Insurance Law News - March 2009

• Insured Can “Stack” Policy Limits Across All Applicable Policy Periods in Cases of Continuous and Progress Property Damage / Bodily Injury
• Bad Faith and Punitive Damages Award Upheld Where Insurer Conducted Biased Investigation, Judge Excluded Evidence of Insured’s Prior Violent and Dishonest Acts, and Judge Excluded Recorded Statements as Hearsay
• Third-Party Claimant Does Not Have Standing to Bring Declaratory Relief Action Against Insured’s Liability Insurer

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Insured Can "Stack" Policy Limits Across All Applicable Policy Periods in Cases of Continuous and Progress Property Damage / Bodily Injury

A California Court of Appeal has held that an insured is entitled to combine or “stack” the policy limits of all applicable policies across all applicable policy periods in cases of continuous and progressive property damage and bodily injury, thus creating a split of authority with the “no-stacking rule” previously adopted by another California appellate panel. (State v. Continental Casualty Insurance Co. (2009) 170 Cal.App.4th 160)

Facts

The coverage dispute at issue in this case arose out of claims of groundwater contamination stemming from the 1950s conversion of a quarry in Riverside County into an industrial waste disposal site. A state geologist inspected the quarry for suitability in 1955, and the State of California proceeded to design the site and supervise its construction. Over the next two decades, numerous flaws in the site’s design and construction allowed contaminants to escape. In 1998, the State was found liable for all past and future remediation costs, estimated to be as high as $700 million.

Seeking indemnification, the State filed suit against its excess liability insurers, each of which covered a two- or three-year period in the 1960s and 1970s. The trial court concluded, among other things, that every policy in effect for any policy period during which the loss was occurring covered the entire loss (subject to the policy limits). However, the trial court also ruled that that the State could only recover up to the policy limits of the policies in effect during a single period to be selected by the State. This “no-stacking” holding was one of several issues on appeal.

Holding

The Fourth Appellate District reversed the trial court, holding that the State was not limited to a single policy period and that the State could combine or “stack” the policy limits of all applicable policies across all applicable policy periods. First, the Court examined the language of the policies, noting that they only limit each particular insurer’s liability under each particular policy (that is, not in reference to other policies), and that nothing in the policy language expressly prohibits stacking. The Court also noted that, with the exception of uninsured motorist policies, stacking is generally the rule. For example, the fact that California follows the "horizontal exhaustion" rule (whereby excess policies are not triggered until the limits of all underlying primary policies are exhausted) necessarily implies that the insured (like the excess carrier) is entitled to stack primary policies; otherwise, the primary policies could never be exhausted.

The Court then rejected the “no-stacking” rule previously adopted by the Sixth Appellate District in FMC Corp. v. Plaisted & Cos. (1998) 61 Cal.App.4th 1132, and identified several arguments against such a rule. First, the policy language is susceptible to the meaning that stacking is allowed and should be construed against the insurer. Second, FMC's finding that stacking affords the insured more coverage than it paid for is circular: it assumes what it is meant to prove – that the policies do not provide for stacking. Moreover, if an occurrence is continuous across two policy periods, the insured has paid two premiums and can recover up to the combined total of two policy limits – something that is neither unfair nor unexpected. Finally, even if stacking somehow resulted in a windfall to the insured, courts would not be authorized to cure it through “judicial intervention,” as FMC suggests, because courts cannot rewrite contracts.

Notably, the Continental Casualty holding applies even if there is only a single “occurrence,” but it is limited to cases to where there is continuous and progressive bodily injury or property damage. The Court openly acknowledged that one reason to prohibit stacking is that the insured should not be better off when an occurrence is continuous across multiple policy years. However, the Court also noted that “a continuous loss spanning two or more policy periods is fundamentally different from an instantaneous loss, such that it is appropriate to place a greater contractual obligation on the insurers.” 

