Weekly Law Resume - August 8, 2013: Insurance Coverage – Bad Faith - Unfair Claim Act Cause of Action

by Low, Ball & Lynch

Yanting Zhang v. The Superior Court of San Bernardino County
California Supreme Court (August 2, 2013)

In Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, 304 (Moradi-Shalal) the California Supreme Court held that when the Legislature enacted the Unfair Insurance Practices Act (“UIPA” – also known as the Fair Claims Regulations), it did not intend to create a private cause of action for commission of the various unfair practices listed in Insurance Code section 790.03, subdivision (h). This case presented the question whether fraudulent conduct, which also violates the insurance regulations, can give rise to a cause of action under the Unfair Competition Law ("UCL").

Yanting Zhang sued California Capital Insurance Company over a dispute following a fire at a commercial premises. Besides standard causes of action for breach of contract and breach of the covenant of good faith and fair dealing, Zhang alleged California Capital engaged in unfair advertising by promising to pay timely covered losses when it had no intention of doing so. California Capital demurred to the cause of action on the basis that such a cause of action was prohibited. The trial court agreed, and sustained a demurrer to that cause of action. The Court of Appeal reversed, and ordered the demurrer overruled. The Court of Appeal noted that Unfair Competition Laws did not allow monetary damages, but instead provided the remedy of restitution and/or injunctive relief for unfair competition, which prohibits any unfair or fraudulent business practice. The Court of Appeal noted that the same actions which might constitute a violation of the UIPA also could support a cause of action under the UCL. As such, the cause of action was sufficiently stated to survive a demurrer.

California Capital appealed to the California Supreme Court, which initially accepted the case three and a half years ago, and issued its ruling on August 2, 2013. The Supreme Court affirmed the ruling of the Court of Appeal, holding that while a plaintiff may not use the UCL to “plead around” an absolute bar to relief, the UIPA does not immunize insurers from UCL liability for conduct that violates other laws in addition to the UIPA.

The Court noted that in its prior decisions since Moradi-Shalal, it had confirmed that its decision was not meant to impose sweeping limitations on private antitrust or unfair competition actions. Its decision in Moradi-Shalal left intact not only administrative remedies, but also “traditional common law theories of private recovery against insurers,” including “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.” Thus, first party bad faith actions were unaffected by Moradi-Shalal. This included claims under the UCL for actions based on fraud.

Here, Zhang’s UCL claim was premised on allegations of false advertising. She contended that California Capital misleadingly advertised that it would timely pay the true value of covered claims. She asserted that its treatment of her claim demonstrated it had no intention of honoring that promise. California Capital argued that any bad faith claim might be turned into a false advertising suit, because all insurers at least impliedly promise to pay what they owe under their policies. However, the Court held that as long as a UCL claim did not rest exclusively on UIPA violations, and where, as here, the actions of the insurer violated both the UIPA and the other statutes and/or common law, a UCL claim may be brought based on claims handling practices.

The Supreme Court went on to note that it felt that this was particularly reasonable, given the limited remedies available under a UCL cause of action. No damages or attorneys’ fees may be recovered under a UCL claim. Instead, remedies are limited to injunctive relief and restitution. In that regard, a UCL claim does not duplicate the contract and tort causes of action involved in bad faith litigation, where damages are central. Finally, the Court noted that in 2004, voters in California further limited the scope of UCL claims with the passage of Proposition 64, which requires private plaintiffs to demonstrate economic injury caused by the alleged unfair competition, and that such plaintiffs may not represent the interest of others without meeting the requirements for a class action.

The Supreme Court agreed that Zhang's allegations stated a cause of action for violation of the UCL, and it affirmed the Court of Appeal’s decision overruling California Capital’s demurrer.

More than ever, carriers must be aware of the provisions of the UIPA claims regulations. Failing to do so and to act appropriately not only exposes the carrier to bad faith claims, but now there is the potential for a plaintiff through a UCL cause of action to admit evidence of the specific insurance regulations to get that information before a jury.

For a copy of the complete decision see:


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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