News - March 2007

• Inadequate Investigation of Fungus/Collapse Claim Exposes Insurer to Bad Faith Liability
• Insurer Has No Duty to Defend or Indemnify Landlord Against Breach of Lease Claim Brought by Tenant
• Although Landslide Results in Damage During Successive Policy Periods, There Is Only One “Occurrence” For Purposes of Limits

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Inadequate Investigation of Fungus/Collapse Claim Exposes Insurer to Bad Faith Liability

The California Court of Appeal has held that an insurer’s alleged inadequate investigation of a first-party fungus/collapse claim exposed the insurer to possible bad faith liability, and that the evidence of bad faith was sufficient to create a triable issue of fact. (Jordan v. Allstate Insurance Co. (2007) WL 852632)

Facts

Mary Ann Jordan purchased a homeowner’s policy from Allstate Insurance Company. The policy provided “all-risk” coverage subject to certain exclusions. Among other things, the policy excluded coverage for loss caused by or consisting of (1) “wet or dry rot” or (2) “collapse.” However, the “collapse” exclusion was subject to an exception that provided coverage for “the entire collapse of a covered building structure” and “the entire collapse of a part of a covered building structure,” if caused by various perils, including “hidden decay of the building structure.”

Jordan discovered that a window had fallen out of the wall of her living room and that the floorboards in the corner of the living room were “giving way.” She hired an expert, who concluded that the damage was caused by a fungus known as poria incrassata. Jordan submitted a claim, which Allstate denied based on the exclusion for “wet or dry rot.” Jordan then sued Allstate for breach of contract and bad faith, but the trial court entered summary judgment in favor of Allstate.

On Jordan’s first appeal, the Court of Appeal concluded that, although Allstate’s interpretation of the policy was reasonable, the “wet or dry rot” exclusion and the additional coverage for “collapse” caused by “hidden decay” were contradictory and confusing, thus creating an ambiguity. Thus, the Court of Appeal concluded that Jordan could demonstrate the existence of coverage for her loss if she could establish the occurrence of an “entire” (meaning “actual,” not “imminent”) collapse.

Upon return of the case to the trial court, Allstate moved for summary adjudication of Jordan’s cause of action for bad faith, arguing that since the Court of Appeal already had concluded that Allstate’s interpretation of its policy was reasonable (even though erroneous), Allstate had not acted in bad faith as a matter of law. The trial court was persuaded by that argument and granted Allstate’s motion.

Holding

On Jordan’s second appeal, the Court of Appeal held that although Allstate’s interpretation of the policy was reasonable as a matter of law, there were numerous questions of fact regarding whether Allstate’s investigation of Jordan’s claim was adequate. For example, Jordan submitted evidence of the following: (1) Allstate made no attempt to interview Jordan or her expert; (2) Allstate did not hire a structural engineer until long after Jordan filed suit, even though some of Allstate’s own experts previously had recommended that Allstate hire an engineer; (3) Allstate allowed its claim adjusters to determine if a collapse had occurred, despite the fact that the adjusters had no credentials or background in structural engineering; (4) Allstate’s adjusters recognized that the collapse coverage applied where there was “hidden decay,” but never made any attempt to inspect the inner walls or sub‑flooring of Jordan’s house.

Comment

This case reinforces the principle that, in order to rely upon the “genuine dispute” doctrine to defeat a claim for bad faith, the insurer first must establish that it conducted a reasonable investigation of the claim. In addition, this case reinforces the principle that even after an insured files suit, the insurer has a continuing obligation of good faith, which includes a continuing duty to investigate the insured’s claim.

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Insurer Has No Duty to Defend or Indemnify Landlord Against Breach of Lease Claim Brought by Tenant

The California Court of Appeal has held that a liability insurer had no duty to defend or indemnify its insured, a landlord, against claims that the landlord failed to maintain and repair premises leased to a tenant. (Golden Eagle Insurance Company v. Cen-Fed, Ltd. (2007) WL 841117)  

Facts

Cen-Fed, Ltd. leased part of an office building to Washington Mutual Bank for use as a bank branch. The lease contained an attorney’s fees clause which provided that in case of litigation, the prevailing party would be entitled to recover reasonable attorney’s fees from the losing party. 

