Yanting Zhang sued California Capital Insurance Company (“CCIC”) for breach of contract, bad faith, and violation of the UCL, arising from the handling of a claim for fire loss at a commercial property owned by Zhang. The UCL cause of action alleged that CCIC falsely advertised a promise to provide timely coverage in the event of a compensable loss, when CCIC had no intention of paying the true value of fire loss claims. CCIC demurred to that cause of action on the grounds that a UCL claim cannot be supported by a violation of conduct prohibited by the UIPA. The trial court granted the demurrer and Zhang filed a petition for writ of mandate to the Court of Appeal which reversed the trial court decision. The Supreme Court granted review.
The opinion in Zhang is the latest in a line of decisions by California appellate courts growing out of Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal.3d 287, in which the Supreme Court held that there was no private right of action for violation of an insurer’s duties under the UIPA. The decision in Moradi-Shalal ended years of third party bad faith litigation in California. The court in Moradi-Shalal held that the UIPA only authorized administrative enforcement by the California Insurance Commissioner for violations of the UIPA, but such did not affect actions based on traditional common law theories of private recovery against insurers. Those were said to include claims for “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.”
In Manufacturers Life Ins. Co. v. Superior Court (1995) 10 Cal.4th 257, the Supreme Court held that Moradi-Shalal did not preclude first party UCL actions based on grounds independent from the UIPA, even if the conduct also violates the UIPA. In that case, the court allowed an action under the UCL by an insurance agent against insurers for violations of the California anti-trust statutes, known as the Cartwright Act. The plaintiff agent had alleged an insurance industry conspiracy against it in retaliation for disclosure of the true cost of settlement annuities. Manufacturers Life was followed by State Farm Fire & Cas. Co. v. Superior Court (1996) 45 Cal.App.4th 1093, in which the Court of Appeal held an insured was entitled to pursue a UCL claim against its first party insurer (in a Northridge Earthquake related claim) based on fraud and common law bad faith claims handling. A split in California law resulted when another district court of appeal disagreed with the State Farm decision, holding in Textron Financial Corp. v. Nat. Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061, that a common law first party bad faith claim could not support a UCL cause of action where the alleged bad faith conduct was the type proscribed in the UIPA.
The Supreme Court in Zhang resolved the split in California authority by disapproving Textron and agreeing with State Farm. The majority decision, signed by five of the seven Supreme Court justices, held that a common law first party bad faith claims handling action could qualify as any of the three statutory forms of unfair competition: the conduct was said to be (1) unlawful (under the common law), (2) unfair to the insured, and (3) may qualify as fraudulent business practices. The court noted that the concerns raised in Moradi-Shalal (primarily proliferation in litigation) would not arise because “UCL remedies are limited in scope, generally extending only to injunctive relief and restitution.” Therefore, a UCL claim did not duplicate bad faith claims which are for damages. The court said that its rejection of Textron did not affect its prior decisions in third party insurance claims cases. As to the insured’s cause of action in the case before it, the court said that the UCL cause of action was supported by both the allegations of false advertising and of common law bad faith claims handling.
Justice Wenegar wrote a separate concurring decision, joined by Justice Liu, to say that the majority decision did not go far enough. She argued that since the UIPA did not directly prohibit a private right of action, but merely did not allow one, a UCL claim could be based on its violation (raising the specter of possible third party claims). The majority of the court disagreed with Justice Wenegar in Footnote 8, saying that her conclusion was directly contrary to the court’s holdings in Maufacturers Life and Moradi-Shalal.