Viau & Kwasniewski Takes a Closer Look at Statutory Law and Case Law Protecting California Residents Against Insurance Abuse

Which is more important “case law” – the formation of legal principle derived through the analysis of specific circumstances and ruled on by a judge rendering an opinion – or “statutory law” which codifies what’s permissible and what isn’t?

Answer: When discussing the American legal system both are equally important, as one set of laws and one set of case holdings interpret the other.

The importance of case law and statutory law working in tandem is sometimes clearest when dealing with instances of insurance bad faith.  Insurance bad faith is a legal term of art when insurance companies behave unreasonably and/or act in an unfair or arbitrary manner after a claim is made.

One subset of unreasonable insurance company behavior concerns the notion of “unfair competition” and is codified in the California Business and Professional Code, section 17200 and is known as the “Unfair Competition Law” or UCL. According to the UCL which statutory law promotes fair business practices in California, unfair competition includes, “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.”

In case you think this definition sounds rather broad, lacking specifics, you’re correct. It’s written intentionally as something of a catchall.  By including language like unfair or fraudulent in addition to unlawful, means that business practices can be deemed unfair and therefore prohibited even if the actions taken weren’t breaking a specific law.

The UCL Scores a Case Law Boost

For many years, the insurance industry has viewed this expansive law as not applicable to them in a bad faith case. Often insurance companies have taken the position that B&P 17200 is already covered by breach of contract and bad faith. Thus, insurers have argued, it would be unfair for them to be accused of wrongdoing based on the redundant claims in the UCL.  Well they were wrong.

Historically, this has been the defense on the part of insurance companies who felt their insureds were wrongly attacking the manner in which they conducted their business.

But as Viau & Kwasniewski noted in previous blogs, the robustness of our legal system rests on strength through flexibility. No statutory law is absolute and no case law ruling is free from review or complete reinterpretation. 

In August 2013, in Zhang v. Superior Court, the Supreme Court of the State of California clarified that policyholders who felt their insurance company had acted in bad faith could file a claim under the UCL. This recent case before the court concerned a plaintiff, represented by Viau & Kwasniewski, seeking insurance company compensation following a fire at her Aprtment Complex and the insurance company’s alleged false advertising which promised timely and proper payment. In addition to breach of contract and breach of implied covenant – the latter being the belief that there is an implied covenant of good faith and fair dealing when an insured enters into a an insurance contract expecting honesty, fairness and good faith – the  Court’s holding in Zhang v. Superior Court eliminated this insurance company defense, marking a major victory for insurance claimants throughout the state.

So does this mean it’s case closed for insurance companies? Have we seen the end of insurance bad faith?

No, but now California insureds have another cause of action against those insurance companies that habitually commit bad faith.

Tools of the Trade

In California insurance companies have been stripped of the age old flawed argument that the UCL does not apply to them regarding how they handle claims. However, the very nature of our legal system, forever balancing case law holdings with statutory  law, means that the debate as to what constitutes insurance company misconduct and the arguments for and against its existence will continue.

It is unlikely that insurance bad faith will be ever stop. But, just because the “war” against insurance bad faith hasn’t been won, doesn’t mean lawyers and their clients can’t celebrate a victorious battle. It’ll be fascinating to see how the law post Zhang will develop.

What ever those future rulings may be, the attorneys at Viau & Kwasniewski stand ready to assist. As always, feel free to comment on this blog in the space below, email Viau & Kwasniewski at gkk@vklawyers.com or jlv@vklawyers.com or contact us via phone at (800) 663-1095.

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Business And Professions Code Section 17200 Violation Cause of Action -

Should You Bother In A Bad Faith Case?

            What does a cause of action based on Business and Professions Code sections 17200, et seq. violations add to your breach of contract and breach of implied covenant bad faith case?

