In Zhang v. The Superior Court of San Bernardino County, E047207 (Super.Ct No. CIVVS707287), the Court of Appeal addressed the issue of whether an insured could bring a claim against an insurer under the Unfair Competition Law (“UCL”), based on an insurer’s violations of California’s Unfair Insurance Practices Act (“UIPA”). Reversing the trial court, the Court of Appeal held that existing precedent did not bar such a claim.
In Moradi-Shalal v. Fireman’s Fund Ins. Co., 46 Cal.3d 287 (1998), the California Supreme Court held that there is no private cause of action under Section 790.03 of the California Insurance Code, also known as the UIPA, against an insurer who commit an unfair practice listed in that provision. Subsequent case law interpreted Moradi-Shalal to also prohibit claims brought under the UCL based on UIPA violations. The Court in Zhang, however, found Moradi-Shalal distinguishable.
In Zhang, a policyholder brought suit against her insurer alleging misconduct in the handling of her claim for a fire loss. The complaint alleged breach of contract, breach of the covenant of good faith, and a UCL claim incorporating all of the allegations, and adding allegations of misleading advertising based on the insurer’s representation that it would “timely pay proper coverage.” The insurer demurred to the last claim based on Moradi-Shalal. The trial court sustained the insurer’s demurrer, relying on both Moradi-Shalal and another case, Textron Financial. In Textron Financial an individual had brought a claim against an insurer under the UCL for false and misleading documents, and misrepresenting the terms of the policy. Because the misconduct alleged in Textron was only proscribed by the UIPA, it could not be the basis of a UCL claim.
Although existing precedent appeared seemingly dispositive in Zhang, upon writ of mandate, the Court of Appeal reversed the demurrer and distinguished Textron and Moradi-Shalal. The court noted that while Moradi-Shalal stands for the broad proposition that insurers cannot be held liable solely for violations of the UIPA, and Textron extended this holding to UCL claims predicated on violations the UIPA, neither case holds that insurers who violate the UIPA can never be held liable in tort to an injured party. The Zhang court went on to hold that insurers can be liable based on conduct proscribed by the UIPA, as long as it is conduct otherwise prohibited under the law. The conduct alleged by Zhang, false advertising and fraud, was not only improper under the UIPA, but also under tort law. Thus, plaintiff could properly pursue a UCL claim.
The opinion opens a new door for insureds to pursue private rights of action against insurers in spite of the Moradi-Shalal decision. It will be interesting to see if the Zhang decision will pique the interest of the Supreme Court and inspire them to provide further clarification of this issue.