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Insurance Law News - July 2017

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Insurer Not Entitled to Rescind Based on Insured's Answers to Ambiguous Questions in Application

An insurer was not entitled to rescind a policy based on an insured's answers to ambiguous questions in an application for insurance. (Duarte v. Pacific Specialty Insurance Company (2017) 13 Cal.App.5th 45)

Facts

Victor Duarte owned a rental property in Oakland. In 2009, Jennifer Pleasants became a tenant at the property. Pleasants occasionally sold motorcycle parts from the rented property and operated a "welding shop" there.

In February 2012, Duarte gave Pleasants a 45-day notice to quit, but Pleasants did not vacate the premises. Instead, in March 2012, Pleasant complained to Oakland housing authorities that the premises suffered from various problems, including roof leaks, plumbing leaks, deteriorating floorboards, pest infestation, mildew, etc. That same month, Duarte responded by informing housing authorities that Pleasants was operating a welding shop at the premises. In early April 2012, housing authorities sent Duarte written notice of a mediation to be held in June 2012.

On April 19, 2012, Duarte applied for a landlord's policy through Pacific Specialty Insurance Company (Pacific). The application contained various questions. Question 4 asked, "Has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuits?" In response, Duarte answered "no." Question 9 asked, "Is there any type of business conducted on the premises?" In response, Duarte again answered "no." Pacific approved Duarte's application for insurance and issued a landlord's policy to him. Pacific then sent a property inspector out to the property, and the property inspector reported that there was "no business, farm or ranch" operating on the property.

In June 2012 (two months after the policy was issued), Pleasants filed a lawsuit against Duarte alleging that various problems had existed with the premises throughout Pleasants' tenancy. Duarte tendered the lawsuit to Pacific, but Pacific refused to defend Duarte.

Duarte sued Pacific for breach of contract and bad faith arising from Pacific's refusal to defend Duarte against Pleasants' lawsuit. Pacific moved for summary judgment, arguing that it had a right to "rescind" the policy based on material misrepresentations by Duarte in the application. The trial court granted Pacific's motion for summary judgment. Duarte appealed.

Holding

The California Court of Appeal reversed, holding that Pacific had failed to establish Duarte made material misrepresentations in the application for insurance.

Specifically, Pacific had failed to show that Duarte made any misrepresentation by answering "no" to Question 4. That question asked, "Has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuits?" According to the appellate court, Question 4 contained "garbled syntax" and was "utterly ambiguous." The court rejected Pacific's argument that Question 4 should be interpreted as asking if there was unrepaired damage from a previous claim, or if there were any pending claims, or if there were any known or potential defects, claim disputes, property disputes and/or lawsuits. Rather, Question 4 "is reasonably construed as simply asking whether damage has 'remained unrepaired' from various past events, such as a 'previous claim' or a property dispute or lawsuit." Because Question 4 was ambiguous, Duarte's "no" answer to that question did not provide Pacific with a basis to assert misrepresentation in the application as a defense to coverage.

Similarly, Pacific had failed to show that Duarte made any misrepresentation by answering "no" to Question 9. That question asked "Is there any type of business conducted on the premises?" According to the appellate court, Question 9 could reasonably be interpreted as referring to "regular and ongoing business activity," and it was unclear whether Pleasants was engaged in "regular and ongoing business activity" at the rental house at the time Duarte applied for the policy through Pacific. Moreover, after Duarte submitted the application, Pacific's own property inspector reported to Pacific that there was no "business, farm or ranch" operating on the property. Under such circumstances, the appellate court was "not persuaded" that Pacific had met its burden to show that Duarte misrepresented the existence of a business on the premises at the time Duarte submitted the application for insurance. At a minimum, there was a triable issue of fact as to whether Duarte had made a material misrepresentation when he answered "no" to Question 9.

Based on the above, the appellate court remanded the case to the trial court for further proceedings.

Comment

Generally speaking, an insurer has the right to rely on an applicant's answers in an application for insurance without verifying the accuracy of the answers. However, an insurer cannot rely on an applicant's answers where the questions themselves are ambiguous or unclear. In the Duarte case, the appellate court basically held that Question 4 was ambiguous as a matter of law. The court characterized the other question – Question 9 – as "more straightforward," but concluded that even that question was subject to more than one interpretation.

The lesson from the Duarte case is that when an insurer pursues a "rescission" or "misrepresentation" defense based on an insured's answers to questions in an application, the questions themselves must be clear and unambiguous. To the extent the questions are unclear or ambiguous, any resulting uncertainty will be resolved against the insurer.

