Key Decisions

January 2013- All Articles

(filed under: Key Decisions | January 16, 2013)

Insurance Claim Not Necessarily Privileged Pre-litigation Conduct

People ex rel. Fire Insurance Exchange v. Anapol
(Cal. Ct. of App., 2d Dist.), filed December 6, 2012

KEY FACTS

Fire Insurance Exchange and Mid-Century Insurance Company uncovered what they believed to be a massive insurance fraud ring engaged in the submission of false and/or inflated claims for smoke and ash damage arising from several Southern California wildfires. Fire and Mid-Century brought an action on behalf of the People of the State of California against several members of the alleged ring, including two attorneys who submitted the purportedly false insurance claims on behalf of policyholders. Fire and Mid-Century alleged both the submission of false claims and the use of cappers to obtain insureds willing to pursue such claims.

The attorneys brought motions to strike the complaint under California Code of Civil Procedure section 425.16, the “anti-SLAPP” statute. They argued that their pursuit of insurance claims and acts in obtaining clients constituted pre-litigation conduct protected by their First Amendment right to petition. The trial court denied the motions.

HOLDING & REASONING

The Court of Appeal affirmed. It ruled that the acts of seeking clients and of submitting insurance claims were not necessarily pre-litigation conduct and therefore not necessarily protected. It also ruled that under proper circumstances, submission of an insurance claim could constitute protected pre-litigation conduct.

To help illustrate its ruling, the court addressed the defendant attorneys’ argument that submission of an insurance claim is a necessary prerequisite to litigation. Although the court agreed that this was true, it also noted that “submission of an insurance claim is a necessary prerequisite to obtaining performance under the insurance contract.”

As a result, “it cannot be determined, by the mere fact of submission of a claim, that the claim has been submitted merely for adjusting or if it has been submitted in anticipation of litigation contemplated in good faith and under serious consideration.” The court helped to clarify, saying:

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 who 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.

We hasten to add, however, that such circumstances are the exception, rather than the rule.

The court then turned to the evidence the defendant attorneys submitted in support of their assertion that the claims they presented were in anticipation of litigation. It found the evidence lacking. There was no evidence that any claim was submitted after informal negotiations with the insurance company had proven unfruitful or the insurance company had said it would not pay such a claim.

ANALYSIS

This case is the most recent among a line of cases suggesting that conduct is not a protected “right to petition” merely because the person making a demand for performance under a contract anticipates filing a subsequent lawsuit if the other person rejects the demand for performance under a contract. Two earlier cases had concluded that an insurer was not entitled to file an “anti-SLAPP” motion in an action alleging improper claims handling, even though the insurer anticipated that it would be sued if it did not pay the claim. Those cases include Gallimore v. State Farm Fire & Cas. Co., 102 Cal.App.4th 1388 (2002); Beach v. Harco Nat. Ins. Co., 110 Cal.App.4th 82 (2003).

This case applies this same principle to insureds and their representatives. The insured and/or his/her representatives may not avoid liability for allegedly fraudulent conduct by arguing that the insured’s contractual obligation to submit a claim before suing on the policy is “protected” as pre-litigation conduct, any more than the insurer can avoid liability for improper claims handling by anticipating a subsequent suit on the policy.

Toilet Overflow Is Excluded

Cardio Diagnostic Imaging, Inc. v. Farmers Insurance Exchange
(Cal. Ct. of App., 2d Dist.), filed December 18, 2012

KEY FACTS

Water overflowed from a toilet in a business suite on the third floor of the building in which Cardio Diagnostic Imaging rented a suite on the first floor. The water overflowed because of a combination of two factors. First, a defect in the toilet caused the water to run unchecked. Second, there was a blockage in the drainpipe that prevented the water from simply running down the drain. The water from the third floor suite flooded Cardio’s suite, causing extensive damage to the floors and equipment.

At the time, Cardio was insured under a Farmers Insurance Exchange property insurance policy. The policy covered accidental direct physical losses to Cardio’s property, except as excluded. Among other things, the policy excluded damages caused directly or indirectly by “Water that backs up or overflows from a sewer, drain or sump.”

