Appellate Law Update: April/May 2021

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

CALIFORNIA SUPREME COURT

The Insurance Code’s immunity provisions do not shield title insurers from civil suit for charging unauthorized rates.   Villanueva v. Fidelity National Title (2021) 11 Cal.5th 104.

Plaintiffs filed a class action against Fidelity National Title claiming that Fidelity violated California’s Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.)  when it charged mail delivery and other miscellaneous fees that were not listed in the schedule of rates Fidelity had filed with the Department of Insurance, thus violating Insurance Code provisions governing the business of title insurance.  The case proceeded to a bench trial.  At the close of the plaintiffs’ opening statement, Fidelity moved for nonsuit arguing immunity as to some of the alleged unlawful fees.  The trial court denied the motion and ultimately found for plaintiffs. Fidelity appealed.  The Court of Appeal (Sixth Dist.) reversed, holding that Fidelity was immune from liability for plaintiffs’ claims under Insurance Code section 12414.26 [providing immunity for acts done pursuant to the authority of the rate-filing statutes] and that the courts lacked jurisdiction over the case because the Commissioner was vested with exclusive authority to redress plaintiffs’ claims.

The California Supreme Court granted review and reversed the Court of Appeal.  “The statutory immunity for ‘act[s] done . . . pursuant to the authority conferred’ (Ins. Code, § 12414.26) by the rate-filing statutes does not shield title insurers from suit for charging unauthorized rates.”  Indeed, charging unauthorized rates is contrary to the authority granted by the rate-filing statutes.  The language of section 12414.26 was not broad enough to provide immunity for any and all conduct merely “regulated” by the rate filing statutes, as Fidelity had argued.  The court also noted that the legislative history behind the immunity statute reflected an intention to protect insurers from antitrust liability, and not from lawsuits for charging unauthorized rates to consumers.  Further, “the Insurance Commissioner does not have exclusive jurisdiction over such claims.” While consumers “may” seek redress from the Commissioner, nothing in the statutory language makes that mandatory.  Moreover, as the Commissioner argued, the courts have greater power to order relief, and allowing private enforcement complemented the Department’s efforts.

CALIFORNIA COURT OF APPEAL

Lenders holding insurance proceeds to repair damage to a mortgaged property do not owe the mortgagee interest on those proceeds.  Gray v. Quicken Loans (2021) 61 Cal.App.5th 524.

The plaintiff’s home was damaged by fire.  His insurer sent a payment for repair costs jointly to him and his mortgage lender.  The lender then placed the funds in a non-interest bearing escrow account to be dispersed as repairs were made to its satisfaction, as permitted by the loan agreement.  The plaintiff brought this lawsuit, alleging that the lender owed interest on the funds under Civil Code section 2954.8 [requiring lender “that receives money in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property” to pay two percent interest on the held amount].  The lender moved to dismiss the lawsuit on the ground section 2954.8 did not apply to this situation, and the trial court granted the motion.

The Court of Appeal (Second Dist., Div. Five) affirmed.  Hazard insurance proceeds are received to compensate for a loss that has already occurred; they are not received and held “in advance” within the meaning of section 2954.8.  Absent any contractual basis for paying interest, the lender here had no obligation to pay interest on the held sums.

Insurer could potentially be liable for bad faith when it denied coverage in the face of an opportunity to settle for policy limits.  Planet Bingo LLC v. Burlington Insurance Co. (2021) 62 Cal.App.5th 44.   

Burlington’s insured (Planet Bingo) manufactured gaming devices, which were distributed by a third party (Leisure Electronics).  One of the devices’ lithium batteries caused a fire in a gaming hall in the United Kingdom, resulting in over $2 million in damages. Leisure’s insurer (AIG) paid the claim, and demanded that Planet Bingo indemnify it in full.  Planet Bingo notified Burlington of AIG’s demand, but Burlington disclaimed coverage on the ground the damage did not occur, and no lawsuit had been filed, in the United States or Canada as its policy required.  Planet Bingo convinced AIG to file suit against it in the United States and thereby trigger Burlington’s policy.  AIG did so; Burlington agreed to defend Planet Bingo under a reservation of rights, and then settled with AIG for Planet Bingo’s $1 million policy limit.  Planet Bingo then brought this bad faith action against Burlington, alleging that Burlington acted in bad faith by failing to resolve the case in connection with AIG’s prelitigation settlement demand.  Planet Bingo claimed that Burlington’s failure to respond to the claim sooner caused Planet Bingo’s reputation to suffer, ruining its United Kingdom business and costing it over $9 million in lost profits. Burlington moved for summary judgment on various grounds, including that AIG had never made a pretrial offer to settle for policy limits.  The trial court granted Burlington’s motion and Planet Bingo appealed.

