News - January 2008

• Homeowners Insurer Has No Duty to Defend Woman Who Allegedly Failed to Prevent Husband from Molesting Daughter
• Defamation Suit Against Insured Does Not Allege “Occurrence” Under Homeowners Policy
• General Liability Insurer Properly Denies Defense Under Non-Standard Additional Insured Endorsement
• Insurer’s Misrepresentation of Policy Limits to Induce Settlement Subjects Insurer to Liability for Fraud
• Bad Faith: “Genuine Issue” Rule Negates Bad Faith Claim Only If Insurer Demonstrates It Conducted Thorough Investigation

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Homeowners Insurer Has No Duty to Defend Woman Who Allegedly Failed to Prevent Husband from Molesting Daughter

The California Court of Appeal has held that a homeowners insurer had no duty to defend a woman who allegedly was negligent in failing to prevent her husband from sexually molesting their daughter. (Bjork v. State Farm Fire and Casualty Co. (2007) 157 Cal.App.4th 1)

Facts

In 1977, Melvin Fergerson and his wife Carol Fergerson had a daughter, Darcie. From 1979 through 1994, Mr. Fergerson allegedly molested Darcie. Ultimately, in 1997, Darcie moved out of the family home. Later, Darcie sued her mother, Mrs. Fergerson, alleging that Mrs. Fergerson had negligently failed to prevent Mr. Fergerson from molesting Darcie.

State Farm Fire and Casualty Company and related companies had issued homeowners policies to Mr. and Mrs. Fergerson jointly between 1987 and 2000, and to Mrs. Fergerson individually between 2000 and 2005. Mrs. Fergerson tendered defense of the lawsuit to State Farm, but State Farm denied Mrs. Fergerson’s tender.  

Following State Farm’s refusal to defend Mrs. Fergerson, Darcie and Mrs. Fergerson entered into a stipulated judgment of $4.5 million. Darcie agreed not to enforce the judgment against Mrs. Fergerson’s assets, and Mrs. Fergerson in turn assigned her rights against State Farm to Darcie.

Darcie, as assignee, then filed suit for breach of contract and bad faith, alleging that State Farm had improperly failed to defend and indemnify Mrs. Fergerson in the underlying action. The trial court ruled that Darcie’s claims against Mrs. Fergerson in the underlying action were not potentially covered under the State Farm policies, and that State Farm had thus properly refused to defend and indemnify Mrs. Fergerson. Darcie appealed.

Holding

The Court of Appeal agreed that Darcie’s claims against Mrs. Fergerson in the underlying action were not potentially covered under the State Farm policies, and thus affirmed the judgment in favor of State Farm.

The Court reasoned that the State Farm policies which were in effect while Darcie lived with Mr. Fergerson and Mrs. Fergerson (i.e., between 1987 and 1997) excluded coverage for bodily injury “to … any ‘insured’,” and defined “insured” so as to include Mrs. Fergerson’s “relatives” who were “residents of [her] household.” Here, at the time the alleged molestations occurred, Darcie was Mrs. Fergerson’s relative and resided in her household. Thus, Darcie qualified as an “insured” under Mrs. Fergerson’s policies, with the result that Darcie’s claims against Mrs. Fergerson were excluded from coverage. The Court observed that this “resident relative” exclusion was designed to prevent an insurer from having to defend against potentially collusive intra-family claims, and that it applies even if there is no evidence of actual collusion. Further, because the policies’ “resident relative” exclusion barred coverage, there was no need for the policies to contain a separate “sexual molestation” exclusion.

The Court next reasoned that the State Farm policies which were in effect after Darcie stopped living with Mr. Fergerson and Mrs. Fergerson (i.e., after 1997) only covered bodily injury occurring “during the policy period.” Here, however, Mr. Fergerson had stopped molesting Darcie by 1994, before the post-1997 policies were issued. While it was true that Darcie claimed she continued to suffer emotional distress with physical manifestations after the post-1997 policies were issued, that was not sufficient to require State Farm to defend. Even under California’s “continuous injury” trigger of coverage, there was no evidence that Darcie suffered any “continuous or progressively deteriorating bodily injury” in the post-1997 time period resulting from the earlier molestations.

