California High Court Decision Provides Additional Avenue for First Party Bad Faith Claims

A recent decision by the California Supreme Court allows plaintiffs in first party bad faith lawsuits to file a separate cause of action under the California Unfair Competition Law (UCL). At the same time, however, the decision provides for some discretion and limits regarding the remedies for plaintiffs.

The case, Zhang v. Superior Court, S178542 (E047207; 178 Cal.App.4th 1081; San Bernardino County Superior Court; CIVVS701287), presented the following questions, according to Larry Golub, an insurance litigation partner in the Los Angeles office of Barger & Wolen:

(1) Can an insured bring a cause of action against its insurer under the unfair competition law (Bus. & Prof. Code, § 17200) based on allegations that the insurer misrepresents and falsely advertises that it will promptly and properly pay covered claims when it has no intention of doing so?
(2) Does Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287 bar such an action?

In the underlying case, Zhang alleged that her insurer, California Capital, was guilty of false advertising, breach of contract and bad faith because it had advertised that it would pay her claim in a timely manner.

The complaint against California Capital also contained a UCL cause of action. Under the UCL claim, the plaintiff alleged “that the insurer had engaged in unfair, deceptive, untruthful advertising and that by promising to provide timely coverage in the event of a compensable loss, when they had no intention of paying the true value of the insured’s covered claims,” Golub said.

The decision in this case is good, according to Golub, because while the scope is broad, it narrows the remedies allowed. Because a UCL allegation is an equitable action, the issue is tried by a court and the court has broad discretion. Plaintiffs can only get restitution and injunctive relief, if applicable, he said.

Golub said the decision limits the scope of the 1988 Moradi-Shalal v. Fireman’s Fund Ins. Companies California Supreme Court decision and provides a thorough analysis of the history of bad faith and the UCL over the past 25 years.

“The problem started with the Royal Globe case where it allowed third parties to sue for bad faith. They used the California Insurance Code provisions, the UIPA section 79003,” said Golub.

He said that the 1973 Royal Globe decision opened the floodgates by allowing third party claimants to sue insurers if claims were allegedly not settled properly.

In 1988, the Supreme Court reversed itself in the MoradiShalal case, ruling that third parties do not have a bad faith claim cause of action because there was no private right of action under the insurance code.

“What the Court now is saying, and has been chipping away at for years, is that if you don’t base it on the insurance code, which doesn’t allow a private right of action, but you base it on a common law bad faith claim, or some false advertising claim, as ambiguous as ‘failed to provide timely coverage’, that’s OK,” Golub said.

A ruling footnote in Zhang states that the court was not intending to address third party claims.

Overall, the ruling confirms that under the UCL, the court does have discretion and doesn’t have to award restitution or injunctive relief, Golub said.

“There’s some good things, I think, for insurers and defendants here as well. I think it confirms some of the case law over the years on other issues. For example, you don’t get attorney’s fees under the UCL. It confirms that while the UCL may have broad scope, anything unlawful, unfair or fraudulent, its remedies are very narrow. You can’t get damages. You can’t get punitive damages. You can’t get attorney’s fees. You can only get restitution, which is relatively circumscribed, and injunctive relief, if you’re entitled, if there’s something to enjoin,” Golub said.

The insurance defense attorney doesn’t expect a flood of bad faith claims as a result of this decision.

“I don’t think it opens the floodgate to new claims. I think what it primarily will do will add a UCL cause of action to many bad faith claims,” Golub said.

Read the decision in full.