Keilholtz v. Hertel
Filed 11/15/13 Keilholtz v. Hertel CA4/1
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
COURT
OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION
ONE
STATE
OF CALIFORNIA
ROBERT KEILHOLTZ et al.,
Plaintiffs and Appellants,
v.
ROGER EDWIN HERTEL,
Defendant and Respondent.
D061198
(Super. Ct.
No.
37-2009-00051748-CU-NP-NC)
ORDER MODIFYING OPINION
[No Change in Judgment]
THE COURT:
It is
ordered that the opinion filed herein on October 31, 2013, be modified
as follows:
1. On page 4, the first full sentence is
modified to read:
The homeowners
whose unit had been damaged, Richard and Ronnie Abrams, sued the Association,
individual members of the Board, and the property management company for causes
of action related to the failure to maintain "all risk" coverage,
including breach of fiduciary duty, fraud, negligent misrepresentation,
suppression of fact, constructive fraud, conspiracy, and violation of Civil
Code section 1365, which imposes certain duties on common interest associations
with respect to notifying members regarding insurance policies maintained by
the association.
2. On page 8, in the second paragraph, the first
sentence is modified to read:
On July 25, 2003, the Abramses suffered
a substantial water leak in their unit that caused damage to their condominium
unit, as well as to common areas.
There is no
change in the judgment.
HUFFMAN, Acting P. J.
Copies
to: All parties
Filed 10/31/13 Keilholtz v. Hertel CA4/1 (unmodified
version)
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
COURT
OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION
ONE
STATE
OF CALIFORNIA
ROBERT KEILHOLTZ et al.,
Plaintiffs and Appellants,
v.
ROGER EDWIN HERTEL,
Defendant and Respondent.
D061198
(Super. Ct.
No.
37-2009-00051748-CU-NP-NC)
APPEAL from a judgment of the Superior
Court of San
Diego County,
Robert P. Dalquist, Judge. Affirmed.
George
McGill for Plaintiffs and Appellants.
Tharpe
& Howell, Christopher Sherrill Maile and Eric B. Kunkel for Defendant and
Respondent.
I.
INTRODUCTION
Plaintiffs Robert Keilholtz et al.
(plaintiffs)
title="">[1] appeal a judgment entered in favor of
defendant Roger Edwin Hertel after the trial court granted Hertel's motion for
summary judgment. Plaintiffs, all of
whom are homeowners of individual condominium units in the Las Brisas
condominium complex, a mutual benefit condominium development, filed suit
against Hertel seeking damages for breach of professional negligence, fraud,
and/or negligent misrepresentation.
Hertel was the insurance agent for
the nonprofit mutual benefit corporation, comprised of the homeowners (the
Association), for a period of time. The
Association maintained an insurance policy through Truck Insurance Exchange
(Truck) that protected against risks to both the common areas of the
development as well as risks to the individual condominium units. This type of policy is known as an "all
risk" policy.
In May 2003, some members of the
Association's Board asked Hertel how the Association could decrease its
insurance costs. Hertel suggested that
the Association could change its policy from an "all risk" policy to
one that covered only the common areas of the development, and not the
individual units. This type of policy is
known as a "bare walls" policy.
After this discussion, Hertel
initiated a request with Truck to change the Association's insurance coverage
from "all risk" to "bare walls." The parties dispute the circumstances under
which this change request was initiated.
There is no dispute, however, that Hertel sent the change request form
to an employee of the Association's property management company for signature,
and that it was that employee, and not any member of the Association's Board,
who signed the form authorizing the change in coverage. After receiving the form, the insurance
company implemented the change in coverage.
Plaintiffs maintain that they did not know that the change had been
made. Within weeks of the policy change
from "all risk" to "bare walls," one of the units in the
complex suffered water damage.
Just over a month after the property damage
occurred, the Association held a meeting at which the membership discussed the
benefits and drawbacks of amending the Association's governing documents to
change a provision of the Association's Covenants, Conditions &
Restrictions (CC&Rs) which, according to various statements made by some of
those who were deposed in this case, required the Association to maintain an
"all risk" policy. Hertel
attended that meeting and did not mention that a change in the Association's
policy from "all risk" to "bare walls" had already been
effectuated.
In the meantime, the Association
filed a claim with Truck for the water damage to the unit in the complex. The claim was eventually denied on the ground
that the policy in effect at the time of the property damage did not cover
losses to the homeowners' individual units.
The homeowners whose unit had been damaged sued the Association,
individual members of the Board, and the property management company for causes
of action related to the failure to maintain "all risk" coverage,
including breach of fiduciary duty, fraud, negligent misrepresentation,
suppression of fact, constructive fraud, conspiracy, and violation of Civil
Code section 1365, which imposes certain duties on common interest associations
with respect to notifying members regarding insurance policies maintained by
the association. The action eventually
settled, and, as part of the settlement, the Association agreed to pay the
homeowners' attorney fees related to the action in an amount to be determined
by the court. In order to cover the
attorney fees that the court ultimately awarded, the Association imposed a
special assessment on the remaining individual homeowners in the amount of
$8,500 per unit.
title="">[2] In their action against Hertel, the
individual homeowners sought to recover this special assessment from Hertel
under theories of professional negligence, fraud, and/or negligent
misrepresentation.
Hertel
moved for summary judgment, or, in the alternative, summary adjudication,
arguing, among other things, that he could not be liable to plaintiffs for
professional negligence because he owed no duty to the individual
plaintiffs. Specifically, Hertel
maintained that his client was the Association, not the individual plaintiffs,
and that he was not in privity with the individual plaintiffs and therefore,
owed no duty to them. Hertel further
argued that the lack of any duty to the individual homeowners eliminated the
possibility that they could recover against him on their negligent misrepresentation
claim. Finally, Hertel maintained that
the evidence demonstrated that some of the plaintiffs had learned of the
coverage change around the time of the full Association meeting in August and
took no action as a result, so they could not have justifiably relied on
anything he said to them at that meeting.
