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The issue of whether insurance companies enjoy any special exemption from California’s Unfair Competition Law (UCL) liability has been a hotly litigated topic since the California Supreme Court’s 1988 decision in <a title="Moradi-Shalal Opinion" href="http://scocal.stanford.edu/opinion/moradi-shalal-v-firemans-fund-ins-companies-28538">Moradi-Shalal v. Fireman's Fund Ins. Cos.</a> 46 Cal.3d 287 (1988), and has been currently pending before the same court since it accepted review of <a title="Zhang v. Superior Court, Court of Appeal Opinion" href="http://www.courtinfo.ca.gov/opinions/revpub/E047207.PDF">Zhang v. Superior Court</a>, 178 Cal. App. 4th 1081 (2009) (see the <a title="Zhang v. Superior Court, Supreme Court Docket" href="http://appellatecases.courtinfo.ca.gov/search/case/dockets.cfm?dist=0&amp;doc_id=1928080&amp;doc_no=S178542">supreme court's docket here</a>) in February 2010.  The outcome in Zhang has extensive consequences for insurance companies facing UCL class actions in California.

Moradi-Shalal and its progeny address the interplay between two California statutes.  The first is the UCL, which at the time of Moradi-Shalal was being interpreted so broadly that a violation of virtually any law — federal, state or local — could serve as the predicate for an action under the “unlawful” prong of Section 17200.  The second is Insurance Code § 790, et seq., sometimes referred to as the Unfair Insurance Practices Act (UIPA).  The UIPA prohibits various unfair claims settlement practices by insurance companies, but can only be enforced by the insurance commissioner.

In Moradi-Shalal, the supreme court held that a private right of action may not be based on a violation of the UIPA.  The court reversed its prior decision in Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, which had authorized private third-party “bad faith” actions premised on alleged UIPA violations.  Royal Globe had been widely criticized by courts and commentators due to the “erroneous nature of [the Supreme Court’s] holding (i.e., the strained interpretation of the statutory provisions and the misreading or disregard of available legislative history) and the undesirable social and economic effects of the decision (i.e., multiple litigation, unwarranted bad faith claims, coercive settlements, excessive jury awards, and escalating insurance, legal and other "transaction" costs).”  Moradi-Shalal, 46 Cal.3d at p. 299.  

After Moradi-Shalal, a series of Court of Appeal decisions recognized that a private litigant cannot circumvent Moradi-Shalal’s bar on private actions by re-fashioning a UIPA claim as one under the UCL and arguing that the conduct is “unlawful” within the meaning of the UCL because it violates the UIPA.  Several Court of Appeals’ decisions extended this reasoning to Insurance Code provisions other than UIPA.  These courts have reasoned that, just as with UIPA, the Legislature did not intend to give private litigants the power to file private actions to enforce other sections of the Insurance Code that the Legislature did not expressly empower private litigants to enforce, but instead gave the Insurance Commissioner broad powers to regulate.  Lower court decisions have also extended the Moradi-Shalal prohibition to first-party bad faith claims.

In Zhang, however, the Fourth Appellate District of the California Court of Appeal ruled that fraudulent conduct by an insurer, which is connected with conduct that also would violate the UIPA, can also give rise to a private civil cause of action under the UCL.  The Court of Appeal reasoned that because the UCL allows a plaintiff to allege unfair, unlawful, and misleading conduct against businesses generally (including insurers), the fact an insured asserts what appear to be violations of the UIPA is not necessarily an end run around Moradi-Shalal, so long as the insured also alleges the insurer acted unfairly by engaging in false and deceptive advertising. 

The California Supreme Court’s decision could resolve the Zhang case in a couple of different ways.  First, it could resolve the narrow issue of whether the alleged conduct in the case before the court is sufficient on its own to constitute fraudulent or unfair conduct sufficient to violate the UCL, and thereby give rise to a private UCL action, regardless of whether the conduct could also violate the UIPA.   Alternatively, it may go further and more generally define the scope of the Moradi-Shalal prohibition on private actions.  In either case, but especially if it takes the broader approach, the ruling is likely to have a substantial impact on insurance class action litigation in California.

It may still be some time before the California Supreme Court issues its ruling in Zhang.  The case has been fully briefed by the parties and amici curiae, but as of the date of this post, oral argument has not yet been scheduled.

Uncertainty Persists Regarding Insurance Companies’ Exemption from Liability Under California’s Unfair Competition Law