California Supreme Court Holds that a UCL Action May Be Based on Conduct that Allegedly Violates Both the UIPA and Other Statutes or Common Law

In a long-awaited decision on the interplay between California’s Unfair Competition Law (“UCL”) (Bus. & Prof. Code, § 17200 et seq.) and the Unfair Insurance Practices Act (“UIPA”) (Ins. Code, § 790 et seq.), the California Supreme Court today issued its ruling in Zhang v. Superior Court, Case No. S178542 (rev. granted 2/10/10). The opinion appears at the following link: Zhang v. Superior Court, Case No. S178542 (rev. granted 2/10/10)

The Supreme Court held that the case of Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, 304, “does not preclude first party UCL actions based on grounds independent from section 790.03, even when the insurer’s conduct also violates section 790.03.” (Slip Op. p. 2) The decision is limited to the first party context. (Id., p. 2, fn. 2)

In Zhang, the plaintiff brought suit under a comprehensive general liability policy issued by California Capital Insurance Company. The dispute was over coverage for fire damage to commercial property. Causes of action included breach of contract, bad faith, and violation of the UCL due to alleged false advertising by promising to provide timely coverage when the insurer had no intention of paying the true value of covered claims. The trial court sustained the insurer’s demurrer to the UCL claim based on Moradi-Shalal’s bar of private actions under Ins. Code § 790.03. The Court of Appeal reversed and held that the false advertising claim was a sufficient basis for the UCL claim.

Today, the Supreme Court affirmed the Court of Appeal’s decision and concluded that “UCL claims may be based on claims handling practices, as long as they do not rest exclusively on UIPA violations.” (Slip Op., p. 22) In its extensive analysis, the Court reasoned: “Because Moradi-Shalal barred only claims brought under section 790.03, and expressly allowed first party bad faith actions, it preserved the gist of first party UCL claims based on allegations of bad faith.” (Slip Op., p.19) The Court disapproved Textron Financial Corp. v. National Union Fire Ins. Co., (2004) 118 Cal.App.4th 1061: “Textron’s holding that Moradi-Shalal precludes UCL causes of action based on allegations of bad faith claims handling practices is contrary to the reasoning of Manufacturers Life, Stop Youth Addiction, and Cel-Tech.” (Slip Op. p.20)

Moreover, the distinction between the remedies allowed under common law bad faith claims and the UCL, as well as the standing requirements of Proposition 64 in 2004 supported the decision. “A UCL claim does not duplicate the contract and tort causes of action involved in bad faith litigation, where damages are central. . . . Private plaintiffs must demonstrate economic injury caused by the alleged unfair competition, and may not represent the interests of others without meeting the requirements for a class action.” (Slip Op. p. 21)

The Supreme Court concluded “Private UIPA actions are absolutely barred; a litigant may not rely on the proscriptions of section 790.03 as the basis for a UCL claim. . . . However, when insurers engage in conduct that violates both the UIPA and obligations imposed by other statutes or the common law, a UCL action may lie.” (Slip Op. p. 24)

Parties and counsel in first party bad faith actions now have new territory to explore as they determine how best to position their cases for resolution at all stages in the litigation.