California Supreme Court Hears Argument on Whether Insurance Code Limits UCL Lawsuits Against Insurers

By Samuel Sorich and Larry Golub

On May 8, 2013, the California Supreme Court convened to hear oral argument in Zhang v. Superior Court. The case presents the issue of whether conduct of an insurer, which is related to conduct that would violate California’s Unfair Insurance Practices Act, Insurance Code, §790.03(h) et seq. (UIPA), can be the basis for a private civil cause of action against the insurer under California’s Unfair Competition Law, Business & Professions Code, §17200 et seq. (UCL).

The Court of Appeal in Zhang had ruled in October 2009 that an insurer may be sued by a private citizen for conduct prohibited by the UCL even though the conduct is within the scope of the UIPA. The Supreme Court accepted review of the matter in February 2010.

At the oral argument session, counsel for the insurer relied on the California Supreme Court’s 1988 ruling in Moradi-Shalal v. Fireman’s Fund Insurance Companies, which held that violations of the UIPA may be prosecuted only by administrative action taken by the Insurance Commissioner, not by civil action by private citizens. Counsel argued that the holding in Moradi-Shalal bars a UCL action against an insurer when the action is based on insurer conduct that is governed by the UIPA.

Counsel for the plaintiff insured responded that Moradi-Shalal does not preclude the insured’s UCL action against the insurer, pointing to language in the Moradi-Shalal decision which noted that “the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as fraud, infliction of emotional distress, and (as to the insured) either breach of contract or breach of the implied covenant of good faith and fair dealing.”

We have monitored the Zhang case and other appellate court decisions on the interplay between the UIPA and the UCL in prior blogs. Please see here, here, here and here.

The Supreme Court is required to issue a written opinion in the Zhang case within 90 days of the date of the oral argument, or by August 6, 2013.

The Supreme Court focused on the UCL this week. On May 7, 2013, the Court heard oral argument in Rose v. Bank of America which presents an issue analogous to the issue in Zhang. The question in Rose is whether a cause of action under the UCL can be predicated on an alleged violation of the Truth in Savings Act (12 U.S.C. $4301 et seq.) despite Congress’s repeal of the private right of action initially provided for under that Act.

 

Recent Regulatory Rulings May Provide Leverage for Insurers

As recently reported in this blog post, Los Angeles Superior Court Judge Gregory Alarcon invalidated the California Department of Insurance's regulation on estimating replacement costs for homeowners insurance (10 CCR 2695.183) in Association of California Insurance Companies (ACIC) and Personal Insurance Federation of California v. Jones. This represents the second judicial determination that the Department has overstepped its regulatory authority under the Unfair Practices Act in less than a year. 

In the earlier ruling (the “Torchmark” case), issued in August of 2012, Administrative Law Judge Stephen Smith found that the Department's Fair Claims Settlement Practices Regulations (FCPR) may not be used by the Department to make Unfair Practices allegations under Insurance Code section 790.03(h). A discussion of the Torchmark administrative case, which was argued by Barger & Wolen's senior insurance regulatory attorney, Robert Hogeboom, is available here

In both cases, it was determined that the Department:

  1. unlawfully expanded the intended scope of section 790.03 and
  2. failed to follow the statutory procedures mandated by Insurance Code section 790.06 for taking action against insurers based on unfair practices not listed in section 790.03.

The insurance industry raised the ruling by Judge Smith, as persuasive authority, in the ACIC case as well as in another pending administrative action. While it remains to be seen what affect the Torchmark ruling will have in these other cases, the decision may be helping insurers gain some much-needed leverage when dealing with the Department and its sometimes strong-arm enforcement actions.

The Department, for its part, has sought to downplay the significance of the Torchmark decision, noting that it is not precedential. At least one senior attorney for the Department has urged that Torchmark is not a "final" decision - a claim that we discount.

The trend in the courts, nonetheless, appears to be moving towards holding the Department to the intended limits of the Unfair Practices Act. We will continue to monitor future activities in this area.

Insurance Cases to Watch in 2013

Larry Golub was quoted in a Jan. 1, 2013, article published on Law360, Insurance Cases to Watch in 2013 (subscription required) about key insurance cases lawyers, and those in the insurance industry, should keep an eye out for in 2013. Among other things, the article mentioned litigation filed over Hurricane Sandy losses, cyber liability claims and a much-anticipated California Supreme Court ruling on whether the state's unfair competition law can be used to accuse insurance companies of bad faith.

Golub's comments dealt with that case before the California Supreme Court, Zhang v. The Superior Court of San Bernardino County, which will decide whether policyholders can sue insurers for misrepresentation and false advertising for not promptly paying claims.

Golub told the publication that the state's courts have been split on the issue although insurers insist that Zhang is at odds with the California Supreme Court's decision in a 1988 case prohibiting private rights of action for violations of the Unfair Insurance Practices Act.

Prior to that ruling, insurance companies raised rates fearing they would be hit with private lawsuits brought under that law, a pattern that could repeat itself depending on what the Supreme Court decides, Golub said. The state's unfair competition law allows for restitution but not damages.

The remedies may be limited, but the breadth of the statute is very broad,” he said. “Since there are so many cases coming out on both sides of the issue, it's one that demands resolution.”

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