Declarations and Exclusions

It’s Not That Bad: Tort Damages Unavailable for “Bad Faith” in Overcharging Insurance Premium

Every contract carries with it an implied obligation of good faith and fair dealing: the irreducible promise that neither party will act to unfairly or unreasonably deny the other the benefits of the agreement. Generally, a breach of that obligation of good faith is dealt with as a breach of contract, and the injured party is entitled to damages equivalent to the benefit of the bargain that party would have received if the contract had been performed. In the context of insurance coverage, however, an insurer’s breach of the obligation of good faith and fair dealing -- a denial of policy benefits that is not merely “wrong” but also “unreasonable” -- is compensated as more than a simple breach of contract. It is viewed as a tort, for which the insurer may potentially be liable for general damages (such as damages for the insured’s emotional distress) and for punitive damages. This is the sort of claim generally referred to as “insurance bad faith.”

One of the ongoing questions in California law has been whether tort damages can be recovered for breaches of the covenant of good faith beyond the context of insurance coverage. As a general matter, the rule has been that such damages are not recoverable, even in important contractual relationships such as that between an employee and employer. The California Supreme Court has now held that not every breach of the covenant of good faith by an insurer is compensable as a tort. In particular, when an insurer breaches its duties of good faith by unreasonably overcharging a premium, that act of “bad faith” is to be compensated under ordinary contract measures of damage.

The facts of the case are more complex than can conveniently be summarized here, but they can be reduced to this: the Jones family trucking business was significantly and unreasonably overcharged for insurance, by approximately $50,000. The Joneses brought an action for breach of contract, fraud and “bad faith.” The trial court found that the covenant of good faith and fair dealing had been breached and awarded compensatory damages of more than $2 Million and punitive damages of more than $4 Million. On appeal, the Court of Appeal held that a breach of the covenant of good faith involving premium (as opposed to a breach involving payment of insurance benefits) would not support tort damages, so that the damages would have to be reduced to the amount by which they were overcharged, without additional damages for emotional distress, without an award of attorney’s fees, and without punitive damages. On further review, the California Supreme Court agreed. The Court summarizes its conclusions (citations of authority are omitted) as follows:

[T]here are several critical factors that counsel against the availability of tort remedies for breach of the covenant of good faith and fair dealing in the present case. First, the billing dispute does not, by itself, deny the insured the benefits of the insurance policy -- the security against losses and third party liability. Second, the dispute does not require the insured to prosecute the insurer in order to enforce its rights, as in the case of bad faith claims and settlement practices.

Third, traditional tort remedies may be available to the insured who is wrongfully billed a retroactive premium. If the premium charge is wholly unjustified, the insured may, after successfully defending the action, sue for malicious prosecution. If the debt is reported to third parties, to the debtor’s detriment, a defamation action may lie. The untruthful, bad faith creditor may also be liable for intentional interference with prospective economic advantage.

(The Court also held that the premium dispute should be heard in the first instance by the Department of Insurance, prior to recourse to the courts, because this particular case arose under California’s “Assigned Risk” program.)

The decision in Jonathan Neil & Associates, Inc. v. Jones (August 5, 2004), Case No. S107855, can be found at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

Get Out Your Calculators: Attorney’s Fees Awarded to Insured’s Attorneys in “Bad Faith” Case May Exceed Policy Benefits Recovered for the Insured

In 1985, in the case of Brandt v. Superior Court, the California Supreme Court held that an insured who successfully sues his or her insurer for damages for “bad faith” may recover, as an element of damages, at least a portion of the attorneys’ fees the insured incurred in the case. Specifically, the Brandt decision holds:

When an insurer’s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney’s fees are an economic loss -- damages -- proximately caused by the tort. These fees must be distinguished from recovery of attorney’s fees qua attorney’s fees, such as those attributable to the bringing of the bad faith action itself. What we consider here is attorney’s fees that are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action.

Only the fees relating to recovery of the unpaid benefits can be recovered as damages; additional fees relating to the “bad faith” claim itself, or to pursuing punitive damages, are not to be awarded.

Now, a closely divided (4-3) California Supreme Court has held that an insured who recovered unpaid insurance benefits of approximately $40,000 may be entitled to recover attorney’s fees of $400,000 or more as an element of damages in a related “bad faith” case.

