California Supreme Court Finally Decides How a UCL Claim and First Party Bad Faith Claim Can Co-Exist

On August 1, 2013, the California Supreme Court issued its long-awaited decision in Zhang v. Superior Court, holding that an insured may assert a claim against an insurer based on California’s Unfair Competition Law, Business & Professions Code section 17200 et seq. (the “UCL”) for conduct that allegedly constitutes common law bad faith, even if the alleged conduct also happens to violate the Unfair Insurance Practices Act (UIPA).   

The Supreme Court’s decision resolves a simmering conflict among lower court decisions. A number of courts held that the Supreme Court’s landmark ruling in Moradi-Shalal v. Fireman’s Fund Ins. Companies, 46 Cal.3d 287 (1988), which abolished any private right of action to enforce the UIPA, precluded UCL claims based on specific unfair practices prohibited by Insurance Code section 790.03(h), which is part of the UIPA. Other courts found that Moradi-Shalal did not bar UCL claims when the basis for the UCL claim was common law bad faith, as opposed to the UIPA – even though the asserted “bad faith” practices are also prohibited under the UIPA.  The Supreme Court adopted the latter position, concluding:

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.

While the Court’s opinion does not dwell on the facts of the case, the claim involved an insured’s purchase of a liability policy to cover her commercial property. The insured disputed the insurer’s handling of her fire damage claim and sued the insurer for breach of contract, breach of the implied covenant of good faith and fair dealing (i.e., bad faith), and a violation of the UCL. 

The UCL claim alleged “unfair, deceptive, untrue, and/or misleading advertising” in that the insurer made promises as to coverage “when it had no intention of paying the true value of its insureds’ covered claims.”  The Court observed that the insured alleged “causes of action for false advertising and bad faith, both of which provide grounds for a UCL claim independent from the UIPA.”

The Zhang case was decided on demurrer. Thus, the Court considered only the allegations of the complaint, and it had to assume the truth of those factual allegations.

After presenting a thorough history of prior decisions over the last quarter century that have considered Moradi-Shalal’s effect on UCL lawsuits against insurers (and other defendants), the Supreme Court allowed the insured to pursue her UCL claim and observed,

Because Moradi-Shalal barred only claims brought under section 790.03, and expressly allowed first party [common law] bad faith actions, it preserved the gist of first party UCL claims based on allegations of [common law] bad faith. Moradi-Shalal imposed a formidable barrier, but not an insurmountable one.

As a result, the insured’s alleged claim of false advertising and “litany of bad faith practices” were “sufficient to support a claim of unlawful business practices.”

In summarizing its holding, the Court stated:

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, a UCL action may lie.  The Legislature did not intend the UIPA to operate as a shield against any civil liability.

A concurring opinion written by Justice Werdegar and joined in by Justice Liu agreed with the majority conclusion that the insured should be allowed to pursue her UCL lawsuit against the insurer, but disagreed with the conclusion that no UCL claim could ever be based on violations of the UIPA unless the Legislature affirmatively intended to preclude such indirect enforcement.

While the Zhang decision is likely to generate much attention and be cited extensively in the future, the Court’s holding is nevertheless quite limited and the following points should be noted:

  • The decision is restricted to UCL claims brought by first parties; that is, by insureds.  The Court specifically advised two times that whether third parties may pursue UCL claims “is a matter beyond the scope of this case.”
  • The decision reiterated that while the scope of a UCL claim is broad (“any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising”), the remedies are very narrow – restitution and injunctions. Damages in any form are not recoverable.
  • The UCL does not allow for attorney’s fees (except in those cases where the plaintiff could qualify as a private attorney general under California Code of Civil Procedure section 1021.5).
  • Since the UCL is solely an equitable claim, the trial court possesses “broad discretion” in issuing orders or judgments with respect to any restitution or injunctive relief, and defendants are allowed to advance not only various defenses to the UCL claim but also “equitable considerations” that could minimize or even eliminate a finding of a UCL violation.
  • The restrictions to a UCL claim added by Proposition 64 (standing to assert a UCL cause of action and complying with the class action requirements in any UCL action brought on behalf of others) still apply.
  • The Court referenced another lingering issue in UCL claims – what is the standard for determining what business acts or practices are “unfair” mean in the consumer context under the UCL. This issue, however, remains unsettled and for the Court to decide another day.