Comment

As is evident, the Continental Casualty decision created a district split with the FMC decision regarding the permissibility of “stacking.” In order to resolve the conflicting appellate decisions on this issue, the California Supreme Court has recently granted review in the Continental Casualty case. Until the Supreme Court renders its decision in this case (which may not be until sometime in 2010), this will remain an unsettled area of the law.

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Bad Faith and Punitive Damages Award Upheld Where Insurer Conducted Biased Investigation, Judge Excluded Evidence of Insured’s Prior Violent and Dishonest Acts, and Judge Excluded Recorded Statements as Hearsay

The California Court of Appeal has held that a bad faith and punitive damages award was proper where an insurer conducted a biased investigation of a car theft claim, where the trial judge excluded evidence of the insured’s prior dishonest and violent acts, and where the judge excluded tape-recorded statements as hearsay. (McCoy v. Progressive West Insurance Company (2009) 171 Cal.App.4th 785)

Facts

Cedric McCoy submitted a claim to Progressive West Insurance Company for theft of and damage to McCoy’s vehicle. After conducting an extensive investigation, Progressive denied the claim on the grounds that McCoy had staged the theft and had intentionally damaged the car. McCoy sued Progressive and, after a jury trial, McCoy obtained an award for breach of contract and bad faith, as well as punitive damages.

McCoy claimed his car had been stolen from the parking lot of a Las Vegas casino. Authorities ultimately recovered the car, which had been set on fire and was a total loss. Progressive thought the claim was suspicious for many reasons. For example, videotape of the casino’s parking lot did not show any evidence that McCoy’s car had been in the parking lot prior to the alleged theft. In addition, there was no evidence that anyone had tampered with the ignition, suggesting that the last person who had driven the car had used a key. Further, McCoy and a female friend had driven from California to Las Vegas in separate cars, which Progressive believed suggested that McCoy had never expected to drive his car back to California.

When Progressive’s investigator interviewed McCoy’s ex-wife and McCoy’s brother, both stated that McCoy had been suggesting for some time that he wanted to dispose of the car and buy a nicer one. McCoy himself denied that he had ever made these statements, and his ex-wife ultimately recanted her statement. A Progressive claim supervisor ultimately wrote a claim log note which stated: “We can’t just rely on having two witnesses like this …. And if we don’t come up with something else, we are going to have to pay the claim.” 

Although there certainly was some evidence suggesting the claim was fraudulent, there also was evidence suggesting the claim was not fraudulent. For example, the value of the car prior to the alleged theft was less than the amount that McCoy owed to the lender, which indicated that McCoy would not obtain a financial benefit from the destruction of the car. In addition, McCoy was steadily employed, and was current on all payments including the car payments. Further, Progressive could not rule out the possibility that the car had been stolen by means of a tow truck or duplicate key.

Although the evidence on the issue of fraud was conflicting, Progressive ultimately denied the claim. During trial, the judge refused Progressive’s request to admit the entire claim file (including the recorded statements of McCoy’s ex-wife and brother) into evidence at once, and instead ruled that Progressive needed to introduce evidence contained within the claim file on a “piece by piece” basis.

During the trial, Progressive sought to introduce evidence that McCoy had physically abused his ex-wife (which Progressive believed explained why McCoy’s ex-wife had recanted her statement that McCoy said he wanted to dispose of his car and buy a new one). Progressive also sought to introduce evidence that McCoy had submitted a prior claim against Zurich which, even though Zurich had paid, was actually fraudulent. The trial judge refused to allow Progressive to introduce evidence of the physical abuse and the prior claim against Zurich, ruling that this evidence was more prejudicial than probative, and was likely to confuse and mislead the jury.

McCoy’s evidence established that Progressive had conducted a one-sided investigation that was designed to uncover evidence that the claim was fraudulent. McCoy’s evidence also established that Progressive had violated various provisions of the Fair Claims Settlement Practices Regulations. The jury found that Progressive had breached the policy, and had acted in bad faith. The jury also assessed punitive damages of $100,000 against Progressive.

Holding

The Court of Appeal upheld the jury’s finding that Progressive had breached the policy and had acted in bad faith. The Court also upheld the jury’s award of punitive damages.

