Treweek v. California Capital Ins. Co.

Filed 3/27/07 Treweek v. California Capital Ins. Co. CA2/1

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION ONE

APPEAL from a judgment of the Superior Court of Los Angeles County, Joseph F. De Vanon, Judge. Reversed.

Kremser and Howard and Paul E. Kremser, Jr., for Plaintiffs and Appellants.

Henderson & Borgeson, Daniel E. Henderson III and Millard F. Ingraham for Defendant and Respondent.

______________________________

The owners of an apartment building were sued in 47 separate small claims cases for allegedly creating a nuisance and permitting tenants to inflict emotional and mental distress on the small claims plaintiffs. The owners sought a defense and indemnity from their business liability insurer, which denied the claim on the ground that the small claims plaintiffs had not alleged bodily injury or property damage within the meaning of the policy.

The owners retained an attorney at their own expense and settled most of the small claims cases. They then filed this action against the insurer, alleging breach of contract and breach of the covenant of good faith and fair dealing. Ten months into this litigation, the insurer admitted it had made a mistake in denying the claim. It paid defense costs with respect to all of the small claims cases and indemnity with respect to six of the settlements.

The trial court granted summary adjudication in favor of the insurer on the breach of contract cause of action, concluding that the owners had received all of the monetary benefits due under the policy for defense and indemnity. The breach of covenant claim was tried to the court, which found for the insurer, stating that the failure to provide a timely defense and indemnity was the result of a mistake, not deliberate unfairness.

We conclude that summary adjudication was improperly granted because the insurer may not have paid the full amount owed for indemnity. And because summary adjudication on the contract claim was improper, the covenant claim must be retried so the trial court may consider all of the circumstances surrounding the delay in paying indemnity. The judgment is therefore reversed.

I

BACKGROUND

The parties stipulated to the following facts. Gordon and Carol Treweek owned a 12‑unit apartment building in Pasadena. They sold the building in 2004.

On or about July 24, 2002, acting under the auspices of an organization named Safe Streets Now, around 47 people living near the Treweeks apartment building filed separate complaints against Gordon Treweek (Gordon) in the small claims division of the Los Angeles County Superior Court in Pasadena. (In discussing the small claims cases, we use plaintiffs to refer to the parties who brought the small claims cases, not the Treweeks.) Each of the complaints alleged: Def. allows public nuisance to occur on his property causing me emotional and mental distress. Plaintiffs each sought $5,000 in damages. Trial in all of the cases was set for September 9, 2002.

On or about August 26, 2002, several events occurred in connection with the cases. All of the summonses and complaints were served on the Treweeks. They contacted their insurance agent, who immediately reported the claim to the Treweeks business liability insurer, California Capital Insurance Company, also known as CIG. At CIGs request, the Treweeks mailed copies of the summonses and complaints to CIGs Anaheim claims office.

On August 29, 2002, Catherine Baden, CIGs litigation supervisor, took a recorded statement from Gordon. According to Badens written summary of the statement, Gordon mentioned that in March or April 2001, two neighbors had complained that people were playing basketball, drinking, and making loud noise at night . . . [and] throwing their empty bottles into their backyards. In October 2001, he had received a letter from Safe Streets Now containing complaints about drug and alcohol use, cars speeding to and from [his] building, noise, and trash. Gordon took various measures in response to the complaints, including installing a gate on his property, warning and evicting some tenants, hiring a resident manager, and meeting with a representative of Safe Streets Now, Brian Biery.

Neither Baden nor CIG interviewed anyone else or otherwise investigated the claims against Gordon.

On September 5, 2002, Baden wrote a letter to Gordon, denying coverage for the cases, stating: [The] Small Claims Court Actions . . . are alleging Mental and Emotion[al] Distress, which does not constitute bodily injury as defined by the policy. The damages being claimed by these neighbors would not constitute an occurrence, bodily injury, property damage, personal injury as defined by your policy with [CIG]. []  Our investigation of all of the available facts has led us to the conclusion that we have no coverage in this matter. If you have additional information or new information regarding this claim which we do not already have and which you believe would affect our decision, please forward that information with any explanation you care to make.

The small claims cases were initially called for hearing on September 9, 2002. Of the 47 cases, testimony was presented in about five. Some of the cases were dismissed. The hearing was continued to September 24, 2002. Several plaintiffs submitted letters to the court, describing their cases in greater detail, some alleging that they had been victims of property damage. Gordon got a copy of the letters.

After the initial hearing, Gordon retained Herb Fox, Esq., to assist him in providing a defense and obtaining coverage from CIG. On September 18, 2002, Fox spoke with Baden by telephone and told her about the letters submitted at the hearing. Fox faxed a confirming letter to Baden later that day, stating: The plaintiffs [letters] claim damages arising from symptoms such as emotional and mental distress, sleeplessness, anxiety, nervousness, stress, fright, fear of danger, and general impairment of health.