            The short and broadly stated answer is - an additional predicate to establish the carrier’s “sharp” business practices and misconduct.  The Business and Professions Code sections 17200, et seq. cause of action consequentially may: (a) help you pursue pattern and practice discovery; (b) support your punitive damages claim; and/or (c) bolster your request for attorneys’ fees, as well.  Through restitutionary relief, the cause of action additionally permits the court to make such orders and judgments as may be necessary to restore any money or property the insurance company improperly acquires by means of the wrongful conduct, providing latitude in terms of redress sought.  See, Bus. & Prof. C. § 17203.

Business and Professions Code Section 17200 - An Overview

            Business and Professions Code section 17200 states:

            “§ 17200.  Definition

                        “As used in this chapter, unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1 (commencing with Section 17500) of Part 3 of Division 7 of the Business and Professions Code.”

            This law is commonly referred to as the Unfair Competition Law (“UCL”).  The courts broadly construe what constitutes “unfair competition” under the UCL:

“The statutory language referring to ‘any unlawful, unfair or fraudulent practice’ makes clear that a practice may be deemed unfair even if not specifically proscribed by some other law.  ‘Because Business and Professions Code section 17200 is written in the disjunctive, it establishes three varieties of unfair competition – acts or practices which are unlawful, or unfair, or fraudulent.  In other words, a practice is prohibited as ‘unfair’ or ‘deceptive’ even if not ‘unlawful’ and vice versa.’

‘[T]he Legislature. . . intended by this sweeping language to permit tribunals to enjoin on-going wrongful business conduct in whatever context such activity might occur.  Indeed, . . . the section was intentionally framed in its broad, sweeping language, precisely to enable judicial tribunals to deal with the innumerable new schemes which the fertility of man’s invention would contrive.’ (American Philatelic Soc. v. Claibourne (1953) 3 Cal.2d 689, 698.)  As the Claibourne court observed: ‘When a scheme is evolved which on its face violates the fundamental rules of honesty and fair dealing, a court of equity is not impotent to frustrate its consummation because the scheme is an original one.’. . . ‘[I]t would be impossible to draft in advance detailed plans and specifications of all acts and conduct to be prohibited since unfair or fraudulent business practices may run the gamut of human ingenuity and chicanery.’” (Emphasis in original.)

See, Cel-Tech Communications, Inc. v. L.A. Cellular Telephone Co. (1999) 20 Cal.4th 163, 180 -181, 83 Cal.Rptr.2d 548, 561; Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553, 573 - 574, 71 Cal.Rptr.2d 731, 744 - 745.

            When the people of the State of California passed Proposition 103, three important sections were added to the California Insurance Code.  One of these, section 1861.03(a), expressly provides that the business of insurance shall be subject to the unfair business practices laws, set forth pursuant to Business and Professions Code sections 17200, et seq.

            Insurance Code section 1861.03(a) states:

                        “§ 1861.03.  Unfair insurance practices; prohibition

                        (a)        The business of insurance shall be subject to the laws of California applicable to any other business, including, but not limited to. . . the. . . unfair business practices laws (Parts 2 commencing with Section 16600). . . of the Business and Professions Code.”  (Emphasis added.)

            Sections 17200, et seq. are included in Part 2 of the Business and Professions Code expressly referred to in section 1861.03.  Pursuant to the express mandates of this state’s Legislature, the business of insurance is specifically subject to the provisions of sections 17200, et seq.

How To Fight Carrier Challenges To The UCL Cause Of Action

            Insurance companies typically predicate their challenges to the UCL on certain basic principles: (a) that the 17200 cause of action is an attempt to plead around the proscriptions in Moradi-Shalal v. Fireman’s Fund Ins. Co. (1988) 46 Cal.3d 287, 250 Cal. Rptr. 116;    (b) that the cause of action is superceded by or duplicative of the breach of contract and

breach of implied covenant theories and damages; and/or (c) the insured has no right to any recovery under the UCL.

            The first rebuttal to such carrier challenges is, of course, a discussion of Insurance Code section 1861.03, quoted above.

