On February 15, 2011, Competition Law 360 had an interesting article on Zhang v. Superior Court, no. 178542, which is currently pending before the California Supreme Court. The full article, by Chris Micheletti and Jose Umbert of Zelle Hofmann, is available to subscribers only. Here is a brief excerpt:
It is likely that the decision in Zhang will clarify whether an insured can bring a cause of action against its insurer under the UCL based on allegations of fraudulent misrepresentation and false advertising. Therefore, the ruling may have a substantial impact on insurance litigation in California.
If the Supreme Court allows Section 17200 claims based on insurers' alleged advertising or other representations and promises regarding timely payment for covered losses, those causes of action likely will be regularly inserted in complaints against insurance companies and, given the broad scope of the UCL, will provide insureds with a potentially significant additional avenue for relief. While damages are not recoverable under the statute, the possibility of an injunction requiring changes in company practices may pose a significant threat for a carrier.
On the other hand, if the Supreme Court determines that UCL claims based on conduct that also violates the UIPA are not permitted, the policyholders' arsenal will generally be limited to causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing. Insurance practitioners should therefore pay close attention to the California Supreme Court's upcoming decision in Zhang.
The article mentions that damages are not recoverable under the UCL, and that injunctive relief would be a powerful remedy, but I think restitution would be available in such a hypothetical case against an insurer. If the insured bought the policy in reliance on misrepresentations regarding settlement practices, the policy premiums (or some portion thereof) should be recoverable as restitution. Also, the insured has a vested interest in policy benefits (created by contract and by statute), so if the insurer has refused to pay a covered claim, those benefits should likewise be recoverable as restitution. I have never been able to agree with the idea that the insurance industry should enjoy a special exemption from UCL liability when its fraud relates to settlement practices.
As a reminder, these are the issues on review in Zhang:
(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?
The case has been fully briefed since June 2010, so in theory it could be scheduled for argument at any time. In practice, there are other cases closer to the head of the line.