The State Bar of California
Insurance Law Committee of the Business Law Section
APPELLATE LAW UPDATE
September 30, 2010
Submitted by H. Thomas Watson
Horvitz & Levy LLP
SUPREME COURT: The California Supreme Court recently published the following decisions that may be of interest to attorneys practicing insurance law:
1. An insured who receives a settlement and agrees to release an insurer from all future known and unknown claims may not affirm the settlement contract, keep the settlement proceeds, and sue for fraudulent inducement of the settlement. Instead, the insured must rescind the settlement agreement, which generally requires restoration of the settlement benefits before suing for fraud. (Village Northridge Homeowners Ass'n v. State Farm Fire and Cas. Co. (2010) 50 Cal.4th 913.) Village Northridge HOA sought benefits for damages caused by the Northridge earthquake. State Farm paid more than $2 million under a policy with limits of $5 million, but disputed whether all of the claimed damage was caused by the earthquake. Village Northridge disputed State Farm’s interpretation of the policy limits. The parties settled with State Farm paying an additional $1.5 million and Village Northridge releasing all of its known and unknown claims against State Farm.
Village Northridge then sued State Farm for fraudulently inducing the settlement agreement by misrepresenting the policy limits, but at the same time sought to affirm the settlement agreement and keep the $1.5 million State Farm paid under that agreement. The trial court sustained State Farm’s demurrer without leave to amend. The Court of Appeal reversed, holding that rules requiring rescission of asettlement and release as a prerequisite to suing for fraudulent inducement did not apply in the insurance context.
The Supreme Court granted review. Reversing the Court of Appeal, the Supreme Court held that an “ ‘affirm and sue’ ” strategy is barred by both precedent and Civil Code section 1691, when the settlement agreement at issue includes a waiver of all known and unknown claims. Instead, the insured must proceed under the rules for rescission and restore the benefit received under the contract before suing for fraud in the inducement. However, the insured may seek to delay restoration until judgment under Civil Code section 1693, if restoration is impossible because the insured has already spent the settlement funds and the defendant cannot establish substantial prejudiced.
2. Civil Code section 3345’s trebling provision for actions brought by senior citizens applies only if the remedy sought is intended to serve as a punishment or penalty. Thus, a plaintiff seeking relief under a statute which provides only for restitution damages may not apply section 3345 to that remedy. (Clark v. Superior Court (2010) 50 Cal.4th 605.) A group of senior citizens sued an insurance company under California’s unfair competition law (Bus. & Prof. Code, § 17200 et seq.), alleging deceptive sales of high- commission annuities with large “ ‘early surrender’ ” penalties, and seeking restitution to the plaintiff class of money spent to purchase the annuities. Plaintiffs also sought trebling of the restitution award under Civil Code section 3345, which allows the trier of fact to award senior citizens and disabled persons up to three times an amount imposed by statute as a “fine, or a civil penalty or other penalty, or any other remedy the purpose or effect of which is to punish or deter.” The Court of Appeal held that the plaintiffs were entitled to seek a trebling of the restitution award under section 3345 because that award had a deterrent effect.
The Supreme Court reversed, holding that: “Because restitution in a private action brought under the unfair competition law is measured by what was taken from the plaintiff, that remedy is not a penalty and hence does not fall within the trebled recovery provision of Civil Code section 3345, subdivision (b).”
COURT OF APPEAL: The California Court of Appeal recently published the following decisions that may be of interest to attorneys practicing insurance law:
1. Anti-SLAPP motion is properly granted to dismiss tort lawsuit stemming from attorney’s issuance of subpoena to conduct discovery related to UIM arbitration. (Mallard v. Progressive Choice Ins. Co. (Sept. 15, 2010, G042527) ___ Cal.App.4th ___ [2010 WL 3566659] [Fourth Dist., Div. Three].)
2. “Evidence of Property Insurance” document is an insurance binder when issued by an agent with actual or ostensible authority to bind insurance, and therefore enforceable as a policy of insurance policy. (Chicago Title Ins. Co. v. AMZ Ins. Services, Inc. (Sept. 9, 2010, G041188) ___ Cal.App.4th ___ [2010 WL 3506365] [Fourth Dist., Div. Three].)
3. Insurer had no duty to defend employer for negligent driver under CGL policy that excluded coverage for automobile accidents. (Sprinkles v. Associated Indem. Corp (2010) 188 Cal.App.4th 69 [Second Dist., Div. Five].)
4. Where the insured has notice of a deadline for submitting claims set in an insurer’s liquidation proceedings, California Insurance Guarantee Association (CIGA) may not process claims filed after that deadline even if the foreign jurisdiction’s liquidation statute gives the liquidator discretion to process late claims. (HCM Healthcare, Inc. v. California Ins. Guarantee Ass’n (2010) 187 Cal.App.4th 1317 [Second Dist., Div. Eight].)