            The following also provides additional arguments to defeat the carriers’ contentions - and further underscores why the UCL cause of action is worth the trouble:

(a)       The UCL cause of action is not barred by Moradi-Shalal:

            In Moradi-Shalal, the California Supreme Court overruled Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842.  Royal Globe held that private litigants could bring an action pursuant to Insurance Code section 790.03 against insurance companies, regardless of whether the action was brought by the insured (i.e., first party), or by a person making a claim against the insured (i.e., third party).

            What Moradi-Shalal broadly stands for are the propositions that: (a) third parties cannot bring direct actions (including section 17200 actions) against insurance companies; and (b) there is no private right of action, at all (i.e., by first or third parties), for alleged violations of the Unfair Insurance Practices Act set forth at Insurance Code section 790.03.

            What Moradi-Shalal does not stand for is the proposition that first party individual plaintiffs cannot bring UCL claims against insurance companies.  Nevertheless, many carrier defendants (improperly) cite Moradi-Shalal in support of that postulate.

           

            Carriers further argue that where the only facts supporting the UCL cause of action constitute misconduct proscribed by Insurance Code section 790.03(h), the insured’s Business and Professions Code section 17200 cause of action is nothing more than an attempt to plead a direct claim based on Insurance Code section 790.03 violations - which Moradi-Shalal prohibits.

            That carrier argument also is erroneous:

            First, even in cases apparently predicated solely upon claims handling misconduct, the courts have allowed the UCL cause of action.  These courts did not find that the UCL theory contravened Moradi-Shalal.

            For example:

            In Gallimore v. State Farm Fire & Cas. Ins. Co. (2002) 102 Cal.App.4th 1388, 1391, 126 Cal.Rptr.2d 560, 562, the Second District Court of Appeal held that a cause of action predicated upon Business and Professions Code sections 17200, et seq. is valid even where it is based on allegations of improper claims handling and adjustment.  The Court of Appeal reversed the trial court’s Order granting defendant State Farm’s motion to strike.  Carrier defendants seek to distinguish Gallimore arguing that the case did not involve claims handling practices.  However, even the Court in Dible v. Haight Ashbury Free Clinics, Inc. (2009) 170 Cal.App.4th 843, 851, 88 Cal.Rptr.3d 464, 471 recognized that the plaintiff/insured in Gallimore brought an action under the UCL “seeking to enjoin improper handling of claims. . . .”

            Similarly, the Second District Court of Appeal in Kapsimallis v. Allstate Ins. Co. (2002) 104 Cal.App.4th 667, 676 - 677, 128 Cal.Rptr.2d 358, 365, reversed the trial court’s granting of the insurance carrier’s motion for judgment on the pleadings as to breach of contract, bad faith, and Business and Professions Code section 17200 violations.  The Court held that the pleadings properly alleged claims mishandling based upon the carrier’s denial of coverage for the insureds’ Northridge earthquake claims in bad faith.

            Second, a UCL violation does not require violation of a predicate law (790.03 or otherwise):

            An act or practice may constitute “unfair competition” under 17200 if it is forbidden by law - or even if not specifically prohibited by law, it is deemed an “unfair” act or practice.  Hence, Insurance Code section 790.03 is not and need not be a predicate for an insured’s UCL cause of action.  The insured’s Complaint allegations may include unfair, unlawful, and fraudulent conduct the carrier committed that is not delineated or described in Insurance Code section 790.03.  Some insurance company misconduct becomes so personal, harassing, and discriminatory - and causes extensive harm far beyond and unrelated to claims handling issues, that the predicate acts are not limited to the proscriptions set forth in Insurance Code section 790.03.  Because “unfair” acts not set forth in section 790.03 may be alleged as supportive of an insured’s Business and Professions Code claim, Moradi-Shalal is not undermined by, and has no application to, the analysis demonstrating the validity of the insured’s UCL theories against the carrier defendant. 

            In enacting the UCL itself, and not by virtue of particular predicate statutes, the Legislature conferred upon private plaintiffs “specific power” to prosecute unfair competition claims. 

