Insurance Law News - September 2010

• Where Insured Contends Insurer Fraudulently Induced Settlement Agreement, Insured Cannot Affirm Agreement and Sue for Damages, But Instead Must Seek Rescission
• Pursuant to "Going and Coming" Rule's "Required Vehicle" Exception, Employee Is "Insured" For Accident While Driving to Work, and Employer's Liability Thus Falls Within "Auto" Exclusion of CGL Policy
• "Evidence of Insurance" Was Binder and, Despite Terms of Written Producer's Agreement, Producer Issuing Binder Was Insurer's Agent

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Where Insured Contends Insurer Fraudulently Induced Settlement Agreement, Insured Cannot Affirm Agreement and Sue for Damages, But Instead Must Seek Rescission

Where an insured contends an insurer fraudulently induced the insured into entering into a settlement agreement, the insured cannot affirm the agreement, keep the money and sue for damages but, instead, must seek to rescind the settlement agreement in accordance with California’s rescission statutes. (Village Northridge Homeowners Association v. State Farm Fire and Casualty Company (2010) 50 Cal.4th 913)

Facts

An earthquake caused damage to property that Village Northridge Homeowners Association (Village Northridge) owned. Village Northridge made a claim to its insurer, State Farm Fire and Casualty Company (State Farm).

State Farm represented that the policy limit for earthquake damage was $4,979,900, with a 10 percent deductible. State Farm made several payments, totaling about $2,068,000, to Village Northridge for the earthquake loss.

Later, Village Northridge located documents indicating the limits were different than State Farm had represented. In addition, Village Northridge discovered additional allegedly caused by the earthquake. State Farm re-inspected the property and concluded that some of the additional damage was earthquake-related, while other damage was not. State Farm paid Village Northridge about $7,466 for the additional damage.

Still later, although they continued to dispute the policy limits and the amount of money owed, Village Northridge and State Farm negotiated a written settlement agreement by which State Farm paid an additional $1.5 million. Pursuant to the settlement, Village Northridge released State Farm from all known or unknown claims related in any way to Village Northridge’s earthquake claim. More specifically, Village Northridge specifically agreed to “refrain and forbear from commencing, instituting, or prosecuting any lawsuit, action, or any other proceeding against [State Farm] based on, arising out of, or in connection with any claims, actions, causes of action, charges, demands, contracts, covenants, liabilities, obligations, expenses . . . and damages that are released and discharged.” 

After entering into the settlement agreement and accepting the $1.5 million settlement payment, Village Northridge sued State Farm. In its complaint, Village Northridge alleged that State Farm had misrepresented that the policy limit for earthquake damage was only $4,979,900, and that the actual limit was much higher. Village Northridge also alleged that the $1.5 million additional settlement State Farm paid was grossly deficient and represented only a partial payment for the actual damage. In addition, Village Northridge alleged that it had signed the settlement agreement “under compulsion” in order “secure partial benefits owed.”

Significantly, Village Northridge insisted throughout the litigation that it did not seek to rescind the settlement agreement and that it did not intend to refund the $1.5 million that State Farm had paid. Instead, Village Northridge asserted that it wanted affirm the release and to sue for additional damages.

The trial court ruled in favor of State Farm, and concluded that Village Northridge “could not affirm the settlement agreement and simultaneously assert claims that were explicitly released in it.” The case went to the Court of Appeal and, eventually, to the California Supreme Court.

Holding

The Supreme Court ruled in favor of State Farm, and concluded that Village Northridge could not affirm the settlement agreement and simultaneously assert claims that were explicitly released in the settlement agreement. The Court noted that California statutes and California case law specify the rules under which a party can seek to set aside a settlement agreement.

Village Northridge alleged State Farm committed fraud in the inducement in the settlement process by misrepresenting policy limits. Generally, when one party contends he entered into a contract because he was induced to do so by fraud, that party must rescind the agreement.

