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CALIFORNIA APPELLATE COURT EXPANDS PERMISSIBLE LAWSUITS AGAINST INSURERS
 
            On October 29th, the California 4th District Court of Appeals, Division Two, issued its opinion in Zahng v. Superior Court.  This decision expands the circumstances under which a policyholder may bring a civil lawsuit against his or her insurer for alleged violations of the California Unfair Competition Law (UCL) - CA Business and Professions Code sections 17200 et seq.  Zahng contradicts another appellate court ruling which held that UCL lawsuits cannot be brought against insurers based upon actions which are prohibited under the Unfair Practices Act (UPA), found in the California Insurance Code section 790 et seq. 
 
            The California UPA applies only to insurers.  It defines a broad array of prohibited conduct by insurers.  California case law generally holds that an insurer may not be sued in civil court for any act which violates the UPA.  The only remedy in such a case is an enforcement action by the Department of Insurance.  This rule was established with respect to claims against another person's liability insurer in Moradi-Shalal v. Fireman's Fund, 46 Cal. 3rd 287; 250 Cal. Rptr. 116; 1988.  The rule was extended to first-party suits by a policyholder against his or her own insurer in Zephyr Park v. Superior Court, 213 Cal. App. 3d 833; 262 Cal. Rptr. 106; 1989. 
 
            In Zahng v. Superior Court the plaintiff sued her insurer, California Capital Insurance Company, over a dispute following a fire at her place of business.  One of the claims in the lawsuit was that the insurer had violated the UCL through false advertising.  The California UCL generally makes it illegal for any business, not just an insurer, to engage in any "unfair competition".  The plaintiff claimed that the insurer's alleged false advertising constituted a violation of the UCL.   
 
            The defendant insurer argued that this claim was prohibited, both by Moradi-Shalal, and by the appellate court decision in Textron Financial v. National Union Insurance Company, 118 Cal. App. 4th 1061; 13 Cal. Rptr. 3d 586; 2004.  Textron Financial addressed a very similar claim and held that a UCL claim cannot be brought against an insurer based upon acts that are prohibited under the UPA.  If Textron Financial had been followed in Zahng, this claim would have been dismissed.  Instead, the Zahng court disagreed with the holding in Textron Financial and issued a contradictory ruling.  (Since Textron Financial was decided by a court in a different division of the 4th Appellate District, the Zahng court was not required to follow its holding.)   
 
            The actual unfair advertising claim in Zahng seems very weak.  The plaintiff alleges that the insurer "made fraudulent misrepresentations and promulgated misleading advertising with respect to its intentions to 'pay proper coverage in the event the insured suffers a covered loss'."  It is difficult to tell without looking at the full record, but it appears that the false advertising claim is merely that the insurer advertised good claims handling and the policyholder didn't think the claims handling was good.  If a claim this broad and this vague will support a lawsuit, we should expect to see many similar lawsuits if Zahng is upheld.  In some ways the opinion almost reads like a primer on how to structure a complaint so that it will survive a demurrer. 
 
            California law on this issue is now unclear.  There are two appellate court cases, Textron Financial and Zahng, reaching opposite conclusions on the same legal issue.  The only way that this issue can be definitively resolved is for the California Supreme Court to review the Zahng decision and to decide, one way or the other, which rule prevails. 
 
            The Zahng opinion may be found on the California Courts web site at http://www.courtinfo.ca.gov/opinions/.  Select opinions posted in the past 120 days and look at those posted on October 29.  
 
For more information about the Zahng decision, please contact William Gausewitz at 916.447.4044 or by emailing him at WGausewitz@mrllp.com.