In a highly awaited decision, the California Supreme Court in Zhang v. Sup. Ct. of San Bernardino County (August 1, 2013) 2013 Cal. LEXIS 6520, Case No. S178542, considered whether insurance practices that violate the California Unfair Insurance Practices Act (UIPA) (California Ins. Code, § 790 et seq.) can give rise to a first-party cause of action under the California Unfair Competition Law (UCL) (California Bus. & Prof. Code, § 17200 et seq.). The Zhang opinion considered and focused on the earlier California Supreme Court decision of Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 304, which held that when the Legislature enacted the UIPA, it did not intend to create a private cause of action for the commission of unfair practices listed in Insurance Code, § 790.03(h). Limiting its holding in Moradi-Shalal, the court in Zhang held that Moradi-Shalal does not preclude first party UCL actions based on grounds independent from Ins. Code, § 790.03, even when the insurer's conduct also violates § 790.03. The regulation of insurers’ claims handling practices by the UIPA does not immunize the insurer from independent first-party liability under the UCL.
Plaintiff, Yanting Zhang, was insured by defendant California Capital Insurance Company. Plaintiff sued California Capital over coverage for fire damage to her commercial property. In addition to causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing, plaintiff's complaint alleged violations of the UCL. In her UCL claim, plaintiff alleged that California Capital had engaged in "unfair, deceptive, untrue, and/or misleading advertising by promising to provide timely coverage in the event of a compensable loss, when it had no intention of paying the true value of its insured's covered claims."
California Capital challenged the pleadings and demurred on the basis that it was an impermissible attempt to plead around the bar established in Moradi-Shalal against private actions for unfair insurance practices under Ins. Code, § 790.03. The Zhang court disagreed. While the court affirmed that a plaintiff may not rely solely on the proscriptions of Insurance Code, § 790.03 as the basis for a UCL claim, the court held that when insurers engage in conduct that violates both the UIPA and obligations imposed by other statutes or the common law, a first-party UCL action may exist. Thus, plaintiff was permitted to continue to litigate her UCL claim.
Rejection of Textron Financial Corp. v. National Union Fire Ins. Co.
The Zhang decision ended a split of authority in California between two California Court of Appeal decisions: State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093 and Textron Financial Corp. v. National Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061. The Zhang court agreed with State Farm and disapproved of Textron Financial Corp. to the extent it was inconsistent with the Zhang opinion.
State Farm involved a first-party bad faith action brought by insured homeowners based upon State Farm's alleged covert alteration of their earthquake insurance coverage. In addition to alleging causes of action for breach of the implied covenant of good faith, breach of contract, professional negligence and fraud, the homeowners also pursued UCL remedies seeking injunctive relief and restitution. State Farm demurred to the UCL claim, contending that it was an improper attempt to plead around the Moradi-Shalal bar against private actions under section 790.03 of the UIPA. The State Farm court disagreed, holding that the UCL cause of action was supported by the insureds' allegations of fraud and common law bad faith, which were independent bases for the plaintiffs' UCL cause of action.
The court in Textron Financial Corp. v. National Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061 disagreed with the State Farm decision. In Textron Financial Corp., Textron held a security interest in a bus insured by the defendant insurer. Textron submitted a claim to the defendant after the bus was damaged in an accident. The claim was denied, and Textron sued National Union for breach of contract, fraud, bad faith and also included a UCL claim for injunctive relief and restitution. Textron demurred to the UCL claim. The Court of Appeal in Textron Financial Corp. held that the UCL claim was not permitted since the unfair practices alleged in Textron's complaint were the type of activities covered by the UIPA, and that "merely alleging these purported acts constitute unfair business practices under unfair competition law is insufficient to overcome Moradi-Shalal."
The Zhang decision disapproved of Textron Financial Corp., and rejected California Capital's argument that the plaintiff's UCL claim was actually directed at its claims handling, not its advertising. The Zhang court held that the State Farm decision was consistent, and Textron inconsistent, with the court's previous decisions on the scope of UCL liability. The court explained that under the UCL, it is necessary only to show that the plaintiff was likely to be deceived and suffered economic injury as a result of the deception. The court additionally pointed out that as the State Farm court observed, the court in Moradi-Shalal was concerned with the adverse effects of recognizing an implied right of action for damages under section 790.03, whereas UCL remedies are limited in scope generally extending only to injunctive relief and restitution.
The Zhang decision therefore ends a past split between California appellate courts regarding the scope of UCL liability. However, the utility of this ruling to the policyholder bar is yet to be seen.
No Effect on Third Party UCL Claims
The Zhang court declined to consider a right of third parties to raise UCL claims. The court noted that in Moradi-Shalal, the court had identified numerous adverse consequences of such third-party claims including proliferating litigation, unwarranted settlement demands, escalating insurance costs, conflicts of interest, practical difficulties with the scope and nature of the third-party cause of actions, and potential constitutional issues. Moradi-Shalal was also concerned with imposing a duty on an insurer to third-party claimants that could conflict with the insurer’s duties to its insureds.
Effect of Zhang on Future First-Party Litigation
As the court only addressed whether a cause of action for violation of the UCL could properly be stated and did not address the substance of the allegations or assess damages, it is yet to be seen whether a cause of action under this statute will provide any additional recovery to policyholders challenging an insurer’s claim handling.
The full effect of the Zhang may be limited in claim handling disputes since, as recognized by the Zhang court, the only remedies under the UCL are the equitable remedies of restitution and injunctive relief. Under the UCL, prevailing plaintiffs may not obtain damages – which is the relief that is typically sought in a breach of contract and/or bad faith case – nor attorneys' fees (with the exception of a “representative action” under UCL, § 17204 and pursuant to Code of Civil Procedure, § 1021.5). The available UCL equitable remedies therefore may not be feasible if policyholders seek to obtain an award of damages on a breach of contract and/or bad faith claim. A policyholder could seek restitution of part of the premium on grounds that the policy was overpriced based on the misrepresentation as to quality of claims handling. Moreover, the remedies under the UCL are subject to the broad discretion of the court. Importantly, the UCL does not require "restitutionary or injunctive relief when an unfair business practice has been shown." Rather, the UCL provides that the court "may make such orders or judgments ... as may be necessary to prevent the use or employment ... of any practice which constitutes unfair competition ... or as may be necessary to restore ... money or property."
Future litigation under the UCL may pose additional challenges for insurers. A carrier's pattern and practice with respect to “other claims" may be more relevant to an alleged breach of the UCL thereby potentially entitling a policyholder to a larger scope of discovery that would exist in a bad faith action not alleging a UCL claim. Class action claims also may be brought under UCL section 17204 against carriers if injury to the class representative can be established, which also presents an exposure to a potential attorneys’ fee award. Unlike a common law misrepresentation claim, the UCL does not require proof of actual reliance on a misrepresentation by plaintiff or any class member, so typically the trial judges (and appellate justices) become the arbiters of the accuracy of insurer advertising. Finally, Zhang, may represent a swing of the pendulum in the California courts’ consideration of private causes of action for regulatory violations alleged against insurers. As such, it may forecast the relaxation of the currently existing exclusive jurisdiction of government agencies with respect to claim handling regulations.