Unfair Business Practices/Unfair Competition Archives

Court upholds Commissioner’s Contention: A Single Insurance Code Violation Can Constitute Bad Faith Without Evidence of a General Business Practice

Every insurance policy, including disability, life, health or accidental death policies, contains an implied covenant of good faith and fair dealing between the insurance company and the insured. This covenant requires that insurance companies refrain from acting in a way that unreasonably jeopardizes, impairs or interferes with the rights of the insured to receive the benefit of the insurance contract. The Unfair Insurance Practices Act (California Insurance Code Sections 790, et seq., “UIPA”) was enacted to regulate the business of insurance by defining and prohibiting practices which constitute unfair methods of competition or unfair or deceptive acts or practices.

California Insurance Code Section 790.03(h) (“Section 790.03(h)”) enumerates a list of sixteen specific unfair claims settlement practices that insurance companies are prohibited from engaging in and which, if the insurance company is found to be in violation, could subject the company to severe penalties. These unfair claims settlement practices include, but are not limited to, misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverage at issue, failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under the insurance policies, failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured, and failing to provide promptly a reasonable explanation of the basis relied on for the denial of a claim.

The California Insurance Commissioner (“the Commissioner”) is tasked with implementing regulations necessary to administer the UIPA. The Commissioner’s authority to promulgate such regulations was recently challenged in the matter of PacifiCare Life & Health Ins. Co. v. Jones, No. G053914, __ Cal. App.4th __ (September 20, 2018). The plaintiff PacifiCare Life & Health Ins. Co. (“PacifiCare”) brought an action challenging the validity of three regulations which the Commissioner relied on in finding that PacifiCare engaged in over 900,000 violations of the Insurance Code and imposing penalties in excess of $173 million. Specifically, PacifiCare argued that the regulation which purported to authorize enforcement action based on a single, knowing commission of a violation is facially invalid since it is inconsistent with Section 790.03(h). PacifiCare claimed Section 790.03(h) does not include the single knowing commission of a violation in its definition of an unfair claims settlement practice, but rather applies only to repetitive acts of misconduct which indicate a general business practice. PacifiCare also argued that the regulation which purported to define the term “knowingly committed” as including implied or constructive knowledge was invalid since this definition is inconsistent with the ordinary meaning of the term, and that the regulation which defined the term “willful” or “willfully” as not requiring intent to violate law or to injure another was also invalid snice the definition was inconsistent with the statutory definition of “willful” found in the Insurance Code.

The trial court granted PacifiCare’s motion for judgment on the pleadings and request for injunctive relief. The Commissioner appealed. Upon review, the California Court of Appeal reversed, disagreeing with PacifiCare and concluding that the Legislature intended to authorize the Commissioner to regulate activities based not only on patterns of unfair claims settlement practices, but also on single acts of misconduct by an insurer. The Court therefore upheld the validity of the challenged regulation and found that Section 790.03(h) defines an unfair claims settlement practice to be either a single knowing commission of a violation, or conduct that is committed with such frequency as to indicate a general business practice. The Court also determined that the regulations defining the terms “knowingly committed” and “willful” or “willfully” were permissible interpretations of UIPA and were therefore valid.

This case is significant in that it makes clear that insurance companies can engage in the sixteen prohibited acts enumerated in Section 790.03(h) by just once committing the described misconduct, and that the Commissioner is authorized to pursue enforcement action based on a single knowing commission of a prohibited practice. As the Court of Appeal stated, this result is consistent with the Legislature’s intent in enacting Section 790.03(h) and related provisions of the UIPA to curb insurer violations of the California Insurance Code.

Policyholder Wins Handed Down in Insurance Decisions. Daily Journal Publishes McKennon Law Group PC Article.

The February 10, 2014 edition of the Los Angeles Daily Journal featured Robert McKennon’s article entitled: “Policyholder Wins Handed Down in Insurance Decisions.” In it, Mr. McKennon discusses six insurance decisions handed down in California and federal courts in 2013 that were favorable to policyholders.