Based on this exclusion, Farmers declined Cardio’s claim.

In the ensuing lawsuit, the trial court concluded that the loss was excluded and that Farmers had properly declined coverage. It granted Farmers’ motion for summary judgment.

HOLDING & REASONING

The Court of Appeal affirmed, finding the exclusion unambiguous.

The court rejected Cardio’s argument that the exclusion applied to large-scale disasters, not to situations nor blockages that prevent water from flowing down an inside drain. While that may have been the intention, it still applied to other overflows because there was nothing in the language of exclusion that restricts its application.

The court also rejected Cardio’s argument that the phrase “backs up or overflows from” means that water must come out of the sewer or drain, and does not include water unable to proceed down an interior drain.

Cardio also argued that the exclusion did not apply because the water overflowed from a toilet rather than a drain. But the court noted that “The toilet was attached to a drain.” If there “is a blockage in the pipes or sewer system, the pipes leading to the drain will be filled and any additional water will overflow into, and eventually out of, the toilet.”

ANALYSIS

For many years, most property insurance policies have excluded various types of water damage, such as floods, ground water, and water that backs up from sewers and drains. There have been inconsistent results in cases throughout the country as to whether the exclusion for “back ups” barred coverage when water could not enter the drain, as opposed to water coming back out of a drain. The language in the policy as quoted in this case is not identical to the language of other policy forms. The lesson of the case is not that overflowing plumbing appliances are always excluded, but rather that it is important to refer to the specific language in the context of the facts of the specific loss.

 

Additional Insured Not Subject To Cross-Insured Exclusion

Gemini Insurance Company v. Delos Insurance Company
(Cal. Ct. of App., 2d Dist.), filed December 6, 2012

KEY FACTS

Delos Insurance Company insured a restaurant called Bobby’s Focsle and its owners. Bobby’s landlord was Loch Lomond Marina. Loch Lomond was named as an additional insured under Bobby’s policy.

A fire at Bobby’s caused damage to Loch Lomond’s property, and to another business, both of which had property insurance with Gemini Insurance Company.

Gemini paid its insureds and then filed a subrogation action against Bobby’s. Delos paid Gemini’s claim with respect to the other business, but refused to pay Gemini’s claim with respect to Loch Lomond. It asserted that because Loch Lomond was an additional insured under Bobby’s policy, an exclusion for claims between insureds applied and barred coverage.

In the ensuing coverage litigation, the trial court found that the additional insured endorsement did not make Loch Lomond an “insured” such that the interinsured exclusion applied.

HOLDING & REASONING

The Court of Appeal affirmed.

The court focused on the endorsement that named Loch Lomond as an additional insured. It was entitled “Additional Insured – Managers or Lessors of Premises” and read in part: “Who is an Insured (section II) is amended to include as an insured the person or organization shown in the Schedule but only with respect to such person or organization’s liability which both (1) arises out of the ownership, maintenance or use of that part of the premises leased to you and shown in the Schedule, and (2) occurs on that part of the premises leased to you and shown in the Schedule, and (3) results from and by reason of your act or omission or an act or omission of your agent or employee in the course of your operations at that part of the premises leased to you and shown in the Schedule.”

Under that endorsement, Loch Lomond is an additional insured only when and where it faces liability arising from Bobby’s acts, undertaken in the course of Bobby’s operations on the leased premises. It is designed to protect parties who are not named insureds from exposure to vicarious liability for acts of the named insured.

ANALYSIS

The court’s decision is consistent with the purpose of policy exclusions for claims between insureds. Such provisions exist to avoid issues of collusion that may arise when insureds, such as family members or business partners, sue each other. In such actions, one insured may benefit from having its insurer pay another insured. As such, the insured against whom a claim is made may have no incentive to let the adversary system develop the truth. In contrast, when one is an insured only in the circumstances of a landlord who is sued vicariously, those issues do not exist.