            Thus, for example, in Progressive West Ins. Co. v. Superior Court (2005) 135 Cal.App.4th 263, 283, 37 Cal.Rptr.3d 434, 450, the Court of Appeal found that the plaintiff/insured properly alleged a UCL theory based on the insurance company’s “sharp, illicit business practice.”  The Court articulated the insured’s theory as follows:

                        “Preciado [insured] alleges that Progressive has a ‘pattern and practice of ignoring California Law by seeking 100% reimbursement for the amounts paid under its med-pay provision.  This systematic scheme is contrary to law, and is nothing more than a sharp, illicit business practice.’  Based on these key allegations, Preciado alleges Progressive fails to investigate claims, fails to properly explain policy benefits, misled Preciado and misrepresented material facts pertaining to his claim, imposes unacceptably high reimbursement amounts, and forced Preciado to retain an attorney and incur economic damages in order to receive proper benefits under the policy.

                        These practices, to the extent they are more general than the allegations of the breach of contract and breach of the covenant of good faith and fair dealing causes of action, state a cause of action. . . .”

            Insurance Code section 790.03 was not and did not need to be the predicate for the plaintiff’s/insured’s UCL cause of action in Progressive West, and the Court found the theory valid.

            Third, Regulations violations may support the UCL allegations:

            The plaintiff’s/insured’s pleading may allege that the carrier defendant violated numerous Regulations, set forth at the Fair Claims Settlement Practices Regulations, Title 10, Chapter 5, subchapter 7.5, sections 2695.1, et seq.  In other words, the UCL claim does not require section 790.03 violations, and again, the UCL theory does not constitute the insured’s attempt to “plead around” Moradi-Shalal. As the Court stated in Stevens v. Superior Court (1999) 75 Cal.App.4th 594, 606, 89 Cal.Rptr. 370, 378:

                        “A regulatory statute may form the basis for such a UCA¹ [Business and Professions Code section 17200] action.  The Supreme Court has long held that the ‘unlawful’ practices which form the basis of a UCA action are ‘. . . any practices forbidden by law, be it civil or criminal, federal state, or municipal, statutory, regulatory, or court-made. . . 

                        “It is not necessary that the predicate law provide for private civil enforcement.”  (Emphases in original.)

Stevens v. Superior Court, id., citing to Saunders v. Superior Court (1994) 27 Cal.App.4th 832, 838 - 839, 33 Cal.Rptr.2d 438, 441.

            Fourth, the insured’s Complaint may include allegations that the insurance company engaged in misleading advertisements within the meaning of the UCL, which is separate and distinct from the claim mishandling allegations (and, therefore, not proscribed by Moradi-Shalal at all). 

            For example, many insurance companies advertise that “they are on your side,” that the insured “is in good hands,” or that they are “like a good neighbor.”  These slogans may influence the consuming public’s decision to purchase the respective carrier’s insurance product.  However, the misconduct at issue in your client’s/the insured’s case may demonstrate that the insurance company had no intention whatsoever of fulfilling the advertising promises made.  A UCL cause of action under such circumstances is valid. 

            In Progressive West Ins. Co. v. Superior Court, supra, 135 Cal.App.4th at 284 - 285, 37 Cal.Rptr.3d at 451 - 452, the Court analyzed the UCL’s fraudulent business practices proscription, and concluded that the insured’s UCL cause of action was valid in light of its allegations that other purchasers of Progressive policies were likely to be deceived or misled regarding the carrier’s insurance products:

                        “A fraudulent business practice under section 17200 ‘is not based upon proof of the common law tort of deceit or deception, but is instead premised on whether the public is likely to be deceived.’  (Pastoria v. Nationwide Ins., supra, 112 Cal.App.4th at p. 1498.)  Stated another way, ‘In order to state a cause of action under the fraud prong of (section 17200) a plaintiff need not show that he or others were actually deceived or confused by the conduct or business practice in question.  A violation can be shown even if no one was actually deceived, relied upon the fraudulent practice, or sustained any damage.  Instead, it is only necessary to show that members of the public are likely to be deceived.’  (Schnall v. Hertz Corp. (2000) 78 Cal.App.4th 1144, 1167 - 1168.) . . . .”

