Policyholders May Now Have a Private Cause of Action Against Their Insurers Under California’s Unfair Competition Law

Earlier this week, my colleague, Ken Kan, discussed the recent decision of the California Court of Appeal in Henderson v. Farmers Group, Inc.,¹ and its holding that the notice-prejudice rule applies where an insured gave timely notice of a claim but failed to provide a proof of loss. Today, I write to discuss another important aspect of the Henderson decision: policyholders may have a private cause of action against their insurers under California’s unfair competition law (“UCL”).

In Henderson, the trial court granted summary adjudication of the UCL claim, holding it barred by Moradi-Shalal v. Fireman’s Fund Insurance Companies.² The Henderson Court reversed, determining that even though claims under the Unfair Insurance Practices Act (“UIPA”) could not proceed under a private right of action, analogous claims against insurance carriers can be brought by policyholders under the UCL.

A cause of action based on violating the UCL imposes strict liability on a business for “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.”³ An unlawful business practice is any action prohibited by law.⁴ UIPA provides that no person may engage in an unfair or deceptive act or practice in the business of insurance.⁵ An unfair practice is defined as the failure to attempt in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.⁶

In addressing this issue on appeal, the Court noted there is a split of authority⁷ on whether a bad faith cause of action may serve as a predicate for a UCL claim if the allegations that support the UCL claim also support a cause of action under UIPA. This is because a cause of action under UIPA can only be brought by the California Insurance Commission. The Supreme Court has granted review to clarify the issue in Zhang v. Superior Court.⁸

After explaining the reasoning in other appellate decisions, the Henderson Court opted to follow the line of cases holding Moradi-Shalal does not bar a UCL cause of action based on an insurer’s bad faith, even though that conduct may also constitute violating the UIPA.

Though it is possible the Henderson decision will be taken up as a "grant and hold"⁹ pending resolution of Zhang in the Supreme Court, the decision is a victory for consumers as it permits policyholders to pursue UCL claims against their insurers even if the Insurance Commissioner has not brought an UIPA claim.

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¹ Henderson, et al. v. Farmers Group, Inc., No. B236259, — Cal.App.4th — (Oct. 24, 2012).
² Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287.
³ Cal. Bus. & Prof. Code §17200.
⁴ Durell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1366.
⁵ Cal. Ins. Code § 790.02.
⁶ Cal. Ins. Code § 790.03, subd. (h)(5).
⁷ In State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093, the Court held that Moradi-Shalal did not bar a UCL claim based on common law theories of fraud or bad faith, even though such alleged acts might also violate the UIPA. (State Farm, at pp. 1098-1099.) However, the Court in Textron Financial Corp. v. National Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061, disagreed with State Farm.
⁸ In Zhang v. Superior Court (2009) 178 Cal.App.4th 1081, review granted Feb. 10, 2010, S178542, the California Supreme Court will decide whether an insured may maintain a cause of action against its insurer under the UCL based on allegations that the insurer misrepresents and falsely advertises it will promptly and properly pay covered claims. The court will also consider whether Moradi-Shalal bars such a cause of action.
The insured brought an action against her insurer for breach of contract, breach of implied covenant of good faith, and violation of the UCL based on the insurer’s handling of a claim arising from a fire at the insured’s commercial premises. The superior court sustained the insurer’s demurrer to the UCL claim without leave to amend. The insured filed a petition for writ of mandate challenging the ruling on demurrer. The Court of Appeal granted the petition and directed the superior court to reinstate the UCL claim. The Court of Appeal reasoned that because the insured’s complaint alleged fraudulent misrepresentations and misleading advertising concerning the insurer’s intention to pay covered claims, conduct proscribed by both UIPA and the UCL, Moradi-Shalal did not bar the insured from maintaining the claim.
⁹ The Supreme Court may issue a “grant and hold” order which grants review but defers all further briefing in the case pending disposition of another case already being considered by the court (called the “lead” case). Upon filing its opinion in the lead case, the Supreme Court will subsequently either order briefing in the "held" case and retain it for issuance of an opinion, transfer the "held" case back to the Court of Appeal for further consideration in light of the opinion in the lead case, or dismiss the matter. (See Cal. Rules of Court, Rule 8.528.) If review is dismissed, the prior Court of Appeal decision governs the case.