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Filing an Insurance Claim can be Protected Conduct

You have been probably wondering whether the filing of an insurance claim constitutes prelitigation activity that is protected under the anti-SLAPP statute, right? Well, if you were, you now have an answer: it is a resounding “maybe.”

In People ex rel. Fire Insurance Exchange v. Anapol, 211 Cal. App. 4th 809 (2012), the California Court of Appeals confirmed that, in certain circumstances, the filing of an insurance claim constitutes prelitigation activity that is protected under the anti-SLAPP statute. While such circumstances are described as the exception, not the rule, they are designed to protect insureds whose legitimate claims for insurance benefits are improperly denied by an insurance company.

The issue ended up before the Court of Appeals after Fire Insurance Exchange and Mid-Century Insurance Company (collectively, “Farmers”) filed a qui tam action after allegedly uncovering an insurance fraud ring engaged in filing false and inflated claims for smoke and ash damages following several Southern California wildfires. Two attorneys were accused of filing false insurance claims on behalf of Farmers’ insureds as part of their role in the fraud ring. The attorneys filed anti-SLAPP motions to strike, asserting that their pursuit of the insurance claims constitute prelitigation conduct protected by their First Amendment right to petition. The trial court denied those motions, and the attorneys sought review of the orders.

In denying the attorneys’ anti-SLAPP motions, the trial court specifically relied upon People ex rel. 20th Century Insurance Co. v. Building Permit Consultants, Inc., 86 Cal. App. 4th 280 (2000) (hereinafter “BPC”) which held that submission of an insurance claim does not constitute protected conduct under the anti-SLAPP law. On appeal, the Court of Appeals addressed “whether BPC completely bars all insurance claims from ever constituting prelitigation conduct.” While the Court held that BPC did not preclude the possibility that the filing of an insurance claim could be protected prelitigation conduct, the alleged acts of the two attorneys were not within the realm of protection.

The acts that the attorneys claimed as protected speech included the filing of allegedly false and fraudulent damage reports and repair estimates on behalf of clients. With their motions to strike, the attorneys filed declarations asserting that the majority of the damage reports were prepared in anticipation of litigation. The Court noted that while the filing of a claim is a necessary prerequisite to litigation, it is also a necessary prerequisite to obtaining performance under an insurance contact. The Court then explained that to grant the filing of a claim anti-SLAPP protection, would require granting anti-SLAPP protection to almost every communication that takes place in a commercial transaction “because human experience alerts us to the possibility that there may be [litigation from] otherwise routine business activity.”

However, while warning that such circumstances are the exception, rather than the rule, the Court explained that in certain circumstances, the filing of an insurance claim would constitute protected speech under anti-SLAPP law.

We can certainly envision circumstances in which an insurance claim is submitted in anticipation of litigation contemplated in good faith and under serious consideration. For example, a claim may be submitted after informal negotiations with the insurance company have proven unfruitful, and the insured has already decided to bring suit on the policy. In those circumstances, submission of the claim would be nothing more than the satisfaction of the statutory prerequisite for a suit. Similarly, an insured that has already been informed that its claim will be denied may submit the claim in the language of a demand letter, threatening suit if the claim is not paid in full. There, too, submission of the claim would qualify as a protected prelitigation statement in furtherance of the right of petition.

Unfortunately for the attorneys who filed the motions to strike under the anti-SLAPP statute, the Court of Appeals ruled that their alleged conduct did not fall within these exceptions, and their declarations were not sufficient to make a prima facie showing that the insurance claims were filed in anticipation of litigation contemplated by the insureds in good faith. Accordingly, while the orders of the trial court were upheld, the door for anti-SLAPP protection for insurance claims was left open by the Court of Appeals.

California Courts Give Effect to the Intent of the Parties to an Insurance Contract

A recent California Court of Appeals decision served as a reminder of the long-standing rule in California that the mutual intent of the parties will always control the interpretation of potentially conflicting provisions in an insurance contract. In its recent decision in Gemini Ins. Co. v. Delos Ins. Co. (Dec. 5, 2012, B239533) __ Cal.App.4th __ [2012 WL 6050774] [Second Dist., Div. Five], the Court of Appeals was faced with the task of interpreting the inter-insured exclusion (i.e., an exclusion for claims between two insureds) in a liability policy as it applied to an additional insured named in the policy when the additional insured’s property has been damaged.