Civil Code section 1691 requires the party seeking rescission to give notice to the other party “as to whom he rescinds,” and to restore all consideration or “everything of value which he has received” under the contract. A related statute, Civil Code section 1693, provides that a party who files an action for rescission “shall not be denied relief because of a delay in restoring or in tendering restoration of such benefits before judgment unless such delay has been substantially prejudicial to the other party; but the court may make a tender of restoration a condition of its judgment.”

Although California has rejected the “affirm and sue” principle adopted by several states, Civil Code section 1693 permits a plaintiff who is unable to restore the consideration received through a settlement agreement to delay the restoration of consideration until final judgment consistent with equitable principles, including that the defendant not be substantially prejudiced by the delay. Had Village Northridge sued for rescission of its release under the statutory scheme governing rescission, it might have had the opportunity to delay restoration of the consideration it received in settling the property damage matter. Again, however, Village Park never attempted to rescind the settlement agreement.

Comment

To allow an insured to settle with an insurer and sign a release, keep the money, and then sue the insurer for alleged fraud without rescinding the release under California’s statutory scheme would violate the terms of the bargain and frustrate its purpose. It would also likely inhibit insurance companies’ practice of using a release to settle disputed claims. The Legislature has created a fair and equitable remedy to address the alleged fraud problem: rescission of the release, followed by suit. When restoration is impossible because the settlement monies have been spent, the financially constrained parties can turn to Civil Code section 1693 to delay restoration until judgment, unless the defendants can show substantial prejudice.

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Pursuant to "Going and Coming" Rule's "Required Vehicle" Exception, Employee Is "Insured" For Accident While Driving to Work, and Employer's Liability Thus Falls Within "Auto" Exclusion of CGL Policy

In light of the “going and coming” rule’s “required vehicle” exception, an employee was an “insured” for an auto accident while driving to work, with the result that his employer’s liability was barred from coverage by an “auto” exclusion in a CGL policy. (Sprinkles v. Associated Indemnity Corp. (2010) 188 Cal.App.4th 69)

Facts

Sinco Co., Inc. (Sinco) was a property management company which required its employee, Juan Babinz (Babinz), to use his own vehicle to transport himself to various job sites each day. While Babinz was driving to work in the vehicle which he used to visit job sites, he caused an automobile accident which resulted in the death of Michael Sprinkles (Sprinkles).

Sprinkles’ heirs filed a wrongful death action against Sinco and Babinz, alleging that Sinco was vicariously liable for the acts of its employee Babinz, and that Sinco had negligently hired Babinz. Sinco and Babinz sought defense and indemnity under various policies issued to Sinco, including a $1 million commercial general liability policy issued by Fireman’s Fund Insurance Company (Fireman’s Fund). However, Fireman’s Fund declined to participate in defending or indemnifying Sinco and Babinz under the CGL policy, citing that policy’s exclusion for injuries “arising out of the ownership, maintenance, use or entrustment to others of any … auto … owned or operated by or rented or loaned to any insured.” The policy defined an “insured” so as to include “your [Sinco’s] employees, but only with respect to acts within the scope of their employment by you while performing duties related to the conduct of your business.”

Sprinkles’ heirs entered into a settlement with Sinco and Babinz. Among other things the settlement agreement provided that Sprinkles’ heirs would receive $2 million under two other policies issued to Sinco; that Sprinkles’ heirs would submit their claims against Sinco and Babinz to arbitration; and that Sinco and Babinz would give Sprinkles’ heirs an assignment of any rights against Fireman’s Fund in exchange for Sprinkles’ heirs’ agreement not to enforce any judgment against Sinco’s and Babinz’s personal assets. 

Thereafter, an arbitrator issued an award of over $27 million in favor of Sprinkles’ heirs and against Sinco and Babinz. The award included a finding that at the time of the accident, Babinz was acting within the course and scope of his employment with Sinco pursuant to the “required vehicle” exception to the “going and coming” rule. The superior court confirmed the award as a judgment.