The Cassim family suffered a loss by fire that compelled them to move out of their house. Their insurer, Allstate, initially paid living expenses, but stopped doing so early on when the company began to suspect that the Cassims may have been responsible themselves for the fire. This and other suspicions that the claim was being unduly inflated caused Allstate to delay payment under the policy, and eventually to reject the claim altogether. The Cassims ultimately lost their house to foreclosure. They retained counsel and brought suit to recover the unpaid benefits under their policy and to recover damages for the insurer’s breach of its obligations of good faith and fair dealing.

At trial, the jury found in the Cassims favor, awarding compensatory damages of $3,594.600 and punitive damages of $5 Million. The amount that the insurer should have paid (which was included in the compensatory damages) was found to be $40,856.40. The Cassims’ attorney had handled the case under a contingent fee agreement entitling him to 40% of the total recovery. Allstate argued that the recoverable attorney fee damages under Brandt should thus be $16,342.56: 40% of the policy benefits portion of the overall damages. The trial court disagreed, and awarded Brandt fees of $1,193,533.

The Supreme Court suggests that the amount awarded for fees may be too high, but that the proper amount will likely be much more than the “40% of recovered benefits” urged by Allstate. The court approves a method for determining an appropriate Brandt award:

To determine the percentage of the legal fees attributable to the contract recovery, the trial court should determine the total number of hours an attorney spent on the case and then determine how many hours were spent working exclusively on the contract recovery. Hours spent working on issues jointly related to both the tort and contract should be apportioned, with some hours assigned to the contract and some to the tort. This latter figure, added to the hours spent on the contract alone, when divided by the total number of hours worked, should provide the appropriate percentage.

An example of this calculation, with numbers similar to the instant case, illustrates the point. Suppose the compensatory damages are $3,594,000. Suppose further that the attorney and the client have a 40 percent contingent fee agreement. The total legal fee for the compensatory award is thus 40 percent of $3,594,000, or $1,437,600. Now suppose counsel spent 1,500 hours on the case, and can prove this breakdown: 200 hours on issues related solely to the contract, 500 hours on issues relevant to both the contract and the tort, and 800 hours on issues related solely to the tort. The trial court could reasonably conclude that half the hours spent on the joint contract/tort issues are fairly attributable to the contract (i.e., half of 500 hours, or 250 hours), and thus 30 percent of the hours worked (200 hours plus 250 hours, divided by 1,500 total hours) is attributable to the contract recovery. Thirty percent of the total legal fee (30 percent times $1,437,600) is $431,280. This is the amount a trial court should award as Brandt fees in this hypothetical situation.

The three dissenting justices are not persuaded that the majority’s approach makes either legal or practical sense. Summarizing the dissenters’ doubts, Justice Baxter writes:

Brandt entitles the plaintiff insured to full recovery of policy benefits, undiminished by the attorney’s fees incurred to recover those benefits. In this case, where the attorney was retained under a contingent fee agreement of 40 percent, the correct award is 40 percent of the recovery under the policy. The method proposed by the majority is not only inconsistent with Brandt but will also burden the system with bitterly contested litigation over which contract issues are intertwined with the tort claims and how legal work on such issues should be apportioned. Because this method is predictably unwise and unworkable, I respectfully dissent.

The opinions in Cassim v. Allstate Insurance Company (July 29, 2004), Case No. S109711, can be read at these links in PDF and Word formats.

An Attorney Divided -- Long-Time Coverage Lawyer Disqualified From “Bad Faith” Suit Against Former Client Insurer

The Fifth District Court of Appeal has held that an attorney who provided ongoing coverage advice to an insurer for thirteen years must be disqualified from representing the claimants in a “bad faith” suit against that insurer.