According to Hertel, the fact that plaintiffs did nothing after learning
of the change in insurance coverage made it impossible for them to prevail on
their claims for fraud and/or negligent misrepresentation.
The trial
court agreed with Hertel that he owed no duty to plaintiffs, and concluded that
this eliminated the possibility that plaintiffs could prevail on their
professional negligence and negligent misrepresentation claims. The court also determined that plaintiffs'
fraud claim failed because plaintiffs had not relied on statements that Hertel
made at the August meeting, and thus, as a matter of law, they had suffered no
damages as a result of his statements.
The trial court granted summary judgment in Hertel's favor.
We conclude that although Hertel
may have owed a duty to the individual homeowners to prevent the kind of damage
suffered by the Abramses, i.e., an uninsured property loss due to the
elimination, without notice, of insurance coverage for their individual units,
this duty does not extend so far as to require him to use due care to prevent
the kind of damage that the plaintiffs in this case allege they have
suffered. Because we conclude that the
duty that Hertel owes to the individual homeowners is limited to a duty to use
due care with respect to protecting their insurable interests, and that the
harm alleged in this action is not harm to plaintiffs' insurable interests, we
affirm the judgment in favor of Hertel as to the professional negligence cause
of action.
We also
affirm the judgment in favor of Hertel with respect to the claims for fraud and
negligent misrepresentation. Because
these claims are based on Hertel's conduct at a meeting that occurred
had already suffered a loss, and the only damages that plaintiffs claim result
from the loss sustained by that unit and the subsequent litigation arising out
of that loss, plaintiffs cannot establish that they were damaged by Hertel's
failure to inform the homeowners at that meeting about the change in the
Association's insurance coverage. We
therefore affirm the judgment in Hertel's favor with respect to the fraud and
negligent misrepresentation claims.
II.
FACTUAL AND
PROCEDURAL BACKGROUND
A.
Hertel is
an insurance agent appointed by Truck to sell and offer insurance services
related to policies issued by Truck.
Hertel serviced policies that the Association purchased from Truck
between 1993 and May 2008, with the exception of a period of time in 1996 and
1997.
Under the
Association's CC&Rs, the board of directors (the Board) was authorized to
hire a property manager to assist the Board in managing the Association and the
La Brisas property. Between 2000 and
2004, William Brooks, an employee of the Eugene Burger Management Corporation
(EBMC), served as the property manager for the Association. One aspect of Brooks's duties as the property
manager "was to deal with matters pertaining to the Association's insurance
coverage." Brooks "was the
person who dealt with H[ertel] regarding the Association's insurance
coverage."
In March
2003, Truck issued an insurance policy to the Association. That policy was a "CONDOMINIUM
PREMIER" policy, which provided for "all risk" coverage,
including "condominium unit coverage." A specific endorsement for "UNIT
COVERAGE" explained that the policy covered the individual units in the
Las Brisas condominium development.
Hertel attended a meeting of the
Association's Board on May 19, 2003.
According to Hertel, members of the Board expressed concern about the
rising costs of the Association's insurance premiums. Hertel suggested modifying the Association's
policy to cover only "bare walls" as opposed to "all risk." He explained that such a change would reduce
the premium. Hertel indicated that the
CC&Rs might have to be amended to allow for such a change.
What happened next is the subject
of much dispute. Hertel contends that in
June 2003, Board member Seymour Phillips called Hertel and asked him to prepare
a request to change the Association's policy from "all risk" to
"bare walls." Phillips denied
that this phone call occurred. Brooks,
the property manager, stated in a declaration that the Board president called
Brooks and directed him to implement the change in the policy to "bare
walls" coverage.
What is not in dispute is that at
some point after May 19, Hertel sent a policy change request form to Brooks
indicating a change in the Association's coverage from "all risk" to
the reduced coverage for "bare walls." Brooks signed the form and returned it to
Hertel, who submitted it to Truck. The
change altered the March 2003 policy to the reduced "bare walls"
coverage, retroactive to the date on which the policy went into effect. Plaintiffs maintain that they were not informed
that this change had been made.
On July 25, 2003, condominium
owners Richard and Ronnie Abrams suffered a substantial water leak in their
unit that caused damage to their condominium unit, as well as to common
areas. The Association submitted a claim
for damages under its policy with Truck.
Truck paid the portion of the claim for damage to the common areas, but
denied the portion of the claim relating the interior of the Abramses' unit, on
the ground that the policy provided only "bare walls" coverage.
On August 23, 2003, the Association
held its annual meeting. The homeowners
were still unaware that the Association's insurance coverage had been changed
from "all risk" to "bare walls." Hertel was at the meeting and gave a
presentation regarding the Association's insurance coverage, including a
discussion of the benefits to the Association of reducing their coverage from
"all risk" to "bare walls."
Hertel did not mention that the Association's insurance coverage had
already been reduced from "all risk" to "bare walls," even
when he was specifically asked whether any change to the Association's coverage
had been made. Apparently, just prior to
the meeting, Brooks had informed Hertel that the Association's CC&Rs had
not been amended to allow for "bare walls" insurance coverage.
reduction in insurance coverage to the general membership that night.
Two days later, Hertel spoke with
Brooks and told him how much it would cost to change the Association's
insurance coverage back to "all risk." On September 10, Hertel sent Brooks a written
bid for changing the Association's policy back to "all risk"
coverage. Brooks met with the Board on
September 15. At that meeting, Brooks
informed the Board members that a change from "all risk" coverage to
"bare walls" coverage had been implemented in June 2003.