Sprinkles’ heirs, as assignees of Sinco and Babinz, then filed a bad faith action against Fireman’s Fund. In the bad faith action, Sprinkles’ heirs argued that the Fireman’s Fund CGL policy’s “auto” exclusion only applied to the use of an auto by an “insured,” and that at the time of the accident Babinz was not an “insured.” Specifically, Sprinkles’ heirs argued that under the particular wording of the Fireman’s Fund policy, an employee was an “insured” only if the employee was both acting “within the scope of [his or her] employment” by [Sinco]” and “performing duties related to the conduct of [Sinco’s] business.” According to Sprinkles’ heirs, at the time of Babinz’s accident while driving to work, Babinz may have been acting “within the scope of [his] employment by [Sinco],” but he was not “performing duties related to the conduct of [Sinco’s] business.” Sprinkles’ heirs thus asserted that since Babinz was not an “insured,” the CGL policy’s “auto” exclusion did not bar coverage for Sinco’s liability arising out of Babinz’s use of his car.

The trial court concluded that Babinz was an “insured” under the Fireman’s Fund CGL policy, and that the policy’s “auto” exclusion thus barred coverage for any liability Sinco had in the underlying wrongful death action. The trial court thus entered judgment in favor of Fireman’s Fund. Sprinkles’ heirs appealed.

Holding

The Court of Appeal affirmed the judgment in favor of Fireman’s Fund. The appellate court noted that under the so-called “going and coming rule,” an employee is not deemed to be acting within the scope of his employment while going or coming from his place of work. However, the “going and coming” rule is subject to the “required vehicle” exception, which applies when an employer requires an employee to use his or her own vehicle for transportation on the job.

Here, pursuant to the “going and coming” rule’s “required vehicle” exception, Babinz’s act of driving to work was deemed to be an “act within the scope [his] employment by [Sinco].” Further, because the accident occurred while Babinz was on the way to work, Babinz was “performing duties related to the conduct of [Sinco’s] business.” Under such circumstances, Babinz was an “insured” under the Fireman’s Fund CGL policy, and that policy’s “auto” exclusion thus barred coverage for any liability Sinco had to Sprinkles’ heirs in the underlying wrongful death action.

Comment

A standard CGL policy defines an “insured” so as to include the named insured’s employees “for acts within the scope of their employment by you or while performing duties related to the conduct of your business.” In contrast, the Fireman’s Fund CGL policy’s definition of “insured” dropped the disjunctive word “or,” so that an “insured” included the named insured’s employees “for acts within the scope of their employment by you while performing duties related to the conduct of your business.” However, according to the appellate court, this slight difference in wording did not affect coverage under the Fireman’s Fund CGL policy. According to the court, it is difficult to conceive of “acts within the scope of employment” that would not also constitute “duties related to the conduct of the business.”

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"Evidence of Insurance" Was Binder and, Despite Terms of Written Producer's Agreement, Producer Issuing Binder Was Insurer's Agent

An “Evidence of Insurance” form was a binder and, despite the express terms of a written agreement between a producer and an insurer, the producer who issued the binder was the insurer’s agent. (Chicago Title Insurance Company v. AMZ Insurance Services, Inc. (2010) 2010 WL 3506365)

Facts

Thomas Mustain and Cheryl Mustain (the Mustains) sought to refinance an existing home loan. They hired a loan broker who, in turn, contacted New Century Mortgage (New Century), the proposed lender. New Century instructed Chicago Title Insurance Company (Chicago Title) to open an escrow for the transaction.

New Century would not fund the loan without evidence the Mustains had purchased an insurance policy for the property. As such, the loan broker contacted an insurance producer, AMZ Insurance Services, Inc. (AMZ), and requested that AMZ obtain insurance and provide Chicago Title with evidence of insurance. The initial premium was supposed to be paid through escrow.