Attorney James Wilkins provided insurance coverage advice to Fireman’s Fund Insurance for some thirteen years before leaving the law firm at which he had done that work and starting a new firm of his own. At his new firm, Wilkins took on the representation of the plaintiffs in a suit for breach of contract and “bad faith” against Fireman’s Fund. The bad faith case involved questions concerning coverage available under a Fireman’s Fund policy. Fireman’s Fund moved to have Wilkins and his firm disqualified from acting in the case, based upon Wilkins’ former representation of Fireman’s Fund. The trial court denied the motion. Fireman’s Fund appealed, and the appellate court has ruled that Wilkins must be disqualified, placing its principal reliance on its own earlier decision in a similar case:

In Jessen v. Hartford Casualty Insurance Company, 111 Cal.App.4th 698, we held that, ‘when ruling upon a disqualification motion in a successive representation case, the trial court must first identify where the attorney’s former representation placed the attorney with respect to the prior client. If the court determines that the placement was direct and personal, this facet of Ahmanson is settled as a matter of law in favor of disqualification and the only remaining question is whether there is a connection between the two successive representations, a study that may not include an ‘inquiry into the actual state of the lawyer’s knowledge’ acquired during the lawyers’ representation of the former client.”

Rejecting the attorney’s arguments that his former representation of the insurer in providing coverage advice for thirteen years was not “connected” to his assertion of “bad faith” claims against that same insurer, the court risked stating the obvious:

Wilkins advised and assisted FFIC in making coverage decisions when he acted as FFIC’s California coverage counsel. An insurer’s acceptance or denial of coverage necessarily raises legal issues about whether the insurer conducted an adequate investigation, whether the insurer gave sufficient consideration to the interests and expectations of the insurer, whether the insurer reasonably construed and applied the relevant policy language, and whether the insurer’s construction and application of the relevant policy language was consistent with its treatment of other similarly situated insureds. . . . Coverage disputes are substantially related to bad faith actions for the purpose of attorney disqualification because they both turn on the same issue -- whether or not there is coverage under the terms of the policy.

Under the circumstances, the appellate court concludes that the trial court had no discretion in the matter: disqualification was mandatory.

The opinion in Farris v. Fireman’s Fund Insurance Company (June 17, 2004), Case No. F043531, can be read at these links in PDF and Word formats.

Clear As Mud -- Cal. Supreme Court Declines to Enforce Limitation on Amount of Coverage for Permissive User of Insured Automobile

A contract of insurance is, almost of necessity, a complex document. The law requires, however, that some of the contract’s terms must be laid out with particular clarity if they are to be enforceable. Considering a so-called “EZ-Reader Car Policy,” the California Supreme Court has held that an insurer cannot enforce a limitation on the amount of coverage available to permissive users of an insured automobile -- even when those limitations are expressly permitted under the controlling statutes -- because the limitation was not sufficiently “conspicuous, plain and clear.”

California’s “Financial Responsibility” law sets minimum limits for the liability insurance that must be obtained on an automobile: $15,000 per person and $30,000 per accident for bodily injury. Many motorists choose to purchase higher limits for their own protection. California law also requires that the liability insurance on a vehicle must be available to “permissive users” -- any person operating the vehicle with the owner’s permission. When an automobile insurance policy provides limits higher than the Financial Responsibility requirements, the policy may provide that only the lower, statutory minimum limits of coverage are available to permissive users.

Farmers Insurance has attempted to incorporate just such a limitation into its policy, but the California Supreme Court has ruled that the limitation cannot be enforced. Applying the rule that a restriction on insurance coverage must be “conspicuous, plain and clear,” the Court concludes that Farmers’ limitation on coverage amounts for permissive users was not any of those things. In the case before it, the limitation was contained in the middle of the page in an endorsement 24 pages into the policy, with no reference elsewhere to alert the insured (or any permissive user) that the restriction applied.

A copy of the endorsement in question is included in the dissenting opinion, and I have reproduced it here, so that readers can judge for themselves how “conspicuous, plain and clear” it is, or isn’t.

The decision in Haynes v. Farmers Insurance Exchange (May 17, 2004), Case No. S104851 can be found at these links in PDF and Word formats.

No Harm, No Foul -- Stipulated Judgment Creates No Presumption of Damages in Malpractice Suit Against Insurance Broker

When an insurance broker negligently fails to obtain necessary liability insurance coverage for a client and the client is later sued on a claim that would have/should have been covered under the nonexistent policy, it is sometimes said that the broker "stands in the shoes" of the insurer and must pay the expense incurred by the client in defending the claim or satisfying any resulting judgments. The Court of Appeal for the Second Appellate District, however, has held that the client's entry into a stipulated judgment with the injured claimant doe not provide evidence of the amount of the client's damages, especially when that stipulation is accompanied by an agreement relieving the client of any personal exposure to liability.