Because the change request
initiated and implemented by Hertel and Brooks from an "all risk"
policy to a "bare walls" policy had been implemented in contravention
of the requirements of the Association's CC&Rs, on May 14, 2004, the Board
voted to procure an "all risk" policy so that the Association's
insurance would be in compliance with the CC&Rs. Hertel prepared a policy change request form
to procure "all risk" coverage for the Association, which was
effective as of May 13, 2004. The Board
also sent a letter to the Association membership soliciting a vote to amend the
CC&Rs to allow for the Association to maintain only a "bare
walls" policy. In the meantime, the
Abramses retained counsel to represent them with respect to the water damage to
their unit. In November 2003, the
Abramses' attorneys sent a demand letter to the Association asking for damages
in the amount of approximately $135,000 for remediation and construction
costs. In July 2004, the Abramses'
attorneys sent a second demand letter asking for approximately $170,000,
including attorney fees. The Board
apparently did not agree to pay the Abramses the amount of money that they were
seeking. The Abramses proceeded to file
a lawsuit against EBMC, the Association and some individual Board members in
March 2005.
The Abrams litigation settled in
May 2007. Pursuant to one term of the
settlement, which was approved by the Board, the Association agreed to pay any
amount in excess of $70,000 that the court might award on a motion for attorney
fees and costs.
title="">[5] The trial court ultimately awarded the
Abramses approximately $365,000 in attorney fees and costs, and entered
judgment for that amount in their favor and against the Association.
In order to pay the judgment, the
Association imposed a special assessment of $8,500 per unit.
B.
Plaintiffs
filed their original complaint in 2009.
After various demurrers and motions to strike, plaintiffs ultimately
filed the operative complaint, a third amended complaint (TAC), in November
2010.
Hertel
moved for summary judgment, or, in the alternative, summary adjudication. Plaintiffs opposed the motion.
The trial
court concluded that Hertel did not owe plaintiffs a duty of care, and that, as
a matter of law, plaintiffs had not relied on Hertel's statements at the
meeting and had suffered no damages as a result of his statements. The court determined that plaintiffs thus
could not prevail on their claims for professional negligence, negligent
misrepresentation, or fraud. The trial
court granted Hertel's motion for summary judgment, and entered judgment in
favor of Hertel. Plaintiffs moved for a
new trial, but the court denied the motion.
Plaintiffs thereafter filed a timely notice of appeal.
III.
DISCUSSION
Plaintiffs
contend that the trial court erred in granting summary judgment in favor of
Hertel because, they maintain, the trial court was incorrect in concluding that
Hertel did not owe them a duty of care, as a matter of law, and there remained
triable issues of fact with respect to all three of their claims against
Hertel.
A.
A moving party is entitled to
summary judgment when the party establishes that it is entitled to the entry of
judgment as a matter of law. (Code Civ.
Proc., § 437c, subd. (c).) A defendant
may make this showing by demonstrating that the plaintiff cannot establish one
or more elements of all of his causes of action, or that the defendant has a
complete defense to each cause of action.
(Towns v. Davidson (2007) 147
Cal.App.4th 461, 466.)
"An issue of fact can only be
created by a conflict of evidence. It is not created by 'speculation,
conjecture, imagination or guess work.'
[Citation.] Further, an issue of
fact is not raised by 'cryptic, broadly phrased, and conclusory assertions'
[citation], or mere possibilities [citation].
'Thus, while the court in determining a motion for summary judgment does
not "try" the case, the court is bound to consider the competency of
the evidence presented.'
[Citation.]" (
231 Cal.App.3d 190, 196–197.)
In reviewing a trial court's ruling
on a motion for summary judgment, an appellate court makes " 'an
independent assessment of the correctness of the trial court's ruling, applying
the same legal standard as the trial court in determining whether there are any
genuine issues of material fact or whether the moving party is entitled to
judgment as a matter of law.
[Citations.]' [Citation.]" (Trop
v. Sony Pictures Entertainment, Inc. (2005) 129 Cal.App.4th 1133, 1143.)
B.
Plaintiffs
contend that the trial court erred in determining that that Hertel owed them no
duty of care, as a matter of law.
"The
elements of a cause of action for professional negligence are (1) the existence
of the duty of the professional to use such skill, prudence, and diligence as
other members of the profession commonly possess and exercise; (2) breach of that
duty; (3) a causal connection between the negligent conduct and the resulting
injury; and (4) actual loss or damage resulting from the professional
negligence. [Citation.]" (Oasis
West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821.)
1. Whether
Hertel owed plaintiffs a duty of care that extends to the protection of their
noninsurable economic interests
Hertel
contends that the trial court correctly concluded that he owed plaintiffs no
duty, as a matter of law. Hertel further
contends that the trial court's decision to grant summary adjudication of this
claim was correct because even if he owed plaintiffs a duty of due care, the
evidence demonstrates, as a matter of law, that he did not breach that duty
and/or that his actions were not the proximate cause of plaintiffs' damages.
There is no dispute that Hertel's
client was the Association and not plaintiffs—the individual members who make
up the Association. The parties disagree
as to whether Hertel owed the individual members of the Association a duty of
due care, such that he may be found liable to them with respect to the economic
loss that they are claiming.
"The
threshold element of a cause of action for negligence is the existence of a
duty to use due care toward an interest of another that enjoys legal protection
against unintentional invasion.
[Citations.] Whether this
essential prerequisite to a negligence cause of action has been satisfied in a
particular case is a question of law to be resolved by the court. [Citation.]
[¶] A judicial conclusion that a
duty is present or absent is merely ' "a shorthand
statement . . . rather than an aid to
analysis . . . .
'[D]uty,' is not sacrosanct in itself, but only an expression of the sum
total of those considerations of policy which lead the law to say that the
particular plaintiff is entitled to protection." ' [Citation.]