The article includes a discussion of Zhang v. California Insurance Co., 57 Cal. 4th 364 (2013), which empowered policyholders to pursue Unfair Competition Law claims against insurers, as well as Rochow v. Life Insurance Company of North America, 737 F.3d 415 (6th Cir. 2013), in which the 6th U.S. Circuit Court of Appeals affirmed a large disgorgement of profits award in long-term disability case governed by the Employee Retirement Income Security Act of 1974 (ERISA). Also discussed are Barnes v. Western Heritage Insurance Co., 217 Cal. App. 4th 249 (2013), Nickerson v. Stonebridge Life Insurance Co., 219 Cal. App. 4th 188 (2013), Aguilar v. Gostischef, 220 Cal. App. 4th 475 (2013) and American Safety Indemnity Co. v. Admiral Insurance Co., 220 Cal. App. 4th 1 (2013). The article is posted here with the permission of the Daily Journal.

Supreme Court Reaches Favorable Decision for Insureds in Zhang v. Superior Court of San Bernardino; Daily Journal Publishes McKennon Law Group PC Article on Zhang

The Wednesday August 7, 2013 edition of the Los Angeles Daily Journal featured Robert McKennon’s article entitled: “Clear win for insureds, though scope uncertain.” In it, Mr. McKennon discusses how a highly anticipated decision by the California Supreme Court in Zhang v. Superior Court of San Bernardino (California Capital Insurance), 2012 DJDAR 10174, expands the availability of claims that can be brought under Bus. & Prof. Code 17200, a.k.a. California’s Unfair Competition Law, or UCL. The article discusses how in Zhang, the Supreme Court addressed the split among courts in California regarding the scope of the court’s prior holding in Moradi-Shalal v. Fireman’s Fund Insurance Companies, 46 Cal. 3d 287 (1988) and adopted a narrow interpretation of Moradi-Shalal. The article explains how the Supreme Court’s holding in Zhang will now allow insureds to bring claims under the UCL against insurers for unfair business practices, such as false advertising, so long as those claims do not rest exclusively on California’s Unfair Insurance Practices Act, or UIPA. This means that insureds will not just have breach of contract and bad faith claims against insurers, but may also have UCL claims too. The article is posted below with the permission of the Daily Journal.

The Importance of Zhang v. California Capital Insurance Co

After much anticipation, last week the Supreme Court of California heard oral arguments in the pivotal case of Yanting Zhang v. California Insurance Co., S178542 on May 8, 2013. This case looks to have a substantial impact on insurance litigation in California and could open up another significant avenue for insureds to pursue claims against their insurance companies. The key issue in Zhang is under what circumstances may an insured bring a cause of action against an insurer under the “Unfair Competition Law” (Bus. & Prof. Code, section 17200 or “UCL”). Specifically, the issues on review by the Supreme Court are: (1) Can an insured bring a cause of action against its insurer under the unfair competition law (Bus. & Prof. Code section 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 46 Cal.3d 287 (1988) bar such an action? Based on the Court’s questions during the oral arguments, as they were reported in the Los Angeles Daily Journal, it appears that the Supreme Court may be on the verge of ruling in favor of the Plaintiff in Zhang and thereby substantially broadening the scope of potential claims available to insured.

A crucial question for the Supreme Court in Zhang, and a focal point of the oral arguments, is the reach of the Supreme Court’s landmark decision in Moradi-Shalal, which barred private actions seeking to enforce California’s Unfair Insurance Practices Act (“UIPA”), namely, Insurance Code Section 790.03, et seq. (“Section 790.03”).

