Appellate Law Update

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

CALIFORNIA COURT OF APPEAL

Whether a fire hazard created by a tenant is one over which the insured homeowner has “control” for purposes of Insurance Code section 2071 is a question for the trier of fact, but the “genuine dispute” doctrine applied to bar bad faith liability because no California law on the “control” issue existed at the time of the coverage decision.  Mosley v. Pacific Specialty Insurance Company (2020) __ Cal.App.5th_

Pacific Specialty’s insureds rented out their home.  Unbeknownst to the homeowners, the tenant re-routed electrical wiring to support a marijuana growing operation.  The re-routed writing caused a fire.  The insureds filed an insurance claim to repair the damage, but Pacific Specialty denied the claim under an exclusion in the policy for “losses ‘resulting from any manufacturing, production or operation, engaged in . . . [t]he growing of plants.’ ”  The insureds filed suit for breach of contract and bad faith.  Concluding that the exclusion applied, the trial court granted summary judgment for Pacific Specialty.

 A majority of the Court of Appeal (Fourth Dist., Div. Two) reversed in part and affirmed in part.  The phrase “resulting from” connotes only a minimal causal connection.  Because the electrical fire had a minimal causal relationship with the growing of plants, coverage was excluded.  However, it was possible that applying the exclusion here would result in the policy providing less fire insurance coverage than mandated by Insurance Code sections 2070 and 2071.  Under those sections, a fire insurance policy must provide at least as much coverage as the standard form, which may exclude only those hazards increased by conditions of which the insured has knowledge or control.  Whether sufficient “control” existed here was a question for the jury; it did not exist simply by virtue of the landlord-tenant relationship.   Thus, summary judgment was improperly granted.  Pacific Specialty was entitled to summary adjudication of the bad faith claim, however.  The lack of any clear and controlling California precedent on the “control” issue gave rise to a genuine dispute over coverage.

Insurance bad faith claim alleging harm from an insurer’s failure to provide independent counsel was not subject to special motion to strike under anti-SLAPP law.  Trilogy Plumbing, Inc. v. Navigators Specialty Insurance Company (2020) __ Cal.App.5th __.

In this insurance bad faith action, the insured alleged that its insurer refused to appoint unconflicted defense counsel to defend the insured against numerous construction defect claims and that the insurer pressured the insured, though conflicted counsel, to pay more in deductible reimbursements than it was actually responsible for under the policy.  The insured further alleged the insurer directed conflicted counsel to pursue a settlement strategy that was contrary to the insured’s instructions and interests.  The insurer filed a motion to strike the complaint under California’s anti-SLAPP law (Code Civ. Proc., § 425.17), arguing that the claim arose out of its protected activity undertaken in connection with litigation and settlement.  The trial court denied the motion.

The Court of Appeal (Fourth Dist., Div. Three) affirmed.  The bad faith complaint did not seek relief for any of the attorneys’ conduct in litigating or settling claims.  The complaint’s allegations, which related to the insurer’s conduct in failing to provide independent, conflict-free counsel, did not arise from any oral or written statements in connection with an issue under review by a judicial body.  Any “references to settlement and other potentially protected activity in the allegations” against the insurer were merely factual “context” for the claim that the insurer breached the insurance contract.

Trial court erred in dismissing coverage, bad faith, and fraud complaint without giving plaintiff an opportunity to amend.  Eghtesad v. State Farm General Insurance Company (2020) __ Cal.App.5th __.

A pro per plaintiff filed a form complaint against State Farm for breach of contract and fraud.  He alleged that he had leased a property to a tenant on condition the tenant cover him for fire damage, and that State Farm confirmed on the phone that the coverage had been obtained, but that when he made a claim, State Farm said he was covered for “slander” only.  State Farm demurred to the complaint on the ground it was vague and uncertain, and failed to state a claim.  The plaintiff requested a continuance to respond to the demurrer, attaching a doctor’s note that he had been injured in an auto accident and was on medication.  The court granted the continuance.  When the continued due date approached, the plaintiff sought another continuance on the same ground, but the court denied it.  The court sustained the demurrer without leave to amend.

The Court of Appeal (First Dist., Div. Two) reversed.  When it comes to an initial complaint, a trial court abuses its discretion in denying leave to amend, even if the plaintiff does not request leave to amend, unless the complaint on its face shows it is incapable of amendment.  Here, the allegations that State Farm told the plaintiff he had coverage for property damage, and later denied it, appeared capable of amendment to state a claim for fraud, breach of contract, and/or bad faith misrepresentation of the policy terms.

This e-Bulletin was prepared by Emily V. Cuatto, Certified Appellate Specialist and Partner of Horvitz & Levy LLP. Ms. Cuatto is a member of the Insurance Law Standing Committee of the Business Law Section of the California Lawyers Association.