            Based upon the insured’s allegations of Progressive’s pattern and practice of deceiving  consumers purchasing its insurance products, the Court concluded that the carrier’s “conduct is likely to deceive the public. . . .”  As such, the Court concluded that the insured stated a valid UCL cause of action.  Id.

            Further, the test in these circumstances is whether a reasonable consumer would likely be misled by the advertising promises made.  See, Lavie v. Procter & Gamble Co. (2003) 105 Cal.App.4th 496, 506 - 507, 129 Cal.Rptr.2d 486, 494; Quelimane Co., Inc. v. Stewart Title Guar. Co. (1998) 19 Cal.4th 26, 54, 77 Cal.Rptr.2d 709, 726.

(b)       The UCL cause of action is not is superceded by or duplicative of the breach of contract and breach of implied covenant theories:

            Carrier defendants argue that the plaintiff/insured has an “adequate remedy” pursuant to the causes of action for breach of the insurance contract and breach of the implied covenant.  Therefore, they posit, the UCL cause of action is invalid.

            Business and Professions Code section 17205 expressly provides that the remedies afforded pursuant to section 17200 are “cumulative. . . to the remedies or penalties available under all other laws of this state.” 

            The statute states:

                        “Unless otherwise expressly provided, the remedies or penalties provided by this chapter are cumulative to each other and to the remedies or penalties available under all other laws of this state.”  (Emphases added.)

See, Bus. & Prof. C. §17205.  (Case law supports the cumulative nature of the remedies:  See, Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 11 Cal.Rptr.3d 45; Rothschild v. Tyco Int’l, Inc. (2000) 83 Cal.App.4th 488, 99 Cal.Rptr.2d 721; Wilner v. Sunset Life Ins. Co. (2000) 78 Cal.App.4th 952; 93 Cal.Rptr.2d 413; Notrica v. State Comp. Ins. Fund (1999) 70 Cal.App.4th 911, 83 Cal.Rptr.2d 89; Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553, 71 Cal.Rptr.2d 731.)

            Pursuant to the statute itself, unless specifically proscribed, the statute’s remedies are

“cumulative.”  The insured’s breach of contract and breach of implied covenant causes of action do not supercede and are not duplicative of the UCL theory.

 (c)       There is a right to recovery under a UCL cause of action:

            The courts recognize the validity of restitutionary equitable relief in a UCL cause of action.  The Court in Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1144 - 1145, 131 Cal.Rptr.2d 29, 37 - 38 stated:

“We defined in Kraus v. Trinity Mgt. Services, Inc. an order for ‘restitution’ as one ‘compelling a UCL defendant to return money obtained through an unfair business practice to those persons in interest from whom the property was taken, that is, to persons who had an ownership interest in the property or those claiming through that person. . . .’”

            The California Supreme Court in Korea Supply goes on to clarify that: (a.) where the disgorgement sought is restitutionary in nature, it is allowed in a 17200 action (indeed, it is the primary remedy allowed); (b.) this remedy applies in both individual and representative actions; and (c.) the UCL action provides a broad statutory remedy that is an important consumer tool:

“We note that the UCL remains a meaningful consumer protection tool.  The breadth of standing under this act allows any consumer to combat unfair competition by seeking an injunction against unfair business practices.  Actual direct victims of unfair competition may obtain restitution as well.”

See, Korea Supply Co. v. Lockheed Martin Corp., supra, 29 Cal.4th at 1152, 131 Cal.Rptr.2d at 44.

            Hence, where the insurance company violates the UCL, and refuses to abide by the promises made in the insurance contract, an example of restitutionary relief afforded is return of the insurance policy premium.  Such relief is particularly advantageous where the policy premium is high.