The Supreme Court’s decision in Moradi-Shalal left open the issue of whether claims for violation of the UCL may still allege conduct that violates Section 790.03. Initially, courts in California heavily favored a broad reading of Moradi-Shalal and found that allegations of fraudulent misrepresentation and false advertising in violation of Section 790.03 cannot be brought under the UCL. Specifically, courts reasoned that allowing such claims would circumvent the Supreme Court’s holding in Moradi-Shalal. See, e.g., Textron Financial Corp. v. National Union Fire Insurance Company, 118 Cal.App.4th 1061, 1070 (2004); Safeco Insurance Company v. Superior Court, 216 Cal.App.3d 1491, 1494 (1990) (finding that the UCL “provides no toehold for scaling the barriers of Moradi-Shalal”). In Textron, a case that arose from an insurer’s refusal to honor a claim for insurance benefits concerning property damage, the court found that “merely alleging these purported acts constitute unfair business practices under the unfair competition law is insufficient to overcome Moradi-Shalal.” Textron Financial Corp., supra at 1070-71.

Now, the Zhang case has the potential to significantly limit the broad reading of Moradi–Shalal applied by courts in California in the past and, if the Court of Appeals decision is affirmed, open the door for a slew of new claims against insurers that they have engaged in unfair business practices in violation of Section 790.03. The Zhang case involves an insured, Zhang, who owned an apartment building which was damaged in a fire in 2005. Zhang attempted to collect benefits under the policy issued by her insurer California Capital Insurance Company (“California Capital”). However, Zhang alleged that there was a litany of problems with California Capital’s handling of her claim and that they refused to approve adequate payment for the repair of the premises. Zhang brought a claim against California Capital for breach of contract, breach of the implied covenant of good faith and fair dealing, and also several alleged violations of the UCL. The claims for breach of contract and bad faith were settled and dismissed, leaving her UCL claim. Included under her UCL claim were allegations that California Capital had acted unfairly by engaging in false and deceptive advertising, suggesting it would provide coverage in the event of a loss, when it had no intent to do so. Most importantly, she also alleged that California Capital engaged in unlawful conduct which violates Section 790.03 as part of UCL claim.

California Capital filed a demurrer to Zhang’s cause of action under the UCL arguing, unsurprisingly, that Zhang could not state a cause of action under Section 790.03 based on the decision in Moradi-Shalal. The trial court sustained California Capital’s demurrer relying largely on the Textron case. Then, in a stunning break from prior decisions, the Court of Appeal reversed the trial court’s holding and found that because Zhang is alleging unlawful and misleading conduct prohibited by the UCL in violation of Section 790.03, the suit may proceed on that claim. The court in Zhang specifically addressed the clearly contradictory holding in the Textron decision. Specifically, the court in Zhang held that, contrary to the finding in Textron, Moradi-Shalal does not bar a claim under the UCL where the plaintiff specifically alleged conduct expressly prohibited by Section 790.03. The court pointed to the Supreme Court’s decision in Manufacturers Life Insurance Co. v. Superior Court, 10 Cal.4th 257 (1995), in which the high court rejected the idea that Section 790.03 was intended to “displace existing rights and remedies for unlawful business practices” in the insurance industry, among them the UCL. As such, the court believed that there is no reason to treat insurers differently from other businesses when it comes to actions under the UCL. The court held that although the UIPA did not provide a private cause of action, in the UCL the legislature had provided such a remedy for conduct that fell within its purview and, as such, Zhang’s allegations that the insurer solicited her business through false advertising and false promises clearly justified a claim under the UCL and is not barred by Moradi-Shalal.

Following the Court of Appeals’ decision in Zhang, both plaintiff’s attorneys and insurance companies anticipated a possibly ground-breaking decision by the Supreme Court after it held oral argument in the case three years after it took up the case. As was reported in the Daily Journal on Thursday May 9, 2013, the Supreme Court heard oral arguments the previous day on May 8. According to the Daily Journal, only three justices asked multiple questions and the arguments were both relatively short. However, “the questions posed by the justices suggested the court is inclined to rule in favor of Zhang.” Specifically, Justice Joyce L. Kennard repeatedly asked Zhang’s attorney “hypothetical questions based on the assumption the court were to side with his client.” Although the attorney for California Capital argued that under Moradi-Shalal, Zhang’s claim must be handled by the insurance commissioner, Justice Carol Corrigan questioned why Zhang cannot sue for false advertising where her contract was fraudulently induced. Justice Carol Corrigan also added that who wins the false advertising argument is currently irrelevant, and the only question is whether Zhang has a right to bring her claim. When asked by the Court whether it would have to overturn Moradi-Shalal if it ruled for Zhang, Zhang’s attorney definitively answered “no” and explained that none of Zhang’s actions are related to Moradi-Shalal and pleading false advertising is enough.