'Courts, however, have invoked the concept of duty to limit generally
"the otherwise potentially infinite liability which would follow from
every negligent act . . . ." ' [Citation.]" (Bily
v. Arthur Young & Co. (1992) 3 Cal.4th 370, 397 (Bily).)
A duty of care may arise through
statute, contract, the general character of the activity, or the relationship
between the parties. (
799, 803 (J'Aire Corp.).) "The determination whether in a specific
case the defendant will be held liable to a third person not in privity
balancing of various factors, among which are the extent to which the transaction
was intended to affect the plaintiff, the foreseeability of harm to him, the
degree of certainty that the plaintiff suffered injury, the closeness of the
connection between the defendant's conduct and the injury suffered, the moral
blame attached to the defendant's conduct, and the policy of preventing future
harm. [Citations.]" (Biakanja
v. Irving (1958) 49 Cal.2d 647, 650 (Biakanja),
italics added.)
In
recovery by a third party beneficiary, i.e., the intended beneficiary of a will
prepared for the decedent by the defendant notary public. The notary public failed to have the will
properly attested, rendering the will unenforceable. The Supreme Court concluded that the notary
owed a duty to an intended beneficiary, and not only to the notary's client, to
properly handle the will's drafting and solemnization. (Ibid.)
Later, in J'Aire Corp., supra, 24 Cal.3d 799, the Supreme Court applied the
tenant of a building used as a restaurant could state a cause of action for
negligence against a renovation contractor hired by the building's owner for
business income lost when the contractor "fail[ed] to complete the project
with due diligence." (
relationship" (id. at p. 804)
that permitted the recovery of economic losses (i.e., the relationship defined
by the Biakanja test) existed between
the contractor and the tenant. The court
dismissed concerns that such a theory of recovery would allow for the
imposition of liability out of proportion to fault, for potentially remote
consequences and speculative damages. (
807-808.) In the court's view, the
"ordinary principles of tort law such as proximate cause," were
"fully adequate to limit recovery" of purely economic damages
"without the drastic consequence of an absolute rule which bars recovery in
all such cases." (
In both Biakanja and J'Aire
addressed was whether the defendant's duty of care could be extended to a third
party who was not in privity with the defendant—i.e., the intended beneficiary
of a will (Biakanja,
lessee of premises that the defendant was renovating (J'Aire Corp., supra, 24
Cal.3d at p. 802)—for injuries alleged to have been suffered by those third
parties.
To determine whether Hertel owed
plaintiffs a legally recognized duty to use due care to protect their interests
in avoiding a"special assessment" to pay for the attorney fees award
in the Abrams litigation, we will apply the six factors identified in these
cases. These six factors, however, do
not end our inquiry as to whether Hertel owed a duty to use due care to protect
the interest at stake in this case. In
Court concluded that three additional factors should be considered in determining,
in that case, whether accountants owed a general duty of care to investors who,
in making their investments, foreseeably relied on an audit opinion that the
investors alleged had been negligently prepared: 1) whether there existed the
risk of imposition of liability out of proportion to fault; 2) the possibility
that the plaintiff might take protective measures to guard against the risk
(private ordering); and 3) whether it would be most efficient to place the loss
on the class of defendants involved rather than the plaintiffs. (Id.
at pp. 398-407.) Other courts have
considered these additional Bily
factors in determining whether a professional negligence claim may be brought
by a third party not in privity with the defendant for an injury alleged to have
arisen as a result of the professional's lack of due care. (See Giacometti
v. Aulla, LLC (2010) 187 Cal.App.4th 1133, 1137-1138 [concluding that an
accounting firm does not have a duty of care to its client's employees when
hired to prepare W-2 wage and tax statements for the client];
Wessel Construction Co. (2004) 125 Cal.App.4th 152, 165-166, 170-172
[concluding that design engineers did not owe the property owner or the general
contractor a duty of care].)
The
application of the combined nine Biakanja/Bily
factors to determine whether a duty of care is owed to a particular third party
who has suffered economic damages is a legal question that is decided on a
case-by-case basis. (See
172 Cal.App.4th 1594, 1610.) We consider
these factors in turn.
a. The
Biakanja factors
i. The
extent to which the transaction was intended to affect the plaintiffs
Citing
FHP, Inc. (2001) 94 Cal.App.4th 781, Hertel notes that in considering this
first factor, "[t]he conduct alleged to have been negligent must have been
intended to affect that particular plaintiff, rather than just a class of persons
to whom the plaintiff happens to belong."
(Id. at p. 792.) Hertel asserts that because the
"transaction in question was the processing of a request by the
offered by the Association's policy
from 'all risk' to 'bare walls,' " the transaction was "not intended
to affect the homeowners as individuals, but instead their association." However,
the record demonstrates that the conduct that plaintiffs allege was negligent
this case.
Hertel was the Association's
insurance agent and, in that capacity, assisted the Association in procuring
insurance policies to meet the Association's needs. In particular, Hertel assisted the
Association in procuring and maintaining an insurance policy that specifically
and directly affected each individual homeowner member of the Association. Prior to the change request at issue in this
case, the Association's policy was an "all risk" policy. As such, the policy provided coverage for
each homeowner's individual unit, not
only for the common areas owned by the homeowners collectively. Thus, the transaction at issue—Hertel's
effectuation of a change intended to eliminate the coverage for the individual
units— clearly was intended to affect these plaintiffs, since it effectively
eliminated the insurance coverage that they had prior to the change. Because of the nature of the "all
risk" policy, Hertel and everyone else involved in making a change from "all
risk" to "bare walls" coverage, had to know that this
transaction would specifically affect the individual homeowners of the Las
Brisas development by eliminating the insurance coverage for their units.
