On August 1, 2013, the California Supreme Court issued its long awaited decision in Zhang v. California Capital Insurance Company. A copy of the decision is available here.
The Court had previously ruled that activities that allegedly violate California’s Unfair Insurance Practices Act (Ins. Code § 790 et seq.) (“UIPA”) do not give rise to a private right of action. See Moradi-Shalal v. Fireman’s Fund Ins. Companies, (1988) 46 Cal.3d 287, 304. The question then arose: even if there is no private right of action under the UIPA, can a consumer/insured still sue an insurance company under California’s Unfair Competition Law (California Business & Professions Code § 17200) (“UCL”), where the alleged wrongful conduct is covered by Section 790.03 of the Insurance Code? The Zhang decision answers this question in the affirmative: A consumer/insured can pursue first party claims against an insurance company under the UCL based on grounds that are independent from Section 790.03, even if the conduct also violates that Insurance Code section.
Previously, if the conduct at issue was governed by the UIPA, insurance companies successfully argued that a plaintiff could not sue under the UCL because the UIPA did not provide a private right of action; to hold otherwise would allow plaintiffs to do an end-run against the bar to private actions under the UIPA. Now, even if the conduct is covered by the UIPA, a plaintiff can still sue as long as there are independent grounds (other than a violation of the UIPA) for the claims made and relief sought.
In Zhang, the plaintiff sued her insurance company in a dispute over coverage for fire damage to her commercial property. She alleged causes of action for breach of contract, breach of the covenant of good faith and fair dealing, and violation of the UCL. The UCL claim was based on plaintiff’s allegation that the insurance company had engaged in false advertising. The lower court sustained defendant’s demurrer, dismissing the UCL claim without leave to amend, on the grounds that the claim was an impermissible attempt to plead around Moradi-Shalal’s bar against private actions for unfair insurance practices.
The decision is significant because it exposes insurance companies to claims under California’s consumer protection laws, including the UCL, for conduct that is otherwise governed by the UIPA. Plaintiffs’ class action lawyers habitually plead violations of the UCL, in particular because of the scope of remedies available under the statute, which include restitution and the potential recovery of civil penalties of up to $2,500 per violation, as well as attorneys’ fees. We can expect to see a sharp uptick in class action litigation against insurance companies as a result of Zhang as the Court has added a significant tool to the arsenal of claims that can be asserted against the companies.