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Insurance Law News - July 2016

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When Auto Insurer Elects To Repair Vehicle to Pre-Accident Condition, Insurer Is Not Also Required to Pay for Resulting "Diminution in Value" to Vehicle

When an auto insurer elects to repair an insured vehicle to its pre-accident condition, the insurer is not also required to pay for any resulting "diminution in value" to the fully repaired vehicle. (Baldwin v. AAA Northern California, Nevada & Utah Insurance Exchange (2016) --- Cal.App.4th ----, 2016 WL 3854444)

Facts

William Baldwin's almost new Toyota Tundra Pickup sustained structural damage due to a collision caused by other motorists. Baldwin had an insurance policy through AAA Northern California, Nevada & Utah Insurance Exchange (AAA) covering collision-related damages to his pickup. Baldwin thus submitted a first-party claim to AAA.

AAA concluded that Baldwin's pickup was not a "total loss" and thus had the pickup repaired at a cost of $8,196. Baldwin contended that due to the collision and following the repairs, the pickup's future resale value was decreased by more than $17,000. However, AAA declined to pay Baldwin for any alleged diminution in value.

Baldwin subsequently filed a lawsuit against AAA asserting claims for breach of contract and bad faith. Baldwin alleged that the insurance policy required AAA to either (1) pay him the full pre-accident value of the pickup or (2) repair the pickup to its original pre-accident condition. Baldwin generally alleged that the repaired pickup did not match its pre-accident condition "with respect to safety, reliability, mechanics, cosmetics and performance," and further alleged that its future resale value had decreased by more than $17,000.

The trial court ruled that Baldwin essentially was seeking reimbursement for the diminution in value of his pickup following the repairs, and that such loss was not covered under the AAA policy. The trial court thus dismissed Baldwin's claims against AAA. Baldwin appealed.

Holding

The Court of Appeal affirmed. With respect to the policy's coverage for physical damage to Baldwin's car, the policy provided that AAA "may pay the loss in money or repair … damaged … property." Italics added. Further, the policy's "Limits of Liability" provision stated that AAA's responsibility for physical damage would not exceed "the lesser of" paying "the actual cash value of the … damaged property" or "the amount necessary to repair … the property with similar kind and quality." Italics added. Thus, pursuant to the terms of the policy, AAA could elect to repair Baldwin's vehicle to a similar condition if repair costs would be less than the actual cash value of the vehicle at the time of the loss. The court concluded that repairing a vehicle to its pre-accident condition does not mean restoring it to its original condition when it left the factory, because "no repair can ever restore a vehicle to its pristine factory condition," and applying such a standard would mean "no vehicle could be adequately repaired." Further, if the insurer could elect to make repairs but still had to pay for diminution in value following repairs, it would basically render meaningless the insurer's right to elect to repair rather than to pay the actual cash value of the vehicle at the time of loss.

The appellate court also noted that the AAA policy contained a specific exclusion for loss "caused by diminution in value of your insured car … by reason of a loss otherwise covered by this policy." Italics added. According to the appellate court, this exclusion was conspicuous, plain and clear and did not violate any public policy. The exclusion thus barred coverage for the diminution in value claim asserted by Baldwin. According to the court, "an insurer may cover the cost of repairing a car damaged in an accident, but exclude coverage for the accompanying decrease in the car's future resale value."

Based on the above, Baldwin did not have a viable claim against AAA for either breach of contract or bad faith.

Comment

The Baldwin case is consistent with several earlier California appellate cases, including Carson v. Mercury Ins. Co. (2012) 210 Cal.App.4th 409. Pursuant to these cases, when a first-party auto insurer elects to repair a vehicle to the vehicle's pre-accident condition, the insurer is not also required to pay for any diminution in value to the vehicle which might remain after the vehicle is fully repaired.

 

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Mere Breach of Contract, Without More, is Not Sufficient to Establish "Wrongful" Retention of Policy Benefits Under Financial Elder Abuse Statute

An insurer's alleged breach of contract, without more, is not sufficient to establish "wrongful" retention of policy benefits under California financial elder abuse statutes, and the existence of the same "genuine dispute" that defeated the insureds' bad faith claim also defeated their financial elder abuse claim. (Paslay v. State Farm General Insurance Company (2016) --- Cal. App.4th ----, 2016 WL 3524086)

Facts

Clayton and Traute Paslay were insureds on a homeowner policy issued by State Farm General Insurance Company. During a period of heavy rain, a roof drain failed, causing water to damage the house's master bedroom ceiling as well as other parts of the residence. At the time of the loss, Clayton was 60 years old and Traute was 80 years old.

State Farm paid policy benefits for repair of the house, and State Farm paid for the Paslays to live in a rental house while repairs were underway. Although State Farm paid approximately $248,000 for (1) repair of the dwelling, (2) additional living expense and (3) damage to personal property, State Farm denied coverage for certain items, including work undertaken in the master bathroom, replacement of drywall ceilings and installation of a new electrical panel.