Hertel
acknowledges that where "a transaction is in fact intended to specifically
affect the plaintiff" there is "cause to consider a departure from
the general rule that there is no duty to guard against economic
loss." However, Hertel maintains
that the transaction was intended to affect the Association and not the
individual homeowners. Although there is
a legal distinction between the Association and its membership, it is
disingenuous to suggest that the effect on the homeowners from the insurance
change requested in this case was "merely collateral," as Hertel
asserts. The change did not affect only
the insurance coverage for the development's common areas, but rather,
specifically eliminated each
individual homeowner's insurance coverage for his or her unit.
Hertel cites Adelman v. Associated Internat. Ins. Co (2001) 90 Cal.App.4th 352,
366 (Adelman), as supporting his
position with respect to this factor, however, our reading of the
it actually supports our conclusion with respect to this factor. Adelman
addressed whether an insurer may "be subject to liability to a noninsured
third party for the negligent performance of its indemnity obligations to the
named insured based upon allegations that there is a 'special relationship'
between the insurer and the third party, as that term has been defined and applied
in [Biakanja], supra, 49 Cal. 2d 647 and its progeny." (Adelman,
supra, at p. 359.) In Adelman,
a homeowners' association (HOA) had procured an insurance policy that
"provided coverage for losses from various perils, including earthquake
damage," and that "covered the common areas of the project but did
not extend coverage to the individual units owned by the plaintiffs." (Id.
at p. 356.) After the buildings in the
complex suffered earthquake damage, the HOA made a timely and proper claim
under the policy seeking the funds necessary to pay to repair damage caused to
the common areas of the project.
However, the insurance company failed to make the requested repairs or
to provide the funds necessary to complete the repairs. (Id.
at p. 357.) Because these structural
repairs had to be made before the individual homeowners could commence repairs
to their individual units, the homeowners "were forced to incur the
expense of finding other living quarters, or to live amidst disrepair, and
suffered significant diminution in the value of their units." (Ibid.)
The individual homeowners sued the
insurance company, seeking compensation for the expenses that they incurred as
a result of the insurance company's failure to timely and fully perform its
obligations under the policy. (
the insurance policy in that case was not intended to affect the homeowners
individually: "By its express
terms, the policy, although purchased with plaintiffs' homeowner assessment
funds, covered only the common areas
of the project; in short, the policy was intended to protect the collective or
group interests of the plaintiffs, not
their individual interests. Plaintiffs
do not credibly claim otherwise. The
policy was purchased in the name of the HOA, which is the statutorily
designated entity formed to protect and enforce the plaintiffs' collective or
group interests. . . .
Given this circumstance, it can hardly be said that the 'end and aim' of
the policy's purchase was the protection of plaintiffs' individual interests."
(Adelman, supra, at p. 366.)
In contrast to the policy at issue
in Adelman, the "all risk"
policy that Hertel is alleged to have changed to a "bare walls"
policy without proper authorization covered not only the common areas of the
development but also each of the individual homeowners' units. The "all risk" policy in this case
clearly was intended to protect not only the collective interests of the
plaintiffs, but also their individual interests. Given the specific nature of the policy at
issue, and the intended effect of the change request, which was to eliminate
entirely the protection for the homeowners' individual units, we conclude that
the first factor weighs in favor of finding the existence of a duty.
ii. Foreseeability
of harm to the plaintiffs
The next factor we consider is
whether the harm that these plaintiffs suffered was foreseeable. It was clearly foreseeable that a change in
the policy coverage from "all risk" to "bare walls" could
cause harm to individual homeowners, particularly if the homeowners were not
informed of the change. Plaintiffs would
have had no reason to procure replacement insurance to protect their individual
interests if they reasonably believed that the Association maintained an
insurance policy that provided coverage for their units. Those persons who were involved in
eliminating the coverage for plaintiffs' individual units could have foreseen
that the individual homeowners might incur a loss that would not be covered by
the Association's new "bare walls" policy.
However, the harm for which
plaintiffs seek to recover in this case is not damage to any of their
individual units. Rather, plaintiffs
seek compensation for the costs of litigation and a resulting settlement that
was triggered by foreseeable damage to the Abramses' unit. The damage for which plaintiffs seek
compensation is far less foreseeable than direct, uninsured property damage to
a homeowner's individual unit. Multiple
intervening events had to occur in order for these plaintiffs to have suffered
the damages that they are seeking to recover here. Unlike the property damage suffered by the
Abramses—damage to their unit that was uninsured due to the change in the
Association's policy from "all risk" to "bare walls,"—the
monetary damage suffered by plaintiffs was far less foreseeable.
We conclude that, on the whole,
this factor weighs against imposing a duty on Hertel with respect to the
damages that plaintiffs seek in this case.
iii. Degree
of certainty that plaintiffs suffered injury
Plaintiffs
clearly suffered injury. While the
CC&Rs required that the Association maintain an insurance policy that
covered both common areas and the homeowners' individual units, the policy was
changed without proper amendment of the CC&Rs, and without plaintiffs'
knowledge or consent. After the change
occurred, one unit suffered physical damage.
Because the Association's policy had been changed, the Abramses, who
owned the unit that sustained the damage, had no insurance to cover the costs
to repair their unit. The Abramses sued
the Association, members of the Board, and the property management company. As a result of that lawsuit, plaintiffs, all
individual homeowners and members of the Association were required to pay a
special assessment to cover a portion of the settlement reached in the Abrams
litigation. This factor thus weighs in
favor of finding a duty owed by Hertel to plaintiffs to protect their interests
under these circumstances.
iv. Closeness
of connection between defendant's conduct and the injury suffered
With
respect to the closeness of the connection between Hertel's acts and plaintiffs'
injuries, Hertel's alleged initiation of the change request that eliminated the
insurance coverage for the individual units in the Las Brisas community was
clearly a causal factor of the Abramses'
loss. However, the causal connection
between Hertel's alleged conduct and the subsequent special assessment imposed
on the Association's membership to pay for the Association's settlement of the
Abrams litigation is far more attenuated.
