September 12, 2013
Twenty-five years ago, in Moradi-Shalal v. Fireman’s Fund Insurance Companies, 46 Cal.3d 287, 250 Cal.Rptr. 116 (1988), the California Supreme Court rejected private rights of action for unfair claims handling practices under the Unfair Insurance Practices Act (UIPA), California Insurance Code § 790.03(h). The Court’s Moradi-Shalal opinion left uncertainty regarding whether and under what circumstances plaintiffs can “plead around” Moradi-Shalal by suing insurers under California’s Unfair Competition Law (UCL), Business & Professions Code, § 17200, for conduct that violates the UIPA.
The California Supreme Court’s recent decision in Zhang v. Superior Court (57 Cal.4th 364, 159 Cal.Rptr.3d 672, 304 P.3d 163 (2013), brings the intersection of the UIPA and UCL into clearer focus. The Zhang decision rejects the insurance industry’s argument that Moradi-Shalal shields insurers from statutory liability for unfair claims practices. Although acknowledging that Moradi-Shalal precludes UCL actions based solely on violations of the UIPA, the Zhang decision allows insureds to bring UCL claims based on conduct that violates common law duties and statutes other than the UIPA, even if the insurer’s conduct also violates the UIPA. Whether third party claimants can sue insurers under the UCL was not before the court and the court carefully avoided addressing the question.
The UCL prohibits “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.” By prohibiting “unlawful” business practices, the UCL “borrows” violations of other laws and makes a violation of those laws a per se violation of the UCL. Conduct that does not violate a specific statute may still run afoul of the “unfair” and “fraudulent” prongs of the UCL.
A split in authority emerged in the intermediate appellate courts regarding the validity of the insurer’s contention that Moradi-Shalal insulated the insurance industry from any liability under the UCL based on conduct that violates the UIPA, regardless of whether that conduct also violates another common law or statutory duty. Plaintiffs relied on State Farm Fire & Casualty Co. v. Superior Court, 45 Cal.App.4th 1093, 53 Cal.Rptr.2d 229 (1996) (State Farm), which allowed a UCL based on an insurer’s allegedly fraudulent and bad faith conduct claim in surreptitiously reducing the earthquake coverage available under homeowners policies. Insurers relied on Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal.App.4th 1061, 13 Cal.Rptr.3d 586 (2004) (Textron), which rejected the result and reasoning in State Farm as inconsistent with Moradi-Shalal.
The Zhang Opinion
In an opinion authored by Justice Corrigan and joined by 4 of the remaining 6 justices, the supreme court agreed with State Farm and overruled Textron. The court pointed out that allowing a cause of action under the UCL in common law bad faith cases raises none of the public policy concerns expressed in Moradi-Shalal about allowing an implied right of action for damages under the UIPA. UCL remedies are limited to restitution and injunctive relief and thus do not duplicate the contractual and tort remedies recoverable in insurance bad faith litigation. Moreover, most of the concerns expressed in Moradi-Shalal about the “undesirable social and economic effects” of allowing private rights of action under the UIPA—proliferating litigation, coercive settlement demands, conflicts of interest, excessive jury awards, and escalating insurance and legal costs—stemmed from statutory bad faith claims brought by third parties, not common law claims by policyholders against their insurers. The court expressly withheld judgment on “[w]hether similar concerns weigh against recognizing a right of third parties to pursue UCL claims.”
The court minimized insurers’ concerns about the manageability of UCL litigation based on unfair claims practices. The insurer had raised the specter of having its claims handling practices in thousands of cases examined in UCL cases seeking injunctive relief or restitution. While noting that those concerns are irrelevant at the demurrer stage where the court need not consider how the insured will prove her claim, the court stressed that a single unfair claims practice is a sufficient foundation for a UCL. The court further noted that if plaintiff attempts to recover on behalf of other insureds, she will be required to certify a class action.
Justice Werdeger wrote a concurring opinion, joined by Justice Liu. They would have gone further than the majority and ruled that conduct that violates only the UIPA can provide the basis for a viable UCL claim.
My next post will discuss the practical implications of the court’s reasoning.