Jose and Teresa Martinez owned a nightclub. In 1998, Alma Valentine was injured in a shooting that arose from an argument inside the club that moved into the adjacent parking lot. Valentine brought suit for her damages against the Martinezes and the security company that patrolled the lot, alleging that their negligence had contributed to her injuries.

The Martinezes had for several years obtained their liability insurance through Membrila Insurance Services. At the time of the shooting, their liability policy issued by Scottsdale Insurance Company contained a broad exclusion barring coverage for claims arising out of assault and battery. When the Martinezes tendered the claim to their insurer, it declined to defend or otherwise provide coverage, based on the assault and battery exclusion. The Martinezes contended that they had been unaware of the exclusion and that Membrila was negligent for failing to obtain a policy without such an exclusion or, at a minimum, calling the exclusion to the Martinezes' attention.

Alma Valentine obtained a significant cash settlement from the security company. She then entered into a settlement with the Martinezes. Under the terms of the settlement, the Martinezes stipulated to the entry of judgment against themselves for $6 Million. Valentine covenanted that she would not seek to enforce that judgment against the Martinezes' personal assets. Instead, she would take an assignment of whatever rights the Martinezes had against Scottsdale (for incorrectly denying the claim) and against Membrila (for negligently failing to obtain proper coverage). Ultimately, the insurer settled for a payment of $240,000, and the case proceeded to trial against Membrila.

The trial court found -- and the Court of Appeal has agreed -- that Membrila had been negligent, but awarded damages of zero. The court concluded that the stipulated judgment of $6 Million did not establish either that the Martinezes were actually liable to Valentine or that the amount of damages for which they were liable was $6 Million. The only damages that the Martinezes could actually prove were the amounts that they had to pay their attorneys because the insurance company had declined to pay for their defense. Those legal expenses came to only $16,000. Because they (and Valentine) had already recovered more than that through the $240,000 settlement with Scottsdale, so that no additional damages were payable by Membrila.

In claims against an insurer that has wrongfully denied coverage, a stipulated judgment agreed to by the insured does create a presumption (which the insurer may attempt to rebut) of the insured's liability to the injured claimant and the amount of damages for which the insured is liable. In its decision affirming the trial court's conclusions here, the Court of Appeal declines to extend that presumption to claims against non-insurers, such as a negligent insurance broker.

The appellate court emphasizes (1) that stipulated judgments, particularly when accompanied by a covenant not to execute against the insured's personal assets, provide innumerable opportunities for collusion and self-dealing, but (2) that the special relationship between and insurer and its insureds warrants the adoption of the rebuttable presumption. Other relationships, such as between an insurance broker and his or her client, are sufficiently distinct from that of insurer and insured that the extension of the presumption is not warranted. The stipulated judgment was thus meaningless and irrelevant in the suit against Membrila. While the Martinezes likely had some liability to Valentine and their lack of insurance for that liability constituted harm caused by Membrila's negligence, there was no evidence of the amount of that liability and no way for the trial court to quantify it other than by speculation. The Martinezes' legal expense was the only proven amount of damage, and the trial court correctly offset the insurer's payment against it, reducing Membrila's liability to zero.

The decision in Valentine v. Membrila Insurance Services, Inc. (May 10, 2004), Case No. B160568, can be found at these links in PDF
and Word formats.

Cooperate or Evaporate -- Insured's Refusal to Divulge Relevant Information Results in Dismissal of Claim

The pattern has been a common one in recent opinions: insured presents claim, insurer requests information, insured refuses to provide it (often as a result of some antagonism that has developed with the insurer), insurer invokes "duty to cooperate," court concludes claim can properly be denied. (We last reported on cooperation issues here.) Here is a fresh example:

Daphne Miranda was injured in an automobile accident. She brought suit against the opposing driver and also made a claim to her own insurer, 21st Century, under her policies underinsured motorist coverage.¹ After settling her claims against the opposing driver, Miranda continued to seek arbitration with 21st Century, asserting that she required additional treatment by a neurologist for post-concussion symptoms relating to the collision.