Based on the oral arguments, it seems that the Justices of the California Supreme Court are inclined to limit the scope of Moradi-Shalal and allow Zhang to proceed with her case. Such an outcome would have very important consequences for insurance litigation in California. Allowing insured plaintiffs to maintain claims under the UCL based on an insurer’s advertising or representation regarding timely payment for covered losses could open the floodgates for a huge number of new claims for such false advertising and fraud in connection with their advertising. Moreover, given the broad scope of the UCL, such claims will also likely to become common in complaints against insurance companies. Although damages per se are not recoverable under the UCL, restitution may be available under the theory that the insured purchased the policy in reliance on misrepresentations by the insurer. Recovery of insurance premiums paid may be a remedy, along with policy benefits that are owed under an insurance policy. In any case, the threat of injunction for violation of the UCL requiring changes to the insurer’s practice would still be a powerful weapon for plaintiffs. On the other hand, if the Supreme Court decides in favor of California Capital, it would reaffirm Textron Court’s broad reading of Moradi-Shalal and continue to limit insured plaintiffs to breach of contract and breach of the implied covenant of good faith and fair dealing claims. The decision by the Supreme Court in the Zhang case is expected within 90 days of the oral argument on May 8. Both insureds and their attorneys should keep careful watch for this potentially momentous decision in the field of insurance litigation.

Insurance Companies Must Show “Substantial Prejudice” to Deny Claims for a Failure to Comply With the Proof of Loss Requirement

Following the August 2009 Station Fire, the lawsuits of over 1,440 policyholders filed against Fire Insurance Exchange (“FIE”) and related insurers were consolidated into one case – Henderson v. Farmers Group, Inc., __ Cal.App.4th __, 2012 Cal. App. LEXIS 1108 (October 24, 2012). In this case, the California Court of Appeal, Second Appellate District, issued an interesting opinion addressing several important issues.

In the consolidated lawsuit, the policyholders alleged that FIE improperly denied their claims by asserting either that: (1) the policyholders did not submit sworn proof of loss as required by the fire insurance policies, or (2) that the policyholders submitted delayed notice of loss. The policyholders asserted causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing (bad faith) and unfair business practices under section 17200. Given the large number of policyholders, five plaintiffs were selected as representative of the other policyholders and had their claims litigated, while the lawsuits of the other policyholders were stayed.

FIE moved for summary adjudication against the five representative plaintiffs, asserting, among other things, that submission of proof of loss is a condition precedent to coverage under the policy, and the failure to submit proof of loss in a timely manner meant the policyholders did not meet their own contractual obligations. While the trial court granted summary adjudication to FIE, the California Court of Appeal reversed.

For the policyholders whose claims were denied based on a failure to meet the policies’ proof of loss deadline – usually within 60 days of a request by FIE – the Court of Appeal ruled that California’s notice-prejudice rule applied. Under the rule, an insurer cannot avoid liability for an untimely claim, unless the insurer shows it suffered “substantial prejudice” from the claimant’s failure to provide timely notice and proof loss. The Court explained:

There is ample reason to apply the “notice-prejudice” rule here. California has a strong public policy against “technical forfeitures.” (Bollinger v. National Fire Ins. Co. (1944) 25 Cal.2d 399, 405.) Since forfeitures are not favored, “‘conditions in a contract, will if possible be construed to avoid forfeiture. [Citations.] This is particularly true of insurance contracts. [Citation.] [¶] And where . . . the condition is express and cannot be avoided by construction, the court may, in a proper case, excuse compliance with it or give equitable relief against its enforcement.’” (Root v. American Equity Specialty Ins. Co. (2005) 130 Cal.App.4th 926, 942, quoting O’Morrow v. Borad (1946) 27 Cal.2d 794, 800.) FIE’s employees testified that they waited for the insured to submit a proof of loss only where FIE’s hygienist recommended cleaning, i.e., when its investigation determined the insured had sustained a specific measure of damage and cleanup costs would be greater than the deductible. A reasonable trier of fact might infer that the insureds’ failure to provide a sworn proof of loss in such cases was a technical forfeiture that FIE used to avoid paying for cleanup costs when its hygienists recommended that course of action after testing samples from the property.