Washington Mutual later sued Cen-Fed for breach of lease, alleging that Cen-Fed had failed to maintain and repair the leased premises in accordance with the terms of the lease, and that as a result Washington Mutual was unable to use a portion of the leased premises. Washington Mutual also alleged that Cen-Fed did not properly maintain the building’s air conditioning, elevators, restrooms, common areas, paint, etc.

Cen-Fed tendered defense of the action to its general liability insurer, Golden Eagle Insurance Company. Golden Eagle agreed to defend Cen-Fed under a complete reservation of rights.

Ultimately, Washington Mutual obtained a judgment against Cen-Fed for approximately $505,000, representing the diminution in value of Washington Mutual’s leasehold interest. In addition, Washington Mutual as prevailing party was awarded costs of suit (including contractual attorney’s fees) against Cen-Fed.

Golden Eagle filed a declaratory relief action against Cen-Fed to determine the scope of Golden Eagle’s coverage obligations to Cen-Fed. The trial court ruled that Golden Eagle had no duty to indemnify Cen-Fed for the $505,000 judgment in favor Washington Mutual. However, the trial court also ruled that although Golden Eagle never had a duty to defend Cen-Fed against Washington Mutual’s claims, Golden Eagle had in fact defended Cen-Fed, and therefore Golden Eagle was obligated under the policy’s “supplementary payments” provision to indemnify Cen-Fed for all costs (including attorney’s fees) which had been awarded to Washington Mutual. Cen-Fed appealed and Golden Eagle cross-appealed.

Holding

The Court of Appeal resolved all issues in favor of Golden Eagle.

First, the court ruled that Golden Eagle’s coverage for “bodily injury and property damage liability” did not potentially cover Cen-Fed’s liability to Washington Mutual in the underlying action. According to the court, Washington Mutual only alleged injury to the value of its leasehold interest (an intangible property right), and did not allege “property damage” (which the policy defined as “physical injury to … or loss of use of … tangible property”). Further, the coverage for bodily injury and property damage liability required an “occurrence,” or “accident,” and  Cen-Fed’s alleged failure to discharge its contractual maintenance obligations to Washington Mutual could not be characterized as an “accident.”

Next, the court found that Golden Eagle’s coverage for “personal injury liability” did not potentially cover Cen-Fed’s liability to Washington Mutual in the underlying action. Although the Golden Eagle policy did define personal injury so as to include “wrongful eviction from … a room, dwelling or premises that a person occupies…,”  the clamant, Washington Mutual, was a corporate organization, not a person. Thus, the policy’s personal injury coverage did not apply.

Last, the court held that the Golden Eagle policy’s “supplementary payments” clause did not cover Cen-Fed’s obligation to pay attorney’s fees to Washington Mutual in the underlying action. It was true that the supplementary payments clause provided that Golden Eagle would pay all costs (including contractual attorney’s fees) assessed against the insured in “any suit … we defend.” However, while Golden Eagle had in fact defended Cen-Fed in the underlying action, Golden Eagle never had a legal duty to defend Cen-Fed in that action. According to the court, a supplementary payments clause must be read “as applying only to those cases where the insurer actually owed a duty to defend.”

Comment    

The most significant thing about this case may be court’s ruling regarding the supplementary payments provision. This case makes it clear that, if the insurer never had a duty to defend the insured in the first place, the supplementary payments provision is not triggered. On the other hand, if the insurer does have a duty to defend the insured, the insurer may have an obligation to under the supplementary payments provision to pay any costs—including contractual or attorney’s fees—which are later assessed against the insured.

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Although Landslide Results in Damage During Successive Policy Periods, There Is Only One "Occurrence" For Purposes of Limits

The California Court of Appeal has held that although a landslide resulted in damage during successive primary policy periods, there was only one “occurrence” and hence only one primary policy limit applied. (Safeco Insurance Company of America v. Fireman’s Fund Insurance Company (2007) WL 764314)

Facts

Harold Lancer and several others owned homes on top of a hill. Lawrence and Linda Rauch and others owned homes at the bottom of the hill. In February 1998, a portion of the uphill properties failed, causing a massive amount of dirt and debris to be deposited onto the downhill properties.