The Facts: A restaurant owner, and tenant to the property, negligently caused a fire which caused damage to property of the landlord. The landlord was an additional insured under the policy at issue, which insured him from liability for acts caused by the restaurant. The policy also contained an exclusion for claims asserted between two insureds. After the fire, the landlord sought relief from the restaurant for damage to his property. On a motion for summary judgment by the landlord’s insurer, the landlord argued that he was not an insured under the policy, and therefore the inter-insured exclusion did not apply. The trial court granted the motion.

Disposition: Affirmed. On appeal, the court addressed the issue as one of contract interpretation. Citing to the long-standing rules of contract interpretation, the court stated:

The rules are well established. In interpreting an insurance policy, we follow the general rules of contract interpretation. We give effect to the mutual intention of the parties, determined, if possible, from the written provisions of the contract. The clear and explicit meaning of those provisions, interpreted in their ordinary and popular sense, controls (Topanga and Victory Partners v. Toghia (2002) 103 Cal.App.4th 775, 779-780. ‘[E]xclusionary clauses are interpreted narrowly, whereas clauses identifying coverage are interpreted broadly.’ (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 406.

The appellate court found that the inter-insured exclusion did not bar recovery by the landlord for damage to his property, but not because the landlord wasn’t an insured under the policy. The court found that the inter-insured exclusion only barred recovery when the landlord (an additional insured) was being charged with liability as a result of the tenant’s (the named insured) negligence in causing the fire at the restaurant, and the landlord sought recovery directly from the tenant. That was not the case. The landlord only sought to recover for the damage to his property; no one sought to hold the landlord liable for the fire. Since the intent of the additional insured provision was to protect the landlord from liability (not limit recovery for damage to property), he would not be considered an additional insured for purposes of his recovering for damage to his own property. The court therefore looked past the literal interpretation of the policy to give effect to the parties’ intent based on a broad reading of the provision identifying coverage.

The court of appeals further found that instances such as this, where a landlord insists on being added as an additional insured under a tenant’s liability policy, are common practice. Thus, clearly, the landlord intended to be added to limit its liability for acts of the tenant, not to limit its recovery for damage to property.

Insurers May Intervene and Assert the Same Rights as Their Insured’s to Contest Both Liability and Damages

Under certain circumstances, an insurer has the right to intervene in a case against its insured to protect its own rights and to avoid harm to the insurer. These circumstances usually involve cases where an insured is either prevented from appearing and defending, or simply chooses not to and a default is taken against the insured. The recent case Western Heritage Insurance Company v. Superior Court, __ Cal. App. 4^th __ (Oct. 11, 2011), addresses the second set of circumstances, and provides an examination of California intervention law and holds that an insurer has the right to intervene in a case and take over in litigation if an insured is not defending the action, and may contest both liability and damages while doing so.

In Western Heritage, the insurer Western Heritage defended its insured and its insured’s employee under a reservation of rights following the employee’s automobile accident during the course of employment. It was revealed that the employee was not participating in her defense and that Western Heritage had filed an answer on her behalf without her participation or consent. As a result, the answer was stricken and a default was entered. Western Heritage therefore filed a complaint in intervention to protect its own interests. The trial court granted the intervention, but ruled that Western Heritage could only dispute damages, not the liability of the employee.

Western Heritage filed a petition for writ of mandate and the court of appeals granted the requested writ relief and held that Western Heritage had “the right to assert, on its own behalf, all defenses that otherwise would be available to the insured parties whether as to liability or damages.” The appellate court explained its reasoning for allowing an insurer to fully defend its own interests:

Indeed, there would be no purpose in allowing an insurer to intervene in order to protect its own interests but then limit the scope of the insurer’s defense to those issues to which its insured, because of the default, is limited to pursuing…. The entire purpose of the intervention is to permit the insurer to pursue its own interests, which necessarily include the litigation of defenses its insured is procedurally barred from pursuing.

Thus, an insurer has the right to intervene in a case when an insured elects to abandon his own defense of claims asserted against the insured, and may assert the same defenses to liability and damages as the insured. With this holding, the court seems to indicate that an insurer retains the right to defend its own interests equal to its insured’s interests when defending its insured. This may serve as a cautionary tale when an insured seeks to assert defenses that are not aligned with the interests of the insurer.

Why Does The Pollution Exclusion in California Insurance Policies Exclude Asbestos Building Contamination But Not Pesticide Building Contamination?