The Court of Appeal (Fourth Dist., Div. Two) reversed.  AIG’s subrogation letter to Planet Bingo was an invitation to negotiate a settlement.  Although the demand was for an amount in excess of policy limits, expert declarations presented on summary judgment indicated that this type of letter was routine in the industry and opened the door to negotiations to resolve the matter including within policy limits.  Thus, there was a triable issue whether the demand presented an opportunity to settle for policy limits.  The court left for remand the questions of whether there can be bad faith liability for failure to settle in the absence of an excess judgment, and, if so, whether the insured’s lost profits were a valid measure of bad faith damages. 

Parents have an insurable interest in an adult child’s personal property in their home.  Wexler v. California Fair Plan Association (2021) 63 Cal.App.5th 55.

Adult daughter lived with her parents, whose home was insured against fire damage under a California FAIR Plan policy.  Claiming smoke damaged her personal property located in her parents’ home, daughter sought insurance benefits from FAIR Plan.  FAIR Plan denied coverage based on a dispute over the cause of the damage.  Parents and daughter brought a coverage action, but parents dismissed their claims and daughter sought to proceed alone on a claim for bad faith.  FAIR Plan demurred to daughter’s complaint on the ground she was not an insured under the policy, which was issued only to her parents.  The trial court granted the motion.

A majority of the Court of Appeal (Second. Dist., Div. Eight) affirmed.  The FAIR Plan, which is a limited type of insurance policy, was expressly issued to the parents and did not cover any additional insureds.  Daughter therefore lacked standing under the policy to seek benefits.  Further, she did not qualify as a third party beneficiary of the policy.  Benefitting her was not a motivating purpose of the contract, and the contract’s benefits could be achieved through enforcement by the parents, who were entitled to coverage for all personal property in the home.  Accordingly, parents, but not daughter, could seek coverage for the damage–and without a claim for coverage, daughter could not pursue a claim for bad faith.  In so holding, the majority rejected daughter’s (and the dissent’s) argument that her parents lacked an insurable interest in her personal property.   

Primary insurer had shown sufficient likelihood of success on claim that umbrella insurer defrauded it into settling contribution lawsuit to survive umbrella insurer’s anti-SLAPP motion.  Truck Insurance Exchange v. Federal Insurance Company (2021) 63 Cal.App.5th 211.

A product manufacturer received a defense and indemnity against asbestos personal injury claims under an umbrella policy issued by Federal Insurance.  After the manufacturer discovered it had an unexhausted primary policy from Truck Insurance, Federal sought contribution from Truck.  A trial court found Truck liable for contribution, and while that decision was on appeal, the parties reached a settlement that provided Truck would pay contribution and would defend the manufacturer until the Truck primary policy exhausted.  After the Truck policy did exhaust, Truck filed its own contribution lawsuit, seeking contribution from Federal for the defense costs incurred after the exhaustion date.  Federal defended against Truck’s lawsuit on the theory that its policy did not contain a duty to defend, and that it defended the manufacturer before only as a business decision.  The trial court agreed that the Federal policy did not contain a duty to defend, and entered judgment for Federal.  Truck then brought the present action for fraud against Federal.  Truck argued that if Federal had paid defense costs only as a volunteer, Truck should not have been liable for contribution and it was defrauded in entering into the settlement by Federal’s representations in the first contribution action that it defended the manufacturer pursuant to its policy.  Federal then filed an anti-SLAPP motion, arguing that its representations in the first contribution action were protected statements made in the context of litigation.  The trial court concluded that the action did arise out of protected activity, but that Truck was likely to prevail on its fraud claim.  The court thus denied the motion, and Federal appealed.