Following the landslide, the slope went unrepaired for over three years, and during that entire time the Rauches were unable to use their backyard. Eventually the Rauches and other downhill neighbors sued Lancer and other uphill owners for nuisance, trespass and negligence. Various parties cross-complained against each other.

At the time of the landslide, Lancer had a homeowners policy through Fireman’s Fund Insurance Company. The Fireman’s Fund homeowners policy covered both “property damage” (defined as physical injury to or loss of use of tangible property) and “personal injury” (defined so as to include wrongful entry and eviction) caused by an “occurrence,” with limits of $500,000 for all damages resulting from any one occurrence. Following the landslide, Fireman’s Fund renewed the policy for three consecutive years.

At the time of the landslide, Lancer also had a personal umbrella policy through Safeco Insurance Company of America. The Safeco umbrella policy also covered “property damage” and “personal injury” caused by an “occurrence,” with limits of $5 million per occurrence.

Fireman’s Fund defended Lancer against the lawsuits brought by the Rauches and the other downhill neighbors. Ultimately Fireman’s Fund paid $500,000 and Safeco paid $450,000 to settle Lancer’s liability to everyone except the Rauches. At that point, Fireman’s Fund contended that it had exhausted its policy limit of $500,000, but agreed to continue to defending Lancer against the Rauches’ claims under a reservation to seek reimbursement of post-exhaustion defense costs from Safeco. The Rauches then proceeded to trial against Lancer and obtained a judgment of over $2 million against him.

Safeco filed a declaratory relief action against Fireman’s Fund, asserting that Fireman’s Fund provided $500,000 for property damage and an additional $500,000 for personal injury during each of Fireman’s Fund’s four policy periods (for a total of $4 million); that both property damage and personal injury occurred during all four policy periods; and that Fireman’s Fund was therefore responsible for all costs of defending and indemnifying Lancer. Fireman’s Fund cross-complained against Safeco, asserting that the landslide had only caused one “occurrence” under the first of Fireman’s Fund’s four policies; that Fireman’s Fund had already exhausted its applicable policy limit of $500,000; and that Safeco was thus obligated to reimburse Fireman’s Fund for all defense costs Fireman’s Fund had paid after exhausting its policy limits.

The trial court ruled in favor of Fireman’s Fund, finding that there was a single occurrence during a single policy period and that Fireman’s Fund’s policy limit was thus $500,000. The trial court thus ruled that Safeco was obligated to indemnify Lancer for any liability above $500,000, and that Safeco was obligated to reimburse Fireman’s Fund for all defense costs Fireman’s Fund had paid after exhausting its policy limits. Safeco appealed.

Holding

The Court of Appeal affirmed. The court held that even assuming the Rauches had suffered both property damage and personal injury, both types of harm resulted from a single cause (i.e., the landslide). According to the court, for purposes of determining policy limits, all damages flowing from a single cause are deemed to be the result of a single “occurrence.” It was irrelevant “that the resulting damage may have continued into subsequent policy periods.” Here, there was only a single occurrence during Fireman’s Fund’s first policy period, so that Fireman’s Fund’s exposure was limited to $500,000.

Comment

The appellate court acknowledged that there might be situations where, even though there is only one “occurrence” (i.e., cause of damage), the insured would be entitled to the policy limits under successive policies. One such situation would be where the insured is liable for “continuous or progressively deteriorating” bodily injury or property damage occurring over successive policy periods.

Here, apparently, the appellate court did not feel that Lancer’s liability arose from “continuous or progressively deteriorating” property damage. Rather, this simply was a situation where the property damage occurred in Fireman’s Fund’s first policy period, and the effects were felt in subsequent policy periods. According to the court, “the mere continuation of damage during successive policy periods, by itself, does not create a series of indefinitely ongoing occurrences.”

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