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Cracking of Underground Tank's Sheathing Was Not "Collapse" Where Policy Expressly Stated That "Collapse" Did Not Include "Cracking"

The cracking of an underground storage tank's sheathing was not a "collapse" where the policy expressly stated "collapse" did not include "cracking" and where the tank, although in a state of "substantial impairment," was not in a state of "imminent" collapse. (Tustin Field Gas & Food, Inc. v. Mid-Century Insurance Exchange (2017) WL 2839138)

Facts

Tustin Field Gas & Food, Inc. (TFGFI) owned a gas station and mini-mart. The station stored fuel in two 15,000-gallon cylindrical tanks, which were buried about six feet beneath the surface of the ground. Each tank was made of steel, and each tank was covered with fiberglass sheathing.

When the tanks were placed underground years earlier, the installer did not follow the manufacturer's instructions to bury them in pea gravel or crushed rock. Instead, the installer simply dug a hole, placed the tanks into that hole, and then backfilled the hole with soil, rocks, boulders, chunks of asphalt, rusted pipes and other debris. One of the two tanks was set atop a nine-inch diameter boulder as well as atop pockets of air.

During state-mandated annual testing, TFGFI discovered that the fiberglass sheathing around one of the tanks (the tank sitting on the nine-inch boulder) had damage. TFGFI had the tank excavated, and determined that the fiberglass sheathing on the underside of the tank had a narrow crack that partially touched the nine-inch boulder, which had itself cracked in two. However, the tank's steel wall was still intact, and its outer fiberglass sheathing had not lost its cylindrical shape. There was no imminent danger that the tank's inner steel wall would be crushed inward, but the tank was no longer usable under California law, because its sheathing had failed.

At the time TFGFI discovered the damage, TFGFI was named as the insured on a policy issued by Mid-Century Insurance Company (Mid-Century). The policy covered TFGFI's interest in "[b]uildings, meaning the buildings and structures at the premises …, including … (2) [f]ixtures, including outdoor fixtures; [and] (3) [p]ermanently installed:  (a) [m]achinery; and (b) [e]quipment."

In addition, the Mid-Century policy provided coverage for "collapse" of a "building or any part of a building" covered by the policy, if the collapse was caused by one or more of various named perils. The policy expressly provided that "collapse" did not include "settling, cracking, shrinkage, bulging or expansion," but the policy did not further define what was (or was not) a "collapse." Elsewhere, the policy excluded "[s]ettling, cracking, shrinking or expansion."

TFGFI submitted a claim, which Mid-Century denied, asserting that the damaged tank was not a "building or any part of a building" and that, in any event, no "collapse" had occurred. TFGFI then sued Mid-Century for breach of contract, bad faith and declaratory relief. The trial court entered summary judgment in favor of Mid-Century, and TFGFI appealed.

Holding

The Court of Appeal affirmed the summary judgment in favor of Mid-Century. The Court noted that – unlike many property policies – the Mid-Century policy did not define collapse as the "actual" falling down or caving in of a building or part of a building. The Court also noted that the policy excluded "settling" and "cracking" and that the policy further expressly provided that "collapse" did not include "settling" and "cracking."

In addition, the Court noted that – unlike some property policies – the Mid-Century policy did not broadly extend to "risks of direct physical loss involving collapse of a building." Importantly, the Court noted that, even if the policy could be construed to apply to something less than an "actual" collapse of part of a building, TFGFI would still need to show the tank was in a state of "imminent collapse," and TFGFI had not done so. The Court also rejected TFGFI's argument that mere "substantial impairment" of the tank's structural integrity was enough to trigger the "collapse" coverage (the same argument the Court of Appeal rejected twenty years earlier in Doheny West Homeowners' Assn. v. American Guarantee & Liability Ins. Co. (1997) 60 Cal.App.4th 400).

Because the Court of Appeal ruled no "collapse" had occurred, the Court did not address the issue of whether the tank was "Machinery," "Equipment" or a "Fixture" and, therefore, "a building or part of a building."

Comment

The Court's holding that no actual "collapse" occurred is consistent with various prior California appellate decisions regarding this issue. Very briefly, if a policy does not specifically require a "collapse" to be a "complete" or "actual" falling down, then an "imminent" (i.e., impending) collapse is sufficient to trigger coverage. (Doheny West Homeowners' Assn., supra, 60 Cal.App.4th 400.) However, if a policy does specifically require a "collapse" to be a "complete" or "actual" falling down, then an "imminent" collapse is not sufficient. (Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070; Jordan v. Allstate Ins. Co. (2004) 116 Cal.App.4th 1206; Grebow v. Mercury Ins. Co. (2015) 241 Cal.App.4th 564.)