On September 20, 2002, Fox had another telephone conversation with Baden. In a letter to Baden of the same date, Fox confirmed that CIG still refused to provide a defense but that Baden was in the process of seeking an opinion from coverage counsel. Fox enclosed a copy of plaintiffs letters to the small claims court. Baden received Foxs letter on September 23, 2002, the day before the small claims court hearings were to resume.

On September 23, 2002, Baden wrote to James Baratta, Esq., enclosing CIGs entire claim file, requesting an opinion on coverage. Baden mentioned that several of the plaintiffs had submitted letters to the small claims court and said she would forward them to Baratta when she received them. Baden believes she eventually did so. According to Baratta, he never received the letters from her.

On October 3, 2002, Baratta wrote to Baden, stating that based upon the information we have reviewed, the matter does not appear insured. Toward the end of the letter, Baratta commented: We have not been provided with evidence of physical manifestation but only allegations of emotional and mental distress. We suggest further inquiry be made in this regard.

The small claims court hearings took at least two more days. Meanwhile, Fox began settlement discussions with representatives of Safe Streets Now. On October 21, 2002, he wrote to Baden, enclosing written settlement offers and counteroffers. Fox stated that Gordon had settled with about 12 of the 47 original plaintiffs and was optimistic about settling with the remaining plaintiffs in the next two weeks. Gordon had agreed to pay $2,500 to each of the plaintiffs, for a total of approximately $90,000. In addition, Gordon had incurred over $15,000 in attorney fees.

On October 28, 2002, Baratta sent Fox a letter, stating that the small claims cases were not covered by CIG because emotional and mental distress did not constitute claims for bodily injury, personal injury or property damage as those terms were defined in the policy.

Ultimately, Fox managed to secure the dismissal of 14 small claims cases and settled the remaining 33 for a total of $84,500.

The Treweeks retained Paul Kremser, Esq., to pursue a bad faith claim against CIG. On April 19, 2004, the Treweeks filed this action, alleging causes of action for breach of contract and breach of the covenant of good faith and fair dealing.

The Treweeks incurred a total of $16,095 in attorney fees and costs for Foxs services, $11,780.74 of which were attributable to Foxs services beginning September 18, 2002, the date of Foxs letter to Baden that mentioned plaintiffs letters to the small claims court. Kremsers attorney fees and costs in pursuing the bad faith claim were $18,980 as of December 6, 2004.

On February 17, 2005, CIG paid the Treweeks the sum of $46,260, allocated as follows: (1) attorney fees and costs of Fox, $11,780.74; (2) attorney fees and costs of Kremser, $18,980; and indemnity for the settlement of six of the small claims cases, $15,500.

In May 2005, the Treweeks moved for summary judgment and, in the alternative, summary adjudication of issues. They argued that the duty to defend arose when they forwarded the small claims complaints to CIG, not when Fox later contacted Baden and informed her of plaintiffs letters to the small claims court. The motion further argued that CIG was required to indemnify the Treweeks for all 33 of the settled cases, not just six. Finally, the Treweeks contended that CIG had breached the covenant of good faith and fair dealing by failing to satisfy its duty to provide a timely defense and indemnity. CIG filed opposition papers.

CIG also filed a cross-motion for summary adjudication as to the Treweeks breach of contract claim. CIG argued that the duty to defend did not arise until Baden learned of plaintiffs letters to the small claims court; CIGs knowledge of the substance of the complaints in small claims court, by itself, did not raise the potential for coverage. CIG further contended that it had paid indemnity for all the settlements that came within coverage, specifically, six cases in which the plaintiffs letters referred to property damage or trespass. Thus, according to CIG, the Treweeks had received all of the monetary benefits due under the policy. In response, the Treweeks filed opposition.

By order dated July 25, 2002, the trial court granted CIGs motion for summary adjudication and denied the Treweeks alternative motions in their entirety. That left the breach of covenant claim for trial.

The parties agreed that the trial would proceed on stipulated facts and evidence (depositions), supplemented with trial briefs. The primary issue was whether CIGs delay in paying defense costs and indemnity constituted bad faith. The trial court found in favor of CIG, concluding that the delay was attributable to Badens failure to send Baratta a copy of plaintiffs letters to the small claims court. In its ruling, the trial court explained that Badens failure was simply a mistake, bad judgment or negligence, not a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement. Judgment was entered in favor of CIG. The Treweeks appealed.

II

DISCUSSION

A motion for summary judgment must be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law. (Code Civ. Proc.,  437c, subd. (c).)