21st Century identified two hospitals at which Miranda had been treated, and attempted to subpoena records relating to that treatment. The hospitals took the position that they would not produce the records without Miranda's written consent. After a series of letters, Miranda's attorney notified 21st Century that Miranda would not provide the necessary consent.

21st Century filed a request in the superior court to obtain an order for the release of the records, noting that Miranda had acknowledged in a deposition that the treatment she received at the hospitals was for the conditions involved in her underinsured motorist claim. The court issued an order requiring Miranda to sign the necessary authorizations. Despite that order, Miranda's attorney continued to insist that she would not sign. 21st Century filed a second motion, requesting that Miranda's demand for arbitration be dismissed for her failure to provide the requested information. The superior court ordered the dismissal and Miranda appealed.

On appeal, the order of dismissal was affirmed, effectively barring Miranda from any further pursuit of her underinsured motorist claim. The appellate court rejected Miranda's claim that the superior court had no jursidiction over her insurance claim, noting that the relevant statute [Insurance Code 11580.2] specifically grants the court power to regulate discovery in underinsured motorist arbitration matters and concluding that the court, not an arbitrator, has the exclusive authority to deal with discovery issues. Having found that the superior court possessed proper jurisdiction, the Court of Appeal had little difficulty in concluding that the superior court had not abused its discretion in directing the dismissal:

Substantial evidence supports the court’s conclusion that the sanction of dismissal was appropriate. For nearly a year before the dismissal, defendant had attempted to obtain evidence that would have assisted the determination whether plaintiff’s dizziness and vertigo were caused by the accident, or whether the symptoms were manifestations of a preexisting condition. Repeated attempts to obtain voluntary cooperation were rebuffed. Defendant sought the assistance of the court, and the court ordered plaintiff to cooperate by signing the authorizations for release of the requested records. After the order was made, plaintiff failed to obey the order, and two months later announced, through counsel, she would not sign the authorizations. Thus, the evidence established that plaintiff flatly refused to obey a court order. This was not an inadvertent failure to respond to discovery, or a mere late service of a discovery response. It was defiant disobedience of the court’s order.

The decision in Miranda v. 21st Century Insurance Co. (April 13, 2004), Case No. G031774, can be found at these links in PDF and Word formats.

Something's Rotten . . . Ambiguous Language May Create Coverage for Decay Caused by Fungus

Mary Ann Jordan bought a 70-year old home in Santa Monica, and insured it under a homeowners policy purchased from Allstate. The policy contained language excluding coverage for damage caused by “. . . rust or other corrosion, mold, [or] wet or dry rot” and excluding damage caused by "collapse". The exclusion for "collapse," however, was subject to an exception: in a separate section of the policy entitled "additional coverage," the insurer agreed that certain collapses would be covered, if it was

“a sudden and accidental direct physical loss caused by one or more of the following: [¶] . . . [¶] b) hidden decay of the building structure; [¶] [and] . . . f) defective methods or materials used in construction, repair, remodeling or renovation, but only if the collapse occurs in the course of such construction, repair, remodeling or renovation.”

Jordan was advised that her home was sustaining damage as the result of a water-borne fungus called Meruliporia Incrassata (Poria), which was causing flooring to give way and a window to fall out of the wall of the home. She presented a claim to Allstate, but the insurer rejected it on the ground that the Poria fungus constituted a form of excluded "wet or dry rot." Jordan filed suit against Allstate. The trial court concluded that Allstate was correct and granted summary judgment in the insurer's favor.

