Another Decision Uses the UCL to Circumvent the Moradi-Shalal Restriction as to Private Rights of Action Against Insurers

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[author: Marina Karvelas]

In a decision issued October 24, 2012, the California Second Appellate District, Division Four became the most recent decision applying California’s unfair competition law, Business & Professional Code, § 17200 et seq. (“UCL”), to bring bad faith claims against insurers, undercutting a key aspect of the decision in Moradi-Shalal v. Fireman’s Fund Ins. Cos.

In Ocie E. Henderson v. Farmers Group, Inc., the court analyzed and rejected the determinations of one line of California decisions issued in the years since Moradi-Shalal that precluded a private right of action under the UCL against insurers for violations of California’s Unfair Insurance Practices Act (“UIPA”), Ins. Code, § 790.03(h) et seq. See Textron Financial Corp. v. National Union Fire Ins. Co., and Safeco Ins. Co. v. Superior Court, abrogated on other grounds by Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co..

Henderson instead followed the same reasoning applied by the Fourth Appellate District, Division Two in Zhang v. Superior Court (review granted Feb. 10, 2010).

Zhang held that a cause of action for violation of the UCL based on conduct that allegedly violates the UIPA is not an end-run around Moradi-Shalal so long as that conduct also supports a claim against the insurer for something other than a UIPA violation.

The conduct at issue in Zhang involved alleged fraudulent misrepresentations and misleading advertising regarding coverage.

The conduct at issue in Henderson involved denial of property damage claims based on the failure to submit a proof of loss and late notice. 

Both Zhang and Henderson rely on State Farm Fire & Casualty Co. v. Superior Court, which held that a breach of contract or bad faith cause of action could serve as a predicate for a UCL claim even if the conduct supporting the claim also constitutes a violation of the UIPA.

Additional decisions following Zhang include: Hughes v. Progressive Direct Ins. Co., review granted September 28, 2011, but deferred pending consideration and disposition of Zhang; Williams v. Prudential Ins. Co., 2010 U.S. Dist. LEXIS 14566 (N.D. Cal. 2010); Burdick v. Union Sec. Ins. Co., 2009 U.S. Dist. LEXIS 121768 (C.D. Cal. 2009). 

In Sanders v. Choice Mfg. Co., 2011 U.S. Dist. LEXIS 137365 (N.D. Cal. 2011), the district court refused to apply Zhang because of its unpublished status but nonetheless applied reasoning similar to Zhang in holding that plaintiff’s allegations regarding untrue and deceptive statements alleged more than just a violation of the UIPA because the conduct also involved allegations of the sale of insurance without first obtaining a license or certificate.

Despite these holdings, other recent decisions in the district courts continue to apply broadly Moradi-Shalal and Textron but have left open their decisions pending the California Supreme Court’s determination in Zhang. See Wayne Merritt Motor Co. v. N.H. Ins. Co., 2011 U.S. Dist LEXIS 122320 (N.D. Cal. 2011) (dismissal without prejudice of UCL claim based on allegations that the insurer misrepresented coverage by “burying” a limitation of liability clause in the endorsement); Willbanks v. Progressive Choice Ins. Co., 2010 U.S. Dist. LEXIS 128144 (E.D. Cal. 2010) (dismissed without prejudice of UCL claim based on unfair claims practices).

While Zhang has been fully briefed since June 2010, oral argument has yet to be set. Presumably, the Supreme Court’s long-awaited decision in Zhang will bring certainty to these conflicting decisions and reconcile the interplay of the UCL and the UIPA.

We will continue to report on the developments in this significant area of insurance litigation.

 

Published In: Antitrust & Trade Regulation Updates, General Business Updates, Insurance Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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