The Court of Appeal (Second Dist., Div. Eight) affirmed.   While the gravamen of Truck’s complaint arose out of Federal’s protected petitioning activity, Truck had shown a probability of prevailing on the merits that Federal had committed extrinsic fraud by not disclosing in the prior action that it had paid as a volunteer and not pursuant to the terms of its policy.  Whether Truck reasonably or unreasonably failed to discover that the Federal policy lacked a duty to defend in the underlying action was a factual dispute for the jury to resolve; the existence of that factual disputed sufficed to defeat the anti-SLAPP motion.

Court of Appeal clarifies that the rule against insuring for losses-in-progress does not preclude coverage for a loss that occurs during a policy lapse.  Antonopoulos v. Mid-Century Insurance Co. (2021) 63 Cal.App.5th 580.

Plaintiffs submitted an insurance claim for the loss of their home in a wildfire.  The insurer denied coverage because the policy had lapsed for nonpayment of premium.  Plaintiffs immediately paid the premium and the insurer reinstated the policy.  The insurer maintained there was still no coverage for the claim, however, because the loss occurred while the policy was lapsed and under the “loss-in-progress” rule (Ins. Code, §§ 22, 250), there is no coverage for losses known before a policy issues.  The parties filed cross-motions for summary judgment on coverage, and the trial court granted plaintiffs’ motion and denied the insurer’s.  The trial court reasoned that by accepting plaintiff’s belated premium payment and issuing a policy reprint that included a policy inception date before the fire without reference to any lapse in coverage, the insurer waived any right to assert plaintiffs had forfeited coverage for the lapse period.   

The Court of Appeal (First Dist., Div. Two) affirmed the denial of the insurer’s motion but reversed the grant of the plaintiff’s motion. While the loss-in-progress rule precludes coverage for losses known prior to policy inception, that rule does not apply where the loss occurs during a lapse in a policy that issued before the loss and is later reinstated.  In that latter situation, whether there is coverage depends on the insurer’s intent to cover the loss when it reinstates the policy, thus waiving the insured’s forfeiture.  As a result, the insurer was not entitled to judgment as a matter of law based on the loss-in-progress rule.  However, the plaintiffs were not entitled to summary judgment, either, since the question of the insurer’s intent to waive the plaintiffs’ forfeiture was a factual question and the record contained conflicting evidence on that issue.

NINTH CIRCUIT

California Insurance Code section 533.5’s prohibition on allowing an insurer to defend and indemnify a defendant in an unfair business practices enforcement action brought by the Attorney General does not violate the defendant’s due process rights.  Adir International LLC v. Starr Indemnity and Liability Company (9th Cir.) 994 F.3d 1032.

The California Attorney General brought false advertising law (FAL) and unfair competition law (UCL) claims against a retailer.  The retailer’s insurer initially defended the retailer under a reservation of rights but then withdrew the defense after the Attorney General accused the insurer of violating California Insurance Code section 533.5 [providing that an insurance policy may not cover any financial losses resulting from an FAL or UCL claim brought by the Attorney General and an insurer has no duty to defend an action in which FAL or UCL penalties or restitution are sought].  The retailer brought a coverage action and the district court granted summary judgment for the insurer.   The retailer appealed, arguing that section 533.5 deprives FAL and UCL defendants of their right to counsel of their choice in violation of the federal Due Process Clause.

The Ninth Circuit disagreed with the retailer and affirmed the judgment for the insurer.  “[T]he due process right to retain counsel in civil cases appears to apply only in extreme scenarios where the government substantially interferes with a party’s ability to communicate with his or her lawyer or actively prevents a party who is willing and able to obtain counsel from doing so.”  Insurance Code section 533.5 did not prevent the retailer from obtaining or communicating with defense counsel; it merely made it harder.  The court declined “to enlarge the limited due process right to retain counsel to include a constitutional right to use insurance proceeds to pay for legal fees.” 

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.