Defendant Recovers Cost Of Notice To Potential Class Members

In Re Insurance Installment Fee Cases
(Cal. Ct. of App., 4th Dist.), filed December 13, 2012

KEY FACTS

A number of State Farm policyholders who paid for their insurance in monthly installments brought a class action against State Farm. They alleged that by collecting a fee to cover the cost of processing the monthly payments, State Farm was charging an additional premium that was not specified on the policy’s declaration page as required by the Insurance Code. They alleged that by doing this, State Farm breached the contract and engaged in unfair business practices.

The policyholders sought to discover the identities of other potential class members. They did this by propounding discovery asking State Farm for the identities of other policyholders who made monthly premium payments. State Farm objected to this discovery as it called for the disclosure of confidential information about its other policyholders.

The trial court ordered State Farm to send letters to its policyholders who made monthly premium payments advising of the litigation and that in the absence of an objection, their identities would be revealed.

The trial court sustained State Farm’s demurrer. It found, among other things, that the fee for making installment payments was not an illegal premium. It therefore dismissed the case against State Farm.

As the prevailing party, State Farm filed a cost bill in which it sought $713,463.72 that it incurred providing notice to putative class members that the plaintiffs sought discovery of their contact information. The trial plaintiffs moved to tax costs. The trial court granted the motion and disallowed the cost item.
HOLDING & REASONING

The Court of Appeal affirmed the dismissal of the action, but reversed the order taxing costs.

The court found that the fee was not an illegal premium and that the policy did not authorize policyholders to pay their premiums piecemeal. Thus, State Farm had not breached any contract provision nor engaged in unfair business practices.

As to the cost of notice, the court found that this was a cost that the trial court and law had compelled State Farm to incur. In particular, State Farm could not have disclosed contact information on policyholders without first giving them notice and the opportunity to object. As such, the cost of giving notice was something State Farm was entitled to recover.

ANALYSIS

Forcing a defendant to notify potential class members where a plaintiff is seeking contact information can represent a powerful weapon to a class action plaintiff. First, giving notice can be an expensive process. Second, it can lead to many additional lawsuits. However, as this case demonstrates, forcing a defendant to give notice entails a degree of risk to a plaintiff in the event the defendant prevails.

Corporate Suspension Defense Must Be Pled

V & P Trading Co., Inc. v. United Charter, LLC
(Cal. Ct. of App., 3d Dist.), filed December 19, 2012

KEY FACTS

V & P Trading sued United Charter for damage to property that was being stored in United Charter’s premises. United Charter answered the complaint and, as an affirmative defense, asserted that the statute of limitations had run. It did not, however, assert that V & P’s corporate status had been suspended for failure to pay taxes.

V & P moved to compel answers to discovery. United Charter opposed it based on the fact that, at the time, V & P’s corporate status – and right to sue – had been suspended. The trial court denied the motion and sanctioned V & P for having made it.

United Charter moved for summary judgment based on the statute of limitations, which had run after V & P had filed suit, but while its status had been suspended. V & P opposed this based on the fact that United Charter had not pled that its status had been suspended. The trial court granted the motion.

HOLDING & REASONING

The Court of Appeal affirmed the motion for summary judgment, but reversed the sanction award.

A plea in abatement, such as suspension of corporate status, must be pled or it is waived. United Charter could not rely on the fact V & P’s corporate status had been suspended. The trial court erred in denying V & P’s motion to compel and in sanctioning it.

As to summary judgment, United Charter had pled the statute of limitations as a defense. Although it was dependent on V & P’s inability to sue, that was not waived for statute of limitations purposes.

ANALYSIS

This case demonstrates the importance of paying one’s taxes in a timely manner. It also demonstrates the importance of properly pleading affirmative defenses.
Other Cases Of Interest

Collecting On A Judgment With An Appeal Pending Is Risky

Cussler v. Crusader Entertainment, LLC
(Cal. Ct. of App., 2d Dist.), filed December 21, 2012

Clive Cussler, a renowned fiction writer, and Crusader Entertainment entered into a contract for purchase and production of motion pictures based on Cussler’s stories and characters. The parties ran into difficulties and protracted and complicated litigation ensued.