According to a recent California appellate court decision, a contractor’s negligent release of asbestos fibers during the removal of asbestos-containing acoustical spray in a condominium complex is excluded by the pollution exclusion in a homeowner association’s property and liability policy, despite a 2003 California Supreme Court ruling that a contractor’s negligent spraying of pesticide in an apartment complex is not excluded by a similar pollution exclusion in an apartment owner’s policy. The Villa Los Alamos Homeowners Association v. State Farm General Insurance Company, __ Cal. App. 4th __, 2011 WL 3586475 (August 17, 2011). How can that be?

Facts

In 2006 the Villa Los Alamos Homeowners Association (HOA) contracted to have spray-applied acoustical (“popcorn”) ceiling texture in common area ceilings and stairways scraped and removed. During the removal, asbestos fibers were released into the air, common areas, individual units and public areas outside the building. The Bay Area Air Quality Management District (District) cited the contractor and ordered the HOA to clean up the asbestos fibers. The HOA submitted a first party claim to State Farm, its insurance carrier, for approximately $650,000 in cleanup costs. The HOA also sued the contractor. The contractor then cross-complained against the HOA and its management company. The HOA tendered its defense to State Farm.

A pollution exclusion in the first party coverage section of the policy excluded coverage for any loss caused by the “presence, release, discharge or dispersal of pollutants,” while the exclusion pertinent to third party claims removes coverage for injuries arising out of “discharge, seepage, migration, dispersal, spill, release or escape of pollutants.” State Farm denied coverage for both the first party and third party claims, citing the pollution exclusion and faulty workmanship exclusions in the policy.

The HOA sued State Farm for breach of contract, bad faith and declaratory relief. The trial court granted summary adjudication in favor of State Farm on the first party claims based on the pollution exclusion. The HOA dismissed its third party claims, and appealed.

Discussion

In MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635 (2003), the California Supreme Court found that the standard pollution exclusion clause in a comprehensive general liability policy was intended to exclude coverage for injuries resulting from events commonly regarded as “environmental pollution.” The Court rejected a broader, literal interpretation of the clause that would foreclose coverage for any and all injuries arising from harmful substances. So, the Court held that it was unlikely that a reasonable policyholder would think that the activity in question there—namely, the ordinary but negligent spraying of pesticides around an apartment building in order to kill yellow jackets—was an act of pollution.

The HOA argued that MacKinnon applied here, and that the pollution exclusion in the State Farm policy did not cover a single, negligent, localized asbestos release. After reviewing MacKinnon and its progeny, the Villa Los Alamos court agreed that the general principles announced in MacKinnon concerning the pollution exclusion also pertain in the context of a coverage dispute over first party property insurance claims based on analogous pollution exclusion—despite the well-recognized analytical differences between first party property and third party liability policies. But the Villa Los Alamos court otherwise rejected the HOA’s application of MacKinnon to the facts at hand.

Reading the State Farm pollution exclusion in accord with MacKinnon as pertaining to environmental pollution, the Villa Los Alamos court asked this question: Did the accidental release and airborne dissemination of asbestos fibers in this case amount to what is commonly regarded as “environmental” pollution? The court concluded that asbestos is a pollutant as a matter of law, and that it was “released” into the air and areas around the popcorn ceiling texture during the contractor’s scraping and removal. Emphasizing factual differences between a homeowner being able to buy and apply pesticides in a residential setting, and the removal of asbestos containing building materials being highly regulated by a myriad county, state and federal laws, the court rejected the HOA’s analogy of the asbestos removal to a single, ordinary act of negligence. In short, the Villa Los Alamos court concluded that the ordinary layperson would understand the release of asbestos fibers under these circumstances to be “environmental pollution.” Citing American Casualty Co. of Reading, PA. v. Miller, 159 Cal. App. 4th 501, 515-516 (2008), the court explained that

the key point under a MacKinnon analysis is whether the act in question is commonly thought of as environmental pollution. Thus, even if the accident consisted of a one-time negligent release of methylene chloride [as in Miller], the pollution exclusion would preclude coverage because permitting the chemical to be released into a public sewer was an act of environmental pollution. (Ibid.) Miller is persuasive. To establish bright-line rules as to what constitutes “environmental pollution” makes no sense: A one-time event can be a polluting event if it creates “‘impurity, something objectionable and unwanted.’” (MacKinnon, supra, 31 Cal. 4th at p. 654.) To reiterate: The release of asbestos from a product into the air people breathe constitutes a health hazard for which no level of exposure is safe. The work here apparently occurred over several days and resulted in the sufficient release of asbestos fibers into the air to contaminate the building complex and the adjacent outside areas, constituting environmental pollution.