Because Darcie’s claims against Mrs. Fergerson were not potentially covered under any of the State Farm policies, State Farm had no duty to defend or indemnify Mrs. Fergerson in the underlying action brought by Darcie. Thus, Darcie, as Mrs. Fergerson’s assignee, could not recover under the State Farm policies.

Comment

An interesting aspect of this case is the court’s ruling that the allegedly “continuing nature” of Darcie’s injuries did not trigger coverage under the policies which were in effect after Darcie stopped living with her parents in 1997. Although the opinion is not entirely clear on this point, the court seems to suggest that once the actual molestations ended in 1994, any ongoing emotional distress/physical manifestations which Darcie suffered while subsequently-issued policies were in force would not trigger coverage under those subsequently-issued policies. In effect, the court refused to find coverage for any continuous emotional/physical injury that might have occurred after the molestations ended.

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Defamation Suit Against Insured Does Not Allege "Occurrence" Under Homeowners Policy

The California Court of Appeal has held that a defamation suit against an insured did not suggest the possibility of an “occurrence,” or “accident,” within the meaning of a standard homeowners policy. (Stellar v. State Farm General Insurance Company (2007) 69 Cal.Rptr.3d 350)

Facts

Richard Stellar filed a complaint against his brother, Philip, alleging causes of action for defamation, intentional infliction of emotional distress and intentional interference with contract. The allegations related to written and verbal statements made by Philip during the sale of their mother’s home.

Philip cross-complained against Richard and Richard’s son, Miles, alleging causes of action for slander per se, libel and intentional infliction of emotional distress. In his cross-complaint, Philip essentially alleged that Richard and Miles had told various third parties that Philip was a child molester and a drug user. Philip further alleged that Richard and Miles had made these statements maliciously, willfully and with the intent to harm Philip. Philip alleged that, as a result of Richard’s and Miles’ statements, Philip suffered damage to his reputation, shame and mortification, along with emotional and physical distress.

Richard and Miles tendered defense of the cross-complaint to Richard’s homeowners insurer, State Farm General Insurance Company. State Farm declined the tender the on grounds that Philip’s cross-complaint against Richard and Miles failed to allege either an “occurrence” or “bodily injury” as those terms were defined in the State Farm policy.

Richard and Miles later filed a suit against State Farm for breach of contract and bad faith, alleging that State Farm had wrongfully failed to defend them against Philip’s cross-complaint in the underlying litigation. However, the trial court ruled that Philip’s cross-complaint against Richard and Miles was not potentially covered under the State Farm homeowners policy, and thus entered summary judgment in favor of State Farm.

Holding

The Court of Appeal upheld the summary judgment in favor of State Farm. In support of its holding, the Court of Appeal relied on Allstate Insurance Co. v. LaPore (N.D. Cal. 1988) 762 F.Supp. 268, in which a federal district court held since defamation is an intentional tort that requires proof of intent to publish, an insured’s alleged act of defamation is not an “occurrence,” or “accident.” The Court of Appeal held that where, as here, the claimant alleges only that an insured acted willfully and intentionally, and the insured presents no evidence that the acts were negligent or unintentional, there is no “occurrence,” or “accident.” Since it was clear that there was no “occurrence,” the Court of Appeal declined to address whether the Philip’s claims against Richard and Miles in the underlying action constituted claims for “bodily injury” within the meaning of the State Farm policy.

Comment

Most homeowners policies limit coverage to “bodily injury” or “property damage” caused by an “occurrence,” which is defined as an “accident.” Thus, since it is difficult to see how one can “accidentally” utter an allegedly defamatory statement, the typical homeowners insurer should generally have no duty to defend an insured in a defamation action.

Keep in mind, however, that a few homeowners policies, and many personal umbrella policies, will also provide coverage for specified “personal injury” offenses, including “defamation.”  Generally, such “personal injury” coverage is not dependent on an “accident.” Thus, a homeowners insurer or personal umbrella insurer that has issued a policy providing “personal injury” coverage might in fact have a duty to defend an insured who is sued for defamation.

