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 LEXIS 137365 (N.D. Cal. 2011), the district court refused to apply Zhang because of its unpublished status but nonetheless applied reasoning similar to Zhang in holding that plaintiff’s allegations regarding untrue and deceptive statements alleged more than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.


California Confirms Insurer's Right to Intervene in Underlying Action to Protect Its Own Interests


In Gray v. Begley, (filed March 22, 2010), the Second Appellate District, Division Three (Justice Croskey), confirmed that an insurer defending its insured may intervene in the underlying action to protect its interests against a private settlement between the insured and the injured party. This right exists even if the insurer has reserved its rights to deny coverage later.

Dicta in prior case law suggested that, in reservation of rights situations, insurers did not have a sufficient interest to justify intervention. The Begley decision, however, confirms that the right to intervene is no different in a situation where the insurer has admitted coverage than a situation where the insurer defends under a reservation of rights.

[T]he key factor in determining whether an insurer is bound by a settlement reached without the insurer’s participation is whether the insurer provided the insured with a defense, not whether the insurer denied coverage.’ It therefore follows that an insurer providing a defense, even though subject to a reservation of rights, may intervene in the action when the insured attempts to settle the case to the potential detriment of the insurer.” Begley at pp. *20-22, citing Safeco Ins. Co. v. Superior Court, 71 Cal. App. 4th 782, 785, 787 (1999).

The necessity for such a rule was evident from the facts of the particular case.

In a personal injury auto accident, CNA and the excess carrier settled the case against their insured corporate defendant for $8 million. However, with respect to its insured driver who was not part of the settlement, CNA defended him under a reservation of rights. The driver had been intoxicated at the time of the accident. After trial, judgment was entered against the driver for $4,500,000.

Although the driver initially filed a motion to vacate the judgment on the basis that the $8 million settlement could be used as a set-off, he subsequently withdrew that motion, released his defense counsel and entered into a private settlement with the plaintiff in exchange for a covenant not to execute against the judgment with an assignment of his rights under the CNA policy to plaintiff. CNA moved to intervene on its own motion to vacate the judgment and apply the set-off. The Court of Appeal agreed:

“CNA should be permitted to intervene to pursue its attempt to reduce that judgment.” Begley, at *23. CNA provided . . . a defense, and had the right to control that defense. Its request for intervention was simply an attempt to pursue its defense—including a motion for setoff—after [the insured] chose to no longer comply with CNA’s chosen strategy. Begley, at *23, n. 19.

Although the facts in Begley implicated the insurer’s right to control the defense after judgment was rendered against the insured, the same principles apply and frequently occur in situations involving private settlements between the insured and third party claimant prior to judgment. As long as the insurer is defending the insured, it has the right to control settlement and defense of the injured party's action against the insured.

This means any settlement between the insured and injured party without the insurer's consent cannot establish the insured's liability or the amount thereof in a subsequent action against the insurer. Hamilton v. Maryland Cas. Co., 27 Cal. 4th 718, 732 (2002); Safeco Ins. Co. v. Superior Court, 71 Cal. App. 4th 782, 785, 787 (1999). Significantly, Begley confirms that a defending insurer may intervene in a good faith settlement motion hearing that seeks judicial approval of a private settlement between the insured and injured party in the underlying action. How far an insurer may go in protecting its interests in such a hearing or otherwise in the underlying action will depend on the particular circumstances of each case.

In addition, certain policy provisions in liability policies may bar such private settlements with the injured party. Defending insurers should rely on these provisions in conjunction with the settled principles articulated in the case law. These policy provisions include:

  • Cooperation clause: “You and any other involved insured must ... cooperate with us in the investigation or settlement of the claim or defense against the ‘suit’ ... ” [ISO Commercial General Liability Coverage Form, CG 00 01 12 04, § IV, ¶ 2.c. (emphasis added)]
  • “No voluntary payments” clause: “No insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.” [ISO Commercial General Liability Coverage Form, CG 00 01 12 04, § IV, ¶ 2.d.]
  • “No action” clause:  “A person or organization may sue us to recover on an agreed settlement ... An agreed settlement means a settlement and release of liability signed by us, the insured and the claimant or the claimant's legal representative.” [ISO Commercial General Liability Coverage Form, CG 00 01 12 04, § IV, ¶ 3.

Of course the rule is different where the insurer refuses to defend. If the contractual duty to defend is breached, the insurer forfeits its right to control the defense and settlement. The insured may enter into a non-collusive settlement with the injured party without the insurer's consent. See Pruyn v. Agricultural Ins. Co., 36 Cal. App. 4th 500, 515 (1995). Likewise, the insurer would have no right to intervene in the underlying action. Begley, at *19.