Finally, the most likely consequence of the Zhang decision is that insureds may, as a matter of course, add UCL claims to bad faith cases as one more cause of action, incorporating by reference the prior alleged bad faith allegations. Since any UCL claim does not allow a damage remedy, and the only monetary remedy is restitution, the ultimate impact of adding a UCL claim may be minimal.

Another Decision Uses the UCL to Circumvent the Moradi-Shalal Restriction as to Private Rights of Action Against Insurers

In a decision issued October 24, 2012, the California Second Appellate District, Division Four became the most recent decision applying California’s unfair competition law, Business & Professional Code, § 17200 et seq. (“UCL”), to bring bad faith claims against insurers, undercutting a key aspect of the decision in Moradi-Shalal v. Fireman’s Fund Ins. Cos.

In Ocie E. Henderson v. Farmers Group, Inc., the court analyzed and rejected the determinations of one line of California decisions issued in the years since Moradi-Shalal that precluded a private right of action under the UCL against insurers for violations of California’s Unfair Insurance Practices Act (“UIPA”), Ins. Code, § 790.03(h) et seq. See Textron Financial Corp. v. National Union Fire Ins. Co., and Safeco Ins. Co. v. Superior Court, abrogated on other grounds by Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co.

Henderson instead followed the same reasoning applied by the Fourth Appellate District, Division Two in Zhang v. Superior Court (review granted Feb. 10, 2010).

Zhang held that a cause of action for violation of the UCL based on conduct that allegedly violates the UIPA is not an end-run around Moradi-Shalal so long as that conduct also supports a claim against the insurer for something other than a UIPA violation. 

The conduct at issue in Zhang involved alleged fraudulent misrepresentations and misleading advertising regarding coverage. 

The conduct at issue in Henderson involved denial of property damage claims based on the failure to submit a proof of loss and late notice.  

Both Zhang and Henderson rely on State Farm Fire & Casualty Co. v. Superior Court, which held that a breach of contract or bad faith cause of action could serve as a predicate for a UCL claim even if the conduct supporting the claim also constitutes a violation of the UIPA. 

Additional decisions following Zhang include: Hughes v. Progressive Direct Ins. Co., review granted September 28, 2011, but deferred pending consideration and disposition of Zhang; Williams v. Prudential Ins. Co., 2010 U.S. Dist. LEXIS 14566 (N.D. Cal. 2010); Burdick v. Union Sec. Ins. Co., 2009 U.S. Dist. LEXIS 121768 (C.D. Cal. 2009).  

In Sanders v. Choice Mfg. Co., 2011 U.S. Dist. LEXIS 137365 (N.D. Cal. 2011), the district court refused to apply Zhang because of its unpublished status but nonetheless applied reasoning similar to Zhang in holding that plaintiff’s allegations regarding untrue and deceptive statements alleged more than just a violation of the UIPA because the conduct also involved allegations of the sale of insurance without first obtaining a license or certificate. 

Despite these holdings, other recent decisions in the district courts continue to apply broadly Moradi-Shalal and Textron but have left open their decisions pending the California Supreme Court’s determination in Zhang. See Wayne Merritt Motor Co. v. N.H. Ins. Co., 2011 U.S. Dist LEXIS 122320 (N.D. Cal. 2011) (dismissal without prejudice of UCL claim based on allegations that the insurer misrepresented coverage by “burying” a limitation of liability clause in the endorsement); Willbanks v. Progressive Choice Ins. Co., 2010 U.S. Dist. LEXIS 128144 (E.D. Cal. 2010) (dismissed without prejudice of UCL claim based on unfair claims practices).

While Zhang has been fully briefed since June 2010, oral argument has yet to be set. Presumably, the Supreme Court’s long-awaited decision in Zhang will bring certainty to these conflicting decisions and reconcile the interplay of the UCL and the UIPA.

We will continue to report on the developments in this significant area of insurance litigation.

