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Monday, 05 August 2013 23:13

California Supreme Court Pierces Insurance Shield Against Unfair Competition Lawsuits

In a landmark and long-anticipated ruling, the California Supreme Court held Aug. 1 that policyholders can accuse insurance companies of false advertising and other violations of the state's extensive unfair competition law. The ruling finds insurers are not immune from unfair competition claims over this kind of conduct, resolving a split between courts on the question.

The case resolves a significant issue for insurers doing business in California in that they are potentially subject to a private action under the California Unfair Competition law, UCL (Cal. Bus. & Prof. Code §17200) for conduct that violates California's Unfair Insurance Practices Act (UIPA) (Cal. Ins. Code §790 et seq.).

The UCL is a consumer protection statute that broadly proscribes "any unlawful, unfair or fraudulent business act or practice." California's Unfair Competition Law requires that a plaintiff must show he or she "has suffered injury in fact and has lost money or property as a result of . . . unfair competition."

The Supreme Court thereby affirmed the Court of Appeal’s decision and concluded that “UCL claims may be based on claims handling practices, as long as they do not rest exclusively on UIPA violations.” The UIPA does not immunize insurers from UCL liability for conduct that violates other laws in addition to the UIPA.

Although relatively narrow, the ruling appears to pierce the shield that insurers have previously enjoyed from unfair competition, potentially inviting more class actions and creating a new avenue for plaintiffs to score injunctions, refunds of premiums and attorneys' fees. The ruling applies only to first party claims (those brought by the insured against the insurer.)

The court decided two cases involving the Unfair Competition Law, holding, in one (Zhang v. California Insurance Co.), that an action may be stated under the act where the conduct violates the Unfair Insurance Practices Act, if it also violates some other statute or common law.  In the other case (Rose v. Bank of America), it announced that a UCL action may sometimes be maintained based on a violation of a federal statute, even though that statute does not authorize private relief.

In the insurance case (Zhang v. Superior Court), Justice Carol Corrigan wrote for the majority in clarifying the effect of the court’s 1988 decision in Moradi-Shalal v. Fireman’s Fund Ins. Companies, 46 Cal 3d 287, which barred private actions for conduct proscribed by Insurance Code section 790.03(h).

Justice Corrigan said:

“When the Legislature enacted the UIPA, it contemplated only administrative enforcement by the Insurance Commissioner….Private UIPA actions are absolutely barred; a litigant may not rely on the proscriptions of section 790.03 as the basis for a UCL claim…. However, when insurers engage in conduct that violates both the UIPA and obligations imposed by other statutes or the common law... the Legislature did not intend the UIPA to operate as a shield against any civil liability.”

The decision reinstates an action by Yanting Zhang against California Capital Insurance Company which she accuses of false advertising and bad faith. Zhang, the plaintiff, sued her insurer, California Capital Insurance, over a dispute arising from a fire at her business, contending that the insurer's handling of her claim was inadequate. Among the various claims asserted by Zhang in her complaint, she maintained that by promising to make timely and proper payment on claimed losses, her insurer had engaged in "false and misleading advertising" in violation of the California Unfair Competition Law. Zhang alleged that she personally suffered actual harm as a result of the insurer’s alleged wrongful actions and thereby broadened the scope of potential claims available to insured under the UCL.

Causes of action included breach of contract, bad faith, and violation of the UCL due to alleged false advertising by promising to provide timely coverage when the insurer had no intention of paying the true value of covered claims. The trial court sustained the insurer’s demurrer to the UCL claim based on Moradi-Shalal’s bar of private actions under Ins. Code § 790.03.  The Court of Appeal reversed and held that the false advertising claim was a sufficient basis for the UCL claim.

The Zhang v. Superior Court case settled the split in authority as to the interpretation of Moradi-Shalal v. Fireman’s Fund Ins. Companies, which held that when the Legislature enacted the Unfair Insurance Practices Act (the “UIPA”) it did not intend to create a private cause of action for the commission of the unfair practices listed in Insurance Code section 790.03(h). In Zhang, the Court held that Moradi-Shalal did not preclude first party UCL actions based on grounds that are independent from section 790.03, even when the insurer’s conduct also happens to violate section 790.03.

The insurer sought to have the UCL claim dismissed, arguing that the California Supreme Court's 1988 decision in Moradi-Shalel v. Fireman's Fund bars a private cause of action for any conduct that is covered under the California Unfair Insurance Practices Act, which itself provides no private right of action to insureds. In rejecting the insurer's argument, the California Fourth District Court of Appeals held that while the California Supreme Court's Morahi-Shalel decision bars private rights of action arising from claims handling conduct covered under the Unfair Insurance Practice Act, it does not bar a claim that is otherwise actionable under some other legal theory. Accordingly the court held that because false advertising is independently actionable under the UCL law, and because "the Legislature has clearly stated that the remedies and penalties under the UCL are cumulative to other remedies and penalties," Zhang's claim was not barred by Moradi-Shalel.

This ruling permits Zhang to include the UCL cause of action in her complaint. Whether or not she can actually prove the false advertising claims at trial is yet to be seen. Also, the Court pointed out the limited scope of remedies under the UCL: 1) a plaintiff in a UCL action cannot recover monetary damages or punitive damages; and 2) the remedies are limited to injunctive relief and in proper cases, restitution. Thus, the inclusion of this cause of action does not substantially increase the insurer's exposure to monetary damages, but insurers will likely now be exposed to a wide variety of potential new private actions arising from claims handling disputes---claims that previously had been presumed to be subject only to regulatory oversight.

Read the full text of the ruling HERE

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