            Moreover, the California Supreme Court holds that where aggrieved parties are harmed by the unfair business practices of a defendant, they may be entitled under certain circumstances to attorneys’ fees pursuant to Business and Professions Code sections 17200, and Code of Civil Procedure section 1021.5.  See, Graham v. DaimlerChrysler Corp. (2004) 34 Cal.4th 553, 21 Cal.Rptr.3d 371 (questioned on other grounds in Doran v. Vicorp Restaurants, Inc. (C.D. Cal. 2005) 407 F.Supp.2d 1120, 1122 - 1123). 

            The California courts, and the Legislature, expressly recognize the importance of the fee award aspect to a UCL claim.  Pursuant to Code of Civil Procedure section 1021.5, fees are awarded to the party prevailing under a UCL claim, and states in part:

                        “Upon motion, a court may award attorneys’ fees to a successful party against one or more opposing parties in any action which has resulted in the important right affecting the public interest if: (a) a significant benefit, whether pecuniary or nonpecuniary, has been conferred on the general public or a large class of persons. . . .”

            Rectifying a pattern and practice of improper claims handling, or misleading advertising promises, may constitute just such a “significant benefit.”  As such, an insurance company defendant’s attempt to take away the aggrieved plaintiff’s/insured’s right to the possibility of attorneys’ fees, particularly at the pleading stage, is improperly premature.

Why Pursue A UCL Theory?

            The discussion above regarding an insured’s right to recovery under a UCL theory illuminates the utility in alleging this cause of action.  Further, evidence of UCL violations paints the insurance company defendant with another “unreasonable carrier” brush stroke.  In addition, on a more nuts and bolts level, a UCL theory may bolster a plaintiff’s/insured’s argument that pattern and practice discovery is relevant in the case. 

            Discovery in a bad faith case should seek to reveal such pattern and practice conduct.  It is the law of the State of California that an insurance company may not engage in a pattern and practice of wrongful claims handling.  How an insurance company handles similar claims is of the utmost importance:  Where the insurance company engages in a conscious and willful pattern and practice of wrongful denial, wrongful delay, purposeful refusal to objectively investigate, and/or discrimination, the insurer is exposed to tortious breach and punitive damages. 

            The manner in which insureds may obtain this discovery was analyzed in the case of Colonial Life & Acc. Ins. Co. v. Superior Court (1982) 31 Cal.3d 785, 183 Cal.Rptr. 810.  This discovery relates to the insurance company’s handling of other similar claims made by other insureds.  The California Supreme Court, and the courts in uniform decisions since 1982, specifically hold that such discovery is relevant, is not privileged or protected, and that if it proceeds as outlined in Colonial Life, properly protects the other insureds’ privacy interests. 

            A UCL theory adds another basis on which a plaintiff/insured may properly argue that the pattern and practice discovery is pertinent to the action. 

            Lincoln said “labor is the true standard of value.”  Does pleading a UCL cause of action create work?  Yes.  Is it worth it?  We hope this article reveals that it is.  (Plus, carriers hate it.  Enough said.)

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¹           The Court in Stevens referred to the UCL as the Unfair Competition Act - hence the acronym “UCA.”

Viau & Kwaniewski: The Nuts And Bolts Of How To Defeat A Strategy That Essentially Renders Some Coverage Illusory

Insurance Carriers’ Increasingly Asserted Requirement In First Party Cases That

Insureds Pay Out-Of-Pocket Before Reimbursement Of Various Covered Costs

The Nuts And Bolts Of How To Defeat A Strategy

That Essentially Renders Some Coverage Illusory

Introduction

In these economic times, there is an almost unassailable argument that insurance companies have even greater incentives to underpay on claims.  Although decisional, statutory, and regulatory law (as well as fundamental notions of integrity), proscribe the practice, the claims department may become a means for the carrier to attain profitability.

The Insurance Services Office (“ISO”) estimates that in 2010, the U.S. property/casualty insurance industry’s net income after taxes reached $34.7 billion.  This is up from its net income of $28.7 billion in 2009.  (ISO Studies and Whitepapers, Insurer Financial Results, 2010, Executive Summary, p. 1.) 