The Court of Appeal has reversed and returned the case for further proceedings and possible trial. The court initially agreed with Allstate's contention that the usual and ordinary meaning of "dry rot" would encompass decay of the kind caused by the Poria fungus. However, the court also concludes that the coverage otherwise excluded may be given back by the "additional coverage" for collapses caused by "hidden decay." The court notes the existence of a contradiction between the exclusion of dry rot and the extension of coverage for damage cause by decay:

[W]e might reconcile this contradiction in one of two ways. First, we could conclude that a collapse due to “hidden decay” would be covered, but not if such decay was caused by “wet or dry rot”; or, second, we could conclude that coverage for a collapse due to “hidden decay” was provided, but non-collapse damage caused by “wet or dry rot” was excluded. Each of these constructions of the policy language is reasonable. The first is consistent with Allstate’s contention that the exclusion for “wet or dry rot” precludes coverage irrespective of whether there is a basis for coverage under the exception to the collapse exclusion. On the other hand, the second interpretation is advanced by Jordan and supports her claim for coverage under the collapse provisions of the “additional coverage” section of the policy. Thus, when read in the context of the entire policy, particularly the provision granting coverage for a collapse caused by “hidden decay,” the effect and application of the exclusion for a loss caused by wet or dry rot is not at all clear.

Finding that the interpretation proposed by Jordan was more consistent with the "objectively reasonable expectations" of the insured, the court resolves the contradiction in her favor. The court finds, however, that there is a factual question whether a true "collapse" has occurred in Jordan's case. For purposes of resolving that issue, it has ordered the case returned to the trial court for further proceedings.

The decision in Jordan v. Allstate Insurance Company (March 1, 2004), Case No. B164112, can be found at these links in PDF and Word formats.

Reaching One's Limit -- Spouse's Claim for "Loss of Consortium" Does Not Trigger Additional Limits of Uninsured Motorist Coverage

Revisiting an issue that arises with surprising frequency, the Court of Appeal has ruled that a spouse's claim for "loss of consortium" does not increase the limits available for Uninsured Motorist Coverage.*

Maria Medina was injured when she was struck by an uninsured motorist. She and her husband Francisco Ayala had their own policy of automobile insurance, which extended Uninsured Motorist coverage with limits of $15,000 "per person" and $30,000 "per accident". In addition to the $15,000 payable directly as a result of Medina's physical injuries, Ayala contended that he should be able to claim the additional $15,000 for the harm that those physical injuries did to the spouses' marital relationship.** The trial court and the Court of Appeal both agreed that only the single "per person" limit of coverage was available, because all of Ayala's damages were traceable to the single injury sustained by Medina.

The policy language at issue was essentially identical to language that has been held to result in only a single limit of coverage in a line of earlier cases. The Court also rejects Ayala's claim that the language of Insurance Code section 11580.2, which regulates uninsured motorist coverage, is open to the interpretation that loss of consortium is separable from the single bodily injury that causes it.

The decision in Mercury Insurance Co. v. Ayala (March 17, 2004), Case No. B165390, can be found at these links in PDF and Word formats.

"No Show" = No Coverage: Denial of Claim is Justified by Failure to Participate in Examination Under Oath

Citing the recent case of California Fair Plan v. Superior Court, previously discussed here, the Second District Court of Appeal has reaffirmed that the failure of an insured to undergo an examination under oath as called for by the terms of the insurance policy is sufficient grounds for the insurer to deny the claim altogether.

Sergio Brizuela purchased a market, and insured the business with CalFarm Insurance Company. A month after the close of escrow, the market was destroyed in a fire. Brizuela submitted a claim on his policy and he, his wife and an employee all spoke with the insurer's investigator. As the investigation proceeded, CalFarm concluded that the claim was potentially fraudulent. It hired counsel and requested that Brizuela appear for an examination under oath, to which Calfarm was entitled under the language of the policy. Over the course of several months, Brizuela failed to appear for a series of scheduled examination dates. CalFarm eventually denied the claim. Brizuela sued for breach of contract and "bad faith." The trial court granted summary judgment in CalFarm's favor, and the Court of Appeal has now affirmed that judgment.

Among other claims, Brizuela argued that he should have been permitted to require CalFarm to provide him copies of his earlier statements as a pre-condition his participation in the examination. The Court of Appeal did not agree:

Brizuela complained at length about the alleged unreasonableness of CalFarm’s conduct without ever agreeing to submit to examination on any date. CalFarm’s refusal to provide Brizuela with copies of previously-recorded statements was not justification for his actions. It was not unreasonable for CalFarm to reject Brizuela’s request for copies of his previously recorded statement. There is no authority for the proposition that an insurer is under a legal obligation to provide an insured with a copy of the insured’s previously recorded statements taken before a civil action has been filed and discovery commenced. If an insured seeks the statement to refresh a recollection at an examination under oath, the insurer’s refusal to provide the statement may affect the insured’s ability to provide information at the examination. But that normally is the insurer’s choice. Even if there might be circumstances when it might be unfair or unreasonable for an insurer to demand an examination under oath without complying with an insured’s request for an earlier recorded statement, here, Brizuela has given no reason why CalFarm’s refusal to provide the statement was unfair or unreasonable.

