Insurance Law News - March 2011

• Extended Replacement Cost Provision Did Not Actually Increase Limit But Merely Provided for Potential Payment in Excess of Limit, So Insureds Still Had to Replace in Order to Recover Extended Amount
• Personal Umbrella Insurer Has No Duty to Defend Insured Against Suit Based On Sexual Harassment / Battery
• "Strict Compliance" With Warranty Provision Is Prerequisite for Coverage Under Policy
• Auto Insurer May Be Liable in Bad Faith For Paying For Repairs That Insured Did Not Authorize and Then Prosecuting Subrogation Claim Against Tortfeasor

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Extended Replacement Cost Provision Did Not Actually Increase Limit But Merely Provided for Potential Payment in Excess of Limit, So Insureds Still Had to Replace in Order to Recover Extended Amount

Because an extended replacement cost provision did not actually alter the policy limit, but instead merely provided for a potential payment in excess of the limit, the insureds were still required to repair, rebuild or replace in order to recover replacement cost benefits. (Minich v. Allstate Insurance Company (2011) WL 834071)

Facts

Allstate Insurance Company issued a homeowner’s insurance policy to Kelly and Debbie Minich. The policy provided that, if Mr. and Mrs. Minich’s house were damaged or destroyed, Allstate would pay the “actual cash value” of the damaged property, in an amount not to exceed the “limit of liability shown on the Policy Declarations.” The limit of liability for the dwelling, as stated on the policy declarations, was $129,840.

The policy declarations showed that the dwelling coverage was subject to an extended replacement cost endorsement that provided that, if the insureds were to “repair, rebuild or replace” their house, Allstate would pay an amount not to exceed “150% of the limit of liability . . . as shown on the Policy Declarations . . . .” Thus, the maximum amount potentially due under the policy was $194,760 (i.e., the stated limit of $129,840 multiplied by the 150% factor stated in the endorsement).

A wildfire destroyed Mr. and Mrs. Minich’s house. Within two weeks after the fire, Allstate paid Mr. and Mrs. Minich $129,590 (i.e., $129,840 less the policy’s $250 deductible).

Mr. and Mrs. Minich argued that, because of the extended replacement cost endorsement, the policy “limit” for the dwelling was $194,760. Thus, even though they had not completed (or even started) to replace the house, Mr. and Mrs. Minich demanded that Allstate immediately pay an additional $64,920 (i.e., the difference between the prior payment of $129,590 and the extended amount of $194,760). Allstate declined Mr. and Mrs. Minich’s demand, but offered to pay the additional amount if and when Mr. and Mrs. Minich demonstrated they actually were rebuilding or replacing the house.

Eventually, Mr. and Mrs. Minich provided Allstate with a copy of the plans and permit for a new house. About 15 months after the fire, Mr. and Mrs. Minich invited Allstate to inspect the foundation of the house. Allstate promptly inspected the work and, within a few weeks, issued the additional payment of $64,920. At the time Allstate paid this additional amount, the construction of the new house was less than 50% complete.

Mr. and Mrs. Minich ultimately filed suit against Allstate, claiming that Allstate had been contractually obligated to pay the additional $64,920 immediately after the fire, and that Allstate had acted in bad faith by not immediately paying the additional amount. The trial court entered summary judgment in favor of Allstate, finding that Allstate had not breached its contract and had not acted in bad faith.

Holding

The Court of Appeal affirmed the ruling in favor of Allstate.

The maximum amount that Allstate initially owed was the “limit of liability shown on the Policy Declarations.” The “limit of liability shown on the Policy Declarations” was $129,840. The extended replacement cost endorsement did not actually alter the policy limit but, instead, merely provided for a potential payment in excess of the policy limit.

Neither the terms of the policy nor the terms of the California Insurance Code required Allstate to pay any additional amount to Mr. and Mrs. Minich unless they actually repaired, rebuilt or replaced within the time allowed. Allstate paid the additional amount almost immediately after the insureds demonstrated that they had completed the foundation for the new house (and even though they had not completed the rest of the new house).

