California Supreme Court Holds Insured May Sue Insurer Under Unfair Competition Law Based On Grounds Other Than Unfair Insurance Practices Act As To First Party Claims

California Supreme Court Holds Insured May Sue Insurer Under Unfair Competition Law Based On Grounds Other Than Unfair Insurance Practices Act As To First Party Claims

08.05.2013

Can insurance practices that violate Insurance Code § 790(h) of the Unfair Insurance Practices Act (“UIPA”) support an action under the Unfair Competition Law (“UCL”), Business & Professions Code § 17200 et seq.? In Zhang v. Superior Court (California Capital Ins. Co.), California Supreme Court Case No. S178542, filed August 1, 2013, the California Supreme Court essentially held, “Yes,” but only if based on grounds independent from Insurance Code § 790.03(h). The Supreme Court also limited its holding to insurance claims of insureds against their insurers. 

Insurance Code § 790.03(h) lists certain unfair insurance practices, including false advertising, failing to promptly respond to a claim and not attempting to settle a claim in good faith. In Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal.3d 287 (1988), the Supreme Court held that Insurance Code § 790.03(h) did not allow a private cause of action for the listed unfair practices, that enforcement of the statute was up to the Insurance Commissioner, and that the third party action against the insurer based on Insurance Code § 790.03(h) was thus barred. Zhang makesclear that Moradi-Shalal is not a bar to suits against insurers under the UCL.
 
In Zhang, the insured sued her insurer for fire damage to her property, alleging breach of contract, bad faith and violation of the UCL. Her UCL claim alleged that her insurer engaged in unfair, deceptive, untrue and/or misleading advertising by promising to provide timely payment in the event of a compensable loss, when it had no intention to do so. The insurer demurred to the UCL claim, contending it was barred under Moradi-Shalal because it was simply a recasting of the UIPA claim.. The Court of Appeal decided against the insurer, who sought review. The Supreme Court affirmed. 
 
Business & Professions Code § 17200 of the UCL prohibits “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.” For “unlawful,” the UCL makes violations of other laws independently actionable. The Court observed that “a practice may violate the UCL even if it is not prohibited by any other statute,” as “[u]nfair and fraudulent practices are alternate grounds for relief.” Although the Court reiterated that a plaintiff may not “plead around” a bar to relief by recasting a claim as one for “unfair competition, the Court also noted that Moradi-Shalal left intact common law theories against insurers, such as fraud, infliction of emotional distress, breach of contract and bad faith, all of which would allow a UCL claim based on the “unfair” prong. The Court further observed that since Moradi-Shalal involved a third party claim, “first party bad faith actions were unaffected by Moradi-Shalal.” 
 
As such, the Court concluded that UCL claims based on practices prohibited by Insurance Code § 790.03(h) may be permitted in first party cases, as long as such conduct also violated other obligations imposed by other statutes or common law. 
 
As applied to the claim before it, the Court upheld the denial of the demurrer to the insured’s UCL claim, observing that it was based on common law claims of bad faith and false advertising and not exclusively on violations of Insurance Code § 790.03(h). The Court stated that “[t]o bar a UCL action, another statute must absolutely preclude private causes of action or clearly permit the defendant’s conduct.” 
 
The Court noted that prevailing plaintiffs on an UCL claim are limited to injunctive relief and restitution and may not receive damages. Therefore, it rationalized that UCL remedies were limited and did not duplicate the damages sought in bad faith claims. The insurer asserted that awarding a plaintiff both contract damages and restitution of premiums would be improper. The Court responded that the trial court has discretion to withhold restitution “if equity so requires.” The Court also rejected the insurer’s contention that formulating and enforcing an injunction would be problematic, stating that the trial court must determine whether injunctive relief would be appropriate depending on the evidence of the insurer’s claims handling practices. 
 
Acknowledging that there were a multitude of problems in recognizing third party claims under Insurance Code § 790.03(h), such as unwarranted settlement demands and escalating insurance costs, the Court repeated that this decision applied only to first party claims. 
 
Thus, while reaffirming the holding of Moradi-Shalal in third party cases, the Court, in essence, allowed the practices listed in Insurance Code § 790.03(h) to support a UCL claim in first party cases, as insureds invariably allege bad faith in actions against insurers. The Court concluded by stating that the Legislature did not intend the statute “to operate as a shield against any civil liability.” 

View Attachment (PDF)