Supreme Court Rules Unfair Insurance Practices Act Does Not Bar Insured’s Lawsuit Against Insurer

Publish Date:Aug 12, 2013
Summary:
On August 1, 2013, the California Supreme Court held in Zhang v. Superior Court that an insured may bring a lawsuit against an insurer based on California’s Unfair Competition Law (UCL) for insurer conduct that may violate the Unfair Insurance Practices Act (UIPA).

On August 1, 2013, the California Supreme Court held in Zhang v. Superior Court that an insured may bring a lawsuit against an insurer based on California’s Unfair Competition Law (UCL) for insurer conduct that may violate the Unfair Insurance Practices Act (UIPA).  

The Supreme Court’s decision resolves a conflict among lower courts.  Some courts held that the Supreme Court’s 1988 ruling in Moradi-Shalal v. Fireman’s Fund Ins. Companies, which abolished any private action to enforce the UIPA, precluded UCL lawsuits based on conduct prohibited by Insurance Code section 790.03 which is part of the UIPA.  Other courts held that the Moradi-Shalal ruling did not bar UCL lawsuits.

In its Zhang decision, the Supreme Court resolved the issue stating, “We hold that Moradi-Shalal 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.”

The plaintiff in the Zhang case purchased a comprehensive general liability insurance policy. The plaintiff was not satisfied with the insurer’s handling of her fire damage claim. She sued the insurer for false advertising and insurance bad faith, both of which are grounds for a UCL claim independent from the UIPA.

After reviewing court decisions that considered Moradi-Shalal’s effect on UCL lawsuits against insurers, the Supreme Court allowed the plaintiff to pursue her UCL claim and observed, “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.  Moradi-Shalal imposed a formidable barrier, but not an insurmountable one.”

The Zhang decision is limited to first party UCL lawsuits. The Court explained that whether Moradi-Shalal limits third parties to pursue UCL claims “is a matter beyond the scope of this case.”

The Court summarized its decision stating, “Private UIPA actions are absolutely barred, a litigant may not rely on the prescriptions 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. The Legislature did not intend the UIPA to operate as a shield against any civil liability.”

A concurring opinion written by Justice Werdegar and joined in by Justice Liu agreed with the conclusion that the plaintiff should be allowed to pursue her UCL lawsuit against the insurer, but the concurring opinion disagreed with the conclusion that no UCL claim could ever be based on violations of the UIPA.

The Supreme Court’s opinion is available at www.courts.ca.gov

        

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