Decades ago, in the landmark decision of Moradi-Shalal v. Fireman’s Fund Ins. Companies, 46 Cal.3d 287 (1988) the California Supreme Court held that California Insurance Code § 790.03, part of the Unfair Insurance Practices Act, did not create a private right of action against insurers who commit the unfair claims handling practices enumerated in that statute. The reasoning was that enforcement of the Act was the province of the Insurance Commissioner.
On October 29, 2009, a California Court of Appeal in Zhang v. The Superior Court of San Bernardino County, 178 Cal.App.4th 1081 (2009) held that an insured could state a cause of action under California Business & Professions Code § 17200 (known as the Unfair Competition Law or “UCL”) based on alleged conduct that violates Insurance Code § 790.03.The insured alleged the insurer improperly handled his fire loss claim and engaged in deceptive advertising, promising that the insurer will pay covered losses when it had no intention of doing so. The Court of Appeal held that, while the insured could not state a UCL claim for unreasonable claims handling under Moradi-Shalal, Moradi-Shalal does not bar the insured’s UCL claim based on allegations the insurer had “engaged in unfair, deceptive, untrue and/or misleading advertising” (which tracked the language of the UCL). In doing so, the Court partially disagreed with the Court in Textron Financial Corp v. National Union Fire Ins. Co., 118 Cal. App.4th 1061 (2004), which held that Moradi-Shalal prohibited a UCL cause of action based on similar “false advertising” allegations.
The Zhang Court read Moradi-Shalal as precluding a UCL claim based on conduct that violates Insurance Code § 790.03 if that conduct is “not otherwise prohibited.” The Court stated that allegations that the insurer had made “fraudulent misrepresentations” and published “misleading advertising” alleged “unlawful, unfair or fraudulent business” acts and “unfair, deceptive, untrue, or misleading advertising” prohibited by the UCL. According to the Court, “to construe the Unfair Insurance Practices Act as immunizing insurers from the consequences of misconduct that other business must suffer would simply make no sense.”
While the Court disclaims that its ruling will allow an “end run” around Moradi-Shalal -- because the Plaintiff is seeking only the statutory remedies of restitution and injunctive relief authorized under the UCL -- the decision could predictably have that result. The Court did not decide the “broader” issue of whether a mere allegation of “unfair” conduct in violation of the UCL would be precluded by Moradi-Shalal, but the decision essentially states that the mere incantation of fraudulent conduct in agreeing to provide coverage without the intent to do so, false advertising, or misrepresentation of the policy terms is sufficient to avoid the Moradi-Shalal bar on “unfair” practices claims. According to the Zhang Court, those allegations will suffice to state a UCL claim even if the lawsuit is nothing more than a claims-handling dispute.
Under the Zhang decision, the unfair claims-handling practices enumerated in Insurance Code § 790.03 can once again be used to state a cause of against insurers so long as they are framed as fraudulent conduct under the UCL. Such UCL claims against insurers are problematic because a plaintiff making a UCL claim may seek class action relief, civil penalties for each statutory violation, and attorneys’ fees based on the common fund or substantial benefit doctrines.
The decision gives cause for concern that, once again, insureds will use Insurance Code § 790.03 as a basis for a private right of recovery against insurers in civil lawsuits decided by lay jurors and not insurance regulators, which concern was previously obviated by the Supreme Court’s decision in Moradi-Shalal.
On December 10, 2009, a petition for review of the Court of Appeal’s decision was filed with the Supreme Court.