As Hertel argues, there is not a
plaintiffs' injuries. The loss that
plaintiffs incurred was a share of the cost of an open-ended settlement with
the Abramses that the Board authorized after failing to settle on more
favorable terms at an earlier point in the litigation. If the Association had handled the Abrams
matter differently, there may have been no need to impose an assessment on
plaintiffs. Because Hertel's actions
were not closely connected with the circumstances that led to the imposition of
the special assessment, this factor weighs against a determination that Hertel
owes plaintiffs a duty with respect to their injury.
v. The
moral blame attached to defendant's conduct
Hertel's alleged deviation from the
standard of care in his industry is not particularly blameworthy. His conduct did not present a risk to health
or safety, and, unlike the defendant's conduct in Biakanja, was not unlawful.
The harm that Hertel's actions may have caused was solely economic. Hertel's conduct therefore does not stand out
as morally blameworthy. This factor thus
weighs against finding that Hertel owed a duty to plaintiffs with respect to
their injury.
vi. The
policy of preventing future harm
The final Biakanja factor is the policy of preventing future harm. Where CC&Rs require that an HOA provide
insurance coverage that protects not only common areas but also the individual
units of its members, one who assisted that HOA in procuring and maintaining
such coverage knows that changing that coverage to "bare walls"
coverage
will impact those individual homeowners and may have a
potentially drastic affect on them.
Plaintiffs allege that Hertel
initiated the change request without proper authorization, either at the
suggestion of someone who did not have the authority to make such a request, or
out of a mistaken belief that he had been asked to do so. Plaintiffs further allege that Hertel
initiated the change knowing that the CC&Rs may have required the
Association to maintain "all risk" coverage yet failing to determine
whether the CC&Rs had been amended to allow for the elimination of
individual unit coverage. If a fact
finder determines that these allegations are true, imposing liability could act
as an incentive to others to ensure that such significant changes to HOA
insurance policies are not effectuated unless such changes are requested by the
appropriate individuals and there has been some minimal offer of proof that the
requested changes have been authorized by the governing documents and/or
governing body of that association. We
therefore conclude that the policy of preventing future harm weighs slightly in
favor of recognizing a duty on Hertel's part that extends beyond protecting
only the plaintiffs' insurable interests, and that would impose liability on
him for failing to prevent the type of harm plaintiffs have alleged they
suffered.
b. The
Bily factors
i. The
possibility that liability might be imposed out of all
proportion
to fault
The
duty under the scenario presented in that case could have vastly expanded the
number of possible plaintiffs and the types of claims against the auditor,
thereby "rais[ing] the spectre of multibillion-dollar professional
liability that [wa]s distinctly out of proportion to" the auditor's fault
and the connection between the auditor's conduct and the investors' injury (
In this case, imposing a duty would not raise similar concerns. The nature of the duty that the plaintiffs in
Bily sought to impose would have
created potentially limitless exposure for the auditor, despite the fact that
the auditor's role in the financial reporting process was secondary, in that
most of the information on which an auditor relies necessarily comes from the
client, and involves complex professional judgment. (Id.
at p. 400.) In contrast, the number of
potential plaintiffs to whom an insurance agent such as Hertel would owe a duty
is limited. Specifically, only where an
HOA's insurance policy protects the individual interests of the homeowners in
addition to their common or collective interests, would an insurance agent have
a duty to meet the standards of his profession with respect to those
homeowners.
Further, the Bily court was concerned that auditors could be left as the sole
parties from whom investors could recover if the court were to impose a duty on
them, noting that by the time investors have determined that they have been
damaged, "[t]he client, its promoters, and its managers have generally
left the scene, headed in most cases for government-supervised liquidation or
the bankruptcy court," such that the "auditor has
. . . assumed center stage as the remaining solvent
defendant and is faced with a claim for all sums of money ever loaned to or
invested in the client." (
Here, there are multiple parties who could be found to bear
responsibility for the losses that plaintiffs suffered. In fact, it is possible that a fact finder
would conclude that Hertel is not solely liable, and that he should be held
responsible for only a portion of the damages that plaintiffs seek. Including Hertel as one of multiple parties
owing a duty to plaintiffs and allowing for liability for failing to protect
would not be out of all proportion to any fault that he may be found to bear.
ii. The
level of sophistication of the plaintiff in the context of the
including the potential for "private ordering" to
protect against the risk
The Bily court distinguished the class of third party investors,
creditors, and others who read and rely on audit reports and financial
statements, from ordinary consumers. (
The court noted that, unlike the " 'presumptively powerless
consumer' " in product liability cases, more sophisticated
investor/creditor plaintiffs have the ability to " 'privately order' the
risk of inaccurate financial reporting," either through their own
investigation or audit, or by contractual arrangements with the client. (Ibid.) The Bily
court observed, "As a matter of economic and social policy, third
parties should be encouraged to rely on their own prudence, diligence, and
contracting power, as well as other informational tools. This kind of self-reliance promotes sound investment
and credit practices and discourages the careless use of monetary
resources. If, instead, third parties
are simply permitted to recover from the auditor for mistakes in the client's
financial statements, the auditor becomes, in effect, an insurer of not only
the financial statements, but of bad loans and investments in
general." (Ibid.) Thus, in a financial
transaction that presents a risk of loss, a party contemplating the transaction
should be encouraged to take appropriate steps to protect his or her own
interests through prudence, diligence and contracting power.
