California Supreme Court Resolves Split of Authority Concerning Viability of UCL Claims Covered by the UIPA

By Todd Holvick

In Zhang v. Superior Court, the California Supreme Court resolved a split of authority in the Courts of Appeal regarding the viability of California Unfair Competition Law (UCL) claims based on insurer conduct also covered by section 790.03 of the California Unfair Insurance Practices Act (UIPA). Prior to the Supreme Court’s ruling in Zhang, some courts held that the Supreme Court’s ruling in Moradi-Shalal v. Fireman’s Fund Ins. Companies, which held that there is no private right of action under the UIPA, precluded UCL claims where the insurer’s conduct was covered by the UIPA, while other courts determined that Moradi-Shalal does not preclude a UCL claim based on conduct that violates the UIPA so long as the insurer’s conduct is independently actionable.  The Supreme Court resolved the split holding that “Moradi-Shalal does not preclude first party [i.e., the insured] UCL actions based on grounds independent from section 790.03, even when the insurer’s conduct also violates section 790.03.”

In Zhang, the plaintiff purchased a comprehensive general liability policy from California Capital Insurance Company (California Capital) to insure a commercial property. Following a coverage dispute related to fire damage to the property, the plaintiff filed suit alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the UCL. The plaintiff’s UCL claim alleged that California Capital “engaged in unfair, deceptive, untrue, and/or misleading advertising” by promising to provide “coverage when it had no intention of paying the true value of its insured’s covered claims.”

California Capital sought to dismiss the UCL claim on the grounds that it was merely an impermissible attempt to plead around Moradi-Shalal’s bar against a private right of action under the UIPA. The circuit court agreed with California Capital, but was revered on appeal. The Supreme Court granted California Capital’s petition for review.

On review, a majority of the Supreme Court upheld the Court of Appeals decision. The majority opinion engaged in an extensive discussion of Moradi-Shalal and its progeny and determined that those authorities simply do not stand for the proposition that a private plaintiff lacks standing under the UCL whenever the alleged unfair conduct also violates a statute under which there is no private right of action. To the contrary, the majority stated that “Moradi-Shalal itself established that while violations of section 790.03 are themselves not actionable, there is no bar to common law fraud and bad faith actions.” To be clear, the majority confirmed that a plaintiff cannot utilize a UCL claim to plead around the absolute bar to a private right of action under the UIPA. However, the majority stated that the UIPA does not operate as a shield against civil liability where the insurer’s conduct violates both the UIPA and obligations imposed by other statues or the common law. Rather, to preclude a UCL action, “another provision must actually bar the action or clearly permit the conduct.”

Ultimately, the Court’s majority opinion resolves a significant split among the courts of appeals and makes clear that insurance practices that violate the UIPA may support an action by an insured under the UCL, even though an insured would have no private right under the UIPA.

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