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General Liability Insurer Properly Denies Defense Under Non-Standard Additional Insured Endorsement

The California Court of Appeal has held that a general liability insurer had no duty to defend a corporation under the terms of a non-standard “additional insured” endorsement. (Boeing Company v. Continental Casualty Company (2007) 157 Cal.App.4th 1258)

Facts

Continental Casualty Company (Continental) issued a liability policy to Christmas in April USA (CIA), a non-profit corporation that enlists volunteers to repair and rehabilitate homes of low-income elderly persons. The Boeing Company (Boeing) supervised and provided materials for one of the home repair projects. A volunteer worker on the project suffered an injury and filed suit against Boeing.

Boeing tendered defense of the lawsuit to CIA’s insurer, Continental, pursuant to a “special endorsement” in the Continental policy that afforded “additional insured” status to “any person or organization while acting as any agent for, or on behalf of, the named insured [CIA]…. [H]owever, such coverage will be granted only on written request of the insured.” Continental denied Boeing’s tender on the ground that the named insured, CIA, had never made a written request to have Boeing added as an additional insured on the Continental policy.

Boeing then filed suit against Continental for breach of contract, bad faith and declaratory relief based on Continental’s refusal to defend. However, the trial court dismissed Boeing’s complaint because the named insured, CIA, had never sent Continental a written request to add Boeing as an additional insured. Boeing appealed.

Holding          

The Court of Appeal affirmed the ruling that Continental had no duty to defend Boeing. The appellate court held that the “special endorsement” was unambiguous and required “the insured”—CIA—to send a written request to add an additional insured. The court cited various portions of the Continental policy to support its ruling that the phrase “the insured” referred to CIA. While Boeing alleged that Boeing had sent a written request to Continental for additional insured coverage, Boeing could not amend its complaint to state that “the insured”—CIA—had—done so. Thus, Boeing could not possibly qualify as an additional insured and Continental properly denied a defense.

Comment       

Courts determine whether language in an insurance policy is ambiguous by looking at that language in the context of the policy as a whole. In this case, the court found that the policy language was clear and thus enforced it as written.

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Insurer’s Misrepresentation of Policy Limits to Induce Settlement Subjects Insurer to Liability for Fraud

The California Court of Appeal has held that where an insurer misrepresents the policy limits to induce an insured into settling a disputed insurance claim, the insured may keep the money paid and sue for fraud. (Village Northridge Homeowners Association v. State Farm Fire and Casualty Company (2007) 69 Cal.Rptr.3d 551)

Facts

Village Northridge Homeowners Association (“HOA”) made a claim to its insurer, State Farm Fire and Casualty Company (“State Farm”) for earthquake damage. State Farm initially paid the HOA over $2 million, and ultimately entered into a settlement agreement by which State Farm paid an additional $1.5 million in exchange for an unconditional release of all claims.

Two years later, after it had spent the $1.5 million on earthquake repairs, the HOA sued State Farm for breach of contract and bad faith, claiming that State Farm had fraudulently induced the HOA into executing the release. The HOA also claimed that State Farm had misrepresented the policy limits of its policy to be $4.9 million when they were in fact $11.9 million. Finally, the HOA claimed that the court had inherent power to set aside a fraudulently-procured release and that State Farm’s $1.5 million payment was a grossly deficient partial payment toward the HOA’s earthquake loss.

State Farm demurred, contending that under California Supreme Court precedent, Garcia v. California Truck Co. (1920) 183 Cal. 767 and Taylor v. Hopper (1929) 207 Cal.102, the HOA could either (1) rescind the settlement agreement and return the $1.5 million State Farm paid or (2) affirm the settlement agreement and sue for fraud. However, State Farm argued, the HOA could not affirm the settlement, keep State Farm’s settlement payment, and still pursue a claim against State Farm that it had expressly released. The trial court sustained State Farm’s demurrer without leave to amend and the HOA appealed.