The Court of Appeal concludes, among other things, that the requirement for the insured to participate in examination(s) under oath is essentially unconditional: the insurer does not need to demonstrate that it has been "prejudiced" by the insured's non-cooperation as a prerequisite to denying the claim. Moreover, the availability of the same information through depositions or other procedures in a later lawsuit does not relieve the insured of the obligation to undergo the requested examination.

The decision in Brizuela v. CalFarm Insurance Company (March 3, 2004), Case No. B160875, can be found at these links in PDF and Word formats.

"Upon" Reflection: California Supreme Court Interprets Jewelers Block Coverage

By a vote of 4 to 3, what journalists would call a "sharply divided" California Supreme Court has concluded that the use of the phrase “actually in or upon such vehicle at the time of the theft” in an exception to an exclusion in a jewelers block insurance policy was ambiguous in the context of a theft that occurred while the person transporting jewelry was not in or touching his automobile, but was immediately next to it trying to diagnose a mechanical problem. Because of the ambiguity, the Court majority concludes that the loss is covered. The dissenters complain that this result puts California at odds with the majority of other jurisdictions, which interpret the provision to require that the victim be inside of or at least physically in contact with the vehicle at the time of the theft.

The Court summarizes the facts that gave rise to the claim:

The facts in this case are simple and essentially undisputed. On February 17, 2000, Brian Callahan, a jewelry salesman, left his home with two “hard cloth garment bags” containing jewelry (some of which belonged to E.M.M.I. Inc., a manufacturer and marketer of jewelry) in the trunk of his vehicle. Shortly after driving away from his home, he heard a clanking noise emanating from the rear of the vehicle. Callahan stopped on the side of the road to investigate the source of the noise, got out of the car and closed the car door but left the engine running. He walked to the rear of the vehicle and, as he crouched down to visually inspect the exhaust pipes, he felt someone pass quickly by him. When he looked up, he saw an individual get into his car and drive away. Callahan was no more than approximately two feet from the car during the entire time he was outside the vehicle until the time of the theft. The police subsequently found the vehicle, but the jewelry was missing.

Under the long-established terms of a typical "jewelers block" insurance policy, a theft that occurs while the jewelry is being transported is covered by the policy only if the courier from whom the jewels are taken is "actually in or upon" the vehicle. The insurer in this case denied the claim, because Callahan had exited the automobile and was not literally "in" it or "upon" it when the thief struck.

In the course of an extensive analysis -- with repeated reference to dictionaries, rules of contractual construction and the long and occasionally obscure history of jewelers block insurance -- the majority concludes that the policy language is ambiguous and operates to defeat the "reasonable expectations" of the insured.

Presented with such an alternative, we do not believe a reasonable insured would construe the exception to the vehicle theft exclusion to mean that the insured must be either inside or on top of the vehicle, or that the term “upon” applies solely to motorcycles. An insured using an automobile would not expect coverage to vanish when engaged in routine and necessary activity such as stepping out of the car to retrieve the jewelry from the backseat or trunk. Had the insurer intended the phrase “or upon” to apply solely to the use of motorcycles or other means of transportations such as ships and trains, it could, and should, have made this intention clear to the insured.

By similar logic, the Court rejects the insurer's argument that a "theft" does not occur unless the jewels are taken by "force or intimidation, . . . not by stealth." As there is no express definition of "theft" in the policy, the Court declined to adopt a restrictive interpretation.

Jewlers block insurance, in California at least, now joins horseshoes and nuclear war as an activity in which "close" is good enough.

The decision, with dissents, in E.M.M.I. Inc v. Zurich American Insurance Company (February 23, 2004), Case No. S109609, can be found at these links in PDF and Word formats.