The Court further explained that “the notice-prejudice rule avoids an absurd result that would follow were courts to require absolute compliance with the proof of loss condition.” Reviewing the available facts, the Court of Appeal found that FIE failed to establish “substantial prejudice,” and indeed noted that even FIE’s person most knowledgeable testified that FIE relied upon the conclusions of expert hygienists hired to determine the level of char each house suffered, not the proof of loss, in preparing the damage estimates.

For the policyholders whose claims were denied because of delayed notice, the Court determined that FIE did show that it was prejudiced by the delayed notice because the condition of the property at the time the claim was made was substantially different from its condition when the loss occurred. However, summary adjudication was still reversed because FIE failed to raise the delayed notice until the lawsuit. In the letter denying the claim of the representative plaintiff that provided delayed notice, FIE’s denial was based on the grounds that “there were insufficient levels of smoke, ash, and/or soot present in the home,” and that it was reserving any available defenses. While FIE argued that the reservation language in the letter meant that it could raise the delayed notice defense to justify its denial decision, the Court of Appeal disagreed. Specifically, the Court held that under Insurance Code section 554, a failure to “promptly and specifically object to a delay in the presentation of notice” means that further objections based on delay are waived. The Court further noted that:

“The law is established that where an insurance company denies liability under a policy which it has issued, it waives any claim that the notice provisions of the policy have not been complied with.” (Comunale v. Traders & General Ins. Co. (1953) 116 Cal.App.2d 198, 202-203.) The rationale for this rule is “that an insurer cannot deny all liability, and at the same time be permitted to stand on a provision inserted in the policy for its benefit. . . . [W]here the insurer denie[d] all liability under the policy, the insured is misled into believing it would be futile to perform any affirmative obligation under the policy. In other words, the insurer is deemed to have waived the insured’s failure to perform because the nonperformance is attributable to the insurer’s conduct. [Citation.] Thus, the cases in which a notice or proof of loss provision has been deemed waived by the insurer usually involve an insured lulled by the insurer’s silence into believing it had complied with the policy notice and/or proof of loss provisions. Consistent with this rule, section 554 operates to deem an insurer’s belated objection to an untimely notice of claim or proof of loss waived if not promptly called to the attention of the insured. . . . [S]ection 554 prevents an insurer from lulling the insured into believing that notice and proof of loss are unnecessary.” (Insua v. Scottsdale Ins. Co. (2002) 104 Cal.App.4th 737, 742–743, fns. omitted.)

Finally, the California Court of Appeal affirmed the trial court’s summary adjudication ruling in favor of the insurer regarding alter ego and other vicarious liability theories, but reversed the trial court’s summary adjudication ruling on the causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair competition under Business & Professions Code section 17200 et seq. With regard to the latter claim, the Court found that Moradi-Shalal v. Fireman’s Fund Insurance Companies, 46 Cal. 3d 287 (1988), did not bar a UCL cause of action based on an insurer’s bad faith, even if the same conduct might also constitute a violation of the Unfair Insurance Practices Act (which can only be enforced by the California Insurance Commissioner). With this, the lawsuit will be remanded back to the trial court, although we expect that the California Supreme Court’s upcoming opinion in Zhang v. Superior Court, 178 Cal. App. 4th 1801 (2009) could result in a rehearing of the section 17200 cause of action.

