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CA Court of Appeal: Unfair Insurance Practices Act Violation May Support Unfair Competition Law Claim

By: Kurt W. Melchior

A recent appeals court decision moves away from insurance law precedent set more than 20 years ago.  The court affirms a policyholders' right to sue an insurer in court, as long as the insurers actions violate BOTH the Unfair Insurance Practices Act and the Unfair Claims Law.

Since 1988, when the California Supreme Court decided Moradi-Shalal v. Fireman's Fund Ins. Co., 46 Cal. 3d 287, policyholders have been unable to bring claims for violation of the Unfair Insurance Practices Act (UIPA"), Ins. Code sec.790 et seq., and particularly for violation of section 790.03, which defines numerous "prohibited acts" in insurance claims administration. Recently, in Zhang v. Superior Court ___ Cal. App. 4th ___; 09 DJDAR 15454 (October 29, 2009), the California 4th District Court of Appeal held that an insured can bring a private civil claim for fraudulent conduct by an insurer under the Unfair Competition Law ("UCL")[1], where a UIPA violation is coupled with misconduct.  In particular, the court sustained the trial court's decision that a policyholder can pursue a claim arising out of an insurer's promise that it will cover an insured's loss, if the insurer had made that promise in bad faith.  Thus, the victim can bring an insurer's unfair claims handling before the court if the victim can also show that at some earlier point – particularly in promoting and selling the insurance – the insurer promised fair claims handling, but had no intention to carry out that promise.  The actual bad faith handling of the claim should be significant evidence to prove that non-intention.


Yanting Zhang ("Zhang") sued her insurer, California Capital Insurance Company ("California Capital"), over a coverage dispute, following a fire at Zhang's property.  Among other things, Zhang alleged that California Capital "engaged in unfair, deceptive, untrue, and/or misleading advertising . . . . [by promising] its insureds that it will timely pay proper coverage in the event the insured suffers a covered loss . . . . [when California Capital] in fact has no intention of properly paying the true value of its insureds' covered claims."  California Capital demurred, contending that Zhang could not state a private cause of action due to the California Supreme Court's decision in Moradi-Shalal v. Fireman's Fund Ins. Companies, 46 Cal. 3d. 287 (1988), which limited enforcement of the UIPA to action by the Insurance Commissioner.  The trial court sustained the demurrer and Zhang appealed. The Court of Appeal reversed and remanded the case to the lower court.


A. Violation of the UIPA

The Appeals Court agreed with the trial court to the extent it held that a claimant cannot state a private cause of action for tort damages under the UCL based "directly and solely" on violations of the UIPA,[2] stating:

"if a plaintiff relies on conduct that violates the [UIPA] but is not otherwise prohibited, Moradi-Shalal requires that a civil action under the UCL be considered barred.  Thus, if the plaintiff . . . had attempted to sue California Casualty under the UCL because the latter had "[n]ot attempt[ed] in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear" (Ins. Code, § 790.03, subd. (h)(5)) or "failing, after payment of a claim, to inform insureds or beneficiaries, upon request by them, of the coverage under which payment [was] made (Ins. Code, § 790.03, subd. (h)(9), a somewhat closer case would be presented."[3]

Thus, a violation of the UIPA, does not, in itself, give rise to a private cause of action for violation of the UCL.

B. Violations of both the UIPA and the UCL

The Court of Appeal departed from the trial court's rationale in evaluating acts alleged to violate the UIPA which also violate a specific provision of the UCL, holding that such acts can give rise to a private cause of action. The court began by determining that "The UCL . . . on its face applies to all ‘businesses' . . . certainly does not expressly except or exempt insurers . . . [and] authorizes any injured person to sue for the violation of its requirements . . . that is, for ‘unfair competition.'"[4]  Second, the Court noted that "'Unfair competition' is defined in section 17200 [of the UCL] to ‘include any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising.'"  Therefore, the court concluded that where a plaintiff alleges wrongful conduct that is not merely improper under the UIPA, but is also violates the UCL, a claim can be sustained.[5]  Thus, since Zhang had specifically alleged that California Capital made fraudulent misrepresentations and disseminated misleading advertising misstating its intentions to pay coverage to its insureds, she properly stated a claim under the UCL.[6]  On this point, the Court held:

"[T]he UCL . . .defines ‘unfair competition' to include ‘unlawful, unfair or fraudulent business' acts or practices, and ‘unfair, deceptive, untrue, or misleading advertising.'  There can be no doubt that false advertising is a recognized basis for suit under the UCL both expressly as provided in the statutes and in case law. . . The same is true for fraud."[7]

The court concluded that "at the very least, Zhang's allegations . . . that [California Capital] solicited her business through false advertising and false promises clearly justifies a claim under the UCL."[8]

The Court of Appeal emphasized that the California Supreme Court's holding in Moradi-Shalal does not limit private causes of action against insurers, where the allegations in a complaint are independently sufficient to support a claim for violation of the UCL:

"The Supreme Court in Moradi-Shalal did not state that insurers who violate the UIPA can never be liable in tort to the injured party . . .Indeed, after explaining that enforcement of violations of [the UIPA] was vested solely in the insurance commissioner, it noted that ‘the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as 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.'"[9]

Finally, the Court of Appeal gave the trial court guidance in evaluating Zhang's UCL claim on remand:

"[N]othing in this opinion should be construed as a holding that Zhang can recover . . . if she proves only that California Capital behaved unreasonably in handling her claim. She will also have to establish that [California Capital] advertised or otherwise represented to the public that it operated honestly and equitably in settling claims and that it in fact had a policy or regular practice of ‘lowballing,' delaying, or taking unfair advantage so that its advertising and/or representations were in fact likely to mislead the public."[10]


The ruling in Zhang is significant in that it establishes that an insurer can be liable under the UCL for a policy of denying or limiting claims in bad faith, subject to additional elements of proof.  As such, the decision tempers the result of Moradi-Shalal, which barred private claims against insurers for violation of the UIPA.  Simply put, bad faith acts which were actionable as violations of the Insurance Code prior to Moradi-Shalal (and which are no longer actionable under the UIPA)[11] may yet be actionable under the UCL.  Zhang is illustrative of a series of cases mitigating the Moradi-Shalal holding and in essence partially restoring the pre-Moradi-Shalal legal landscape.[12]

[1] The UCL is codified in the California Business and Professions Code, §17200 et seq.

[2] Zhang, at 4.

[3] Id., at 8-9. (emphasis in original).

[4] Id., at 5, citing (Bus. & Prof. Code, § 17204.)

[5] Id., at 6.

[6] Id., at 9.

[7] Id. (emphasis in original).

[8] Id., at 11.

[9] Id., at 7.

[10] Id. at 11 (emphasis in original).

[11] Since the holding in Moradi-Shalal, the Insurance Commissioner had been vested with the exclusive authority to enforce the UIPA via administrative actions, but such actions can be plagued by administrative delays.

[12] Other cases following this trend are City of Hollister v. Monterey Ins. Co., 165 Cal. App. 4th 455 (2008) and Manufacturers Life Ins. Co. v. Superior Court,10 Cal.4th 257 (1995).

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