Daily Blast August 1, 2013

On August 1, 2013, the Supreme Court of California issued an opinion in Zhang v. Superior Court of San Bernardino County (August 1, 2013, S178542) ___ Cal.4th ___, analyzing whether insurance practices that violate the Unfair Insurance Practices Act (UIPA) can support an Unfair Competition Law (UCL) action. (Slip opn., p. 1.) The Supreme Court held that Moradi-Shalal v. Fireman’s Fund Ins. Companies (1996) 46 Cal.3d 287 (“Moradi-Shalal”) does not preclude first party UCL actions based on grounds independent from Insurance Code section 790.03, even when the insurer’s conduct also violates section 790.03. (Id. at p. 2.)

Plaintiff purchased a comprehensive general liability policy from defendant insurance company. (Slip opn, p. 3.) Plaintiff sued after disputes in coverage and alleged causes of action for breach of contract, breach of implied covenant of good faith and fair dealing, and violations of the UCL. (Id. at pp. 2-3.) In her UCL claim, plaintiff alleged that the insurance company had engaged in false advertising “by promising to provide timely coverage in the event of a compensable loss, when it had no intention of paying the true value of its insureds’ covered claims.” (Id. at p. 3.) The insurance company demurred to the UCL claim, contending it was impermissible to plead around Moradi-Shalal’s bar against private actions for unfair insurance practices under section 790.03. (Ibid.) The trial court sustained the demurrer without leave to amend. (Ibid.) The Court of Appeal reversed, holding that plaintiff’s false advertising claim was a viable basis for her UCL cause of action. (Ibid.) Defendant sought review. (Ibid.)        

The Supreme Court affirmed the Court of Appeal’s judgment. (Slip opn., p. 24.) The Supreme Court addressed the evolution of the law regarding UCL claims against insurers after its decision in Moradi-Shalal. (Id. at pp. 8-23.) In Manufacturers Life Ins. v. Superior Court (1995) 10 Cal.4th 257 (“Manufacturers Life”), the court held that acts violating both UIPA and the Cartwright Act could give rise to a UCL claim—UIPA does not exempt insurers from liability for anticompetitive conduct. (Id. at p. 17.) Thereafter, State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093 (“State Farm”) recognized that the reasoning in Manufacturers Life supported claims for UCL relief based on conduct proscribed by the UIPA, if it was independently actionable under the common law fraud and bad faith actions. (Ibid.) Next, the Supreme Court decisions in Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553 and Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163 (“Cel-Tech”) expanded on the law, explaining that a statute may bar a UCL action if that statute absolutely precluded private causes of action or clearly authorized the defendant’s conduct. (Ibid.) After the decision in Cel-Tech, a split in Court of Appeal opinion was created by Textron Financial Corp. v. National Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061 (“Textron”), which held that UCL actions may not be brought for the type of activities covered by the UIPA. (Id. at pp. 14-15, 18.)          

The Supreme Court in Zhang concluded that Moradi-Shalal does not bar a UCL action against an insurer based on grounds independent of the UIPA. (Id. at pp. 23-24.) Moradi-Shalal“was concerned with the adverse effects of recognizing an implied right of action for damages under section 790.03, whereas UCL remedies are limited in scope, generally extending only to injunctive relief and restitution.” (Id. at p. 20.) The court explained that a plaintiff may not use the UCL to substitute for a tort or contract action and plead around an absolute bar to relief. (Id. at pp. 2, 4.) Indeed, the act provides equitable means for private individuals to bring suit to prevent unfair business practices and restore damages to victims. (Id. at p. 4.) However, the UIPA does not immunize insurers for conduct that violates other laws in addition to the UIPA. (Ibid.) Accordingly, the Supreme Court disapproved of Textron to the extent it was inconsistent with the opinion and approved of the State Farm analysis. (Id. at pp. 21, 23.) The court concluded that a UCL cause of action was supported by plaintiff’s bad faith claims, as well as her false advertising claims. (Id. at p. 23.)

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