Business Law

Appellate Law Update

The following published decisions may be of interest to attorneys practicing insurance law:

CALIFORNIA COURT OF APPEAL

“Genuine dispute” doctrine applied to bar bad faith liability for an insurer who relied on an expert report concerning the cause of the damages.  501 East 51st Street v. Kookmin Insurance (2020) _ Cal.App.5th_

The owners of an apartment complex filed an insurance claim for property damage after an underground water main burst. The insurer denied coverage in reliance on an expert report concluding that the damage to the building was caused not by the water main accident, but instead by long-term settlement and earth movement, which was not a covered loss.  The owners filed a coverage and bad faith suit.  The insurer moved for summary adjudication of the bad faith claim, arguing that its expert’s report created a “genuine dispute” with the owners’ expert, and that the “genuine dispute” doctrine barred bad faith liability.  The trial court granted summary adjudication for the insurer.  The owners dismissed their remaining claims and appealed.

The Court of Appeal (Second Dist., Div. Eight) affirmed.  The insurer was entitled to rely on its expert’s report, which created a “genuine dispute” with the owners over the efficient proximate cause of the property damage at issue.  While the insurer’s initial investigation suggested there might be coverage, the insurers did not act unreasonably in obtaining a further opinion when the repair estimate exceeded expectations, and where both sides’ experts initially had noted extensive pre-existing damage to the building and had cautioned that further investigations and testing should be conducted.  The court rejected the owners’ attempt to use routine notes in the  insurer’s claim file referring to potential coverage litigation as evidence of bad faith.  In the absence of any evidence the insurer’s reliance on the final expert report, prepared after further investigation, was contrived or frivolous, the genuine dispute doctrine barred bad faith liability.

“Genuine Dispute” doctrine did not shield insurer from potential bad faith liability where triable issues existed on whether reliance on expert report concerning the cause of damage was reasonable.  Fadeeff v. State Farm General Insurance, Co. (2020) __ Cal.App.5th_

Homeowners filed an insurance claim for smoke damage to their home and property after the 2015 Valley Fire. The insurer made initial payments after the original adjuster found the house was “well maintained” and the damage was caused by the fire. The insurer denied supplemental claims, however, based on a recommendation by a third party unlicensed adjuster and two experts, who concluded the damage was caused by wear and tear, not smoke and soot. The homeowners sued for insurance bad faith and punitive damages. The trial court granted summary judgment to the insurer based on the “genuine dispute” doctrine.

The California Court of Appeal, (First Dist., Div. Two) reversed.  The genuine dispute doctrine permits summary judgment for the insurer only if it is undisputed that the insurer conducted a “full, fair and thorough” investigation. Here, there were triable issues on whether the insurer’s reliance on an unlicensed adjuster, rather than the experts with respect to some of the supplemental claims, was reasonable.  Further, there were triable issues on whether it was reasonable for the insurer to rely on the unlicensed adjuster whose opinions appeared inconsistent with the insurer’s own adjusters’ conclusions earlier in the investigation.  The insurer also failed to show it was indisputably reasonable to rely on experts to deny the remaining claims where there was evidence that the unlicensed adjuster failed to properly direct the experts to investigate the owner’s specific claims and took no steps to determine the accuracy of the experts’ conclusions.  Finally, there were triable issues about whether the scope of the investigation was too narrow. 

Subcontractor’s insurer who defended construction defect suit against general contractor was entitled to equitable subrogation from other subcontractors who breached their contractual duty to defend the general contractor.  Pulte Home Corp. v. CBR Electric, Inc. (2020) _ Cal.App.5th_

Pulte Home, the general contractor on a housing project, was sued for constructive defects in a housing project.  Pulte tendered the defense to its subcontractors’ insurers, claiming additional insured status under the subcontractors’ policies by virtue of its contracts with the subcontractors obliging the subcontractors to defend Pulte against claims arising out of the subcontractors’ work.  Two of the subcontractors’ insurers accepted the tender, including St. Paul Mercury Insurance, who had insured a landscaping subcontractor.  Following resolution of the underlying construction defect litigation, St. Paul filed an equitable subrogation action against the subcontractors who declined to defend Pulte.  The trial court found for the defendants, holding that the equities tipped against St. Paul because it would be unfair to shift the “entire” loss onto the defendant subcontractors on a joint and several basis.  The trial court also held that the equities did not favor St. Paul because there was no causal relationship between the subcontractors’ breach of their duty to defend and the construction defects, applying Patent Scaffolding Co. v. William Simpson Constr. Co. (1967) 256 Cal.App.2d 506 [general contractor promised to obtain fire insurance covering subcontractor’s property but did not do so; after a fire of unknown origin, the subcontractors’ insurer sought equitable subrogation from contractor; equitable subrogation denied because the general contractor’s failure to procure insurance did not cause the loss].

The Court of Appeal (Fourth Dist., Div. Two) reversed. Although one of the elements of equitable subrogation is that “ ‘justice requires that the loss be entirely shifted from the insurer to the defendant,’  . . . the word ‘entirely’ in that context refers not to the total amount the plaintiff (or subrogee) paid, but refers instead to ‘the claimed loss’  . . . the subrogee is seeking from the defendant.”  “In other words, subrogation entirely shifts the claimed loss, but the claimed loss doesn’t have to be the entire loss the subrogee suffered.”  Thus, the trial court erred in rejecting the equitable subrogation claim on the ground it required shifting liability for the defense costs fully and jointly and severally on the defendants; the trial court could have shifted onto each defendant only that the portion of the defense costs incurred to defend the defendant’s own work.  Also, the trial court misapplied the causation analysis in Patent Scaffolding, which case was distinguishable (if even correctly decided) anyway.  As for causation, “[t]he proper inquiry is whether defendants’ breach caused Pulte to incur the loss St. Paul is claiming in this litigation,” which it clearly did.   Moreover, in contrast to the Patent Scaffolding defendant who merely breached its contract to insure against the loss and did not cause the loss, the defendants here did cause the loss, and so were in an equitably inferior position to St. Paul, who was merely an insurer.  The remaining equities also favored St. Paul, including that public policy supports allowing an party who accepts the duty to defend to recover from those who breach that duty.

Prior decision holding company’s method of calculating workers’ compensation insurance premiums was incorrect did not preclude company from raising equitable defenses to a subsequent action seeking to force it to pay additional premium.  State Compensation Insurance Fund v. Readylink Heathcare, Inc. (2020) _ Cal.App.5th_

A nursing staffing company purchased workers’ compensation insurance from the State Compensation Insurance Fund (SCIF) from 2001-2005.  SCIF charged the company a premium based on its payroll numbers.  In an audit of the 2005 policy year, SCIF asserted that certain per diem payments the company made to its nurses, which the company treated as expenses, should be treated as payroll for purposes of calculating company’s premium.  The company challenged SCIF’s position on whether the per diem expenses counted as payroll in proceedings before the Department of Insurance.  The Commissioner agreed with SCIF, and after further appellate proceedings, the decision was affirmed by the Court of Appeal.  SCIF then filed this suit alleging the company was in breach of contract for failing to pay sufficient premium.  SCIF moved for judgment on the pleadings, which the trial court granted, concluding that the prior decision in SCIF’s favor on the manner of calculating premium compelled judgment in its favor in this action.  The company appealed.

The Court of Appeal (Fourth Dist, Div. One) reversed.   The prior decision determined that SCIF was correct to include the per diem expense payments as part of payroll, but there were other issues between the parties that impacted whether the company owed additional money, and how much, that were not fully litigated and determined in the prior action, including the company’s various affirmative defenses such as estoppel and fraud. 

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