AMZ transacted business with Pacific Specialty Insurance Company (PSIC) on a regular basis, but PSIC had never filed a notice of agency appointment filed with the Department of Insurance (an action which clearly would have made AMZ an agent of PSIC). Although PSIC never appointed AMZ as an agent, PSIC did have a written producer’s agreement with AMZ. The producer’s agreement stated that AMZ was not PSIC’s agent, and that AMZ did not have authority to bind coverage until AMZ had first transmitted a signed application and collected at least a partial premium payment, and until PSIC had receiving written approval to bind from PSIC.

Despite the express terms of the producer’s agreement, PSIC knew that, on at least 30 prior occasions, AMZ had issued a form entitled “Evidence of Insurance” (EOI) without first obtaining a written application or collecting at least a partial premium payment. In other words, PSIC and AMZ engaged in a course of conduct over time that was inconsistent with the terms of the written producer’s agreement.

AMZ provided Chicago Title with an EOI form that stated on its face that “[t]his is evidence that insurance as identified below has been issued, is in force, and conveys all the rights and privileges afforded under the policy.” The EOI identified the insurer as PSIC, the insureds as the Mustains, the address of the Mustains’ property, the nature and limits of coverage, the amount of the deductible, the amount of the annual premium, and the effective date of coverage.

After AMZ issued the EOI, New Century funded the loan and escrow closed. However, although the premium was supposed to be paid from the escrow account, Chicago Title failed to remit the premium. Shortly after the close of escrow, a fire destroyed the house and killed Mr. Mustain.

PSIC refused to pay Ms. Mustain’s property insurance claim, asserting that the EOI was not a binder, that no one had paid the premium payment, and that AMZ was not PSIC’s agent. Chicago Title paid Ms. Mustain $270,200 (the full amount she would have been entitled to recover if PSIC had issued the policy described on the EOI), and she assigned to Chicago Title all of her rights against PSIC, AMZ and others.

A jury found PSIC liable to Chicago Title for breach of contract and bad faith. The court entered judgment in favor of Chicago Title for $270,200 as contract damages and approximately $210,000 in bad faith damages for the attorney fees that Chicago Title incurred. Thereafter, PSIC appealed.

Holding

The Court of Appeal affirmed. The EOI form that AMZ issued qualified as a binder, which is a contract that temporarily obligates the insurer to provide insurance coverage pending issuance of the insurance policy for which the applicant has applied. Per Insurance Code section 382.5, a binder is a writing that includes, among other things, the name and address of the insured (and any additional named insureds, mortgagees, or lienholders), a description of the property insured, a description of the nature and amount of coverage, any special exclusions not contained in a standard policy, the identity of the insurer and the agent executing the binder, the effective date of coverage.

Although AMZ did not adhere to the terms of the written producer’s agreement, the evidence established that, through a pattern of dealing in prior escrow transactions, PSIC had authorized AMZ to bind coverage by issuing an EOI before receiving a signed application and collecting any premium.

Although PSIC had not filed a notice appointing AMZ as an agent, and despite the terms of the written producer’s agreement, there was substantial evidence to support the jury’s determination that AMZ had actual authority to bind PSIC by issuing EOI forms for escrow transactions.

Comment

In this instance, it appears that PSIC put form over substance on several different occasions. For example, PSIC insisted that the EOI form was not a binder, even though the EOI form contained all of the statutory elements of a binder. In addition, PSIC steadfastly maintained that AMZ was not PSIC’s agent, even though the evidence established that, through a course of conduct, PSIC had allowed AMZ to deviate from the terms of the written producer’s agreement and that PSIC effectively had made AMZ an agent for the purpose of binding coverage in connection with escrow transactions.

In retrospect, it might have been more cost-effective for PSIC to pay the insurance claim under a reservation of rights and to then seek to recoup the money from Chicago Title and/or AMZ. Instead, PSIC denied coverage outright, and exposed itself not only to a contract claim but to a bad faith claim. Because Ms. Mustain assigned her contractual and extra-contractual claims to Chicago Title, PSIC ultimately had to pay the contract claim and Chicago Title’s attorney fees (per the Brandt case).

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