The California Court of Appeal has issued an opinion which, if allowed to stand, threatens to eat away at the once-settled body of law that prohibits third-party claimants who were injured by an insured from suing the insured’s insurance company for unfair claims settlement practices under California Insurance Code § 790.03.  Over 20 years ago, the State Supreme Court held that only the State’s Insurance Commissioner may pursue insurers for improper settlement practices under that statute; § 790.03 does not grant either insureds or third-party claimants the right to sue insurers for violating the statute’s prohibitions.  (Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287.)

But the new opinion — from the intermediate appellate court — would create a loophole that could accommodate a whole fleet of trucks.  (Zhang v. Superior Court (2009) 178 Cal.App.4th 1081.)  According to Zhang, if plaintiff’s allegations are not limited to unfair claims handling, but also include "specific" allegations that the insurer "made fraudulent misrepresentations and promulgated misleading advertising" — i.e., it never intended to pay covered claims — the complaint will survive the insurer’s demurrer challenge.  However, to prevail, plaintiff would be required to prove the insurer made false representations to the public and that the insurer had a policy that was inconsistent with these representations.

Zhang candidly acknowledged it disagreed with a prior opinion which held squarely to the contrary.  (Textron Financial Corp. v. National Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061.)  The conflict in the published opinions of the intermediate appellate courts makes Zhang a prime candidate for review by the California Supreme Court.  Indeed, the high court extended its time to rule on the insurer’s Petition for Review until March 9.  (Ptn. for Review filed 12/09/09, No. S18542.)

Zhang is a troubling opinion, and Appellate Strategist urges interested parties to support the insurer’s petition.  It is easy enough to allege a policy or practice.  Under this decision, that alone is sufficient to defeat the insurer’s demurrer against what should have been a stillborn claim.  The value of Moradi-Shalal is that it deals an immediate fatal blow, saving defendants the time and expense of discovery and trial on allegations a plaintiff cannot possibly prove.  If Zhang survives, the insurer cannot defeat the suit short of a motion for summary judgment, and perhaps not even then.