Cause of Action Asserted Against Blue Cross for Violation of Montana’s Unfair Trade Practices Act is Not Preempted by ERISA

In a recent decision, the Ninth Circuit Court of Appeals ruled that ERISA does not preempt causes of action based on unfair insurance practice claims brought under Montana’s Unfair Trade Practices Act. However, the Court did find that Montana’s so-called “little HIPAA” was preempted by federal HIPAA, which is part of ERISA.

In Fossen v. Blue Cross and Blue Shield, __ F.3d __ (9th Cir. October 18, 2011), the Court considered an appeal from a District Court ruling that entered summary judgment in favor of Blue Cross on two causes of action. Plaintiffs – which consisted of three brothers, their corporations and a partnership of the three corporations – sued Blue Cross after the health insurer increased their premiums by over 40%. The lawsuit, filed in state court, alleged two causes of action: violation of Montana Code Annotated § 33-22-526(a) (also known as Montana’s “little HIPAA” statute) and violation of Montana Code Annotated § 33-18-101 (also known as Montana’s Unfair Trade Practices Act). Plaintiffs alleged that premium increase violated little HIPAA’s prohibition against imposing a “premium or contribution that is greater than the premium or contribution for a similarly situated individual” on account of “any health status-related factor of the individual” and the Unfair Trade Practices Act’s prohibition against “unfair discrimination between individuals of the same class and of essentially the same hazard in the amount of premium, policy fees, or rates charged.” The action, filed in state court, was removed to the District Court, which eventually granted Blue Cross’ motion for summary judgment as to all causes of action.

On appeal, the Ninth Circuit first considered whether ERISA and federal HIPAA preempted state law causes of action based on Montana’s little HIPAA statute and conferred federal jurisdiction over the claim. Applying the two-part test detailed in Aetna Health Inc. v. Davila, 542 U.S. 200 (2004), the Ninth Circuit determined the little HIPAA claim was preempted because the same claim could have been brought under the federal HIPAA statute and there was no other independent duty implicated by Blue Cross’ actions. Specifically, the Ninth Circuit advised that:

Because the Fossens’ state HIPAA cause of action could have been brought under ERISA § 502(a), and because that cause of action is identical to and expressly dependent upon ERISA, the district court properly denied the Fossens’ motion to remand and exercised jurisdiction over this case.

Next, the Ninth Circuit evaluated whether ERISA preempts the plaintiffs’ statutory unfair insurance practice claim, considering both express preemption under ERISA § 514 (29 U.S.C. § 1144) and conflict preemption under ERISA § 502 (29 U.S.C. § 1132). With respect to express preemption, the court applied the two-part test detailed in Kentucky Association of Health Plans v. Miller, 538 U.S. 329 (2003) and determined that because statute is both “specifically directly toward entities engaged in insurance” and substantially affect[s] the risk pooling arrangement between the insurer and the insured” it is exempt from express preemption.

As to conflict preemption, the court again applied Davila, and determined that the unfair insurance practice claim was not preempted by ERISA because it sought relief (i.e., restitution) that was consistent with ERISA’s enforcement scheme, but that no provision of ERISA expressly guarantees the same rights as the statute.

Also, the unfair insurance practices statute creates a right that is separate from and could not possibly be remedied under ERISA. Whereas HIPAA (both the state and federal versions) prohibits plans and their insurers from charging different premiums on account of “health status-related factor[s],” 29 U.S.C. § 1182(b)(1); Mont. Code Ann. § 33-22-526(2)(a), the unfair insurance practices statute applies more broadly to bar “any unfair discrimination” with respect to premiums, Mont. Code Ann. § 33-18-206(2) (emphasis added); see, e.g., McCarter v. Glacier Gen. Assurance Co., 546 P.2d 249, 251 (Mont. 1976). Because these statutes are not identical in scope (as is the case with the state and federal HIPAA provisions), they are not conflict preempted.

Accordingly, the Ninth Circuit reversed the district court’s grant of summary judgment and remanded this claim for further consideration of the plaintiffs’ allegations that Blue Cross violated Montana’s Unfair Trade Practices Act.

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