The
individual homeowners who are suing Hertel in the present case are not like the
sophisticated investors who brought suit against an auditor in
The individual homeowners have a special relationship with both the
Association representing them, as well as with the insurance agent who obtained
the "all risk" insurance policy for the Association—a policy that
specifically provided protection for the homeowners' risk of loss to their
individual units—and who acted to change that policy in a way that eliminated
this protection. The homeowners were in
a uniquely vulnerable position with respect to the transactions at issue in
this case in that under the terms of the Association's CC&Rs, the
homeowners justifiably relied on the Association and the insurance agent to
protect their individual interests.
Although the homeowners could have purchased additional insurance to
provide back-up coverage for the risk of damage to their individual units, this
would have been economically inefficient since such risks were covered by the
Association's "all risk" policy.
Procuring additional insurance in this circumstance would have been
redundant. Under these circumstances,
the Bily consideration of
"private ordering" does not counsel against imposing a duty on Hertel
toward the individual homeowners.
iii. The
potential adverse impact on the class of defendants on
whom the plaintiffs seek to impose a duty
The
that imposing liability on auditors would not only fail to create "a
significant and desirable improvement in audit care," but would also
likely cause "deleterious economic effects." (Bily,
supra, 3 Cal.4th at p. 404.) The Bily
court explained, "In view of the inherent dependence of the auditor on the
client and the labor-intensive nature of auditing, we doubt whether audits can
be done in ways that would yield significantly greater accuracy without
disadvantages." (
It is unclear whether such a concern makes sense in this case. Rather, it would appear that there could be
fairly simple things that an insurance agent could do differently in a
situation like the one in this case to ensure greater "accuracy" in
changing HOA insurance coverage, with little downside. Specifically, an insurance agent could
request verification of a change request to an "all risk" policy from
an HOA's board, or could request to see the minutes of the board actions
authorizing such a change. Such efforts
would be minimal, would be unlikely to decrease the availability of agents
willing to assist HOAs in procuring coverage, and would help prevent the kind
of unintended lapse in insurance coverage that occurred here. For these reasons, we conclude that this factor
minimally weighs in favor of imposing a legal duty on Hertel for which the
homeowners had to pay a special assessment as a result of the litigation over
the uninsured loss to the Abramses' unit.
c. Consideration
of all the factors leads to the conclusion that Hertel did not owe the
individual homeowners a duty with respect to the injury that they are claiming
While some of the
imposing a duty on Hertel, the most significant of the factors—specifically,
the foreseeability of the particular harm for which recovery is sought and the
closeness of connection between the defendant's conduct and the injury
alleged—counsel against imposing a duty on Hertel in this case. In our view, having concluded that it was not
reasonably foreseeable that Hertel's alleged conduct would result in the kind
of injury suffered by plaintiffs here, and that his alleged conduct is not
closely connected to the injury alleged, it would be unreasonable to impose
liability on Hertel for such damages.
Hertel's duty to use due care as an
insurance agent does not extend to protecting the individual homeowners from
harm beyond harm to their insured
interests. The damages for which
plaintiffs seek compensation in this case—damages from a special assessment
imposed on them as a result of the settlement of the Abrams litigation—are not
within the scope of this duty. Although
we disagree with the trial court's conclusion that Hertel would never owe any
duty at all to the individual homeowners, we nevertheless conclude that under
the circumstances alleged in this case, the trial court did not err in granting
summary adjudication in favor of Hertel on plaintiffs' professional negligence
claim.
C.
causes of action
Plaintiffs
contend that the trial court erred in granting summary adjudication in favor of
Hertel on their second and third causes of action for fraud and negligent
misrepresentation.
title="">[7] We reject this contention.
Both the
second and third causes of action are based on Hertel's conduct at the August
23, 2003 annual meeting, and not on his June 2003 conduct in initiating the
change request. Plaintiffs allege that
property manager Brooks invited Hertel to speak to the Association's membership
at the August 2003 meeting. At that
meeting, Hertel gave a presentation in which he expounded on the merits of
changing the association's insurance policy from "all risk" to
"bare walls" coverage.
Plaintiffs allege, and Hertel does not dispute, that he did not inform
anyone at the meeting that the Association's policy had already been changed to
a "bare walls" policy prior to the meeting, and thereby implied, at a
minimum, that the policy that was in effect at the time of the meeting was an
"all risk" policy. One member
asked Hertel "if any change in insurance coverage had as yet been
effected, and" in reply, Hertel represented that no change in the policy
had been effectuated.
name="_ftnref8" title="">[8] The Association membership voted not to
change the policy to a "bare walls" policy at that meeting.
The
elements of fraud, which give rise to the tort action for deceit, are (1) a
misrepresentation, (2) with knowledge of its falsity, (3) with the intent to
induce another's reliance on the misrepresentation, (4) justifiable reliance,
and (5) resulting damage. (
Cal.4th 167, 173 (Small).) The tort of negligent misrepresentation,
another species of the tort of deceit (Bily,
supra, 3 Cal.4th at p. 407), does not require the intent to defraud but
only " '[t]he assertion, as a fact, of that which is not true, by one who
has no reasonable ground for believing it to be true.' " (Small,
supra, at p. 174.) The elements of negligent misrepresentation
are "(1) the misrepresentation of a past or existing material fact, (2)
without reasonable grounds for believing it to be true, (3) with intent to
induce another's reliance on the fact misrepresented, (4) justifiable reliance
on the misrepresentation, and (5) resulting damages." (Apollo
Capital Fund LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226,
243.)
In order to
establish fraud or negligent misrepresentation, plaintiffs must demonstrate
that they were damaged as a result of Hertel's misrepresentations. Even assuming that everything that the plaintiffs'
assert is true—i.e., that Hertel misrepresented in August 2003 that no change
had been effectuated, and that plaintiffs and members of the Board remained
unaware of the change until months later, in or around approximately November
2003—plaintiffs have not identified any harm that they suffered as a result of
having been kept in the dark about the change in coverage between August and
November.
