In Zhang v. Superior Court (No. 178542, filed 8/1/13), the California Supreme Court held that, although violations of the Unfair Claims Settlement Practices Act create no private right of action, insureds retain all other causes of action against insurers. Thus, merely because insurer conduct also violates the Unfair Claims Settlement Practices Act (referred to by the Court as the Unfair Insurance Practices Act (“UIPA”)), nothing precludes an action under the state’s Unfair Competition Law (“UCL”). Notably, however, the Court specifically confined its holding to first-party claims by insureds and stated it was not authorizing third-party claims against insurers under the UCL.
In Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, the Supreme Court held that UIPA (Insurance Code sections 790 et seq.), requiring insurers “to attempt in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear,” creates no private right of action, because enforcement power rests exclusively with the Insurance Commissioner. Thus, neither the insured nor a third-party claimant can sue the insurer for violating the statute.
In Zhang, the plaintiff sued California Capital Insurance Company following a fire at her commercial premises. Claiming breach of contract and breach of implied covenant of good faith and fair dealing, she alleged a litany of misconduct relating generally to the handling of her claim and the insurer’s alleged refusal to make payment adequate to repair the premises.
Zhang also alleged a third cause of action for violation of the UCL, adding allegations that California Capital engaged in unfair, deceptive and misleading advertising by promising to timely pay claims, with no real intention of paying the true value of the claims and no intention of honoring the advertised promises.
The trial court sustained California Capital’s demurrer to the third cause of action, ruling that fraudulent conduct by an insurer connected with conduct that would violate UIPA does not also give rise to a private civil cause of action under the UCL, based on Moradi-Shalal.
The Court of Appeal reversed, saying: “Moradi-Shalal did not state that insurers who violate the Unfair Insurance Practices Act can never be liable in tort to the injured party.” According to the appeals court, even if the Legislature did not intend to create new causes of action when it enacted UIPA, there was no legislative intent to repeal the UCL, or to displace existing rights and remedies for unlawful business practices in the insurance industry. Therefore, Zhang’s specific additional allegations of fraudulent misrepresentations and misleading advertising were sufficient to state a cause of action under the UCL.
The Supreme Court granted review to answer two questions: (1) Can an insured bring a cause of action against its insurer under the UCL based on allegations that the insurer misrepresents and falsely advertises that it will promptly and properly pay covered claims when it has no intention of doing so; and (2) Does Moradi-Shalal bar such an action?
The Supreme Court came down on the side of the policyholder, stating that: “We hold 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. We have made it clear 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 said that the UCL “borrows” rules set out in other laws and makes violations of those rules independently actionable. But a practice may also violate the UCL even if it is not prohibited by another statute. Although an action under the UCL “is not an all-purpose substitute for a tort or contract action,” the act provides an equitable means through which both public prosecutors and private individuals can bring suit to prevent unfair business practices and restore money or property to victims of these practices.
Stating that parties may not plead around Moradi-Shalal by merely relabeling a cause of action for claim handling that violates UIPA as one for unfair competition violating the UCL, the Court distinguished Zhang’s action because she had alleged false advertising.
Specifically, Zhang had alleged that California Capital misleadingly advertised that it would timely pay the true value of covered claims, and its treatment of her claim demonstrated it had no intention of honoring that promise. The Court noted that this could state an independent cause of action for fraudulent or unlawful business practices or unfair, deceptive, untrue or misleading advertising under the UCL. Thus, the Supreme Court rejected California Capital’s argument that the crux of Zhang’s UCL claim was improper claims handling, and the allegations of unfair competition and false advertising were nothing more than an attempt to plead around the bar of Moradi-Shalal.
In a separate concurring and dissenting opinion, Justice Werdegar stated that the majority opinion set too high a threshold for a sustainable UCL claim, by holding that conduct which merely violates the UIPA, in and of itself, can never support a UCL claim. According to the Justice, the “unlawful” prong of the UCL should be read as authorizing any UCL claim for conduct that violates of UIPA.
Zhang signals that insurers must carefully review all advertising statements for accuracy and the avoidance of misleading and potentially unrealistic representations on the scope of coverage offered and the handling of claims.
As a service to its clients and potential clients, Haight offers certification training to claims professionals on California’s Fair Claims Settlement Practices regulations and other claims-handling standards.
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