southern District of California, which found that a corporate parent was not per se distinct from its subsidiary and that a plaintiff must therefore allege “something more” than the mere fact that a parent and its subsidiary were legally separate entities, was rejected. Because the RICO statute had to be liberally construed to effectuate its remedial purpose, the court concluded that allegations of “something more” were not required.

Participation in Enterprise

In order state a RICO claim under §1962(c), a plaintiff must allege that the defendant participated in the conduct of an enterprise’s affairs, the court explained. More specifically, the plaintiff must allege that the defendant participated in the operation or management of an enterprise such that the defendant had some part in directing the enterprise’s affairs.

In this case, the individual failed to allege any facts pertaining to participation. Nevertheless, he argued that the operation or management of an enterprise was a question for the jury to decide. This argument was irrelevant, in the court's view, because the operation or management of an enterprise must first be alleged, and the individual failed to do that.

Mail, Wire Fraud

Because the individual failed to identify the communications that constituted mail and wire fraud, his allegations of predicate activity were deficient, according to the court. A pattern of racketeering activity was lacking, as well.

The June 30, 2009, decision in Robert Watts v. Allstate Indemnity Co., ED Cal., Civ. S-08-1877 LKK/GGH, will appear at CCH RICO Business Disputes Guide ¶11,700.

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