The California Supreme Court yesterday issued a decision that confirms an expansive view of the scope of the unfair competition law, Cal. Bus. & Prof. Code § 17200 et seq. (the “UCL”). The Court held that an insured may sue an insurer under the UCL based on conduct that violates the Unfair Insurance Practices Act, Cal. Ins. Code § 790 et seq. (the “UIPA”), as long as that conduct also violates another law or legal standard. The Court repeatedly noted that its decision did not impact third-party suits.
At first glance, the Court’s opinion in Zhang v. Superior Court (California Capital Ins. Co.), __ Cal. 4th __, 2013 WL 3942607 (Aug. 1, 2013), flatly contradicts a well-established limitation on UCL claims previously articulated by the Court in Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287 (1988). In Moradi-Shalal, the Court unequivocally barred UCL actions based on alleged violations of the UIPA, because the UIPA contemplated only administrative enforcement by the Insurance Commissioner, not lawsuits by private plaintiffs. For years, insurers have relied on Moradi-Shalal to argue that where a lawsuit alleges a UCL claim based on insurance practices that fall within the scope of the “unfair insurance practices” prohibited by the UIPA, that claim must be dismissed.
In Zhang, the Court held that the insurer’s conduct alleged by the insured there—which included false advertising and bad faith—supported a UCL claim even though the alleged conduct was also prohibited by the UIPA. That is because the conduct allegedly violated other laws, independent of any UIPA violation. Despite the apparent surface clash with Moradi-Shalal, the Court appeared to view its Zhang holding as entirely consistent with that case and with its other, more recent UCL cases.
In particular, the Court noted that even in Moradi-Shalal, it had observed that an insured who could not bring a UCL claim still could pursue “traditional common law theories of private recovery against insurers. These include ‘fraud, infliction of emotional distress, and (as to the insured) either breach of contract or breach of the implied covenant of good faith and fair dealing.’” Zhang, 2013 WL 3942607, at *4 (quoting Moradi-Shalal, 46 Cal. 3d at 305). The Court also explained that in another prior decision, Manufacturers Life Ins. Co. v. Superior Court, 10 Cal. 4th 257 (1995), it had “made . . . plain that the UIPA does not generally exempt insurers from UCL liability” and that, while “the plaintiff could not plead around Moradi-Shalal by basing a UCL cause of action on conduct violating only the UIPA, . . . a UCL claim was supported when the insurer’s conduct independently violated the Cartwright Act.” Zhang, 2013 WL 3942607, at *5. The Court also approved the analysis in State Farm Fire & Cas. Co. v. Superior Court, 45 Cal. App. 4th 1093 (1996), which had relied on Manufacturers Life to allow UCL claims based on a range of alleged insurance practices—including fraud and bad faith—as independent from, even though duplicative of, the UIPA.
In Zhang, the plaintiff’s allegations focused on false advertising. She alleged that the insurer had misled her into believing that it would pay the “true value of covered claims” but that “its treatment of her claim demonstrated it had no intention of honoring that promise.” Zhang, 2013 WL 3942607, at *9. The insurer argued that “the crux of her UCL claim was improper claims handling,” and that she was simply trying to “plead around the bar of Moradi-Shalal.” Id. As the insurer also pointed out, virtually any insurance bad faith case could be converted into one for false advertising, based on express or implied promises to pay claims. The Supreme Court did not directly respond to this contention, thereby implying that as long as an insured’s complaint about an insurer’s conduct contains sufficient allegations to support the charge of false advertising, it would also support a UCL claim based on those allegations. In addition, the Court noted that the plaintiff’s UCL claim was also supported by her allegations of bad faith. The Court further noted that insurer practices could meet any of the three prongs of conduct addressed by the UCL, as they could be unfair or fraudulent, as well as unlawful.
The Court observed that UCL claims are not duplicative of bad faith or other common-law claims against insurers, which are focused on recovery of damages, because the UCL allows only restitution, injunction, and other equitable relief. Finally, the Court observed that courts have the discretion under the UCL to withhold restitutionary relief available under that statute, and may do so if it would be duplicative of a compensatory award under another cause of action.
Justice Werdegar wrote a concurring opinion, opining that Moradi-Shalal did not in fact stand for a rule prohibiting UCL claims based on UIPA violations.
The Zhang opinion is significant because it authorizes UCL suits by insureds against insurers based on alleged conduct that was previously considered ineligible for a UCL claim. It is difficult to imagine that any practice proscribed by the UIPA could not easily be recast by a plaintiff’s lawyer as some common-law or other theory sufficient to support a UCL claim under Zhang. As a result, Zhang threatens to broaden the range and scope of such UCL claims.