California Supreme Court Holds that Insurers May Be Held Liable for Violations of California’s Unfair Competition Law

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In Zhang v. Superior Court, __ Cal.3d __ (2013), the California Supreme Court held that Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287 does not preclude insureds from maintaining a claim for violations of California’s Unfair Competition Law (UCL) against insurers. In Moradi-Shalal, the court held that, when the Legislature enacted California Insurance Code 790.03(h) (UIPA), it did not intend to create a private cause of action for commission of the various unfair insurance practices set forth in the UIPA. Thereafter, a split of authority developed in the California Courts of Appeal concerning whether an insurer could be subject to liability for UCL violations based upon conduct that was also a violation of the UIPA. The court has resolved the disagreement finding that an insurer may be held liable for violations of the UCL even when the insurer’s conduct also violates the UIPA.  The court issued its decision today.

In Zhang, the plaintiff alleged causes of action for false advertising under the UCL and insurance bad faith based upon the insurer’s alleged misleading advertising, which included false promises that the insurer would timely pay proper coverage in the event the insured suffered a loss. The insurer demurred based upon the grounds that plaintiff’s false advertising claim was barred by Moradi-Shalal, and the trial court sustained the demurrer. The Court of Appeal disagreed with the trial court, and the California Supreme Court affirmed the Court of Appeal’s decision.

As a result of the decision, insurers may now be subjected to claims for violations of the UCL.  Insureds may recover under the UCL if they can show that they were likely to be deceived, and that they suffered economic injury as a result of that deception. The court also held that insurers may be liable under the UCL for conduct which also supports a bad faith claim, such as unreasonable claims handling practices, withholding of policy benefits, etc.

If an insured prevails on its UCL claim, it may be entitled to restitution (i.e., return of premiums) and injunctive relief. Damages are not available under the UCL. Although there is no provision for attorney’s fees under the UCL, the court noted that a prevailing plaintiff may seek attorneys’ fees as a private attorney general under Code of Civil Procedure section 1021.5. Additionally, insurers may now be subjected to class actions for violations of the UCL. Insurers should also expect insureds to use the decision to attempt to expand the scope of discovery.

Click here to review the decision.