Zhang v. Superior Court
(2013) 2013 Cal. LEXIS 6520
The 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.
In 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.
With 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.