Comment

When a covered peril renders a structure a total loss and the policy provides coverage on an “actual cash value basis,” the insurer initially is required to pay the “fair market value” of the structure or the policy’s stated limit (whichever is less). When a covered peril renders a structure a partial loss and the policy provides coverage on an “actual cash value basis,” the insurer initially is required to pay the replacement cost less a fair and reasonable deduction for depreciation based on the condition of the property at the time of loss. (Insurance Code section 2051.)

If the insured has purchased some form of replacement cost coverage, and if the insured actually repairs, rebuilds or replaces the property, then the insured is entitled to collect the difference between the insurer’s initial payment and the amount specified in the policy. (Insurance Code section 2051.5, subd. (a).) The amount specified in the policy might be an “extended” amount (e.g., 125% or 150% of the amount listed on the declarations) or might be a “guaranteed” amount (i.e., limited only by the amount the insured reasonably and necessarily spent to repair, rebuild or replace).

After the insurer makes the initial payment, the insurer must allow the insured at least 12 months to repair, rebuild or replace (and must allow 24 months if the loss arises from a government-declared disaster). Further, if the insured demonstrates “good cause,” the insurer must grant the insured extensions of up to 6 months to repair, rebuild or replace. (Insurance Code section 2051, subd. (b).) Currently, there is no case law interpreting the “good cause” requirement in the replacement cost statutes.

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Personal Umbrella Insurer Has No Duty to Defend Insured Against Suit Based On Sexual Harassment / Battery

A personal umbrella insurer had no duty to defend its insured against a suit alleging that the insured had sexually harassed and sexually battered the claimant. (Shanahan v. State Farm General Insurance Company (2011) WL 806385)

Facts

Cheryl Skigin sued her former employer, John Shanahan, alleging various claims, including sexual harassment and sexual battery. Among other things, Skigin alleged that: (a) during a Christmas party at Shanahan’s house, Shanahan grabbed Skigin’s buttocks and commented that they were “firm”; (b) during that same Christmas party, Shanahan stated, “Don’t you want me to f--- your brains out?”; (c) on numerous occasions thereafter, Shanahan repeatedly tried to convince Skigin to leave her husband; and (d) on at least one occasion, Shanahan sent flowers to Skigin’s residence along with a card suggesting that Skigin and Shanahan were involved in a romantic relationship.

Shanahan tendered defense of the lawsuit to his personal umbrella insurer, State Farm General Insurance Company. The State Farm umbrella policy provided that State Farm would indemnify Shanahan against damages because of either: (a) an “accident” causing “bodily injury” including “emotional distress or mental injury”; or (b) various “personal injury” offenses including “libel, slander, defamation of character or invasion of rights of privacy.” The policy further provided that State Farm would defend Shanahan against any suit seeking covered damages.

State Farm refused to defend Shanahan against Skigin’s lawsuit. Thereafter, Shanahan spent over $1 million in defending against Skigin’s claims, and he paid $700,000 in settlement of her claims.

Shanahan then sued State Farm for breach of contract and bad faith, alleging that State Farm had wrongfully failed to defend and indemnify him in the underlying action brought by Skigin. The trial court entered summary judgment in favor of State Farm. Shanahan appealed.

Holding

The Court of Appeal affirmed, finding that Skigin’s claims against Shanahan were not potentially covered under the State Farm personal umbrella policy, and that State Farm thus had no duty to defend Shanahan.

The court rejected the argument that Shanahan’s alleged act of grabbing Skigin’s buttocks was potentially covered under the “bodily injury” provisions of the State Farm policy. According to the court, even if Shanahan’s alleged act did cause Skigin to suffer bodily injury (i.e., emotional distress), any such injury was not the result of an “accident.” Absent an “accident,” the bodily injury coverage was not implicated.

Further, Shanahan’s alleged act of stating that Skigin wanted to have sex did not trigger the “slander” provisions of the “personal injury” coverage. Without ever addressing whether Shanahan’s alleged statement could be deemed to be a “false statement of fact,” the court simply noted that there was no allegation or extrinsic evidence suggesting that Shanahan’s alleged statement was ever “published” to a third party. Absent “publication,” there could not be a claim for “slander.”