The
Abramses' property loss occurred in June 2003, after the insurance coverage change had been effectuated but
the August 2003 meeting. All of the
damages that plaintiffs seek arise out of their having to pay for the
settlement of the Abramses' claims against the Association resulting from their
property loss. Although the evidence
demonstrates that Hertel's statements at the August meeting were false, that he
knew they were false, and that he intended that plaintiffs rely on the
statements and vote to amend the CC&Rs to permit a change in coverage from
"all risk" to "bare walls," there is no evidence that
plaintiffs' reliance on these statements caused any additional damage to them.
plaintiffs ultimately suffered arose as a result of the property loss suffered
by the Abramses during a time period when the Association's insurance coverage
had been reduced from "all risk" to "bare walls." The conduct that caused the property loss to
be uninsured and that caused the Abramses to initiate litigation against the
Association was the implementation of a change in the Association's insurance
policy from "all risk" to "bare walls," which occurred in
June 2003. Hertel's misrepresentations
in August 2003 that plaintiffs allege prevented the Board and other members of
the Association from learning that the insurance policy had been changed did
not lead to plaintiffs' having to pay $8,500 each to cover the settlement with
the Abramses.
Further,
there is no evidence in the record that suggests that plaintiffs suffered any
additional, separate injuries as a result of Hertel's misrepresentations at the
August 2003 meeting. Rather, in the
operative complaint, plaintiffs assert that if Hertel had not misrepresented at
that meeting that no change in coverage from "all risk" to "bare
walls" had already occurred, (1) they could have "take[n]
prophylactic steps [on] their own behalf (such as the obtaining of additional
condominium interior and contents coverage to protect against the 'gap' created
by the reduction to only 'bare walls' coverage)," and (2) they "would
also have been able to intervene informally with [the insurance company
or if necessary, later file a complaint in intervention in the Abrams
litigation, all in an effort to secure reversion to 'All-Risk' coverage from
the unauthorized 'bare walls' coverage."
Plaintiffs contended that if they had been able to do either of these
things, they could have avoided the $8,500 special assessment. As evidence supporting their contention that
Hertel's misrepresentations at the August 2003 meeting caused damage to them,
plaintiffs refer to the declaration of Russell Russo, a Las Brisas homeowner
and one of the plaintiffs. Russo, who
was present at the August 2003 meeting, states, "Had I not been of this belief
that the full, 'all risk' coverage remained in effect—a belief based primarily
upon Hertel's representation, which I now know to have been false—I would
certainly have insisted that the Las Brisas HOA Board commence litigation
against [the insurer] at once, by an action for declaratory or other relief, to
judicially compel [the insurer] to immediately effect reinstatement of the 'all
risk' coverage. I knew that such a court
action would be successful, probably by summary judgment, because the alleged
change to 'bare walls' had been utterly and completely lacking in any proper
authorization, either by 'Board action' or by the required CC&R
amendment . . . ."
We find
these assertions of injury meritless.
First, no injury can be traced to the homeowners' inability to obtain
individual insurance for their condominium units after the August 2003 meeting at which Hertel misrepresented the
Association's coverage. As noted, the
only property damage to which plaintiffs have pointed that resulted in the
Association members having to pay a special assessment is the uninsured
property damage suffered by the Abramses.
The change in the policy from "all risk" to "bare
walls," and the Abramses' subsequent property loss, both occurred
and cannot demonstrate, that their damages resulted from not having had the
opportunity to obtain property insurance to cover their individual risk due to
misrepresentations made by Hertel in August 2003.
Second,
although the plaintiffs assert that they would have intervened in the Abrams
litigation or would have filed suit against Truck directly, there is no
evidence that they did either of these things even after members of the Board
and/or Association became aware in November 2003 that the Association's policy
had been changed to "bare walls."
In a letter dated November 10, 2003, an attorney for the Abramses
advised the Association that its policy had been changed from "all
risk" to "bare walls," effective April 3, 2003, and that the
Abramses planned to seek compensation from the Association. Plaintiffs do not dispute the contents of
this letter, or that it was received by members of the Association, including
one of the named plaintiffs, Robert Keilholtz, who in his deposition admitted
to knowing about the change in coverage when he learned of the Abramses' plan
to seek compensation from the Association.
Keilholtz also admitted that "the first time we were made aware, me
personally and most of the board members and most of the HOA members, was at the
time that [the Abramses] had a loss and that we found out that we probably
wouldn't have coverage," which occurred during Keilholtz's 2003-2004
service as a Board member. Despite
learning of the change in the policy from "all risk" to "bare
walls" in or around November 2003, at no point in time did any of the
plaintiffs file a lawsuit against Truck or attempt to intervene in the Abrams
litigation. There is nothing to suggest
that plaintiffs were prevented from doing these things as a result of being unaware
of the true nature of the Association's insurance coverage between August 2003
and November 2003. They have not
asserted that any cause of action that they may have possessed became
time-barred as a result of the delay in their learning about the coverage
change, that any defense they may have had to the Abramses' claims was lost
during the few months' time when they remained unaware that their insurance
coverage had been reduced, or that their ability to properly litigate or defend
such claims was hindered as a result of any loss of evidence caused by the
delay in their knowing about the change in coverage.
Finally,
with respect to plaintiffs' allegation that they suffered damages in the amount
of $8,500 per unit for attorney fees paid in settlement of the Abramses' claims
because Hertel's misrepresentations at the August 2003 meeting prevented them
from intervening "informally" with Truck before Truck assumed its
defensive position with respect to the Abramses' loss, this cont
| Description | A modification decision. |
| Rating |
