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August 2013

Conduct That Violates Unfair Insurance Practices Act May Be Actionable Under Unfair Competition Law Despite Moradi-Shalal Restriction

On Aug. 1, the California Supreme Court held that an insured may state a cause of action against an insurer under the Unfair Competition Law (UCL) for conduct that violates the Unfair Insurance Practices Act (UIPA) despite the bar against private actions under the UIPA itself.  The Supreme Court’s holding in Zhang v. Superior Court, Opinion No. S178542, resolved a split on the issue among the state’s intermediate appellate courts. 

Yanting Zhang sued her insurer, California Capital Insurance Co., over coverage for and the handling of a fire loss claim.  Zhang alleged causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the UCL.  In the UCL claim, Zhang alleged California Capital had “engaged in unfair, deceptive, untrue, and/or misleading advertising” by promising to pay claims with no intention of paying the true value of the covered claims.  Zhang also alleged several bad-faith practices by California Capital including unreasonable delays causing deterioration of the insured property; withholding of policy benefits; refusal to consider cost estimates; misinforming her as to the right to an appraisal; and falsely telling Zhang’s mortgage holder that Zhang did not intend to repair the property, resulting in foreclosure proceedings.

The trial court sustained California Capital’s demurrer on the UCL cause of action finding it was an impermissible attempt to plead around the bar against private actions under the UIPA pursuant to Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal. 3d 287.  The court of appeal had reversed finding the complaint sufficiently pled facts to support a UCL cause of action.  California Capital sought review from the Supreme Court, which affirmed.

The Supreme Court first noted the UCL (Cal. Bus. & Prof. Code § 17200 et seq) defines unfair competition as “any unlawful, unfair or fraudulent business practice and unfair, deceptive, untrue or misleading advertisement.”  Damages are not recoverable under the UCL, with plaintiffs limited to injunctive relief and restitution.  Proposition 64, approved in 2004, further limited private causes of action under the UCL by requiring that private plaintiffs show economic injury.  Zhang alleged economic injury in the form of premiums paid, which she claimed resulted from California Capital’s misleading advertisements.

The Supreme Court distinguished Moradi-Shalal because in that case it was concerned with a private right of action for damages under the UIPA (Cal Ins. Code § 790 et seq).  Because UCL causes of action only provide for restitution or injunctive relief, the Supreme Court decided its concern about damages recoveries was resolved.  Moradi-Shalal also was concerned with the adverse consequences a private right of action would create for third-party claims, including proliferating litigation, unwarranted settlement demands, escalating insurance costs, and practical difficulties with the scope and nature of the third-party cause of action.  Because Zhang was a first-party insured, these issues were averted.

The Supreme Court relied heavily on Manufacturers Life Ins. Co. v. Superior Court (1995) 10 Cal. 4th 257, 279-280, where the Supreme Court held that a UCL claim for anticompetitive conduct was proper under the Cartwright Act, even though the same conduct violates the UIPA.  California Capital argued that Manufacturers Life was distinguishable because no claim for anticompetitive conduct under the Cartwright Act was present.  The Supreme Court disagreed, holding that nothing in the language of the Manufacturers Life decision indicated such a limitation.  Rather, Manufacturers Life “stands for the proposition that a cause of action neither barred by Moradi-Shalal nor absolutely precluded by other law may serve as the basis for a UCL claim.” 

In addition, Moradi-Shalal only barred claims brought under the UIPA and expressly permitted first-party bad-faith actions.  The Supreme Court took this one step further and held a UCL claim could be based on allegations of bad faith in addition to violations of other laws.  Zhang’s UCL claim was grounded in the facts that supported her bad-faith action and, thus, a cause of action for a UCL violation was properly pleaded.  Even though the conduct alleged also violated the UIPA, a private cause of action under the UCL was still proper because bad-faith breaches are independently unlawful, unfair, and potentially fraudulent as those terms appear in the UCL.

California Capital argued Zhang’s UCL cause of action would be unmanageable because it would require review of California Capital’s claims handling practices in thousands of cases.  The Supreme Court rejected this argument because a UCL claim may be based on a single instance of an unfair business practice.  Moreover, the possible difficulty Zhang might encounter with regard to proving her UCL claim is not a “relevant consideration on review of a demurrer ruling.”

Click here for the opinion. 

This opinion is not final.  It may be modified on rehearing or review may be granted by the U.S. Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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