In the consolidated lawsuit, the policyholders alleged that FIE improperly denied their claims by asserting either that:  (1) the policyholders did not submit sworn proof of loss as required by the fire insurance policies, or (2) that the policyholders submitted delayed notice of loss.  The policyholders asserted causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing (bad faith) and unfair business practices under section 17200.  Given the large number of policyholders, five plaintiffs were selected as representative of the other policyholders and had their claims litigated, while the lawsuits of the other policyholders were stayed. 

For the policyholders whose claims were denied based on a failure to meet the policies’ proof of loss deadline – usually within 60 days of a request by FIE – the Court of Appeal ruled that California’s notice-prejudice rule applied.  Under the rule, an insurer cannot avoid liability for an untimely claim, unless the insurer shows it suffered “substantial prejudice” from the claimant’s failure to provide timely notice and proof loss.  The Court explained: 

There is ample reason to apply the “notice-prejudice” rule here.  California has a strong public policy against “technical forfeitures.”  (Bollinger v. National Fire Ins. Co. (1944) 25 Cal.2d 399, 405.)  Since forfeitures are not favored, “‘conditions in a contract, will if possible be construed to avoid forfeiture.  [Citations.]  This is particularly true of insurance contracts.  [Citation.]  [¶]  And where . . . the condition is express and cannot be avoided by construction, the court may, in a proper case, excuse compliance with it or give equitable relief against its enforcement.’”  (Root v. American Equity Specialty Ins. Co. (2005) 130 Cal.App.4th 926, 942, quoting  O’Morrow v. Borad (1946) 27 Cal.2d 794, 800.)  FIE’s employees testified that they waited for the insured to submit a proof of loss only where FIE’s hygienist recommended cleaning, i.e., when its investigation determined the insured had sustained a specific measure of damage and cleanup costs would be greater than the deductible.  A reasonable trier of fact might infer that the insureds’ failure to provide a sworn proof of loss in such cases was a technical forfeiture that FIE used to avoid paying for cleanup costs when its hygienists recommended that course of action after testing samples from the property.

The Court further explained that “the notice-prejudice rule avoids an absurd result that would follow were courts to require absolute compliance with the proof of loss condition.”  Reviewing the available facts, the Court of Appeal found that FIE failed to establish “substantial prejudice,” and indeed noted that even FIE’s person most knowledgeable testified that FIE relied upon the conclusions of expert hygienists hired to determine the level of char each house suffered, not the proof of loss, in preparing the damage estimates.

For the policyholders whose claims were denied because of delayed notice, the Court determined that FIE did show that it was prejudiced by the delayed notice because the condition of the property at the time the claim was made was substantially different from its condition when the loss occurred.  However, summary adjudication was still reversed because FIE failed to raise the delayed notice until the lawsuit.  In the letter denying the claim of the representative plaintiff that provided delayed notice, FIE’s denial was based on the grounds that “there were insufficient levels of smoke, ash, and/or soot present in the home,” and that it was reserving any available defenses.  While FIE argued that the reservation language in the letter meant that it could raise the delayed notice defense to justify its denial decision, the Court of Appeal disagreed.  Specifically, the Court held that under Insurance Code section 554, a failure to “promptly and specifically object to a delay in the presentation of notice” means that further objections based on delay are waived.   The Court further noted that:

