A New Way to Sue Insurers - Unfair Competition Law Allows Direct Action Against Insurer

A New Way to Sue Insurers - Unfair Competition Law Allows Direct Action Against Insurer

In Zhang v. Superior Court (California Capital Insurance Company), S178542 (Cal. 08/01/2013) [enhanced version available to lexis.com subscribers], the California Supreme Court was called upon to determine if the California Unfair Competition Law (UCL) and the Unfair Insurance Practices Act (UIPA). The question is whether insurance practices that violate the UIPA can support a UCL action. In Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, 304 (Moradi-Shalal) [enhanced version available to lexis.com subscribers], the Supreme Court held that when the Legislature enacted the UIPA it did not intend to create a private cause of action for commission of the various unfair practices listed in Insurance Code section 790.03, subdivision (h) [enhanced version available to lexis.com subscribers]. In the wake of Moradi-Shalal, a split developed in the Courts of Appeal regarding the viability of UCL claims based on insurer conduct covered by section 790.03.


Plaintiff Yanting Zhang bought a comprehensive general liability policy from California Capital Insurance Company (California Capital). She sued California Capital in a dispute over coverage for fire damage to her commercial property. The complaint included causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the UCL. In her UCL claim, Zhang alleged that California Capital had “engaged in unfair, deceptive, untrue, and/or misleading advertising” by promising to provide timely coverage in the event of a compensable loss, when it had no intention of paying the true value of its insureds’ covered claims.


The rules by which the sufficiency of a complaint is tested against a general demurrer require the court to treat the demurrer as admitting all material facts properly pleaded, gives the complaint a reasonable interpretation, reading it as a whole and its parts in their context. If the complaint states a cause of action under any theory, regardless of the title under which the factual basis for relief is stated, that aspect of the complaint is good against a demurrer.

Overview of the UCL

The UCL defines “unfair competition” as “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.” (Bus. & Prof. Code, § 17200 [enhanced version available to lexis.com subscribers]). A practice may violate the UCL even if it is not prohibited by another statute. Unfair and fraudulent practices are alternate grounds for relief.

An action under the UCL is not an all-purpose substitute for a tort or contract action. Instead, the act provides an equitable means through which both public prosecutors and private individuals can bring suit to prevent unfair business practices and restore money or property to victims of these practices. The equitable remedies of the UCL are subject to the broad discretion of the trial court. The court may make such orders or judgments as may be necessary to prevent the use or employment of any practice which constitutes unfair competition or as may be necessary to restore money or property.

The voters by initiative restricted private enforcement of the UCL to those who have “suffered injury in fact and [have] lost money or property as a result of… unfair competition.” (Bus. & Prof. Code, § 17204 [enhanced version available to lexis.com subscribers].) Accordingly, to bring a UCL action, a private plaintiff must be able to show economic injury caused by unfair competition.


The question before us is the extent to which relief under the UCL is limited by the holding in Moradi-Shalal. There, the Supreme Court reconsidered and abolished a UIPA cause of action that had been approved by Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880 (Royal Globe) [enhanced version available to lexis.com subscribers]. The Royal Globe plaintiff was a third party claimant who sued the insurer of property where she was injured. The Royal Globe court decided that section 790.03(h), enacted in 1959 as part of a comprehensive regulation of the insurance business, permitted third party plaintiffs to sue insurers for unfair acts or practices proscribed by the statute. Royal Globe was overruled in Moradi-Shalal.

Significant for our purposes is Moradi-Shalal’s observation that the abrogation of Royal Globe left intact not only administrative remedies, but also traditional common law theories of private recovery against insurers. These included 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. Thus, first party bad faith actions were unaffected by Moradi-Shalal.

After Moradi-Shalal, the law regarding UCL claims against insurers went through a rather complicated evolution, in a variety of contexts. First, a series of Court of Appeal decisions rejected attempts to state UCL causes of action against insurers in bad faith cases. If the Legislature has permitted certain conduct or considered a situation and concluded no action should lie, courts may not override that determination. A plaintiff may not “plead around” absolute barriers to relief by relabeling the nature of the action as one brought under the unfair competition statute.

The Viability of Zhang’s UCL Claim

As noted, Zhang’s UCL claim is premised on allegations of false advertising. She contends California Capital misleadingly advertised that it would timely pay the true value of covered claims. She asserts that its treatment of her claim demonstrated it had no intention of honoring that promise. California Capital argued that the crux of the UCL claim was improper claims handling, and the allegations of unfair competition and false advertising were nothing more than an attempt to plead around the bar of Moradi-Shalal.

The Supreme Court concluded that bad faith insurance practices may qualify as any of the three statutory forms of unfair competition. They are unlawful; the insurer’s obligation to act fairly and in good faith to meet its contractual responsibilities is imposed by the common law, as well as by statute. If they are unfair to the insured the unfairness lies at the heart of a bad faith cause of action. The unfair conduct may also qualify as fraudulent business practices. Under the UCL, it is necessary only to show that the plaintiff was likely to be deceived, and suffered economic injury as a result of the deception.

On demurrer review the Supreme Court may consider the sufficiency of the plaintiff’s allegations to state a cause of action under any legal theory. Zhang alleged a litany of bad faith practices by California Capital, including unreasonable delays causing deterioration of her property; withholding of policy benefits; refusal to consider cost estimates; misinforming her as to the right to an appraisal; and falsely telling her mortgage holder that she did not intend to repair the property, resulting in foreclosure proceedings. These allegations are sufficient to support a claim of unlawful business practices.


When the Legislature enacted the UIPA, it contemplated only administrative enforcement by the Insurance Commissioner. Private UIPA actions are absolutely barred; a litigant may not rely on the proscriptions 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.


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. While a plaintiff may not use the UCL to “plead around” an absolute bar to relief, the UIPA does not immunize insurers from UCL liability for conduct that violates other laws in addition to the UIPA.

Here, plaintiff alleges causes of action for false advertising and insurance bad faith, both of which provide grounds for a UCL claim independent from the UIPA. Allowing her also to sue under the UCL does no harm to the rule established in Moradi-Shalal. UCL actions by private parties are equitable proceedings, with limited remedies. They are thus quite distinct from the claims for damages with which Moradi-Shalal was concerned.

Of course, since a CGL is a third party liability policy one can only wonder how Ms. Zhang had a right to recover for damage to her real property, a coverage not provided by the CGL.


Like the Supreme Court’s decision in Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574 [enhanced version available to lexis.com subscribers], by ruling on a demurrer, where all allegations are assumed to be true. The Supreme Court expanded the right of insured people to sue their insurers when they are unhappy with the results of a claim presentation. This case will provide, by judicious pleading, every person who claims that the insurer violated one of the categories of the UIPA that were barred by Moradi Shalal may simply allege a violation of the UCL. By alleging false advertising Ms. Zhang’s suit that would have been barred may otherwise proceed. Whether she can prove the UCL was violated or that she was damaged remains to be seen after the trial.

Like Gruenberg, also decided on a demurrer, this decision will be misread to allow UCL actions if alleged and defendants will be required to defeat the allegations at trial or summary judgment. I am afraid this decision will have the same effect on litigation as did the decision in Royal Globe.

Of course, since she purchased a CGL policy, a third party liability policy, I cannot conceive how Ms. Zhang had any right to recover for damage to her property under a CGL which only insures for damage she may do to others.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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