The Court of Appeal held that the trial judge properly refused to admit the entire claim file into evidence as one exhibit, and that Progressive was required to establish a foundation for individual pieces of evidence in the claim file (such as witness statements) on a “piece by piece” basis. The Court of Appeal also noted that the recorded statements were hearsay, and that Progressive’s alleged “reliance of its investigative or claim agents on these recorded statements in resolving the coverage issue does not satisfy the requisite foundation showing.” 

Comment

In this case, Progressive certainly had some evidence that McCoy’s claim was fraudulent. However, there also was contrary evidence, which Progressive ultimately disregarded. This supported a finding that Progressive’s investigation was one-sided and biased.

It is important to remember that trial judges have wide discretion to admit or refuse certain types of evidence. An appellate court will not overturn a trial judge’s discretionary ruling unless the appellate court concludes that the trial court abused its discretion and acted in an “arbitrary, capricious or patently absurd manner that resulted in a manifest miscarriage of justice.” Here, the trial judge exercised his discretion to exclude evidence that would have cast McCoy as a dishonest and violent man. If the court had exercised its discretion to admit some or all of this evidence, the jury’s verdict might well have been different.

This case also highlights the fact that recorded statements are hearsay, and that the party offering the statement into evidence at trial must establish that the statement falls within one of the recognized exceptions to the rule against hearsay evidence. Here, Progressive probably could have avoided this problem if, after McCoy had filed suit, Progressive had obtained pre-trial deposition testimony from the witnesses who previously had given the recorded statements.

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Third-Party Claimant Does Not Have Standing to Bring Declaratory Relief Action Against Insured’s Liability Insurer

The California Court of Appeal has held that a third-party claimant did not have standing to bring a declaratory relief action against the insured’s liability insurer to determine the scope of coverage under the insured’s policy. (Otay Land Company v. Royal Indemnity Company (2008) 169 Cal.App.4th 556)

Facts

United Enterprises, Inc. (United) owned real property on which it operated a trap and shooting range. Flat Rock Land Company (Flat Rock) eventually acquired the property.

After Flat Rock acquired the property, Flat Rock discovered that the property had become contaminated during the time that United owned the property. Flat Rock thus sued United, seeking recovery of environmental cleanup costs incurred in connection with the property. United tendered defense of the action to its liability insurer, Royal Indemnity Company (Royal), and Royal agreed to defend United under a reservation of rights.

Royal then filed a declaratory relief action against the insured, United, seeking a determination that Royal did not have any duty to defend or indemnify United in the underlying action brought by Flat Rock. Royal did not name the third-party claimant, Flat Rock, as a defendant in the declaratory relief action. Flat Rock filed a motion to intervene in Royal’s declaratory relief action in order to “assist” United in litigating the coverage issues. However, the trial court denied Flat Rock’s motion to intervene, and that ruling was affirmed on appeal. (See Royal Indemnity Co. v. United Enterprises, Inc. (2008) 162 Cal. App.4th 194.)

Flat Rock then filed its own separate declaratory relief action against Royal, alleging that Flat Rock had a legitimate interest in making coverage arguments that might affect Flat Rock’s ability to recover damages and cleanup costs from United in the underlying action. The trial court dismissed Flat Rock’s complaint, finding that Flat Rock did not have standing to sue Royal for a declaration as to Royal’s duties to United. Flat Rock appealed.

Holding

The Court of Appeal affirmed the trial court’s dismissal of Flat Rock’s complaint for declaratory relief action against Royal. The appellate court reasoned that Flat Rock was not an “insured” under United’s policy through Royal, and that Flat Rock’s presence in the case was not necessary to resolve the coverage dispute between United and Royal. At most, Flat Rock was merely a “potential” judgment creditor of the insured and thus a “potential” beneficiary of the proceeds in the event coverage was found. Accordingly, the appellate court ruled that Flat Rock lacked standing to sue Royal to resolve coverage questions arising under the policy United had through Royal.

Comment

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