Business Law

May-June 2023 Appellate Law Update

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Insurer had a duty to defend lawsuit alleging insured was liable for dog attack, even if lawsuit’s allegations that the insured owned the dog were false.  Dua v. Stillwater Insurance (2023) __ Cal.App.5th __.

A husband and wife were walking their dogs along a public street when their dogs were attacked by two pit bulls let loose by their owner.  They sued the dog owner and his girlfriend.  As against the girlfriend, the plaintiffs alleged that the dogs lived in the girlfriend’s home and that girlfriend knew the dogs were dangerous and so had an obligation to prevent them from attacking others.  The girlfriend tendered the claim to her homeowners’ insurer under her standard policy providing liability coverage against claims seeking damages because of bodily injury or property damage.  In tendering the complaint, the girlfriend noted that she did not own the dogs and that they were not in her custody when the attack occurred.  The insurer nonetheless declined coverage on the basis of an animal liability exclusion precluding coverage for damages “caused by any animal, at any time, at any premises insured hereunder, or caused by, arising out of, or in any way related to any animal owned by or in the care, custody, or control of the insured, or any member of the insured’s family or household.”  The girlfriend settled the claims and sued her insurer for coverage, bad faith, and punitive damages.  The insurer moved for summary judgment, arguing that there was no potential for coverage because the girlfriend could be liable to the plaintiffs only if she controlled the dogs, and if she did, then the damages would be excluded.  The trial court granted the motion.

The Court of Appeal (Second Dist., Div. Two) reversed.  The insurer was obligated to defend against claims that were false, so the fact the extrinsic evidence indicated the insured did not control the dogs did not negate the potential for coverage raised by the complaint.  Further, the insurer could not prove that the animal liability exclusion would apply given that same extrinsic evidence that the dogs were not the girlfriend’s.  A concurring opinion reached the same result, under slightly different analysis.  According to the concurrence, while the legal theory of liability presented in the plaintiffs’ complaint was novel, that did not mean it was doomed to failure, and so there was at least some potential for the plaintiffs to recover damages because of bodily injury or property damage. Thus, there was a duty to defend, and that duty could not be eliminated by reference to the exclusion (because the extrinsic evidence indicated the exclusion did not apply).  The court also reversed on the issue of bad faith, concluding that there were triable issues concerning whether the insurer did an inadequate investigation into whether the insured owned the dogs.  On punitive damages, the court remanded to permit the trial court to consider in the first instance whether the facts could support punitive damages.

Absent evidence of the specific property that had to be repaired or replaced due to COVID-19 virus contamination, business owner could not obtain coverage for “direct physical loss or damage” to its property. Santa Ynez Band of Chumash Indians of the Santa Ynez Reservation California v. Lexington Insurance (2023) __ Cal.App.5th __.

The insured closed its casino business for three months after concluding that COVID-19 was spreading in the casino.  During the closure, the casino installed temperature check machines and barriers to try to reduce the spread of the virus once it reopened.  The casino then made a claim to its first party property insurer, which denied coverage on the ground that the policy covered only those losses caused by “direct physical loss or damage.”  The casino sued for breach of contract and bad faith.  The parties filed cross-motions for summary adjudication on coverage.  In support of its motion, the casino submitted declarations from a professor and a research scientist asserting that the virus “physically altered” the surfaces at the casino, requiring the casino to make alterations to the property.  The insurer submitted a declaration from a medical doctor opining that the virus does not damage property surfaces and can be cleaned with disinfectant.  The trial court granted summary judgment for the insurer.

The Court of Appeal (Second Dist., Div. Six) affirmed.  “A plaintiff opposing a summary judgment motion involving a property damage coverage claim must 1) be able to present proof that the alteration of its property actually caused damage; 2) identify the specific property that had been damaged; 3) and especially present proof whether that property had to be replaced or was no longer usable; and 4) present evidence of the dollar amount of its loss.”  The casino failed to meet its burden on these elements because it did not present any evidence that any of its property, such as rugs or machines or tables, had to be replaced or became wholly unusable.  Installation of barriers merely made “the standard pandemic-related precautions that many businesses made to reopen to the public after the shutdown.  It is not proof that its property had been damaged.”  The casino experts’ declarations that there was physical damage were conclusory and insufficient to show what property was altered.

See also Starlight Cinemas v. Massachusetts Bay Insurance (2023) __ Cal.App.5th __ [holding that “direct physical loss” requires a physical alteration of the covered property, so insured was  not entitled to coverage for a mere loss of use of a property due to COVID-19 business shut down orders]

Civil Code section 3287 does not provide for prejudgment interest in uninsured motorist proceeding based on insured’s prevailing Code of Civil Procedure section 998 offer.  Glassman v. Safeco Insurance Company of America (2023) 90 Cal.App.5th 1281.

While crossing the street, plaintiff and her mother were struck by a vehicle.  Plaintiff’s mother died, and plaintiff suffered serious injuries and emotional distress.  She received $255,000 under her Safeco Insurance Company auto policy and $250,000 from the

driver’s policy. Safeco denied her claim for excess underinsured motorist (UIM) benefits, and plaintiff initiated a UIM arbitration. After pre-hearing discovery during which Safeco’s retained expert issued a report indicating plaintiff’s emotional injuries were extensive, plaintiff served a Code of Civil Procedure section 998 offer for $999,999.99, one cent less than the policy limit.  Safeco rejected the offer. The matter was arbitrated and the arbitrator concluded that plaintiff’s compensable expenses were “well over” $1 million and she was thus entitled to the full $1 million policy limit, but declined to determine the exact amount of her damages. The trial court confirmed the arbitration award.  Plaintiff also sought prejudgment interest under Civil Code section 3287, subdivision (a), arguing that her damages became certain as of the date of her section 998 offer.  The trial court denied the motion.

The Court of Appeal (Sixth Dist.) affirmed. Nothing in the statutory language of either Civil Code section 3287 or Code of Civil Procedure section 998 indicates that a section 998 offer renders damages liquidated for purposes of section 3287.  While the court did not rule out the possibility that notice to a UIM insurer that the plaintiffs’ damages exceed the policy limit could render the damages sufficiently liquidated to permit an award of prejudgment interest, the record here did not show that the arbitration award was based solely on the information already available to Safeco at the time plaintiff made her section 998 offer.  Therefore, the record did not show that the amount of plaintiffs’ damages were known or reasonably available to Safeco when plaintiff made that offer.

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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