Last, neither Shanahan’s alleged act of pressuring Skigin to leave her husband nor his alleged act of sending flowers and a romantic card to her home were potentially covered under the “invasion of privacy” provision of the “personal injury” coverage. According to the court, neither entreating an individual to leave his or her spouse, nor sending flowers and a card to the individual’s home, suggests a claim for “invasion of privacy.”

Since Skigin’s claims against Shanahan were not potentially covered under the State Farm personal umbrella policy, State Farm had no duty to defend.

Comment

This case follows a fairly consistent line of California cases in which courts have held that an insurer has no duty to defend an insured against claims of sexual harassment / sexual battery.

One notable aspect of this case is the manner in which the appellate court dealt with the argument that the claimant “potentially” sought damages from the insured because of one or more of the “personal injury” offenses listed in the policy. The court indicated that, unless the claimant alleges, or extrinsic evidence otherwise reveals, facts satisfying all elements of a listed “personal injury” offense, the insurer will have no duty to defend under that portion of the policy.

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"Strict Compliance" With Warranty Provision Is Prerequisite for Coverage Under Policy

An insured must strictly comply with a warranty provision in order to obtain coverage when the subject matter of the warranty bears directly on the risk underwritten by the policy. (Trishan Air Inc. v. Federal Ins. Company (2011) WL 540532)

Facts

Trishan Air, Inc. purchased an aviation insurance policy from Federal Insurance Company. The policy contained a pilot warranty requiring a two-person pilot crew at all times any covered aircraft was in operation. In addition, the warranty required both pilots, including the back-up second-in-command pilot, to complete ground and flight courses, including simulator training, for the make and model of the covered aircraft within the 18 months prior to operating the aircraft.

After an accident involving one of Trishan’s corporate jets, Trishan submitted a claim to Federal. Federal denied coverage because the co-pilot had not undergone the training mandated by the policy’s pilot warranty. Indeed, Federal argued that the co-pilot had never attended any formal course relative to the type of aircraft involved in the accident.

Trishan counter-argued that the co-pilot had over 45 years and 15,000 hours of flight experience, such that even if he had performed the simulator training he would not have learned any new information or received any training that would have affected any of the actions he took with respect to the accident. Furthermore, one of Trishan’s experts testified that the 8-10 hours of cockpit simulation training the co-pilot did receive in the covered aircraft was very similar to simulator training, and in some cases better. Accordingly, the expert opined that the co-pilot’s failure to undergo the training would not have affected his qualifications to operate the aircraft and would not have prevented the accident.

Following the denial of coverage, Trishan filed a federal court lawsuit against Federal for breach of contract, bad faith, reformation, and declaratory relief. The district court granted summary judgment in favor of Federal, holding that Trishan did not strictly comply with the pilot warranty, thus precluding coverage under the policy.

Holding

The Ninth Circuit Court of Appeals upheld the district court’s grant of summary judgment to Federal, stating that California courts have recognized the necessity of “strict compliance” with warranty provisions to invoke coverage. In so doing, the Court of Appeals rejected Trishan’s argument that the warranty was a mere condition of the policy requiring only substantial compliance.

In its discussion, the Court generally noted that strict compliance with a warranty is necessary when the warranty serves as a factor bearing directly on the underwritten risk. In this type of situation, an insurer is within its rights to limit coverage as it sees fit by including warranty provisions in its policy. This was particularly true in the case of aviation policies because the identity and qualifications of the pilots operating the aircraft are elements of the fundamental risk insured.

The Court rejected Trishan’s argument that the training the co-pilot received served as a substitute for simulator training in substantial compliance with the warranty provision. The Court observed that the substantial compliance doctrine typically requires that the insured’s non-compliance be minor and that the insured comply with at least some of the specific requirements at issue. Since Trishan had failed to comply with any of the training requirements of the co-pilot warranty, the Court held that coverage would have been precluded even if the substantial compliance doctrine applied.

Comment

This decision upholds an insurer’s ability to rely upon an insured’s strict compliance with warranty provisions to invoke coverage as long as the subject matter of the warranty bears directly on the actual risk insured.