“The law is established that where an insurance company denies liability under a policy which it has issued, it waives any claim that the notice provisions of the policy have not been complied with.”  (Comunale v. Traders & General Ins. Co. (1953) 116 Cal.App.2d 198, 202-203.)  The rationale for this rule is “that an insurer cannot deny all liability, and at the same time be permitted to stand on a provision inserted in the policy for its benefit. . . .  [W]here the insurer denie[d] all liability under the policy, the insured is misled into believing it would be futile to perform any affirmative obligation under the policy.  In other words, the insurer is deemed to have waived the insured’s failure to perform because the nonperformance is attributable to the insurer’s conduct.  [Citation.]  Thus, the cases in which a notice or proof of loss provision has been deemed waived by the insurer usually involve an insured lulled by the insurer’s silence into believing it had complied with the policy notice and/or proof of loss provisions.  Consistent with this rule, section 554 operates to deem an insurer’s belated objection to an untimely notice of claim or proof of loss waived if not promptly called to the attention of the insured. . . .  [S]ection 554 prevents an insurer from lulling the insured into believing that notice and proof of loss are unnecessary.”  (Insua v. Scottsdale Ins. Co. (2002) 104 Cal.App.4th 737, 742–743, fns. omitted.)

Finally, the California Court of Appeal affirmed the trial court’s summary adjudication ruling in favor of the insurer regarding alter ego and other vicarious liability theories, but reversed the trial court’s summary adjudication ruling on the causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair competition under Business & Professions Code section 17200 et seq.  With regard to the latter claim, the Court found that Moradi-Shalal v. Fireman’s Fund Insurance Companies, 46 Cal. 3d 287 (1988), did not bar a UCL cause of action based on an insurer’s bad faith, even if the same conduct might also constitute a violation of the Unfair Insurance Practices Act (which can only be enforced by the California Insurance Commissioner).  With this, the lawsuit will be remanded back to the trial court, although we expect that the California Supreme Court’s upcoming opinion in Zhang v. Superior Court, 178 Cal. App. 4th 1801 (2009) could result in a rehearing of the section 17200 cause of action.

In Minich Allstate issues a homeowner’s insurance policy to Kelly and Debbie Minich.  A fire destroys the Minichs’ home.  The policy requires Allstate to pay the Minichs the "actual cash value" of their home up to the $129,840 policy limit.  An extended policy limits endorsement requires Allstate to pay up to 150% of the policy limit in excess of the actual cash value if the Minichs actually repair or replace the home. 

Allstate pays the $129,840 policy limit, less the $250 deductible, within 2 weeks of the fire.  Allstate refuses to pay the $64,920 extended limit until the Minichs demonstrate to Allstate 15 months after the fire that they in fact are rebuilding the home.

Allstate files a motion for summary judgment and argues that it timely paid the Minichs the full "policy limit" under §2051(b)(1), and that the additional $64,920 represents an amount above the policy limit.  Allstate maintains that it is not required to pay the additional $64,920 unless and until the Minichs rebuild their home.  

The Minichs oppose Allstate's motion and argue that §2051 and §2051.5 require that an insurer pay the "policy limit or the fair market value of the structure, whichever is less" (§2051(b)(1)), without regard to whether the insured repairs the structure. The Minichs maintain that the "policy limit" of their policy includes the $64,920 provided for in the extended limits endorsement. 

The trial court grants Allstate's motion, and enters judgment in its favor. The Minichs appeal.

The appellate court concludes that the Minichs’ interpretation of the policy is flawed, and that neither the statutes nor the policy require Allstate to pay the extended limits under the endorsement without regard to repair or replacement.  The appellate court interprets the endorsement to refer to an amount in excess of the policy limit, and not to extend or increase the policy limit.

The appellate court also notes that public policy supports its interpretation; otherwise the homeowner would be “bettered” by receiving replacement cost benefits above the actual cash value of the home without ever having to actually replace the home—a benefit not bargained for in the insurance contract.  And a benefit that the California legislature could easily have mandated in the statutes, if it had so intended.

Since the appellate court determined that Allstate timely paid the Minichs all benefits owed under the policy, it also affirmed summary judgment and dismissal of the Minichs’ bad faith claims.  The Minich decision reaffirms that a homeowner must actually start repairs of its damaged home in order to collect policy benefits under an extended repair or replacement cost limits endorsement over and above the actual cash value of the loss.