After a trial and assorted post-trial motions, the trial court entered a judgment. The judgment provided that Cussler “shall take nothing” from Crusader. It further provided that Crusader shall recover $5 million in damages, prejudgment interest and, as “the prevailing party,” costs of suit.

Both Cussler and Crusader appealed the judgment on numerous grounds.

While that appeal was pending, the trial court entered an order awarding Crusader $13,949,131 in attorney fees as the prevailing party. Cussler appealed the fee order.

Cussler was unable to raise sufficient funds to post a bond to stay enforcement of the judgment. As a result, Crusader collected $20,907,200.14 from Cussler.

The Court of Appeal reversed the trial court’s judgment with respect to the $5 million award to Crusader and the trial court’s finding that Crusader was the prevailing party. It otherwise affirmed the judgment and remanded the case so that the trial court could determine whether there was a prevailing party and, if so, whether that party was Cussler or Crusader.

The Court of Appeal also reversed the fee order as Crusader was no longer the prevailing party on its contract claim and was no longer entitled to contractual attorney’s fees.

Cussler filed a motion for an order of restitution and interest. In this motion, Cussler sought to recover the $20,907,200.14 Crusader collected, plus interest at a rate of 10%.

The trial court granted the restitution order and ordered Crusader to pay interest at the rate of 7%. Crusader appealed the interest award.

The trial court affirmed the interest award.

Where one party collects money by executing on a judgment that is later overturned on appeal, the other party may seek restitution of the collected funds upon remand. The court may, in its discretion, award interest on the amount of restitution. In general, interest is awarded unless it would be inequitable under the circumstances.

The California Constitution provides that the legal rate of prejudgment interest is 7% and the legal rate of postjudgment interest is 10%. Thus, an award of 7% was not arbitrary or capricious. While it is true that 7% was substantially more than one might have gotten by depositing the money in a bank or buying treasury bills, that did not make it excessive, particularly in view of the fact that Crusader did not provide evidence of what it did with the funds it had collected from Cussler or what interest rate it received on them.

In ruling that 7% was not excessive, the court noted that if Crusader had been the prevailing party, it would have sought interest at the statutory or constitutional rates.

In short, “[w]hen Crusader collected $20 million pending an appeal, it assumed ‘the risk that it may have to repay the award, along with interest,’ if Cussler prevailed on the appeal.”

Court Erred With Jury Instructions In Pregnancy Discrimination Case

Veronese v. Lucasfilm Ltd.
(Cal. Ct. of App., 1st Dist.), filed December 10, 2012

KEY FACTS

Lucasfilm is a privately held film and entertainment company founded by George Lucas. It has a campus in the Presidio in San Francisco and two properties in Marin County, Skywalker Ranch and Big Rock Ranch. Lucas lives in San Anselmo, at a property that was frequently referred to below as “Parkway” or the estate; it is a large complex with as many as nine houses on it. Sarita Patel was the estate manager. Patel generally supervised six employees, though if there were construction or other projects at the estate, she would oversee as many as 50 people.

Lucasfilm sought an Executive Assistant for Patel. The position was one that was very demanding and involved significant caretaking responsibilities relative to the Lucas family. Patel considered it important that her assistant be the “right fit,” meaning that she looked at the assistant relationship as “almost like a marriage. . . . [Y]ou spend a lot of time with this person working on . . . intimate details, a lot of chaos. [¶] So the fit is how you get along. Do you bug each other? How you brainstorm together. How do you solve problems.”

Veronese was interviewed for the position and there was a great deal of communications by way of email. Patel had some personal doubts that Veronese would be a “good fit.” Lucasfilm decided to hire Veronese as a consultant for a term of one month to assist Patel and to use that month to assess whether she was a “good fit” for the position.

Before Veronese’s start date, Veronese called Patel to tell her she was pregnant and that she had been feeling nauseous and sick. She asked if she could come in late on the day she was to start.

Patel responded that Veronese’s health was most important, that the job was not going anywhere and that the whole thing should be delayed until Veronese was up to it. Later, Veronese’s start date was deferred because of concerns about how certain chemical fumes on the premises might affect her and her pregnancy and because Lucasfilm wanted the fumes to be dissipated.

