Zhang v. Superior Court

In Zhang v. Superior Court, 57 Cal.4th 364 (2013), the California Supreme Court affirmed the Court of Appeal’s decision, holding that an insured can allege a cause of action for violation of the California Unfair Competition Law (“UCL”) along with claims for breach of the implied covenant of good faith and fair dealing (bad faith) and false advertising. Such claims do not constitute an impermissible attempt to plead around the California Supreme Court’s decision in Moradi-Shalal v. Fireman’s Fund Ins. Co. (1988) 46 Cal.3d 287 (“Moradi-Shalal”), which held that violation of the Unfair Insurance Practices Act (“UIPA; Ins. Code §790, et seq.”) does not afford a private cause of action for such statutory violation. In the Zhang decision, the Supreme Court held that alleged bad faith insurance practices may qualify as any of the three statutory forms of unfair competition:

They are unlawful – an insurer is obligated to act fairly and in good faith to meet its contractual responsibilities imposed by common law as well as by statute;
They are unfair to the insured – unfairness lies at the heart of a bad faith cause of action; and
They may qualify as fraudulent business practices (under the UCL, it is necessary only to show that the plaintiff was likely to be deceived, and suffered economic injury as a result of the deception).

The Zhang lawsuit arose out of the tender of a first-party fire loss involving a commercial property by plaintiff Zhang to California Capital Insurance Company (“California Capital”). As a result of California Capital’s handling of the claim, Zhang filed a complaint against California Capital alleging causes of action for: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; and (3) violation of the UCL. As respects Zhang’s UCL claim, she alleged that California Capital had “engaged in unfair, deceptive, untrue, and/or misleading 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 insured’s’ covered claims” (i.e., the UCL claim was premised on California Capital’s alleged false advertising).

In response to Zhang’s complaint, California Capital filed a demurrer arguing that Zhang’s cause of action for violation of the UCL constituted an impermissible attempt to plead around the Moradi-Shalal decision barring private actions for unfair insurance practices under Insurance Code section 790.03. The trial court agreed, and sustained the demurrer without leave to amend. Thereafter, Zhang filed an appeal of the trial court’s decision. In response, the Court of Appeal reversed the trial court’s decision and held that Zhang’s false advertising claim was a viable basis for her UCL cause of action. Thereafter, California Capital filed a Petition for Review of the Court of Appeal’s decision in the Supreme Court. Subsequently, the Supreme Court accepted review of the Zhang decision.

Zhang’s UCL claim was premised on allegations of false advertising. She contended that California Capital misleadingly advertised that it would timely pay the true value of covered claims when, in fact, it had no intention of honoring its promise. In response, California Capital argued that Zhang’s UCL claim was actually directed at its claims handling, not its advertising. Hence, because Zhang’s complaint arose out of California Capital’s claims handling, it constituted an impermissible attempt to plead around the bar against filing private causes of action premised on violation of Insurance Code § 790.03.

In rejecting California Capital’s arguments, the California Supreme Court relied on its decision in Manufacturers Life Ins. Co. v. Superior Court (1995) 10 Cal.4th 257 and the California Court of Appeal’s decision in State Farm Fire & Cas. Co. v. Superior Court (1996) 45 Cal.App. 4th 1093. In the Manufacturers Life decision, the Supreme Court held that insurers were not exempt from UCL liability. The Supreme Court noted that an insured could not plead around Moradi-Shalal by basing a UCL cause of action on conduct violating only the UIPA, but that a UCL claim could be alleged when the insurer’s conduct independently violated the Cartwright Act (i.e., antitrust liability).

In the State Farm decision, the Court of Appeal rejected State Farm’s arguments that the insured’s claims of common law bad faith and fraud were an attempt to plead around the Moradi-Shalal bar against private causes of action based on Insurance Code section 790.03.

Based on the reasoning in the Manufacturers Life and State Farm decisions, the Supreme Court confirmed Zhang’s right to maintain a UCL cause of action as follows:

As noted in State Farm, bad faith insurance practices may qualify as any of the three statutory forms of unfair competition. (State Farm, supra, 45 Cal.App.4th at p. 1107.) They are unlawful; the insurer’s obligation to act fairly and in good faith to meet its contractual responsibilities is imposed by the common law, as well as by statute. (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574; Benavides v. State Farm General Ins. Co. (2006) 136 Cal.App.4th 1241, 1249.) They are unfair to the insured; unfairness lies at the heart of a bad faith cause of action. (Gruenberg, at pp. 573-574; State Farm, supra, 45 Cal.App.4th at pp. 1104-1105.) They may also qualify as fraudulent business practices. Under the UCL, it is necessary only to show that the plaintiff was likely to be deceived, and suffered economic injury as a result of the deception. (Kwikset Corp. v. Superior Court, supra, 51 Cal.4th at p. 322; In re Tobacco II Cases, supra, 46 Cal.4th at p. 312.)

The Supreme Court also minimized the scope of its decision affirming Zhang’s right to pursue a UCL claim by noting the narrow relief afforded under the UCL. The Supreme Court stated as follows:

As the State Farm court observed, 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. (State Farm, supra, 45 Cal.App.4th at pp. 1108-1110.) A UCL claim does not duplicate the contract and tort causes of action involved in bad faith litigation, where damages are central. (See Korea Supply Co. v. Lockheed Martin Corp., supra, 29 Cal.4th at p. 1150.)

Indeed, since State Farm was decided the scope of the UCL has been further restricted by the passage of Proposition 64 in 2004. Private plaintiffs must demonstrate economic injury caused by the alleged unfair competition, and may not represent the interest of others without meeting the requirements for a class action. (Kwikset Corp. v. Superior Court, supra, 51 Cal.4th at p. 326; Arias v. Superior Court, supra, 46 Cal.4th at p. 980.) Thus, there is additional support for State Farm’s conclusion that allowing UCL claims in common law bad faith cases is unlikely to resurrect the problems caused by Royal Globe. (State Farm, supra, 45 Cal.App.4th at p. 1110.) We note as well that those problems stemmed from the recognition of third party claims under section 790.03, not from claims by insureds against their insurers.