A defendant seeking summary judgment has met the burden of showing that a cause of action has no merit if that party has shown that one or more elements of the cause of action cannot be established [or that there is a complete defense to that cause of action]. . . . In reviewing the propriety of a summary judgment, the appellate court independently reviews the record that was before the trial court. . . . We must determine whether the facts as shown by the parties give rise to a triable issue of material fact. . . . [T]he moving partys affidavits are strictly construed while those of the opposing party are liberally construed. . . . We accept as undisputed facts only those portions of the moving partys evidence that are not contradicted by the opposing partys evidence. (Raghavan v. Boeing Co. (2005) 133 Cal.App.4th 1120, 1132.) The same principles apply to motions for summary adjudication. (See Lomes v. Hartford Financial Services Group, Inc. (2001) 88 Cal.App.4th 127, 131.)

A. Duty to Defend

[A] liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. . . . [T]he carrier must defend a suit which potentially seeks damages within the coverage of the policy. . . . Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded. . . . . . . The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy. . . . . . . [F]or an insurer, the existence of a duty to defend turns not upon the ultimate adjudication of coverage under its policy of insurance, but upon those facts known by the insurer at the inception of a third party lawsuit. . . . Hence, the duty may exist even where coverage is in doubt and ultimately does not develop. . . . . . .

The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded . . . , or until it has been shown that there is no potential for coverage . . . . (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295 (Montrose I), citations omitted.)

Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insureds favor. . . . [] . . . [] . . . To prevail [in an action seeking relief on the issue of the duty to defend], the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. Facts merely tending to show that the claim is not covered, or may not be covered, but are insufficient to eliminate the possibility that resultant damages (or the nature of the action) will fall within the scope of coverage, therefore add no weight to the scales. (Montrose I, supra, 6 Cal.4th at pp. 299300.)

Under the Treweeks business liability policy, CIG agreed as follows: [The insurance company] will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury, [or] property damage . . . to which this insurance applies. We will have the right and duty to defend any suit seeking those damages. Bodily injury was defined as bodily injury, sickness, or disease sustained by a person . . . . Property damage meant [p]hysical injury to tangible property, including all resulting loss of use of that property . . . [] [and] [l]oss of use of tangible property that is not physically injured.

We agree with the trial court that the complaints filed by the small claims plaintiffs did not give rise to a potential for coverage. They alleged harm in the form of emotional and mental distress. That type of harm does not constitute bodily injury. (See Gravillis v. Coldwell Banker Residential Brokerage Co. (2006) 143 Cal.App.4th 761, 774776; Aim Insurance Co. v. Culcasi (1991) 229 Cal.App.3d 209, 220222.) Thus, Badens knowledge and receipt of those complaints on or about August 26, 2002, did not obligate CIG to provide a defense. Nor did Gordons recorded statement on August 29, 2002, add anything to the mix. He did refer to neighbors complaints about trash, including bottles. But, under a reasonable interpretation of the insurance policy, we cannot say that litter, by itself, is property damage, namely, physical injury to, or loss of use of, tangible property.

CIG contends its duty to defend arose, at the earliest, on September 18, 2002, when Fox first spoke and wrote to Baden, mentioning plaintiffs letters to the small claims court. Some of those letters referred to property damage, for example, broken windows, theft of personal property, and physical damage to vehicles. Accordingly, CIG paid all of Foxs attorney fees and costs beginning September 18, 2002. It follows that the Treweeks have received all monetary benefits due under the policy in connection with the duty to defend.

Nevertheless, the Treweeks make much of an insurers duty to investigate. But that duty was not violated here. [A]n insurer does not have a continuing duty to investigate whether there is a potential for coverage. If it has made an informed decision on the basis of the third party complaint and the extrinsic facts known to it at the time of tender that there is no potential for coverage, the insurer may refuse to defend the lawsuit. . . . []  An insured may not trigger the duty to defend by speculating about extraneous facts regarding potential liability or ways in which the third party claimant might amend its complaint at some future date. . . . Thus, the issues here are what facts [the insurer] knew at the time [the insureds] tendered the defense of the [third party] lawsuit, both from the allegations on the face of the third party complaint, and from extrinsic information available to it at the time; and whether these known facts created a potential for coverage under the terms of the Policy. (Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1114.) Simply put, the small claims complaints and Gordons recorded statement did not warrant further investigation into the cases.

