Implications of Allowing Unfair Competition Law Claims for Bad Faith Claims Handling: Zhang v. Superior Court

September 16, 2013

Insurance LawMy last post discussed the California Supreme Court’s decision in Zhang v. Superior clarifying the circumstances in which a policyholder can sue an insurer under the California Unfair Competition Law, Business & Professions Code § 17200. Today’s post elaborates on the practical implications of the court’s decision.

Practical Implications

The Zhang decision’s impact on insurance claims litigation remains to be seen. The court reaffirmed Moradi-Shalal and refused to resurrect private rights of action under the UIPA. While any violation of the UIPA can be reframed as a violation of an array of other common law and statutory duties, remedies under the UCL are limited to restitution and injunctive relief. Restitution of premiums is difficult to justify in bad faith claims handling disputes in which policyholders seek to affirm the contract and recover damages for breach of contract and bad faith. In challenging restitution awards in such cases, insurers will point to language in footnote 10 of the Zhang opinion recognizing that courts have “discretion to withhold restitutionary relief if equity so requires.” Policyholders will counter with language from another California Supreme Court opinion explaining that “the legislature has clearly stated its intent that the remedies and penalties under the UCL be cumulative to other remedies and penalties.” Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal.4th 553 (1998).

The decision’s larger significance lies in the possibility of recovering private attorney general fees under Code of Civil Procedure § 1021.5 in successful UCL actions, a possibility the supreme court acknowledged in footnote 4 of its Zhang opinion. Such awards are discretionary and depend on plaintiffs convincing the trial court that their UCL claims “resulted in the enforcement of an important right affecting the public interest.” Class action lawsuits in which plaintiffs secure an injunction against a harmful claims practice are likely to meet the “public interest” threshold. Whether run-of-mill insurance bad faith claims serve the public interest will be more difficult to prove.

The Zhang decision also has the potential to expand the scope of litigation over insurance claims handling. The court recognized that sufficiently similar UCL claims based on an insurer’s breach of the implied covenant of good faith and fair dealing can be litigated as a class action. Moreover, even individual litigants may rely on the court’s decision in seeking discovery of pattern and practice evidence in order to establish the insurer’s liability under the “unfair” prong of the UCL or to justify injunctive relief.