5. Evidence that an insurer failed to follow internal underwriting guidelines does not waive or estop the insurer from denying coverage based on insured’s misrepresentations in the insurance application, even if the misrepresentations would have been discovered had the guidelines been followed. (Colony Ins. Co. v. Crusader Ins. Co. (Aug. 27, 2010, B215274) __ Cal.App.4th ___ [2010 WL 3371559] [Second Dist., Div. Four].)
6. Where a settlement demand, although in excess of an individual insurer’s policy limit, is within the aggregate policy limits of the multiple primary insurers on the risk and is reasonable in light of the ultimate judgment, the demand triggered each primary insurer’s obligation to tender its policy limit toward that settlement and the failure to do so constitutes a bad faith failure to settle. (Howard v. American Nat. Fire Ins. Co. (2010) 187 Cal.App.4th 498 [First Dist., Div. Four].) The plaintiff, who was molested for several years during his childhood by a Catholic priest, sued the Bishop who retained the priest. The Bishop tendered his defense to multiple primary and excess insurers. Several insurers defended the Bishop; American did not. The plaintiff made several pretrial settlement demands, ranging from $2.75 million to $1.85 million. American refused to offer more than a “ ‘a minimal amount’ ” towards settlement. The case did not settle. The jury found theBishop liable for negligent retention, awarding the plaintiff $5.5 million, including $2.5 million in compensatory damages and $3 million in punitive damages. The Bishop then settled with the plaintiff for a cash payment plus an assignment of his rights against his insurers. Two of the insurers who had defended the Bishop paid their policy limits. Plaintiff then sued the Bishop’s insurers to collect on the judgment andto recover bad faith damages. The two insurers who had already paid their policy limits agreed to pay an additional settlement amount, and assigned to plaintiff their right to seek contribution from American.
The trial court ruled that American breached its duty to defend, and ordered itto pay almost $3 million ($2.5 million more than its policy limits). The Court of Appeal affirmed. With respect to extra-contractual damages, the court reasoned that, “[a]lthough there was never a settlement demand within American’s $500,000 policy limit, there was a settlement demand for $1.85 million that was well within the primary insurance policy limits of the multiple insurers on the risk, which totaled almost $4.3 million.” Moreover, “American did not respond to the settlement demand with its policy limits and, had it and other insurers done so, could have settled the litigation. As the trial court observed, the law ‘cannot excuse one insurer for refusingto tender its policy limits simply because other insurers likewise acted in bad faith. Ifthis were not the case, insurers on the risk could simply all act in bad faith, thus immunizing themselves from bad faith liability.’ ” Here, “[t]he Bishop was forced to reach his own settlement . . . [and] suffered damages from American’s misconduct, including payments the Bishop made to settle the case, and postjudgment attorney fee and accounting expenses incurred to protect his interests. The trial court properly found that American breached its duty to settle.”
7. Insurer properly denied coverage for losses incurred when an MRI machine failed to “ramp up” because the loss was caused by a foreseeable malfunction of the MRI stemming from an intentional act, not an accident causing a physical loss. (MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co. (2010) 187 Cal.App.4th 766 [ Second Dist., Div. Eight].)
8. Insurer who pays a single lump sum to settle a plaintiff’s causes of action for personal injury as well as bad faith, breach of contract, fraud, and misrepresentation, without allocating the settlement funds between those claims, waives its right to pursue a subrogation claim against another tortfeasor whose liability is limited to the plaintiff’s personal injury claim. (Essex Ins. Co. v. Heck (2010) 186 Cal.App.4th 1513 [Fifth Dist.].)
9. The Commissioner of the California Department of Insurance has no ministerial duty to bring enforcement actions against insurers whose procedures for handling disability claims allegedly violated Insurance Code sections 12926 and 12921. These codes give the Commissioner discretion whether to take action against insurers and citizens allegedly injured by code violations cannot compel the Commissioner to act. (Schwartz v. Poizner (2010) 187 Cal.App.4th 592 [First Dist., Div. Three].)
10. A commercial general liability (CGL) policy requiring the insurer to defend the insured against any “suit” seeking damages obligates the insurer to defend an insured developer in pre-litigation dispute resolution proceedings required under the Calderon Act (Civil Code section 1375 et seq.) with respect to construction defect claims brought by a homeowners association. (Clarendon America Ins. Co. v. StarNet Ins. Co. (2010) 186 Cal.App.4th 1397 [Fourth Dist., Div. Three].)