The policy included coverage up to $5,000 for costs of mold remediation. During an inspection, the Paslays voiced concern about the possibility that mold had developed in wall and ceiling cavities in the bathroom, but did not expressly make a claim for mold damage. Nonetheless, State Farm paid the $5,000 mold limit. Later, the Paslays' contractor removed some drywall and cabinets in the bathroom, allegedly to determine if any hidden mold existed. During the course of this work, the Paslays and their contractor allegedly discovered hidden water damage. Before State Farm could inspect the allegedly-hidden water damage, the Paslays' contractor demolished a substantial portion of the bathroom. Later, the Paslays provided State Farm with photographs showing the alleged hidden water damage before the demolition. However, State Farm's construction consultant advised State Farm that the allegedly hidden water damage would not have required demolition of the bathroom.

In addition, the policy included limited coverage for costs of upgrades required by the building code. Without State Farm's approval, the Paslays' contractor had a subcontractor remove all drywall on the ceilings (even those with no water damage), asserting this was necessary because the ceilings' texture contained asbestos that required abatement. However, State Farm's construction consultant advised State Farm that the water damage would not have required removal of all drywall on the ceilings, and that the asbestos could have been abated by scraping the texture from the ceilings.

State Farm authorized a six-month lease of a rental property in which the Paslays could live during repairs. After the initial six-month period expired, State Farm authorized month-to-month extensions. Ultimately, the landlord elected to rent the property to other tenants, and the Paslays resumed living in their own home, which by then was partly (but not completely) repaired. There was no evidence that, after the landlord terminated the lease, the Paslays requested that State Farm pay for another rental residence.

The Paslays ultimately sued State Farm for breach of contract, bad faith and financial elder abuse. They alleged State Farm failed to pay certain policy benefits and forced them to move back into their house while it was still under construction. The complaint also included a prayer for punitive damages.

State Farm moved for summary adjudication on all claims. In support, State Farm submitted detailed evidence outlining the handling of the claim and the amounts paid under the policy. In opposition, the Paslays submitted evidence in an effort to rebut some (but not all) of State Farm's assertions. The trial court entered judgment in favor of State Farm, and the Paslays appealed.

Holding

The Court of Appeal upheld the trial court's dismissal of the claims for bad faith and financial elder abuse, as well as the prayer for punitive damages. However, the Court of Appeal determined the Paslays' evidence was sufficient to raise triable issues regarding certain items for which State Farm failed to pay, namely the demolition and reconstruction of the master bathroom and the removal of drywall ceilings throughout the house. Among other things, the Court noted that the policy's $5,000 mold limit (which State Farm paid) did not shield State Farm from liability for allegedly hidden water damage discovered in the course of mold remediation of the master bathroom, including "exploratory" demolition undertaken to locate mold.

Although the Court held there were triable issues of fact regarding the Paslays' breach of contract claim, the Court held there were no triable issues of fact about whether State Farm had acted reasonably. Among other things, the evidence established that State Farm had relied upon a construction consultant, who promptly evaluated the claimed damage. In short, the Court concluded that even though State Farm's denial of coverage for the costs of demolition and reconstructing the bathroom and the ceilings might have been "mistaken" (i.e., might constitute a breach of contract), State Farm's denial of coverage for those items was not unreasonable (i.e., did not amount to bad faith), largely because there was a "genuine dispute" about the amount due under the policy.

With regard to Mrs. Paslay's claim for financial elder abuse, the Court of Appeal concluded there was no evidence that, by failing to pay certain policy benefits, State Farm had engaged in a "wrongful" retention of policy benefits, an "intent to defraud" or some "undue influence." As such, that claim failed.

Comment

As stated, Mrs. Paslay was 80 years old at the time of the loss.Under the Elder Abuse and Dependent Adult Civil Protection Act (Welfare & Institutions Code, section 15600 et seq.), an elder is "any person residing in [California], 65 years or older."  This Act broadly defines financial abuse of an elder as occurring when a person or entity "[t]akes, secretes, appropriates, obtains, or retains real or personal property of an elder" for "a wrongful use," with an "intent to defraud" or by "undue influence."

The Court found no evidence that State Farm retained policy benefits with an "intent to defraud" or by "undue influence." Thus, the key question was whether there was a triable issue regarding a "wrongful use" of policy benefits.

The Elder Abuse and Dependent Adult Civil Protection Act (specifically, 15610.30(b)) provides that a person or entity is "deemed to have taken, secreted, appropriated, obtained, or retained property for a wrongful use if, among other things, the person or entity takes, secretes, appropriates, obtains, or retains possession of property and the person or entity knew or should have known that this conduct is likely to be harmful to the elder … adult." Under existing California case law, a party may engage in elder abuse by misappropriating funds to which an elder is entitled under a contract. The issue, according to the Court of Appeal, is whether a merely incorrect denial of policy funds under the circumstances shown here may constitute a "wrongful use" of those funds for purposes of an elder abuse claim.

The Court noted that the Act requires proof "the person or entity knew or should have known that this conduct is likely to be harmful to the elder … adult." In view of the italicized phrase, the Court of Appeal concluded an insurer's "wrongful use" (i.e., wrongful retention of policy benefits) occurs only when the insurer who breaches the contract actually knows that it is engaging in a harmful breach, or reasonably should be aware of the harmful breach. The same evidence that established a "genuine dispute" sufficient to defeat the Paslays' bad faith claim was sufficient to defeat Mrs. Paslay's financial elder abuse claim.

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