• Zhang v. Superior Court (California Capital Insurance Co.) (August 1, 2013) - - Cal.4th - - , 2013 W.L. 3942607
  • November 11, 2013
  • Law Firm: McCormick Barstow Sheppard Wayte Carruth LLP - Fresno Office
    Plaintiff Yanting Zhang sued California Capital Insurance Company in a dispute over coverage for fire damage to her commercial property. Her complaint included causes of action for breach of the insurance contract, breach of the implied covenant of good faith and fair dealing, and violation of the Unfair Competition Law (“UCL,” Calif. Bus. & Prof. Code §§ 17200 et seq.). Zhang’s UCL cause of action alleged that California Capital “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 insureds' covered claims.

    Zhang’s UCL claim required the Supreme Court to resolve a split among the appellate courts. In State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093, 1107, the Second District held the plaintiff-insureds sufficiently alleged a cause of action against their insurer under the UCL based on allegations of conduct constituting common law fraud and breach of the implied covenant of good faith and fair dealing, even though the same conduct violated the Unfair Insurance Practices Act (“UIPA,” Calif. Ins. Code §§ 790 et seq.). However, in Textron Financial Corp. v. National Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061, 1070, the Fourth District held that, “While insurance companies are subject to California laws generally applicable to other businesses, including laws governing unfair business practices . . ., parties cannot plead around Moradi-Shalal's holding by merely relabeling their cause of action as one for unfair competition.”


    California Capital demurred to Zhang’s UCL claim. California Capital relied on Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal.3d 287, 304, in which the Supreme Court held when the Legislature enacted UIPA, it did not intend to create a private cause of action for commission of the various unfair practices listed in Insurance Code § 790.03.  California Capital also relied on the holding in Textron that a UCL claim may not be brought for settlement practices prohibited by UIPA. California Capital argued that the crux of Zhang’s UCL claim was improper claims handling, and the allegations of unfair competition and false advertising were nothing more than an attempt to plead around the bar of Moradi-Shalal against private actions for violations of UIPA.

    The trial court sustained the demurrer without leave to amend. The Court of Appeal reversed, holding that Zhang's false advertising claim was a viable basis for her UCL cause of action. The Court of Appeal disagreed with Textron, believing it “focused too narrowly on the ‘unfair’ prong of potential liability under the UCL.” The appellate court endorsed the proposition, which it drew from State Farm, that an insurer is not protected from UCL liability simply because its claims handling practices may be prohibited by Insurance Code § 790.03. The appellate court decided that Zhang's false advertising claim supported her UCL cause of action, a result it deemed consistent with Moradi-Shalal. California Capital sought review by the Supreme Court.


    Justice Corrigan, joined by Chief Justice Cantil-Sakauye and Justices Kennard, Baxter and Chin, held that Moradi-Shalal does not preclude first party UCL actions “based on grounds independent from” Insurance Code § 790.03, even when the insurer's conduct also violates section 790.03. The Court stated it previously “made it clear that while a plaintiff may not use the UCL to ‘plead around’ an absolute bar to relief, the UIPA does not immunize insurers from UCL liability for conduct that violates other laws in addition to the UIPA.”

    The Court noted that Moradi-Shalal left intact not only administrative remedies but also traditional common law theories of private recovery against insurers. These include “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.” (Moradi-Shalal, 46 Cal.3d at p. 305.) Further, the Court noted that first party bad faith actions were unaffected by Moradi-Shalal.  Because Zhang alleged causes of action for false advertising and insurance bad faith, both of which provide grounds for a UCL claim independent from the UIPA, the Supreme Court held, “[a]llowing her also to sue under the UCL does no harm to the rule established in Moradi-Shalal.” The Supreme Court held “State Farm consistent, and Textron inconsistent, with our decisions on the scope of UCL liability.”

    The Court noted that the specific allegations of wrongful conduct contained in Zhang's UCL cause of action (using misleading documents and misrepresenting both the terms of the insurance policies and its obligations under them for its own benefit) are the types of activities covered by UIPA. (Ins. Code, § 790.03(a) & (h).) The Supreme Court rejected California Capital’s argument that a UCL claim might be supported by allegations of a false promise to issue insurance, but could not be supported based on the underpayment of a claim, stating, “This distinction is insignificant, given our conclusion that UCL claims may be based on claims handling practices, as long as they do not rest exclusively on UIPA violations.”

    In a concurring opinion, Justice Werdegar, joined by Justice Liu, concluded that the majority’s holding that no UCL claim can ever be based on violations of the UIPA “is unnecessary dictum” and “wrong,” because it “misreads our own prior precedent and imposes on the UCL limits never contemplated by the Legislature.”


    Because the proper test for what  is an “unfair act” remains unsettled, it is likely that more insureds’ attorneys will include UCL claims. The scope of “unfair” or “fraudulent” business acts is extremely broad. The Unfair Competition Law defines “unfair competition” as “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.” (Bus. & Prof. Code, § 17200.) The Zhang Court noted that, “[t]he standard for determining what business acts or practices are ‘unfair’ in consumer actions under the UCL is currently unsettled. . . .  The parties here do not address this question, nor do we.” In addition, “unfair” and “fraudulent” practices are alternate grounds for relief. False advertising is included in the “fraudulent” category of prohibited practices. Given the UCL’s broad scope, it seems likely that many insureds will include a UCL claim in their complaints against insurance companies. However, the lack of an established test for what is “unfair” is likely to lead to additional legal challenges.

    Insureds’ attorneys are likely to use UCL claims as a mechanism to conduct discovery regarding other claims. The Supreme Court rejected California Capital’s policy argument that litigation of Zhang's UCL cause of action will be unmanageable because it would require the examination of its claims handling practices in thousands of cases. The Court noted that “a UCL claim may be based on a single instance of unfair business practice.” The Court further observed that, “[w]ere Zhang to attempt to recover on behalf of other insureds, she would be required to certify a class action.” The Court also stated, “[f]urthermore, we are not concerned at the pleading stage with how Zhang might go about proving her claim.” However, the ability to seek injunctive relief in a UCL cause of action may provide insureds’ attorneys with a mechanism to seek discovery regarding other claims.

    Insureds’ attorneys are likely to file more class actions under the UCL. The Zhang Court noted that although the UCL does not provide for attorneys’ fees, a prevailing plaintiff may seek attorney fees under the private attorney general doctrine. Under that doctrine, a court may award attorneys' fees to a successful party in an action which has resulted in a significant benefit to the general public or a large class of persons. This doctrine provides an alternative basis to seek attorneys’ fees if the insured established an “unfair practice” under the UCL that did not constitute “bad faith.” Thus, it seems likely that more insureds’ attorneys will pursue class actions in order to seek attorneys’ fees under the private attorney general doctrine.

    Insureds may seek restitution of premiums paid. The Zhang Court stated it previously “made clear” that “an action under the UCL ‘is not an all-purpose substitute for a tort or contract action,’” that remedies for a UCL violation are “narrow in scope” and, “[p]revailing plaintiffs are generally limited to injunctive relief and restitution. [Citations.] Plaintiffs may not receive damages ... or attorney fees.”   However, in a UCL claim, the insured may seek restitution, which could include repayment of insurance premiums in addition to policy benefits. The Supreme Court rejected California Capital’s policy argument that restitution of premiums paid would be improper if compensatory damages were also awarded for breach of the insurance contract, noting that, “[t]he trial court, however, has discretion to withhold restitutionary relief if equity so requires.” While the trial court will have discretion to decline restitution, it seems likely that insureds bringing a UCL claim will include a prayer for restitution of any premiums paid.