In Century, Jesus Garcia, Sr.’s home was damaged when his adult son intentionally started a fire in his bedroom.  Garcia Sr. subsequently submitted a claim under his homeowner’s insurance policy issued by Century National Insurance Company (“Century”).  Although Garcia was the named insured, his wife and son also qualified as an insured under the policy.  Century denied the claim on the grounds that the damage was caused by an intentional wrongful act by an insured.  Garcia challenged the denial arguing that the Insurance Code does not bar “innocent insureds” from recovering despite a co-insured’s wrongful acts.  At trial, the state court granted Century’s demurrer and Garcia appealed.  

Writing for a unanimous court, Justice Baxter agreed with Garcia and held that the policy provision which precluded coverage was invalid.  To reconcile this result with section 533, the Court relied on Insurance Code section 2070 which states: “All fire polices . . .  shall be on the standard form, and, except as provided by this article shall not contain additions thereto. No part of the standard form shall be omitted therefrom except that any policy providing coverage against the peril of fire only, or in combination with coverage against other perils, need not comply with the provisions of the standard form of fire insurance policy . . . provided, that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.”  In other words, fire insurance policies in California must provide coverage that is at least as good as the coverage outlined by section 2071’s standard form provisions.  Now here is where it gets a little tricky.

While certainly a victory for innocent co-insured policyholders, the long-term impact of this opinion is unclear.  On one hand, the Court’s holding raises serious doubts about the use of policy provisions that deny coverage for the intentional acts of “any” insured.  On the other hand, the Court relied heavily on Insurance Code sections 2071 which applies solely to fire insurance coverage.  In addition, the Justice Baxter himself remarked in a footnote that the holding in Century “should not be read as necessarily affecting the validity of clauses” in other contexts.  Nevertheless, we can count of the fact that more cases will be coming in the future that test the boundaries of Insurance Code section 533. 

In this case, Scottsdale Insurance Company (“Scottsdale”) brought suit against Century Surety Company (Century) seeking equitable contribution based on Century's failure to participate in the defense of 17 common insureds in hundreds of actions in which Scottsdale, along with at least one other insurer, shared the costs of the defense of those insured parties.  Scottsdale also sought equitable contribution with respect to indemnity of the common insureds in those underlying actions in which Scottsdale (and at least one other insurer) had paid amounts to settle the actions.

Three principal defenses were raised.  In the unpublished portion of the opinion, the court discusses two of them and concludes that the trial court correctly decided both.  Century argued that it was not required to defend or indemnify three of the common insureds because Century's insurance policies did not provide coverage of the insureds for the actions alleged against them.  Specifically, Century relied on a policy exclusion intended to exclude from coverage any action arising out of work which had been completed by the insured prior to the effective date of the policy (the prior work exclusion).  The trial court concluded that Century's prior work exclusion was not conspicuous, plain, and clear, and refused to enforce it.  Century was therefore required to share equitably in the costs of the defense and indemnification of the common insureds, despite the presence of this exclusion.

Thus, Century argued it should be ordered to pay Scottsdale the difference between the equal share Scottsdale paid without Century's participation, and the equal share it would have paid had Century participated.  The trial court rejected Century's proposed method of calculation, and instead awarded Scottsdale half of all defense and indemnity payments it made with respect to the claims for which it was entitled to recover equitable contribution.  This result, however, was in conflict with the general rule, applied in non‑insurance cases, that in order to be entitled to equitable contribution a party must have first paid more than its share of the loss and it bears the burden of proving such circumstance.

The court applied those principles and concluded that they should have equal application in insurance cases.  As a result, the court held that not only must Scottsdale prove that it had paid more than its "fair share" of the defense and indemnity costs for the common insureds but it also bears the burden of producing the evidence necessary to calculate such "fair share."  Moreover, the court held that one insurer cannot recover equitable contribution from another insurer any amount that would result in the first insurer paying less than its "fair share" even if that means that the otherwise liable second insurer will have paid nothing.  Because the trial court applied an incorrect standard, the court reversed and remanded for a redetermination of Scottsdale's equitable contribution damages.