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The most important court decisions of the Summer

Winter 2019

Duty To Defend Found For Losses Arising From Loss-Of-Use Property Damages

Thee Sombrero, Inc. v. Scottsdale Insurance Co.
(Ct. App. Dist. 4), filed October 25, 2018

Thee Sombrero operated a nightclub called El Sombrero in Colton, California, subject to a conditional use permit. The city approved the club’s floorplan, which only allowed for one main entrance equipped with a metal detector. Sombrero hired Crime Enforcement Services (“CES”) to guard this entrance and provide general security services. After a fatal shooting at Sombrero, the city modified the permit so the property could only operate as a private banquet hall. Sombrero later discovered that the shooter gained entry through an unauthorized and unsecured VIP entrance that CES guards had converted from a storage area. Sombrero sued CES, for breach of contract and negligence. Sombrero alleged that the CES guards’ negligence led to the shooting, the permit modification, and the loss of ability to use the property as a nightclub. This loss of use caused reduced property value and income, approximating $923,000. After obtaining a default judgment against CES, Sombrero sued Scottsdale Insurance Company, CES’s insurer, for indemnification. Sombrero argued that the loss of use of their property as a nightclub constituted “‘loss of use of tangible property that is not physically injured’” which is expressly covered as property damage under CES’s policy. The trial court rejected this argument, holding that Sombrero’s losses are “strictly economic” and do not constitute tangible property damages covered under the policy. The trial court relied on Giddings v. Industrial Indemnity Co. 112 Cal.App.3d 213, 219 (1980) stating, “where these intangible economic losses provide ‘a measure of damages to physical property…’” they may be covered. Economic losses are damages that inherently result from property damage; they are alternative measures of property damage. In fact, loss-of-use damages are economic losses. Only losses that are exclusively economic, absent property damage or loss of use, are not covered. On appeal, Sombrero argued that it suffered a loss of use of tangible property. The Court of Appeal reversed and ruled in Sombrero’s favor, holding that the claim for the diminution in the value, although measured economically, was still a claim for the loss of use of tangible property. Here, although the use permit itself may not be tangible property, the loss of the ability to operate the property as a night club could cause tangible property damage and physically by materially affecting its use. The court also found that the reasonable expectation as to the meaning of “loss of use” includes the loss of a significant use of the premises, not only the total loss of all possible uses.


Loss Of Consortium Damages Are Subject To A Single Per Person Limit

Jones v. IDS Property Casualty Ins. Co
(Ct. App. 3rd Dist.), filed on September 25, 2018

Mark Alan Jones was seriously injured in a traffic accident involving Janet and Richard Buhler. Jones’ wife alleged that her claim for loss of consortium was separate from her husband’s claim for bodily injury. After obtaining a judgment for damages and loss of consortium against the Buhlers, the Joneses sought declaratory relief against the Buhlers and their insurer, IDS Property Casualty Insurance Company. The Joneses argued that since loss of consortium is an independent tort and not a derivative claim, it is subject to a separate per person limit. The Joneses asserted that the policy must have clearly specified that loss of consortium damages would be aggregated with the damages of the injured spouse. The Buhlers’ policy reads: “the bodily injury liability limits for each person is the maximum we will pay as damages for bodily injury, including damages for care and loss of service, to one person per occurrence.” Historically, California courts have analyzed whether a spouse’s loss of consortium claim is subject to the same per person limit as the physically injured spouse, and almost unanimously concluded that policy language is sufficient to aggregate the two claims. Here, the court found that the policy language was clear and unambiguous. Although loss of consortium is an independent tort, a number of cases held that the limit depends on the insurance policy language. This meant all damages, including for care and loss of services, arising out of a bodily injury sustained by one person as the result of any one occurrence. Courts have found that “loss of services” covered loss of consortium, because it arises out of the bodily injury sustained by the injured spouse, and that loss of consortium actually “includes loss of services as one of its elements.” Additionally, the bodily injury sustained by one person includes all injury and damages “sustained by others as a consequence” of the bodily injury. Here, the court ultimately ruled in IDS’ favor, holding that the Jones’ claims were aggregated and that IDS was authorized to pay $250,000 (the per person limit) instead of the $500,000 (the per occurrence limit).


Dynamex's ABC Test Is Limited To Wage And Hour Claims

Jesus Cuitlahuac Garcia v. Border Transportation Group, LLC et al.
(Ct. App. 4th Dist., Div. 1), filed on October 22, 2018