After further communications and as a result of one particular email from Veronese, Patel concluded that Veronese was not a “good fit.” Patel became concerned about candor, integrity, flexibility, and the potential for misunderstanding or miscommunication. Perhaps most importantly, Patel perceived selfishness in Veronese’s email, that she was thinking about herself rather than providing support. In short, the email raised “red flags” to Patel, including that Veronese felt she was “entitle[d],” that she was not service-oriented, and that she had unreasonable expectations.

As a result, the entire idea of hiring Veronese was abandoned.

Veronese responded by suing for pregnancy discrimination. She alleged six causes of action.

Following 11 days of testimony, five causes of action were submitted to the jury in a special verdict form. After three days of deliberation, the jury found for Veronese on three claims – pregnancy discrimination, failure to prevent pregnancy discrimination, and wrongful termination in violation of public policy. The jury found for Lucasfilm on the other two claims – retaliation and failure to accommodate disability.

Lucasfilm appealed based on what it claimed was error in the instructions the judge gave to the jury.

HOLDING & REASONING

The Court of Appeal reversed. It found that the judge made errors in instructing the jury and that these errors were prejudicial to Lucasfilm.

The trial court erred in failing to give Lucasfilm’s proposed special instruction that: “You may not find that Lucasfilm discriminated or retaliated against Julie Gilman Veronese based upon a belief that Lucasfilm made a wrong or unfair decision. Likewise, you cannot find liability for discrimination or retaliation if you find that Lucasfilm made an error in business judgment. Instead, Lucasfilm can only be liable to Julie Gilman Veronese if the decisions made were motivated by discrimination or retaliation related to her being pregnant.”

Numerous California cases contain language similar to what Lucasfilm proposed. A plaintiff in a discrimination case must show discrimination, not just that the employer’s decision was wrong, mistaken, or unwise. An employer may fire an employee for a good reason, a bad reason, a reason based on erroneous facts, or for no reason at all, as long as its action is not for a discriminatory reason.

The trial court erred in giving Veronese’s proposed instruction that said, “A potential hazard to a fetus or an unborn child is not a defense to pregnancy discrimination.”

While such an instruction was an accurate statement of the law, there was no issue as to whether the decision not to hire Veronese was because of any concerns about her fetus. Thus, the instruction could be interpreted as telling the jury that if anyone at Lucasfilm was even concerned about Veronese’s fetus, it was per se illegal regardless of its impact or lack thereof on the hiring decision.

The trial court also erred in failing to instruct the jury on the difference between a “failure to hire” claim and a “wrongful termination” claim.

ANALYSIS

One interesting aspect of this case was that Veronese was no ordinary plaintiff. She married Joseph Alioto Veronese, the son of San Francisco attorney (and former supervisor) Angela Alioto and the grandson of the late attorney (and San Francisco Mayor) Joseph L. Alioto. Mr. Veronese is himself an attorney, and Ms. Alioto and he represented Veronese throughout the case. The decision offers a good discussion of pregnancy discrimination law.

State Whistleblowing Protection Does Not Apply To Municipal Laws

Edgerly v. City of Oakland
(Cal. Ct. of App., 1st Dist.), filed December 12, 2012

Deborah Edgerly was the former city administrator of the City of Oakland. Ron Dellums, who was then the mayor, fired her.

Edgerly sued the City for wrongful termination. She asserted she was fired in retaliation for her refusal to violate the City’s charter, municipal code, and civil service rules and resolutions and that her firing was in violation of the statewide whistleblower statute set forth in Labor Code section 1102.5(c).

The trial court sustained a demurrer to two of Edgerly’s three causes of action. It then granted a motion for summary judgment on the third cause of action.

The Court of Appeal affirmed. It framed the primary question before it as a question of first impression under California law: Should alleged violations of a charter city’s municipal law be deemed violations of state law for purposes of section 1102.5(c)? Based on principles of statutory construction and public policy considerations, the court held that they should not.