However, if the subject matter of the warranty provision does not bear directly on the risk (i.e., a record keeping warranty in most circumstances), substantial compliance may be sufficient to invoke coverage.

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Auto Insurer May Be Liable in Bad Faith For Paying For Repairs That Insured Did Not Authorize and Then Prosecuting Subrogation Claim Against Tortfeasor

Although an auto insurer has a contractual right to elect to repair a damaged vehicle rather than pay the insured the cost of repairs, the insurer may nevertheless be liable for bad faith if it pays for repairs that were not authorized by the insured and then pursues a subrogation claim against the responsible tortfeasor, thereby prejudicing the insured’s rights against that tortfeasor. (Hibbs v. Allstate Ins. Co. (2011) 192 Cal.App.4th 1339)

Facts

Harry and Jessica Hibbs owned a van that they insured through Allstate Insurance Company. Jerome Brooks crashed into the van while it was parked, causing substantial damage to the van.

The van was towed to a repair shop known as Body Tech. Although the exact facts were disputed, it was generally agreed that Mrs. Hibbs visited Body Tech and signed a “tear down” authorization and a general repair authorization. The following day, after assessing the damage, Body Tech created a detailed estimate regarding the repairs. Body Tech contends that it then discussed the details of the estimate with Mrs. Hibbs over the phone, although Mrs. Hibbs denied any such discussion. Mrs. Hibbs never signed the detailed written estimate.

The parties disputed who instructed Body Tech to proceed with the repairs. Either way, Body Tech ultimately repaired the van for a total cost of $6,200.40. Allstate paid $5,700.40 to Body Tech (subtracting $500 for the Hibbses’ deductible). Allstate then pursued a subrogation action against Brooks and recovered $6,200.40, of which it paid $500 to the Hibbses.

The Hibbses filed suit against Allstate, alleging causes of action for breach of contract and bad faith. The trial court granted summary adjudication for Allstate on the Hibbses’ claims but denied Allstate’s section 998 motion for costs. Both parties appealed.

Holding

The Court of Appeal reversed and remanded the case for trial on the Hibbses’ bad faith cause of action, finding that a triable issue of fact existed as to whether Allstate acted in bad faith by prosecuting its subrogation claim against Brooks.

As a preliminary matter, the Court concluded that Allstate did have a right to decide whether to repair the van or instead pay the Hibbses the cost to repair. Allstate’s policy expressly provided, “Allstate will pay for the loss in money, or may repair or replace the damaged … property at our option.” Additionally, nothing in Allstate’s policy gave the Hibbses a right to object to Allstate repairing the van rather than paying the cost to repair.

That being said, the Court found that Allstate’s election to repair the van did not give it the power to proceed with the repairs without the Hibbses’ consent. Further, the Court found there was a triable issue of fact as to whether the Hibbses in fact authorized the repairs. California Business and Professions Code section 9884.9 requires auto repair dealers to obtain the customer’s signature on an itemized written estimate prior to beginning labor. Because Mrs. Hibbs never signed an itemized written estimate, any “authorization” she may have purportedly given was void. Accordingly, because it failed to comply with section 9884.9, Body Tech was not entitled to payment.

The Court next found that a question of fact existed as to whether Allstate acted in bad faith by prosecuting its subrogation claim against Brooks. As already noted, if the repairs were not properly authorized by the Hibbses under section 9884.9, Body Tech was not entitled to payment. Accordingly, by paying Body Tech for its repair work, Allstate acted as a volunteer, thus cutting off its right to subrogation. Moreover, by prosecuting its subrogation action against Brooks, Allstate prejudiced the Hibbses’ rights against Brooks, who was entitled to a set-off for the amount paid to Allstate in subrogation. The Court ultimately remanded the case for trial on whether such conduct by Allstate constituted bad faith.

Comment

The Court noted that if an insurer chooses to repair a damaged vehicle rather than pay the insured the cost to repair, the insured’s prevention of the insurer’s performance (i.e., his refusal to consent to the repairs) excuses the insurer’s obligations under the policy. Thus, Allstate might have been better off had it never paid Body Tech for the repair work.

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