What Insurers and Their Counsel Need to Know about California's Unfair Competition Law

Article excerpt

Because of the state's commercial importance, California's UCL statute may catch national and international insurers in its complicated net

NATIONAL and international insurance companies are facing claims under state law unfair competition statutes in force around the United States. There are unfair and deceptive practices statutes in many states, including major commercial states such as Arizona, Florida, Illinois, Massachusetts, Michigan, New Jersey, New York and Texas.(1)

It is particularly important that insurers and their counsel understand California's unfair competition statute, which is Section 17200 et seq. of the California Business and Professions Code for three reasons:

* It has been the subject of much litigation and judicial interpretation and thus promises to be a secondary source of precedent in interpreting the statutes of other states.

* Defense strategies that have been applied successfully in California may be used elsewhere.

* National insurance companies must presume that if they are to be sued anywhere under an unfair competition law (UCL), the most likely location is California. It should be recognized that California UCL exposures may exist for any carrier doing business in California regardless of whether it is domiciled in some other state or nation.

The broad scope of the California statute, which proscribes "any unlawful, unfair or fraudulent business act or practice," presents a significant challenge to the targeted insurance company and requires a well-planned defense.

CALIFORNIA UCL LAW

The most significant features of the California UCL statute include these.

A. Liability

Liability may be based on any one of three types of business practices: unlawful conduct, unfair practice, or fraudulent activity, the California Supreme Court explained in Cel-Tech Communications Inc. v. Los Angeles Cellular Telephone Co.(2)

The showing of an intent to injure is not necessary to a finding of liability.(3)

Liability may be imposed based on a single wrongful act.(4)

The "unlawful" practice prong of the statute "borrows" the violation of other laws, "civil or criminal, federal, state, municipal, statutory, regulatory or courtmade,"(5) and provides a remedy or additional remedy for violation of those laws.(6) Consequently, an insurer found to have breached the covenant of good faith and fair dealing or to have violated California insurance regulations may also face UCL liability.

One court stated, "In general, the `unfairness' prong `has been used to enjoin deceptive or sharp practices."(7) While one court declared that the UCL "does not give the courts a general license to review the fairness of contracts,"(8) another held that breach of the covenant of good faith and fair dealing implied in a contract may satisfy the "unfairness prong of the UCL."(9)

At present, the precise standard for liability for an "unfair" practice is uncertain in the context of a consumer protection action against an insurer. The California Supreme Court in Cel-Tech rejected earlier criteria adopted by several of the state's intermediate appellate courts--that is, weighing the utility of the conduct against the gravity of the harm. The supreme court instead adopted a new standard expressly applicable to unfair competition claims: "unfair" means conduct that violates the spirit or policy of antitrust laws because its effects are comparable to a violation of such laws. The court specifically declined, however, to adopt a standard applicable to UCL claims brought by or on behalf of consumers rather than competitors. Nevertheless, the insurer defendant in a consumer protection case probably should argue, based on Cel-Tech, that its liability for "unfair conduct" requires a showing that it violated the spirit or policy, if not the letter, of a predicate law.

The "fraudulent" practice prong of the statute refers to conduct likely to deceive the public. …