(2013) 2013 Cal. LEXIS 6520
Zhang case represents a victory for California insureds who have had to endure
misconduct in the handling of their claims by their insurers. For many
years, insurers were able to avoid liability for mishandling claims by
taking cover under the Unfair Insurance Practices Act (UIPA) (Insurance
Code section 790
et seq.). While the UIPA prohibits insurers from engaging in unfair practices
in handling claims (section 790.03, subdivision (h)), in 1988, the California
Supreme Court decided that individuals could not personally sue insurers
for violating section 790.03, subdivision (h).
Moradi-Shalal v. Firemen's Fund Ins. Cos. (1988) 46 Cal.3d 287, 304.
Since then, individual lawsuits brought against insurers for claims mishandling
were routinely thrown out. In
Zhang, the California Supreme Court stepped in to limit the preclusive scope
of the UIPA and allow insureds to sue their insurers for claims mishandling
under California's unfair competition law (UCL) (Business & Professions
Code section 17200
et seq.), even if that conduct also violates the UIPA.
Zhang, Yanting Zhang sued her comprehensive general liability insurer, California
Capitol Insurance Company, after it denied her coverage for fire damage
to her property. She alleged that California Capitol had engaged in unfair
and misleading advertising by promising to provide timely coverage in
the event of a covered loss when it had no such intention, which constituted
an unfair business practice under the UCL. California Capitol successfully
argued that Zhang's UCL claim was an impermissible attempt to avoid
Moradi-Shalal's bar against private lawsuits under the UIPA and the trial court
dismissed the case.
The court of appeal reversed the trial court's ruling, finding that
an insurer is not protected from UCL liability simply because its claims-handling
practices may also violate the UIPA. The California Supreme Court granted
review in the case to settle the question of whether insureds may sue
their insurers for claims mishandling under the UCL.
In answering this question with a resounding "yes," the Supreme
Court reviewed its decision in
Moradi-Shalal as well as the litany of cases decided thereafter to provide a thorough
analysis of the relationship between the UCL and the UIPA when it comes
to lawsuits for claims mishandling. The Supreme Court noted that
Moradi-Shalal was a third-party action for damages under the UIPA, which would cause
adverse consequences such as proliferating litigation and escalating insurance costs.
Zhang, by contrast, was a first-party action (i.e., suit brought by the insurer's
insured) under the UCL. Because only equitable relief (injunction and
restitution) is available under the UCL and, as a result, the adverse
consequences stemming from a third-party action are absent in a first-party
action, the Supreme Court concluded that
Moradi-Shalal does not preclude first party UCL actions for claims mishandling.
Zhang, the tides have turned and California insureds can now vindicate their
rights under the UCL without fear of having their cases thrown out under
Moradi-Shalal. After years of having insurers avoid liability for mishandling their
insureds' claims, this is a much-welcomed result.