Here, Mid-Century's policy did not expressly require an "actual" collapse. However, unlike the policy involved in Doheny, Mid-Century's policy also did not broadly extend to "risks of direct physical loss involving collapse of a building." Thus, even if the policy could have been construed to apply to an "imminent collapse," TFGFI had not shown the tank was in a state of "imminent collapse." At most, TFGFI had demonstrated a "substantial impairment" of the tank's structural integrity, which is insufficient to constitute a "collapse" under California law.

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"Genuine Dispute" Doctrine Does Not Necessarily Insulate Insurer from Suit Alleging Bad Faith Delay in Paying Underinsured Motorist Benefits

Triable issues of material fact existed as to whether the "genuine dispute" doctrine insulated an automobile insurer from a suit alleging bad faith delay in paying underinsured motorist benefits to its insured. (Zubillaga v. Allstate Insurance Company (2017) 12 Cal.App.5th 1017)

Facts

Carmen Zubillaga was insured on an Allstate Insurance Company automobile policy that included underinsured motorist (UIM) coverage with a $50,000 per person limit. The policy provided for arbitration of claim disputes.

In March 2011, another motorist ran a red light and injured Zubillaga. Initially, Zubillaga reported pain to her face and arm, but not her back. Over the next several months, Zubillaga saw a chiropractor 39 times. During this time frame, Zubillaga reported pain to her back.

In August 2011, Zubillaga's doctors concluded that she had multiple disc protrusions. Her doctors further concluded that she would likely require future medical treatment, including additional chiropractic treatments, medications for pain, and epidural steroid injections.

The responsible driver's liability insurer paid its $15,000 bodily injury limit to Zubillaga. In November 2011, Zubillaga through her attorney presented a claim for UIM benefits to Allstate. Zubillaga asserted that she had medical bills of over $17,000 and that she would have lower back pain for the remaining 52 years of her life expectancy. Zubillaga thus demanded that Allstate pay $35,000, which represented the full amount of Zubillaga's remaining UIM policy coverage.

Allstate rejected Zubillaga's demand of $35,000, and offered her $9,367. In response, Zubillaga demanded arbitration of her UIM claim. Allstate retained an orthopedist who conducted a defense medical examination of Zubillaga. In October and November 2012, Allstate's orthopedist opined that Zubillaga's treatment thus far had been excessive and that she did not need epidural steroid injections.

In June 2013, Zubillaga received an epidural steroid injection which cost $6,850. Also in June 2013, Zubillaga's doctor rendered a report stating that Zubillaga would need three more steroid injections in the future. Allstate did not have its defense medical expert review these additional records. However, Allstate did offer Zubillaga $15,584 in settlement. Zubillaga continued to demand the remainder of the UIM policy limit – $35,000 – in settlement.

In September 2013, Zubillaga's UIM claim against Allstate proceeded to arbitration. Following the arbitration, the arbitrator awarded Zubillaga $35,000, the amount of her UIM demand. Allstate paid the arbitration award.

Zubillaga then filed a bad faith lawsuit against Allstate, claiming that Allstate did not fairly investigate Zubillaga's claim and that it should have paid her the UIM policy limits sooner. Allstate moved for summary judgment based on the "genuine dispute" doctrine. The trial court granted Allstate's motion. Zubillaga appealed.

Holding

The Court of Appeal reversed the summary judgment. According to the appellate court, there were triable issues of material fact regarding whether Allstate's evaluation of Zubillaga's UIM claim was unreasonable and in bad faith. Allstate's medical expert rendered opinions in October and November 2012, but Allstate continued to rely on those opinions through the arbitration in September 2013, without ever consulting its medical expert again or conducting any further investigation. In the meantime, Zubillaga had received one epidural steroid injection that cost $6,850, and Zubillaga's doctor had recommended that she receive three more injections. Under such circumstances "[a] jury could reasonably find Allstate's continued insistence that [Zubillaga] did not need epidural steroid injections was without a good faith investigation and without a reasonable basis for genuine dispute." Thus, the trial court had erred in granting Allstate summary judgment based upon the genuine dispute doctrine.

Comment

An insurer that denies or delays the payment of policy benefits because of a "genuine dispute" with its insured as to the existence of coverage or the amount of the insured's claim is not liable in bad faith. However, the genuine dispute doctrine does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured's claim. A genuine dispute exists only where the insurer's position is maintained in good faith and on reasonable grounds. The problem here was that after the insurer obtained an initial opinion from a medical expert, the insurer did not keep its medical expert up to date as to additional developments regarding the insured's treatment.

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