Lesson Learned

There is no “bright-line” rule for when an ordinary layperson will consider a “release” of harmful substances in or around a residential structure to be “environmental pollution” rather than an “ordinary act of negligence.” One can imagine the Villa Los Alamos court just as easily analogizing the release of asbestos fibers from asbestos-containing building materials in a residential building to be an “ordinary act of negligence” on par with pesticide contamination a la MacKinnon rather than “environmental pollution” a la Miller. The clever insurance coverage attorney will start framing and controlling the analogy early on.

California Homeowner’s Insurer Not Required To Pay Extended Repair Limits Until Homeowner Shows Proof of Repair

Under standard homeowner insurance policies the insurer is typically required to pay only the “actual cash value” of a loss—i.e., the fair (depreciated) market value—unless and until the insured actually incurs repair costs in excess of the actual cash value to repair the home. In Kelly Minich, et al. v. Allstate Insurance Company, __ Cal.App.4^th __, 2011 Cal.App. LEXIS 270 (March 11, 2011) (Minich), a California appellate court recently rejected a homeowner’s creative interpretation of its Allstate homeowner’s insurance policy to get extended repair or replacement cost policy limits without regard to actually repairing or replacing the fire-damaged home.

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.

The Minichs sue Allstate for breach of contract and bad faith, claiming that Allstate should have paid them the $64,920 immediately after the fire. The Minichs contend that Insurance Code §2051 and §2051.5 2 require that an insurer pay the “policy limit” of a homeowner’s policy whenever the house is destroyed, irrespective of whether the insured rebuilds the house, and that the “policy limit” includes the $64,920 provided for in the endorsement.

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.

New ED CA Decision is a Feast of First-Party and Third-Party Insurance Coverage and Bad Faith Principles

Every now and then a court decision comes along that is a virtual one-stop shop for basic insurance coverage and bad faith principles—a primer for newbie insurance attorneys and a refresher for seasoned litigators. Chief Judge Anthony Ishii’s recent decision granting in part and denying in part an insurer’s motion for summary judgment on a farm-owners insurance policy is one. Ted Gaylord, et al. v. Nationwide Mutual Insurance Company, et al., 2011 U.S. Dist. LEXIS 21736 (Eastern District of California, March 4, 2011). The Gaylord decision also sounds a cautionary note to policyholder attorneys to be mindful that first-party and third-party claims in a single action may be subject to different limitations periods.

The Facts

Gaylord owns and operates a livestock operation, raising his own cattle and raising cattle for others. In June 2008 some of the cattle die suddenly. By September and October 2008 cattle begin dying at an alarming rate. Gaylord suspects feed poisoning. Autopsies and feed testing confirm that the cattle are dying from liver failure caused by toxic plants in the alfalfa feed. There is no known cure, so Gaylord gets permission from the Department of Agriculture to sell the cattle off for early slaughter—but at a financial loss for Gaylord and the other cattle owners.

Nationwide issued a farm-owners insurance policy to Gaylord in March 2008. One part insures against physical loss to covered property (first-party); one part insures against third-party liability claims. Gaylord says he moved his farm-owners insurance from Fireman’s Fund to Nationwide because his long-trusted insurance agent told him that Nationwide had better coverage, including coverage for cattle loss from poisoned feed. But Gaylord’s agent says he told Gaylord that a “custom feeding of livestock” endorsement was necessary to cover cattle loss from poisoned feed, and that Gaylord declined it because it was too expensive.

Gaylord makes a first-party claim with Nationwide for the cattle loss on October 2, 2008. Nationwide denies the first-party claim on October 3, 2008, and advises Gaylord that he has until May 21, 2009, to file a legal action under the one-year contractual limitations clause. It isn’t clear how Nationwide comes up with the May 2009 deadline. Nationwide continues to investigate the third-party claim, and denies it in April 2009.

A third-party sues Gaylord in September 2009 for the loss of its cattle in Gaylord’s care. Gaylord tenders his defense to Nationwide in October 2009. Nationwide seeks the advice of coverage counsel, and denies the tender in January 2010. Gaylord sues Nationwide in March 2010 for breach of contract, bad faith and declaratory relief on both his first-party and third-party claims. Nationwide moves for summary judgment.