The Treweeks reliance on Eigner v. Worthington (1997) 57 Cal.App.4th 188 is misplaced. There, the complaint alleged that the insured had engaged in hate crimes, harassment, stalking, assault with an automobile, attempted battery, and threats of strangulation and murder, and had pointed a gun at the plaintiffs. The insurer conducted no investigation and denied the claim outright. Testimony at trial indicated that the plaintiffs had suffered physical injuries and incurred $19,000 in medical bills. The plaintiffs recovered a judgment against the insured. The insurer then moved to vacate the judgment on the ground that, if it had known of the potential for coverage, it would have defended the action and likely obtained a different result. The trial court denied the motion, concluding that the insurer should have conducted an investigation based on the allegations of the complaint, in which event it would have learned that it had a duty to defend. The Court of Appeal affirmed. (Id. at pp. 196200.) Given the difference between the allegations in Eigner and this case, Eigner did not require CIG to further investigate the small claims complaints.

B. Duty to Indemnify

The obligation to indemnify must be distinguished from the duty to defend. The duty to defend arises when there is a potential for indemnity. (Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 659, fn. 9.) The obligation to indemnify, on the other hand, arises when the insureds underlying liability is established. . . . Although an insurer may have a duty to defend, it ultimately may have no obligation to indemnify, either because no damages were awarded in the underlying action against the insured, or because the actual judgment was for damages not covered under the policy. (Ibid.) Whether coverage is ultimately established in any given case may [also] depend on . . . the existence of express conditions or exclusions in the particular contract of insurance under scrutiny, the availability of certain defenses that might defeat coverage, and a determination of whether the facts of the case will support a finding of coverage. (Id. at p. 655, fn. 2.)

CIG states that it decided to pay indemnity in only six of the 33 settled cases based on the content of the plaintiffs letters to the small claims court. In particular, the letters in those six cases made reference to some type of property damage or trespass. None of the other letters, CIG argues, implicated any type of coverage.

The Treweeks counter that, in five additional cases, the plaintiffs letters described some type of bodily injury, such that a duty to indemnify arose. But the record shows that those cases were dismissed, not settled. The Treweeks further argue that CIG should have paid indemnity in another two cases, where the plaintiffs letters alleged the suffering of anxiety, nervousness, fear, or worry. But a reasonable interpretation of bodily injury would not include those conditions. And the Treweeks case authority  Vanoni v. Western Airlines (1967) 247 Cal.App.2d 793, 795797  does not support their argument. Similarly, a loss of sleep due to noisy neighbors is not a bodily injury within the meaning of the policy. The Treweeks authorities on this point  Emden v. Vitz (1948) 88 Cal.App.2d 313, 316317, and Windeler v. Scheers Jewelers (1970) 8 Cal.App.3d 844, 853 and footnote 5  state that sleeplessness, when accompanied by physical injuries  may constitute bodily injury. Thus, indemnity was not owed in any of the cases where the sole basis of the Treweeks claim for reimbursement was the plaintiffs difficulty in sleeping.

Nevertheless, CIG has made no effort to explain why it has not indemnified the Treweeks in one case in which indemnity was arguably owed. Plaintiff Leonard Ramos stated in his August 12, 2002 letter to the small claims court, I have seen occupants [of the Treweeks building] destroy things on my property. The Treweeks settled with Ramos for $3,000. Ramoss allegation of property damage may have obligated CIG to provide a defense. (See Montrose I, supra, 6 Cal.4th at p. 295.) Thus, for purposes of indemnity, the Treweeks may have been presumptively liable to Ramos in the amount of the settlement. (See Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 791.) In short, CIG did not establish as a matter of law that it did not owe indemnity in the Ramos case.

Having concluded that indemnity may still be owed in at least one of the small claims cases, we do not decide whether CIG may have owed or breached a duty to reimburse the Treweeks as to any of the other settlements. Because CIG may not have fully paid the Treweeks what they are owed under the policy, the trial court erred in granting CIGs motion for summary adjudication on the breach of contract claim.

Further, the error in granting CIGs motion tainted the subsequent trial of the breach of covenant claim. In finding in favor of CIG, the trial court concluded: (1) the delay in paying defense costs and indemnity was the result of Badens failure to send Baratta a copy of plaintiffs letters to the small claims court; and (2) Badens failure was a mistake, bad judgment, or negligence, not a conscious and deliberate act of unfairness. But the trial courts decision was based on the two-year delay in paying six of the settlements. We have concluded that at least one more settlement may remain unpaid, four years after the small claims cases settled and two years after CIG paid off the other six settlements. Because the trial court did not consider the additional circumstances surrounding the failure to reimburse the Treweeks for this additional settlement, the breach of covenant claim must be retried.

III

DISPOSITION

The judgment is reversed. Appellants are entitled to costs on appeal.

NOT TO BE PUBLISHED.

MALLANO, Acting P. J.

We concur:

ROTHSCHILD, J.

JACKSON, J.*

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Analysis and review provided by Vista Property line Lawyers.

* Judge of the Los Angeles Superior Court assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.