The California Supreme Court issued its long-awaited decision in Zhang v. Superior Court, a case examining the scope of the California Unfair Competition Law (UCL, California Business and Professions Code §§ 17200 et seq) on Aug. 1.
Zhang addressed the question of whether an insurer may be sued for violation of the UCL based upon allegations that the insurer had violated the California Unfair Insurance Practices Act (UIPA, California Insurance Code § 790.03).
The UCL generally prohibits any business from engaging in “unfair competition,” but doesn’t provide for payment of damages; its remedies are limited to restitution and injunction. Also, the prevailing plaintiff in a UCL action may seek payment of attorneys’ fees as a private attorney general under California Code of Civil Procedure § 1021.5.
The history of this issue dates back to the 1979 California Supreme Court decision in Royal Globe v. Superior Court. Royal Globe, which held that a third party claimant in a liability claim may bring an action directly against the liability policyholder’s insurance company if the insurer was alleged to have violated the UIPA. Royal Globe was overturned by the California Supreme Court in the 1988 decision Moradi-Shalal v. Fireman’s Fund.
Following the issuance of the Moradi-Shalal decision, many plaintiffs attempted to circumvent the ruling by suing insurers. The lawsuits were not explicitly based upon an alleged violation of the UIPA, but upon the argument that the insurer’s alleged violation of the UIPA constituted unfair competition and therefore was prohibited by the UCL.
The courts have generally prohibited third party UCL lawsuits against insurers, but they have been split on the extent to which such actions may be brought by policyholders. One line of cases has held that policyholders may not “plead around” the Moradi-Shalal rule by recasting a UIPA claim as a UCL claim, and have therefore prohibited UCL claims in which the alleged violation is based upon allegations of unfair claims practices. Another line of cases has held that UCL actions may be brought by policyholders when the underlying “unfair competition” is based upon some alleged violation other than a violation of the claims practice requirements of the UIPA.
In Zhang, the plaintiff contended that the violation supporting the UCL claim was not the insurer’s unfair claims practices, but was instead the insurer’s purported “false advertising,” in which the insurer promised “to provide timely coverage in the event of a compensable loss, when it had no intention of paying the true value of its insureds’ covered claims.” The California Supreme Court held that such an allegation of false advertising was sufficient to support a UCL claim against an insurer since a false advertising claim is not an exclusive prohibition of the UIPA. The court said that “Moradi-Shalal does not preclude first party UCL actions based on grounds independent from section 790.03, even when the insurer’s conduct also violates section 790.03.”
The law under Zhang appears to be that an insurer cannot be sued under the UCL for improper claims handling. However, an insurer can be sued if its improper claims handling demonstrates that the insurer made false assertions in promising to handle claims. Under this rule, there appears to be little left of the restriction against pleading around Moradi-Shalal with respect to claims handling. As long as the claims handling dispute is characterized as a false advertising claim, it is permitted under Zhang.
The long-term impact of this decision is unclear. It seems likely that for the foreseeable future every first party bad faith claim will also include a UCL claim based upon the false advertising theory. However, this claim would most likely be absorbed within the associated bad faith claim. It is difficult to see how an insurer would be subjected to sanctions under the UCL claim if the associated bad faith claim is defeated. Based on legal precedent, an insurer’s exposure to loss under the UCL claim seems to be subordinate to the exposure associated with the bad faith claim.
Further, remedies under the UCL claim are limited to injunction and restitution, not damages. It’s difficult to ascertain exactly how a court would construct an order of restitution or an injunction based upon alleged false advertising associated with a bad faith claim. In Zhang, the court acknowledged this conundrum but declined to address it, leaving those issues to lower courts. Although a UCL claim can also be a basis for legal fees, it is unclear how this will be handled in practice.
Despite these ambiguities, the underlying implications for insurers are clear. The result of Zhang is that insurers must prepare to deal with these UCL issues that will probably become a standard component of every policyholder bad faith action based upon allegedly wrongful claims handling.