FRCP 56(c) Summary Judgment Standards

All too often attorneys moving for summary judgment cut and paste points and authorities from older cases, parroting the standards for summary judgment under FRCP 56(c) in archaic and stilted prose. Judge Ishii articulates the standards in clean, non-legalese prose. Cut and paste this. Not that.

Insurance Contract Interpretation

Ditto. Cut and paste this. Not that

The One-Year Contractual Limitations Clause Bars Gaylord’s First-Party Claim

The policy has a one-year limitations clause giving the insured one year to file suit for the denial of a first-party claim. The period commences when damage becomes sufficiently “appreciable” to put the insured on notice to make a claim. The district court concludes that Gaylord knew by October 2, 2008, when Gaylord first reported the cattle deaths to Nationwide, that his loss was “appreciable,” and that Nationwide’s October 3, 2009, denial is “unequivocal.”

The district court also finds that Nationwide’s (standard) offer in its denial letter to consider any new or different information that the insured might furnish does not render the denial equivocal, and does not continue the tolling. Accordingly, the limitations period was tolled for one day, and Garylord had until October 3, 2009, to timely file suit on his first-party claim. The district court grants summary judgment on Gaylord’s first-party claim because Gaylord waited until March 2010 to file suit.

The Conflicting Agent and Insured Declarations Create a Genuine Dispute over Third-Party Coverage

The district court assumes for purposes of the motion that a contractual liability exclusion and a custom feeding exclusion in the policy encompass the third-party liability claims against Gaylord. But livestock operations endorsement (LOE) modifying the liability coverage provides that “In consideration of the premium charged for this endorsement, the liability coverage of this policy applies to your livestock.” Gaylord and Nationwide each offer conflicting interpretations of the LOE, each of which the district court finds to be reasonable—hence ambiguous. Standard rules of insurance contract interpretation would resolve the ambiguity in favor of Gaylord. But…

Gaylord says the agent told him that poisoned cattle were covered. The agent says he told Gaylord that a more expensive endorsement was necessary, and Gaylord declined to pay for it. The district court concludes that the trier of fact will have to resolve this conflicting extrinsic evidence in order for the district court to interpret the policy. If Gaylord is believed, he wins. If the agent is believed, Gaylord loses. So, the district court denies Nationwide’s motion for summary judgment on Gaylord’s third-party liability claim.

A “Genuine Dispute” over Coverage Defeats Bad Faith

When an insurer’s denial of a claim is unreasonable or without proper cause, the insured may be able to recover tort damages. The district court point out, however, that “bad faith” implies conscious unfair dealing, and mere negligence or mistaken judgment is insufficient. Nieto v. Blue Shield of Cal. Life & Health Ins. Co., 181 Cal.App.4th 60, 86 (2010); Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., 90 Cal.App.4th 335, 345(2001). When there is a “genuine issue” or “genuine dispute” as to the “insurer’s liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute.” McCoy v. Progressive W. Ins. Co., 171 Cal.App.4th 785, 793 (2009).

The Ninth Circuit apples the genuine dispute doctrine to duty to defend disputes. See Lunsford v. American Guar. & Liab. Ins. Co., 18 F.3d 653, 654, 656 (9th Cir. 1994). In Lunsford the insurer refused to defend a counterclaim against the insured for abuse of process. The Ninth Circuit found the insurance policy ambiguous and resolved the ambiguity in favor of the insureds, thus mandating that the insurer cover the defense costs. Despite finding a breach of the duty to defend, the Ninth Circuit held, “Because [the insurer] investigated the insureds’ claim and based its refusal to defend on that information and a reasonable construction of the policy, [the insurer] did not act in bad faith, and we conclude that [the insurer] was entitled to summary judgment on the implied covenant of good faith and fair dealing claim.” Id. at 656.

After reciting California insurance bad faith standards in a way that presages the insured is going to come up short, the district court quickly dispatches Gaylord’s first-party bad faith claim based on the contractual limitations period. The district court then concludes that there is no material dispute that Nationwide conducted a reasonable investigation into the third-party claim, sought the advice of outside coverage counsel, and that its interpretation of the contractual liability and custom feeding exclusions under the facts and circumstances is not unreasonable. So, the district court also grants summary judgment on Gaylord’s third-party bad faith claim, including the punitive damages claim.

The take-away—beside some great cut-and-paste points and authorities—is that policyholder attorneys need to be mindful when analyzing limitations periods that the insured may need to file suit early to protect a first-party claim, even when the third-party claim may not be ripe.