The Zhang case is a dispute following a fire at the plaintiff’s commercial property wherein the uninsured Zhang accuses the defendant-insurer of misconduct. The first two actions in the plaintiff’s complaint consist of 88 paragraphs arguing common law allegations of misconduct by the insurance company. Then, in her third cause of action, the plaintiff incorporates these paragraphs and alleges that the defendant engaged in false advertising. That last allegation starts the case down its controversial path.


The Zhang trial court sustained the insurer’s demurrer on the grounds that an earlier Court of Appeal case, Trexton Financial Corp. v. National Union Fire Insurance Company of Pittsburgh, precluded suit under Insurance Code section 790.03 (a.k.a. Fair Claims Handling Act, FCHA). On review, the appellate court disapproved of the Textron holding and held that the allegations of false advertising permitted suit under the Business and Professions Code section 17200 et seq (a.k.a. Unfair Competition Law, UCL).

To address the appellate court’s ruling in Zhang and the difference between it and Textron, we need to understand the current law. The UCL is a set of statutory codes that allow private persons to sue businesses for five types of conduct: (1) an unlawful business practice; (2) an unfair business practice; (3) a fraudulent business act (4) unfair, deceptive, untrue or misleading advertising; or (5) other acts prohibited by later sections of the code. Insurance companies are businesses within this law. A UCL cause of action requires some “predicate” violation, meaning that the plaintiff must complain of some conduct by a business-defendant in order to bring the claim.

As for the FCHA, it too is a set of statutory codes and it too sets out to stop unfair business practices; acts such as disseminating false insurance statements, making false entries into insurance reports, improperly disclosing private financial information. Unlike the UCL, the Legislature wrote the FCHA to apply specifically to insurance companies—almost exhaustively. The  California Supreme Court previously ruled in Moradi-Shalal v. Fireman’s Fund Insurance Companies that private plaintiffs cannot bring actions under FCHA. The Supreme Court has not held the same when it comes to the UCL. And that is the issue at the heart of Zhang when it comes before the supreme court this year.

Like in Zhang, in Textron, the plaintiff also alleged that the insurer engaged in misconduct that violated the FCHA and brought a UCL claim. The Textron appellate court upheld the defendant’s demurrer dismissing the case and pointed out that the conduct the plaintiff complained of was similar to the conduct covered by the FCHA and therefore the plaintiff could not bring a private cause of action. The appellate court in Textron held that, because in Moradi-Shalal the Supreme Court held that FCHA does not allow a private cause of action, FCHA violations cannot be the predicate violation for a UCL claim.

The differences between Textron and the appellate decision in Zhang is FCHA violations can serve as the predicate for a UCL cause of action. Textron unequivocally disfavored such a practice, holding that a plaintiff cannot use the UCL to avoid the Moradi holding. Zhang is holding otherwise. In Zhang, the UCL claim remained even though it was an FCHA violation. Now that we have two courts of equal standing handing down opposite rulings, the California Supreme Court must make a ruling to determine which way the law goes.

There is no evidence to suggest that the California Supreme Court will alter Moradi as to the holding denying a private right of action for violations of the FCHA. However, good public policy indicates that the Zhang approach—allowing UCL claims for FCHA violations—is the right approach. As a general matter, the UCL acts to empower private citizens to enforce fair business practices when the attorney general cannot or chooses not to do so. By extending the right to cover citizens aggrieved by insurance companies, the system can better protect those that are wronged. Moreover, because a successful plaintiff recovers restitution and not damages, the results will be equitable. Essentially, private citizens will be able to file claims to force an insurer to comply with the FCHA and then recover any money or property wrongfully taken.

Posted on January 21, 2013 by jampolzimetlaw
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