On Wednesday, May 8, 2013, the California Supreme Court heard oral arguments on the state’s Court of Appeal decision in Zhang v. Superior Court (California Capital Insurance Company), 100 Cal.Rptr.3d 803 (2009) (previously published at: 178 Cal.App.4th 1081) to decide whether insurance companies may be sued for unlawful business practices under California’s Unfair Competition Law (UCL or Bus. & Prof. Code, § 17200). The Court’s decision will be very important to consumers and insurance companies, as it will likely add clarity on the issue of whether individuals will be equipped with a new ability to bring a private cause of action against insurers pursuant to the UCL, effectively expanding insurance companies’ potential for liability in the civil arena. The California Supreme Court’s decision in Zhang will undoubtedly shape the future of insurance litigation in the state.


Since 1988, courts in California have consistently barred individuals from bringing civil actions against insurance companies for allegations of unfair claims and settlement practices in violation of the Unfair Insurance Practices Act (UIPA), more specifically set forth in §§ 790.03 et seq. of the California Insurance Code. This long-standing framework that has largely worked in favor of insurers is based on the seminal case Moradi-Shalal v. Fireman’s Fund Insurance Companies, 46 Cal.3d 287, 304 (1988), which held that a private right of action did not exist against an insurer for violations of the UIPA. After Moradi-Shalal, an individual could only seek redress for such violations by enlisting the California Department of Insurance, which would then carry out an investigation and could prosecute the matter as an administrative action against the insurer.

This current framework limits the forums in which claimants may seek redress for UIPA violations, effectively precluding the civil litigation against insurers under that theory, as well as the costs and liabilities associated with it.

Zhang Poses as an Expansion of Individuals’ Right to Private Cause of Action

The pending decision in Zhang threatens to alter this landscape for the insurance industry in California. In Zhang, the insured raised, among other things, a cause of action based on the UCL against California Capital Insurance Company, alleging fraudulent advertising and misleading misrepresentations – specifically, that the insurer represented that it would promptly pay claims though it allegedly had no intention of doing so. The insurer initially succeeded on demurrer, relying on Moradi-Shalal and pointing out the well-recognized limitation that plaintiff could not state a private cause of action because the conduct alleged was barred by the UIPA and thus gave the plaintiff no legal standing in the civil court.

Zhang appealed and the pendulum swung back in favor of the insured. The Court of Appeal’s opinion limited Moradi-Shalal, holding that although no private right of action existed under the UIPA, the allegations for false representations and misleading advertising were a proper basis for civil cause of action against the insurer based on the UCL.

Reconciled with Moradi-Shalal

The Court of Appeal reconciled its seemingly marked deviation from Moradi-Shalal by the fact that the plaintiff in Zhang alleged “conduct that is not merely improper under the UIPA.” In Zhang, the insurer made specific allegations for fraudulent misrepresentations and misleading advertising with respect to the insured’s coverage policies in violation of the UCL. Zhang, 100 Cal.Rptr.3d at 808. (Emphasis added.) The Court explained that the UCL’s application to all “businesses” does not expressly except or exempt insurers and, therefore, the UCL gives an injured person the right to sue for violations under its scheme, including unfair competition under Bus. & Prof. Code, § 17204. Zhang, 100 Cal.Rptr.3d at 806-808.

The Court went on to explain that “there is no reason to treat insurers differently from other business when it comes to actions under the UCL except as required by Moradi-Shalal,” but nevertheless acknowledged that if a plaintiff relies on conduct that violates the UIPA exclusively, Moradi-Shalal requires that a civil action under the UCL be barred. Zhang, 100 Cal.Rptr.3d at 807. Accordingly, the plaintiff’s cause of action for false advertising based on violations of the UCL in Zhang was sufficient to bring the insurer into court under the purviews of the UCL despite being barred by the UIPA under Moradi-Shalal.

Legal Analysis

The Court of Appeal’s decision in Zhang – now being deliberated by the California Supreme Court – potentially gives policyholders the right to bring a private civil cause of action against insurance companies for unfair settlement and claims practices under the guise of “misrepresentation.” Zhang creates the potential for significantly increased costs on the part of insurance carriers in the state. An affirmance of the Court of Appeal’s decision would expand policyholders’ rights under the UCL, including restitution and injunctive relief.

Many eagerly await clarity and guidance on the two main questions now before the state’s highest court: (1) Can an insured bring a cause of action against its insurer under the UCL 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 bar such an action?

Oral Arguments

On May 8, 2013, the California Supreme Court entertained oral arguments from both the insured and the insurer on these issues. Attorneys for the insurer argued that allowing an insured to seek remedies such as injunctive relief through a UCL claim would be impermissible because having the Court direct an insurance company on how to fashion its business practices would impinge on the authority specifically vested in the Commissioner of the Department of Insurance, as was explained in Moradi-Shalal.

The attorneys for Zhang, on the other hand, argued that simply because there is overlap between the illegal conduct or activity alleged in a UCL claim and a UIPA claim does not nullify the plaintiff’s right to pursue other law claims (i.e., causes of action based on the UCL), and particularly when those causes of action do not turn on conduct that violates the UIPA. Further, Zhang’s attorney argued that Moradi-Shalal would not need to be overruled because none of the plaintiff’s allegations are raised under the UIPA, and that alleging false advertising is sufficient to maintain a UCL claim.

The California Supreme Court more than once turned back to specific language found in Moradi-Shalal during the session, recognizing that the Court stated a caveat in Moradi-Shalal that “the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as fraud …” Moradi-Shalal, 46 Cal.3d 287 at 305. The Court also went on to remind counsel that the question before it was whether the allegations for fraudulent activity under a UCL claim could be made, not whether the claim was a strong one or could be proven, which would be an issue for another day.

Based on the California Supreme Court’s questions and commentary during the session, the likelihood that the pendulum will make a full swing back in favor of the insurance companies seems weaker. Nevertheless, the state’s highest court has much to consider, including a closer reading into the public policies behind the Moradi-Shalal opinion and the interplay between the UCL and UIPA. A decision is expected to be issued within 90 days from the hearing session, making August 8, 2013, a date to be watched by insureds and insurers alike, unless the Court’s opinion is issued earlier.


It will also be worth noting whether the California Supreme Court will address tangential issues that follow from Zhang. Even if a private right of action is affirmed pursuant to Zhang, civil claimants will undoubtedly face challenges in the civil courts, such as establishing sufficient evidentiary proof of unlawful “policies or practices” because plaintiffs’ grievances often arise from singular claims. The public will also need the courts to provide guidance and to set forth rules, definitions, and/or standards regarding the scope and nature of an insurer’s conduct that would constitute “unfair business practices” under the UCL while delicately maintaining the integrity of the framework under the UIPA.

Courts at some point – whether in the Zhang opinion or future decisions – will also have to determine whether the rights afforded to insured policyholders, if any, will extend to third-party claimants. In addition, courts will need to be cognizant of the policy considerations that would follow from the potentially significant expansion of claimants’ rights to a private civil cause of action because doing so would open the floodgates for increased insurance litigation in a judicial system already working over capacity.

Wilson Elser will monitor the development of this case and provide a comprehensive analysis on how the California Supreme Court’s decision will impact the future landscape of California insurance litigation, as soon as one is issued.