In Zhang v. Superior Court, ___ P.3d ___ , 2013 WL 3942607 (Cal. 2013), the California Supreme Court held that policyholders can sue insurers for unlawful, unfair or fraudulent business practices under California's Unfair Competition Law (UCL), even if the alleged practices also violate California's Unfair Insurance Practices Act (UIPA). The decision reversed the trial court's dismissal of the policyholder's UCL claim for false advertising in the sale of her commercial general liability policy.
Zhang resolved a split in the California Courts of Appeals about whether California's bar on private claims under the UIPA also barred UCL claims for the type of insurance activities addressed in the UIPA. Id. at *5-9. The court held that the bar on UIPA claims did not "immunize insurers from UCL liability for conduct that violates other laws in addition to the UIPA." Id. at *1. However, the policyholder must identify independent grounds for the UCL claim and cannot "rest exclusively on UIPA violations." Id. at *12.
In Zhang, the policyholder alleged false advertising based on false promises to provide "timely coverage in the event of a compensable loss." Id. at *1. The court held that false advertising falls under the UCL's prohibition on "fraudulent" practices and is a proper basis for a UCL claim. Id. at *12. Even without a false advertising claim, the court held that "bad faith insurance practices" may qualify as unlawful, unfair or fraudulent practices prohibited by the UCL. Id. at *10-13 (holding that the "litany of bad faith practices" alleged in Zhang's complaint were also "sufficient to support a claim of unlawful bad faith practices").
The Zhang court rejected the insurer's argument that policyholder UCL claims would be "unmanageable" and unduly burden the courts. Id. at *11-12. The court noted that remedies for UCL claims are generally limited to restitution and injunctive relief; a private party cannot recover damages. Id. at *3. Private plaintiffs bringing UCL claims must also "demonstrate economic injury caused by the alleged unfair competition, and may not represent the interests of others without meeting the requirements for a class action." Id. at *11. Zhang does not open the door to general claims for allegedly improper insurance practices that did not affect the plaintiff. Id. at *11-12 (holding that Zhang's UCL claim was viable because it "sought to recover for [the insurer's] allegedly false advertising as it affected Zhang") (emphasis added).
The Zhang court also emphasized that, as a first party policyholder, Zhang already had an actionable common law claim for bad faith. Id. at *10. The court did not extend its ruling to permit injured third parties to bring claims for bad faith under the UCL. Id. at *12. As the court explained, permitting third party UCL claims would raise concerns about possible "adverse consequences," such as "proliferating litigation" and "conflicts of interest," outside the scope of the Zhang case. Id. at *12.
Despite the court's limitations on its holding, Zhang will likely have a significant impact on California insurance litigation in the near future, triggering new UCL claims against insurers that will test the limits of Zhang's holding.
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