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The most important court decisions of the month
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Lay-Person Definition For “Malice” Should Be Used When Interpreting “Vandalism Or Malicious Mischief” Exclusion
Ong v. Fire Insurance Exchange
(Ct. App. 2d Dist., Div. 1), filed April 3, 2015

Plaintiff Hung Van Ong bought an insured property from his brother, Eugene Ong. After the tenants moved out, the gas and electricity were turned off. Nearly two years later, Eugene submitted a claim to Fire Insurance Exchange for a fire loss that an expert noted, “may have been initiated as a result of an uncontrolled warming fire started by an unauthorized inhabitant.” Fire Insurance Exchange denied the claim because the policy did not cover “Vandalism or Malicious Mischief, breaking of glass and safety glazing materials if the dwelling has been vacant for more than 30 consecutive days just before the loss.” Hung filed a complaint for breach of contract and insurance bad faith. Fire Insurance Exchange moved for summary adjudication. The trial court granted the motion, relying on the “malice in law” definition and stating that the fire was an “obvious hazard to the dwelling without justification, excuse or mitigating circumstances.” The Court of Appeal reversed, finding that the terms “malice” and “vandalism” should be applied in their “ordinary and popular sense.” While “a vacancy exclusion ‘serves to protect the insurer against the increased risks of loss that occur when premises are vacant for an extended period of time’ such an exclusion does not protect against all increased property risks but only those within its terms.” Recognition that the fire was probably started for legitimate cooking or warming reasons, not for purposes of destruction, meant that it was not malicious. The Court of Appeal emphasized that, Fire Insurance Exchange “as the party drafting the policy had the opportunity to include property risks other than vandalism in its vacancy exclusion.”

Broad Release Language Extended To Grandmother’s Alleged Negligent Supervision
Cline v. Homuth
(Ct. App. 3rd Dist.), filed February 27, 2015

Plaintiff Ronald Cline was injured when his motorcycle collided with a teenager driving with a provisional license. Cline settled with the driver’s parents for their $100,000 policy limit. The release included “any other person, corporation, association, or partnership responsible in any manner or degree.” Cline turned around and sued the driver’s grandmother (who was in the car with him at the time of the collision) for negligent supervision. After a bench trial, the trial court found that the release applied to the grandmother because it “unambiguously expresses a mutual intent to benefit a class of persons of which [Homuth] is a member.” The Court of Appeal affirmed. The Court found that the release language was not ambiguous and any reading as to the geographical location was only to describe the incident and did not affect its coverage. The Court also rejected Cline’s argument that the release was ambiguous because Grandma Homuth was not named directly. Since Cline knew she was in the car when the accident happened, there was no evidence that he considered her a potential defendant at the time the release was signed and there was never a communicated intent to exclude her from the release. The Court also rejected the notion that a claimed disparity in the settlement and the amount of damage would somehow “trump the broad language of the release.” Finally, the Court stated that the “undisclosed subjective intent of Cline and his attorney is insufficient to establish that the parties intended that Homuth be excused from the release.”

Malicious Prosecution Improper Where Complainant Could Not Show Favorable Termination
Pasternack v. McCullough
(Ct. App. 4th Dist., Div. 2), filed April 17, 2015

Plaintiff Lawrence Pasternack bought a luxury custom home from developer, Vision West Investments (owned by Curtis Dunham and David McFarland), for $7,065,000. Easton Building Corporation (owned by Dunham) built the home. At the close of escrow, $7 million was paid, with $65,000 held in escrow pending completion of an additional bedroom. Pasternack began complaining about defects in the home. Also during this time, the gas bill was over $3,500 because there was an uncapped gas line that resulted in a gas leak. Meanwhile, the escrow company would not release the remaining $65,000. Attorney Thomas McCullough, representing the developers and builder, filed a lawsuit for breach of the purchase contract and account stated. Pasternack cross-complained for breach of the purchase and sale agreement and rescission. Pasternack then filed a malicious prosecution against Easton, Dunham, and their attorney McCullough. Pasternack claimed that the collection claim for the unpaid gas bill was for the sole purpose of extracting a general release of the construction defect claims. The defendants demurred and filed a special motion to strike. The trial court dismissed the malicious prosecution complaint. Pasternack only appealed the order striking his malicious prosecution action against the attorneys. The Court of Appeal affirmed. It emphasized, “the weight of authority is firmly against allowing a party, such as Pasternack, to commence a malicious prosecution action against any party, based on a severed and favorably adjudicated claim, while the party pursues other claims in the underlying action.”


Restraints On Professional Practice Violate California Business And Professions Code Section 16600
Golden v. Cal. Emergency Physicians Med. Group
(U.S. Ct. App. 9th Cir) filed April 8, 2015

Dr. Donald Golden sued California Emergency Physicians Medical Group (CEP) for race discrimination. Before trial, the parties orally agreed to settle the case. In front of the magistrate judge, Dr. Golden agreed to dismiss his suit and waive his rights to future employment with CEP. Dr. Golden later refused to sign the agreement and moved to set it aside. The District Court referred the matter back to the magistrate to recommend whether it should be set aside. The magistrate determined that Dr. Golden should be compelled to sign the agreement. The District Court adopted the magistrate’s recommendation. But Dr. Golden still refused to sign the agreement and filed a notice of appeal. The Ninth Circuit dismissed the appeal for lack of jurisdiction. After several rounds of motion practice, the District Court ultimately ordered the settlement be enforced, and Dr. Golden filed an appeal. Dr. Golden’s appeal was limited to the issue of whether the no-employment provision of the agreement violated California Business and Professions Code section 16600 which said, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” After a lengthy analysis, the Ninth Circuit noted that California courts “have not clearly indicated the boundaries of section 16600’s stark prohibition but have nevertheless intimated that they extend to a considerable breadth.” The Ninth Circuit had “no reason to believe that the State has drawn section 16600 simply to prohibit ‘covenants not to compete’ and not also other contractual restraints on professional practice.” The Ninth Circuit directed the District Court to conduct further fact-finding to decide whether the “no-employment provisions constitutes a restraint of a substantial character to Dr. Golden’s medical practice.”

Coverage Properly Denied For Claims Not Disclosed On Insurance Application
Crown Capital Securities L.P. v. Endurance American Specialty Insurance Co.
(Ct. App. 2d Dist., Div. 5), filed April 10, 2015

DBSI, Inc. and its various subsidiaries filed for bankruptcy. A bankruptcy examiner issued a final report that linked DBSI to a Ponzi scheme. Soon after, Crown Capital Securities’ customers accused Crown Capital of fraudulently recommending DBSI. When Crown Capital applied for professional liability insurance with Endurance, it disclosed one of the customers’ claims, but not the facts that would support other potential claims that could arise from the same situation. When other Crown Capital customers started filing claims, Endurance “refused to defend the securities firm against undisclosed claims because the policy’s application included an exclusion for nondisclosure of facts that might lead to a claim.” The trial court entered judgment on Endurance’s behalf, finding that there was no coverage under the Policy’s Application Exclusion. The Court of Appeal affirmed. The Court rejected Crown Capital’s argument that the Application Exclusion was “ambiguous as it relates to the circumstances of this case and both parties’ reasonable expectations of the policy.” It instead emphasized that Crown Capital was aware that DBSI had declared bankruptcy and that it had allegedly been operating a Ponzi scheme, and should have disclosed this on the insurance application. Crown Capital’s awareness of potential claims based on the Ponzi scheme and Crown Capital’s customers’ investments in DBSI investments brought those claims within the Application Exclusion “regardless of which such claims must be based.” Therefore, the claims were excluded.



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