Declarations and Exclusions

Real Estate Broker Does Not Owe Duty to Buyer's Child in Failing to Disclose "Toxic Mold" Condition

California requires by statute that sellers of residential real estate -- and their broker representatives -- must disclose to prospective buyers all those known or reasonably discoverable conditions of the property that might “materially affect the value or desirability” of the premises. The Fourth District Court of Appeal has held that this duty to disclose runs exclusively in favor of the actual buyer and does not benefit third parties, including members of the buyer’s family.

Maria Castaneda purchased a home; the seller was represented by Coldwell Banker Residential Brokerage Company Inc. Ms. Castaneda intended to live in the home with her minor child, Marcos Sawyer Salazar. After purchasing the home and moving in, Ms. Salazar discovered that the home contained a previously undisclosed “dangerous level of mycotoxins and mold spores.” Young Marcos Salazar is alleged to have developed asthma as a result of exposure to these conditions.

The ensuing lawsuit was filed on behalf of both Ms. Castaneda and the minor Salazar and against both the seller and the seller’s broker, Coldwell Banker, urging various theories arising from the (allegedly intentional) non-disclosure of the mold condition. The broker attempted to obtain an order dismissing the claims of Salazar, arguing that he was not the actual buyer of the home, not an intended beneficiary of the statutory disclosures, and not one to whom it had owed any duty in the transaction. The trial court refused to dismiss, but the Court of Appeal has held that the minor Salazar is not entitled to sue.

The appellate decision relies primarily on the explicit language of the relevant statute (italics added):

In accordance with the clear and unambiguous language of [Civil Code] section 2079, the inspection and disclosure duties of residential real estate brokers and their agents apply exclusively to prospective buyers, and not to other persons who are not parties to the real estate transaction. Only a transferee, that is, the ultimate purchaser, can recover from a broker or agent for breach of these duties. (§ 1102.13.) Where, as here, ‘“a statute enumerates the persons or things to be affected by its provisions, there is an implied exclusion of others . . . [and] the court is without power to supply an omission.”’ [Citation omitted.] Because Marcos was not a prospective buyer or a transferee, Coldwell Banker did not owe him a duty of care.

On other, common law theories, the appellate court is equally convinced that Marcos was not entitled to pursue a claim against the broker. In particular, as to claims of negligent or intentional misrepresentation, the court notes that an essential element of such claims is the claimant’s reliance on the allegedly false statements: as a minor, Marcos did not “rely” on anything, but simply moved into the house that happened to have been purchased by his mother.

The court’s decision in Coldwell Banker Residential Brokerage Company v. Superior Court (March 29, 2004), Case No. D042574, 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.

Contact! Two New Decisions Consider Jurisdiction of Over Out-of-State Defendants

Unless you are an attorney -- and quite possibly even if you are -- there is nothing particularly riveting about "long-arm" statutes, which address the extent to which the courts of one state can exercise jurisdiction over out-of-state litigants without violating the Constitution. We last reported on this topic here. Two new Court of Appeal decisions address the extent of "contacts" with California -- or "purposeful availment" of some benefit within California -- that will support jurisdiction over non-California-based businesses.

♣ In an action against a group of Las Vegas casinos, the Court of Appeal reversed a trial court dismissing the case for lack of jurisdiction over the defendants. The casinos advertised within California via billboards, print ads and broadcast advertisements, and utilized the services of an independent California company for the purpose of attracting a limited number of "high-end" customers from California. The appellate court found a sufficient connection between the hotels' California-focused activities and the claims asserted by the plaintiff:

Snowney’s alleged causes of action for violation of the unfair competition law, breach of contract, unjust enrichment, and false advertising all arise from or are substantially connected to the Hotel Defendants’ efforts to solicit California patrons. The false advertising count arises directly from the defendants’ local advertising in California in that the complaint, liberally construed [citation omitted], alleges that the advertising was false or misleading.

The counts for violation of the unfair competition law also arise directly from the Hotel Defendants’ forum contacts to the extent the counts are based on a violation of the false advertising law [citation omitted]. To the extent those counts are based on alleged unfair or fraudulent business practices apart from false advertising in California, we conclude that the counts are substantially connected to the defendants’ California contacts. Many of the California residents who visited the hotels presumably did so as a result of the defendants’ advertising in California, or made their reservations via electronic or telephonic communications that were purposefully directed at California residents. We conclude that those California contacts are substantially connected to causes of action that challenge an alleged mandatory surcharge imposed on all hotel guests. We need not detect a causal connection between the defendants’ California contacts and the alleged charging of a nightly energy surcharge without prior notice. [Citation omitted.] Rather, we conclude, in light of the nature and intensity of the contacts, that the contacts are sufficiently related to the alleged causes of action to justify the exercise of personal jurisdiction. Our conclusion also applies to the breach of contract and unjust enrichment counts, which are based on essentially the same alleged wrongdoing.

♣ In another case, the Court of Appeal has concluded that there is a sufficient basis for jurisdiction in California for purposes of a suit against a Nebraska-based telemarketing firm arising from transactions in which "a California resident initiates a phone call to buy a product, reaches a telemarketer who handles the order, the telemarketer then initiates a sale of a separate product and allegedly makes misrepresentations during the sales pitch for the separate product."

Because the original transaction began with the California resident calling out of the state, the usual rules of jurisdiction would not permit suit in California if the claim arose solely from that call. The appellate court reasons, however, that the nature of the allegedly unlawful transaction -- in which the Nebraska telemarketer initiates an "upsell" transaction, offering additional products and services unrelated to those that the California customer had called to order -- was the equivalent of a new marketing call in to California, thus providing the necessary contact to support the exercise of jurisdiction.

The court's decision in the casino case, Snowney v. Harrah's Entertainment, Inc. (March 11, 2004), Case No. B164118, can be found at these links in PDF and Word formats. The telemarketing case, West Corporation v. Superior Court (March 17, 2004), Case No. D042633, 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.