Insurance Appellate Update August 2024

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

CALIFORNIA SUPREME COURT

The one-year contractual limitations provision governing claims “on the policy” does not apply to an Unfair Competition Claim seeking only injunctive relief.
Roseberg-Wohl v. State Farm (2024) __ Cal.5th __.

Plaintiff submitted a claim under her homeowners’ policy seeking reimbursement of expenses she incurred to fix a staircase that was unsafe due to “settl[ing].” The insurer denied the claim based on information provided by plaintiff, observing that there appeared to be no covered occurrence and the policy specifically excluded damage caused by “settling.”  The insurer further noted that the staircase issues appeared more than a year before plaintiff submitted her claim and therefore, any claim was barred by the policy’s one-year limitations provision.  Plaintiff’s husband later asked the insurer to reconsider, and it “reopened” the claim and again denied it.  Plaintiff then filed two lawsuits, one for breach of contract and bad faith that proceeded in federal court, and another state court putative “class action” for violation of the Unfair Competition Law (UCL), Business & Professions Code section 17200 et seq.  The “unfair” practice was failing to conduct a proper claim investigation, and plaintiff sought only an injunction, not restitution of premiums or loss payments.  The insurer demurred arguing that the claims were time-barred under the policy.  The trial judges sustained the demurrers, reasoning that the UCL claim was an action on the policy grounded in plaintiff’s complaints about denial of her claim.  On plaintiff’s appeal in the state court action, a majority of a Court of Appeal panel (First Dist., Div. Two) affirmed.

The Supreme Court reversed.  Plaintiff’s UCL claim seeking only declaratory and injunctive relief was not a direct or indirect attempt to recover damages for the insurer’s nonpayment of her claim, so it was not a “suit or action on the policy for the recovery of any claim” under Insurance Code section 2071.  The UCL’s four year statute of limitations, rather than the policy’s one-year suit provision, applied.

The “illusory coverage” doctrine has never been recognized and even if it exists, requires the insured to show that it reasonably expected coverage for the loss.
John’s Grill, Inc. v. The Harford Financial Services Group, Inc. (2024) __ Cal.5th __.

A restaurant that lost business income during the COVID-19 pandemic sought insurance coverage for its losses under its property policy’s “Limited Fungi, Bacteria or Virus Coverage” endorsement.  The endorsement provided up to $50,000 of additional property and business interruption coverage.  Under the endorsement, the insurer would not pay for any loss caused by the “[p]resence, growth, proliferation, spread or any activity of ‘fungi, wet rot, dry rot, bacteria or virus” unless such conditions resulted from a “specified cause of loss.”  The “specified causes” of loss were explosion, windstorm, hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, volcanic action, falling objects, weight of snow, ice or sleet, and water damage.”  The insurer denied coverage under the endorsement, on the ground that the restaurant’s losses did not result from any of those conditions or events.  On the restaurant’s appeal from the insurer’s successful demurrer, the Court of Appeal (First Dist., Div. Four) ruled that the insurer’s interpretation of the coverage provided by the endorsement rendered the coverage illusory, because a virus would never result from the specified causes of loss.  The appellate court therefore held that the “specified cause of loss” limitation could not be applied and the restaurant could proceed with its claim against the insurer for coverage.

The Supreme Court reversed.  The endorsement clearly and unambiguously “provides virus-related coverage, but only if the virus results from certain specific causes of loss” and the pandemic is not among them.  The court rejected the insured’s argument that the insurer’s reading of the endorsement rendered the extension of coverage illusory.  The court observed that it has “never recognized an illusory coverage doctrine” permitting a court to disregard a clear policy term; rather, the cases simply recognize that when resolving ambiguities, an interpretation that avoids rendering the policy meaningless is preferred.  If an “illusory coverage” doctrine does exist, it would apply only upon a “foundational showing” by the insured that it had a reasonable expectation of coverage for the loss. And even then, the insured would have to show the policy was in fact illusory.  Here, the insured had made no showing that it reasonably expected its property policy to provide pandemic coverage or that the endorsement was entirely illusory.

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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