Taxicab driver Jesus Cuitlahuac Garcia filed a wage and hour lawsuit against Border Transportation Group (BTG). After his personal vehicle’s engine failed, Garcia leased a vehicle from BTG for $65 per 12-hour shift. After being charged an additional $65 for returning the vehicle one hour late, Garcia stopped working for BTG. Garcia alleged that BTG prevented him from renewing his lease while BTG stated that Garcia elected not to renew. Garcia sued for wrongful termination, unpaid wages, failure to pay minimum wage, failure to pay overtime with some claims (not all) based on Industrial Welfare Commission (IWC) wage-orders. BTG moved for summary judgment, arguing that all eight causes of action failed because Garcia was an independent contractor and not an employee since BTG did not exercise control over their drivers. Garcia “remained free to set [his] hours, use the car for personal errands . . . hold other jobs, advertise services in [his] own name, etc.” The trial court granted BTG’s motion for summary judgment after determining that Garcia was an independent contractor and not an employee, under the standard articulated in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations, 48 Cal.3d 341, 350 (1989) (“[t]he principal test of an employment relationship is whether the person to whom the service is rendered has the right to control the manner and means of accomplishing the result desired . . . .”). Garcia appealed. While the case was on appeal, the Supreme Court articulated the ABC test in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018) (shifting the burden onto the employer to show whether or not an employee is an independent contractor). The individual is assumed to be an employee unless the employer can prove otherwise. Following Dynamex, the Court of Appeal reversed the initial judgment stating that the “summary adjudication was erroneous as to the wage order claims but proper as to the non-wage-order claims.” The court found that BTG did not prove that Garcia was an independent contractor according to custom. Garcia clarified that the ABC test, as articulated in Dynamex, is limited to wage and hour claims, while the Borello factor test continues to apply in non-wage-hour claims.


An Insurer Cannot Deny A Claim For Late Notice Without Showing Prejudice

Marty Lat et al. v. Farmers New World Life Insurance Company
(Ct. App. 2d, Div. 1), filed on October 16, 2018

Marty and Mickel Lat filed a lawsuit against Farmers New World Insurance Company following the death of their mother, Maria Carada. Carada held a Farmers flexible premium universal life insurance policy and named her children (the Lats) as beneficiaries. The policy included a “Waiver of Deduction Rider” under which Farmers agreed to waive the insurance cost while Carada was disabled if she provided Farmers with notice and proof of her disability. Carada failed to timely notify Farmers that she had cancer. Upon Carada’s failure to pay, Farmers declared her policy lapsed. The Lats’ claim was denied. Farmers was unaware of Carada’s disability when it declared the policy had lapsed. The Lats argued that because Carada was totally disabled, the missing premium payments (which prompted the lapse) should have been waived. Further, the Lats asserted that the notice of disability requirement included in the Rider should be excused based on California’s “notice-prejudice” rule. The court agreed. California’s “notice-prejudice” rule mandates that an insurer may not deny an insured’s claim under standard occurrence policies based on lack of timely notice or proof of claim unless it can show actual prejudice from the delay. Prejudice cannot be assumed by delay alone; rather the insurer must establish that due to such prejudice, it lost something that would have changed in handling the claim. The notice requirement “serves to protect insurers from prejudice,” not “‘to shield them from their contractual obligations’ through ‘a technical escape-hatch.’” Carrington Estate Planning v. Reliance Standard, 289 F.3d 644 (9th Cir. 2002). Under the notice-prejudice rule, Farmers could not deny Carada’s policy benefits unless Farmers suffered actual prejudice from the delayed notice of her disability. Here, Farmers failed to show actual prejudice because its ability to investigate the insured’s disability was in no way compromised by late notice. Although Farmers was justified in declaring the policy lapsed while unaware of Carada’s disability, its continued refusal to honor its contractual obligations to Carada (and her beneficiaries) after notified was not supported by sufficient prejudice. Therefore, the Lats were entitled to the policy benefits.


Insurer's Denial Or Delay Not “Bad Faith” Unless Unreasonable

Melissa Case v. State Farm Mutual Automobile Insurance Co., Inc.
(Ct. App. Dist. 2), filed November 21, 2018, ordered published on December 18, 2018

State Farm issued restaurant employee Melissa Case an auto policy, carrying uninsured-underinsured motorist (UM) coverage of $100,000 per person and $300,000 per accident. While driving to the restaurant from an off-site catering event, Case was injured in a car accident involving an uninsured driver. She applied for workers’ compensation benefits through her employer’s policy and UM policy benefits under her State Farm auto policy. After Case submitted a demand for UM policy benefits in 2014, State Farm delayed its response to verify a “final lien” relating to medical expenses incurred as workers’ compensation benefits. When State Farm failed to pay UM benefits, Case requested arbitration. In May 2015, Case sued State Farm for breach of contract and bad faith, alleging that although she verified the final workers’ compensation lien, State Farm unreasonably delayed or withheld benefits and never undertook arbitration. In September 2015, Case submitted information to State Farm showing that she had exhausted the possibility of receiving additional payments through the workers’ compensation system. A few months later, the parties settled for UM benefits of $35,000. State Farm then sought summary judgment on Case’s “bad faith” claims. The court granted the motion and entered judgment in favor of State Farm. Case appealed. State Farm contended that it had justifiable reasons for delaying policy benefits while it investigated Case’s eligibility for workers’ compensation under the loss-payable-reduction policy provision. Although Case had stopped seeking workers’ compensation benefits, she still had the option to seek benefits at a later date. Here, the Court of Appeal affirmed summary judgment in State Farm’s favor, finding no triable issues. The Court reasoned that in order to establish “bad faith,” a policyholder must demonstrate the insurer’s conduct was more egregious than merely an incorrect denial of policy benefits. The question of whether denial or delay in paying policy benefits was reasonable (and thus not in bad faith) depends on when State Farm knew the determination of Case’s eligibility for workers’ compensation benefits -- not the determination itself. Therefore, State Farm’s application of the loss payable-reduction provision was reasonable and did not constitute bad faith claims handling.


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