Insurers Can Be Sued Under CA B&P 17200

February 1, 2010

On October 29, 2009, the California Court of Appeal for the 4th Appellate District (serving Orange County and San Diego) decided the case of Zhang v. Superior Court. Generally speaking, the case holds that insurers can be sued under California Business & Professions Code § 17200, the California Statute which prohibits “unfair business practices” and provides for a broad range of remedies. 

In Zhang, the insured sustained a fire at its premises and submitted a claim for benefits with its insurer. A dispute arose over the payment under the policy for the repair and restoration of the premises. The insured sued for breach of contract and bad faith, based on the insurer’s alleged failure to pay the claim and misconduct in handling the claim. The complaint included a third cause of action for violation of § 17200, alleging that the insurer “engaged in unfair, deceptive, untrue, and/or misleading advertising” regarding its intent to pay covered losses.
The insurer filed a demurrer to that complaint, arguing that under prior case law, an insured cannot use statutory violations to seek civil damages against an insurer. The trial court agreed and dismissed the case. The Court of Appeal reversed. It held that although an action based purely on improper claims handlings cannot be brought under §17200, false advertising claims can be. An insurer is like any other business, and if it falsely advertises its services and products, it can be held liable under § 17200. At trial, the insured will have the burden of proving this false advertising claim.

Clearly, this case has far-reaching implications from a pleadings standpoint. If an insured, in a bad faith case, simply pleads facts going beyond mere claims handling and alleging “false advertising”, it will likely survive a demurrer because of this case. However, the court was clear that allegations in a pleading are a far cry from what has to be proven at trial. At trial, the insured would have the burden of establishing the truth of its false advertising claim, a burden which may be harder to sustain.

Notwithstanding this burden, the difficulty with the holding in Zhang is that it opens up a wide range of discovery, as well as draconian remedies such as injunctive relief, restitution, civil penalties, and perhaps attorneys fees under a “private attorney general” theory, all of which may be used by insured’s counsel to exert pressure on insurers to settle, and most certainly will increase the costs of litigation. Counsel representing insurers should consider propounding discovery early on in the action, designed at flushing out facts supporting the “false advertising” claim, with an eye towards filing an early summary adjudication motion.