 

Another Toehold in Using the UCL to Scale the Barriers of Moradi-Shalal

In 1988, the California Supreme Court issued its landmark decision in Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287, disallowing private rights of action based on violations of the Unfair Insurance Practice Act (“UIPA”), otherwise known as third-party bad faith claims. Shortly thereafter, the prohibition was extended to first-party bad faith claims.

Most significantly, a series of Court of Appeal decisions disallowed violations of the UIPA to be brought as claims under the California’s “Unfair Competition Law” (Business and Professions Code Section 17200, et seq., or the “UCL”). 

As one court concluded:

we have no difficulty in [holding] the Business and Professions Code provides no toehold for scaling the barriers of Moradi-Shalal.” Safeco Ins. Co. v. Superior Court, 216 Cal. App. 3d 1491, 1494 (1990). 

More recently, another court held that “parties cannot plead around Moradi-Shalal’s holding by merely relabeling their cause of action as one for unfair competition.” Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061, 1070 (2004).

In November 2009, we reported on Zhang v. Superior Court, a case that rejected Textron, and held that because the UCL allows a plaintiff to allege unfair, unlawful, and misleading conduct against businesses generally (including insurers), the fact an insured asserts what appear to be violations of the UIPA is not necessarily an end run around Moradi-Shalal so long as the insured also alleges the insurer acted unfairly by engaging in false and deceptive advertising, suggesting it would provide coverage in the event of a loss, when it had no intent to do so. 

The case was short-lived, as the Supreme Court accepted review in February 2010 and the decision became depublished. While the Zhang case is fully briefed, the Supreme Court has not yet set oral argument.

On June 15, however, another Court of Appeal decision issued again sought to undercut the prohibition on using the UCL to pursue UIPA-like claims. 

In Hughes v. Progressive Direct Ins. Co., the plaintiff sued his insurer in a purported class action based on the automobile insurer’s alleged company-wide practice of steering its insureds to repair shops that were part of Progressive’s Direct Repair Program (DRP) and misrepresenting their ability to take their vehicle to a non-DRP repair shop. 

The sole claim alleged was under the UCL, but the predicate statute relied on to support the UCL claim was Insurance Code section 758.5.

That statute, which prohibits insurers from requiring an insured’s vehicle to be repaired at a specific repair shop, or suggesting a specific shop be used, unless the insured is informed in writing of his or her rights to select another repair shop, does not, just like the UIPA, permit a private right of action but only enforcement by the Insurance Commissioner pursuant to the UIPA. 

Accordingly, the trial court sustained the insurer’s demurrer to the complaint, concluding that just as the UCL could not be used to circumvent UIPA claims under Moradi-Shalal, neither could a UCL claim proceed based upon Section 758.5.    

The Court of Appeal reversed, and concluded that Moradi-Shalal does not bar a claim by an insured against an insurer under the UCL based solely on the allegations the insurer violated Section 758.5. 

After discussing in detail the decisions issued since the time of Moradi-Shalal vis-à-vis the UCL, as well as the legislative history of Section 758.5, and then relying on a parsed reading of the language of the UCL in which its remedies are “cumulative” to other laws unless otherwise “expressly” provided, the court found that an alleged violation of a statute like Section 758.5, so long as it does not involve conduct violating the UIPA, “may serve as the predicate for a UCL claim absent an express legislative direction to the contrary.”  

The decision, however, was not one of clear unanimity. One of the three Justices on the appellate panel issued his own concurring opinion, in which he expressed his “considerable misgivings” as to the majority opinion. After noting that the opinion “hangs precipitously on one word, namely ‘express,” Justice Fred Woods lamented that the social problems sought to be addressed by the Moradi-Shalal decision and various legislative remedies might now be undone, and that he saw “storm warnings on the horizon.”

Perhaps, just as the Supreme Court accepted review of the Zhang case last year to address that appellate decision seeking to create a chink in the armor of Moradi-Shalal, it will similarly accept review of Hughes to address this latest attack on the scope of Moradi-Shalal and bring some certainty to whether the reach of the UCL is as broad as these two lower appellate courts have held