Holding

The California Court of Appeal reversed. It determined that Garcia and Taylor—which essentially provide that a release can be set aside only through rescission and the restoration of the consideration paid—apply solely in the context of personal injury cases. Here, however, the Court of Appeal reasoned that State Farm did not dispute the existence of its contractual obligation to pay for some damage, but merely disputed the extent of the damage. Therefore, a jury could determine what damages an insured incurred in entering into a fraudulently-induced settlement of a disputed insurance claim.

Moreover, the court also noted that prohibiting an insured from affirming a fraudulently-induced release and suing for fraud damages would leave the insured with no practical remedy in such cases, as it is unlikely that the insured actually would be able to return the consideration paid.

However, the Court also expressly limited its ruling solely to the facts of the case, stating that if an insurer fraudulently induced an insured to settle a claim by a misrepresentation of policy limits, the insured could elect to keep the money paid and then sue for fraud rather than on the released claim.

Comment

The Court of Appeal’s ruling is simply an application of the general principle that a party induced to execute a contract by fraud has the option of rescinding it or affirming it and recovering damages for fraud.

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Bad Faith: "Genuine Issue" Rule Negates Bad Faith Claim Only If Insurer Demonstrates It Conducted Thorough Investigation

In a recent case, the California Supreme Court ruled that the “genuine issue” rule negates a first-party bad faith claim only if the insurer can demonstrate that it conducted a reasonable investigation before denying the insured’s claim. The Court held that, because a jury reasonably could conclude the insurer’s investigation was not reasonable, the insurer was not entitled to summary judgment and the case should be tried to a jury. (Wilson v. 21st Century Insurance Company (2007) 42 Cal.4th 713.) 

Reagan Wilson, a 21-year old woman, was injured in an automobile accident caused by a drunk driver. The drunk driver’s insurer paid its policy limits of $15,000 in exchange for a release. Wilson then made an underinsured motorist claim to her own insurer, 21st Century Insurance Company. Ultimately, she made a demand to 21st Century for $85,000 (the difference between the $15,000 the drunk driver’s insurer had paid and 21st Century’s $100,000 UIM coverage limit).

Even though Wilson’s treating physician had opined that the Wilson had “degenerative disk changes” and that these spinal changes were atypical for her age and “almost certainly” caused by the automobile accident, 21st Century rejected Wilson’s demand, on the asserted ground that she had suffered only soft tissue injuries in the collision, that she had “preexisting” degenerative disc disease and that the $15,000 payment she already had received had fully compensated her for her damages. Before rejecting Wilson’s UIM claim, 21st Century did not attempt to contact Wilson’s physician and did not speak with any other medical practitioner about the claim.

Wilson then demanded UIM arbitration. In preparation for the arbitration, 21st Century deposed Wilson and had a physician examine her and review her medical records. That physician concluded that Wilson had a disk injury, and that the accident had caused the injury. About two years after Wilson’s initial demand, 21st Century revised its evaluation of the claim and paid Wilson $85,000.

Wilson then sued 21st Century, alleging that the two-year delay in paying the UIM claim constituted bad faith. 21st Century moved for summary judgment on the ground that its initial decision to refuse the UIM demand was reasonable in light of the facts known to the company at the time. The superior court granted the motion in favor of 21st Century, but the Court of Appeal reversed. The California Supreme Court ultimately affirmed the Court of Appeal’s ruling and held that Wilson had demonstrated a triable issue of fact as to whether 21st Century’s decision to deny her UIM claim was made unreasonably and in bad faith.

In reaching its conclusion, the Supreme Court reiterated that the “genuine dispute” rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim. The court held that a jury could find that 21st Century lacked any factual basis for its initial denial of Wilson’s claim and that in reaching that coverage decision the company had unfairly ignored medical evidence submitted by Wilson. Thus, the Court held that the case could not be resolved by summary judgment.

This case contains a very detailed discussion of Wilson’s medical records and a detailed discussion of what information was available to 21st Century, and when that information was available. In short, this case demonstrates that the “genuine dispute” rule only applies if the insurer can demonstrate it conducted a reasonably thorough investigation of the insured’s claim prior to denying the claim.

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