Business Law

Appellate Law Update: October 2021

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

California Court of Appeal

Vague allegations that the insured requested the “best policy” and was promised “full coverage” were insufficient to create an insurer duty to prevent insured from being underinsured.  Vulk v. State Farm General Insurance Co. (2021) 69 Cal.App.5th 243.

Plaintiff purchased a fire insurance policy from State Farm and renewed it many times.  State Farm periodically included information in its communications that the insured should investigate the replacement value of his home to ensure he was not underinsured.  When his home burned down in a wildfire, State Farm paid policy limits, but the plaintiff claimed he was forced to rebuild a lesser quality home because the true replacement value was higher than his policy limit.  He brought various claims against State Farm, including claims for negligence and unfair competition (UCL), alleging that State Farm intentionally or negligently underinsured his home.  State Farm moved for summary judgment.  State Farm argued that the UCL claim failed because it was predicated on alleged violations of the Unfair Insurance Practices Act (UIPA), and there is no private right of action under the UIPA.  State Farm further argued that the negligence claim failed as a matter of law because insurers and their agents have no legal duty to ensure that a policy will cover the full amount of any insured loss.  In opposition, plaintiff stated in a declaration that he requested the “best policy” and was told by the State Farm agent that he would have “full coverage.”  He argued that these facts created triable issues whether his case fell within exceptions to the general rule—insurers have no legal duty to ensure full coverage—for cases in which (1) the insured clearly requested a specific type or amount of coverage, or (2) the insurer affirmatively misrepresented the coverage being provided.  The trial court discounted the declaration as inconsistent with plaintiff’s deposition testimony and granted summary judgment for State Farm.

The Court of Appeal (Third Dist.) affirmed.  Plaintiff’s complaint did not rely on exceptions to the general no-duty rule.  Because the issues for summary judgment are framed by the complaint, the motion was properly granted despite plaintiff’s new theory of duty asserted in his declaration, which was properly discounted given its inconsistency with his prior allegations and deposition testimony.  In any event, the declaration did not create a triable issue on any exception to the general no-duty rule.  The insured’s request for the “best policy” was not specific enough to constitute a request for a policy covering 100% of replacement value.  Likewise, a general promise to provide “full coverage” was not specific enough to constitute a promise to provide 100% replacement value.  As for the UCL claim, summary judgment was properly granted because the Insurance Commissioner has exclusive authority to enforce the UIPA, and plaintiffs cannot avoid the jurisdictional bar to private enforcement of UIPA claims by pleading them as UCL claims. 

See also Janney v. CSAA Insurance Exchange (2021) __Cal.App.5th __ [Insurer was entitled to summary judgment on insured’s claims for breach of insurance contract and bad faith where the evidence showed it paid the full replacement value of the plaintiff’s home following wild fire loss, despite genuine dispute over replacement value].

Insured was not entitled to Cumis counsel simply because plaintiff sought damages in excess of policy limits and punitive damages.  Nede v. Aspen American Insurance  (2021) 68 Cal.App.5th 1121.

The owners of a residential property were sued for tenant and squatter injuries that occurred in a fire at the property.  The owners’ insurer defended the action under a reservation of rights to deny coverage for damages in excess of policy limits and punitive damages.  The insurer selected panel counsel to defend the insureds.  The case resolved for an amount within policy limits.  Nonetheless, unhappy with their panel counsel’s litigation choices and apparent hostility towards them, the insureds brought a claim for declaratory relief against the insurer contending they had been entitled to independent (Cumis) counsel.  The insurer demurred to the declaratory relief complaint on the ground that it failed to allege a conflict of interest triggering the right to Cumis counsel.  The trial court sustained the demurrer. 

The Court of Appeal (Second Dist., Div. Eight) affirmed, although the panel majority did so by directing entry of judgment on the declaratory relief claim rather than affirming the trial court’s order on the demurrer.  Procedurally, a demurrer is not the proper vehicle to test the legal sufficiency of a declaratory relief claim.  A declaratory relief claim is sufficiently pleaded so long as it alleges a controversy, even if the allegations are legally insufficient to support relief for the plaintiff.  On the merits, however, affirmance was required because the complaint’s allegations showed the insurer was entitled to judgment as a matter of law.  A reservation of rights disclaiming coverage for damages in excess of policy limits and punitive damages does not create an ethical conflict for the attorney in representing both the insured and insurer that could trigger the Cumis counsel right.  The insured and insurer were aligned in disputing or minimizing liability, and there was no reason to believe anything about the case or the reservation of rights incentivized the attorney to act in a manner that would have compromised the insureds’ rights in favor of the insurer’s.  The attorney’s view that the insureds were likely to be incredible witnesses did not create a conflict either; such a view simply reflected the attorney’s professional assessment of the likelihood of success in defending the against the claims.  

Justice Wiley concurred in the result on the merits, but argued that a demurrer is and should be considered a proper procedural vehicle to adjudicate the legal merits of a declaratory relief claim where the facts are undisputed and the face of the complaint reveals that the defendant is entitled to prevail on the declaratory relief claim.  There was no reason to criticize the trial court’s procedural resolution of the matter, which was more efficient than the alternative of summary judgment or trial.


COVID-related business closures do not involve direct physical loss of or damage to property that could trigger business interruption coverage.  Mudpie Inc. v. Travelers Casualty Insurance Company of America (9th Cir. 2021)

The plaintiff bookstore brought this class action seeking a declaration that its standard commercial general liability and property policy covered business income lost during the COVID-19 pandemic as a result of various government orders seeking to control the spread of the virus.  Travelers denied coverage on the grounds that business closures resulting from the COVID-19 pandemic were not the result of “direct physical loss of or damage to” insured property, and that the policy’s virus exclusion barred coverage in any event.  The district court agreed with Travelers and dismissed the plaintiffs’ complaint.

The Ninth Circuit affirmed.  Applying California law and following the Eighth Circuit’s recent decision in Oral Surgeons, P.C. v. Cincinnati Insurance Co., 2 F.4th 1141 (8th Cir. 2021), the court held that the policy language requires there be actual physical damage or alteration to the property before business interruption coverage may be trigged, not simply a loss of use of the property for its intended purpose as the policyholder argued.  The court’s conclusion was confirmed by the further policy provision that business interruption coverage ends when the property is rebuilt, repaired, or replaced—all of which occur only when there is physical harm to the property.  The court further held that coverage was excluded by the policy’s virus exclusion.  The court rejected the plaintiffs’ argument that the government orders, rather than the virus, were the “efficient proximate cause” of the loss because the policy holder did not plausibly allege that that the cause that set the orders in motion was anything other than the virus or that the virus was so remotely involved in the orders that it could be deemed anything other than the cause of the loss.

Note: In a prior update (August-September 2021), we reported about the Court of Appeal’s decision in Williams v. National Western Life Insurance Company (2021) 65 Cal.App.5th 43.  The Supreme Court granted review and transferred the case back to the Court of Appeal with directions to reconsider the opinion’s conclusion that Victor Pantaleoni lacked an agency relationship with National Western Life Insurance Company in light of Insurance Code sections 31, 32, 101, 1662, 1704 and 1704.5 and O’Riordan v. Federal Kemper Life Assurance Company (2005) 36 Cal.4th 281, 288.  (Supreme Court Case No. S269978.)

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.

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