ISO also concludes, however, that it is clear that the “Great Recession” has had an adverse impact on the property/casualty insurance industry - its 2010 net income of $34.7 billion is just over half of its $62.5 billion in net income for 2007.  (Ibid.)

In 2008 alone, it is estimated that the housing market crash cost homeowner insurers $1 billion in lost premium growth, due to a 50 percent decline in new home construction, and stricter lending standards resulting in fewer sales.  (Robert P. Hartwig, Ph.D., Insurance Information Institute, “The Financial Crisis and the P/C Insurance Industry: Challenges Amid the Economic Storm,” September 23, 2008.)

With this backdrop, property/casualty carriers - particularly homeowner insurers - have been more unyielding vis-à-vis claim proof requirements - to the point of wavering from past industry standards or practices. 

Based on trends we have observed over the past 25 years of practice, including most recently a homeowner bad faith trial that spanned 7 weeks (which concluded with a confidential resolution), we focus in this article on homeowner carriers’ evident evolving attitude towards claims handling in first party homeowner cases.

Additional Living Expenses

Purpose

Standard ISO homeowner Forms provide Coverage D, Loss of Use Coverage, and include “Additional Living Expense (“ALE”).”  After their homes suffer a catastrophic loss, most insureds initially are primarily concerned about their ALE coverage. 

The purpose of ALE is to provide immediate relief due to uninhabitability of the home, and to help insureds maintain their “normal,” pre-loss standard of living. 

ALE benefits often are the first payments the insurance company makes.  Prompt payment of ALE benefits in an amount reasonably necessary for insureds to maintain their “normal” standard of living - e.g., for a comparable residence - often facilitates the smooth handling of the claim thereafter.

Because of the critical and immediate nature of this coverage, carriers in the past typically would front ALE costs - even before insureds provided receipts and proofs of out-of-pocket costs.  Once insureds were able to secure long term relocation, if necessary, they then provided cost proofs to their carriers. 

Even in situations where ALE was advanced, it was not unusual, however, for the homeowner carrier to thereafter delay in ALE payments.  During the October 2003 wildfires, 3,700 homes were deemed a total loss.  There were 123 consumer complaints to the Department of Insurance.  After complaints of under-insurance, the next predominant consumer complaint was delay and denial of ALE.  (See, e.g., Kenneth Reich, “Insurance Firms Get Good Grade on Fire Response,” Los Angeles Times, February 13, 2004.)

A trend we have seen emerging is that some carriers are reluctant to make any ALE advances - they require proofs of cost immediately, as a condition to ALE payment.

This gives rise to hardship for the insured, and the entire claims process often degrades to the point that a breach and bad faith case ensues.

Specific ALE Provision - Exemplar

In a case where the insurance company required the insured to provide proof of actual out-of-pocket payments, the ALE provision stated as follows:

                        “1.       Additional living expense

                                    If covered accidental direct physical loss or damage to the dwelling makes the dwelling uninhabitable by you, we will reimburse you for the reasonable and necessary increase in living expenses incurred by you.  This coverage is for your household to maintain its normal standard of living it had at the time of the loss event. . .  Upon our request, you must provide receipts for expenses incurred.”  (Underscored emphasis added.)

At trial, the insurance company took the position that the policy’s ALE provision required as a condition to ALE coverage receipts and proof of out-of-pocket payments.  The carrier cited specifically to the “we will reimburse you,” and the “[u]pon our request, you must provide receipts for expenses incurred” language.

Arguments Against The Out-Of-Pocket Requirement

Policy interpretation

As a fundamental matter, insurance policy interpretation must give effect to the “mutual intention” of the parties.  (See, Waller v. Truck Ins. Exchg. (1995) 11 Cal.4th 1, 18.)  Such intent is to be inferred, if possible, solely from the written provisions of the insurance contract.

 

Thus, the rules governing policy interpretation “require us to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson wold ordinarily attach to it.”  (Ibid.)  The “clear and explicit” meaning of policy provisions, interpreted in their “ordinary and popular sense” control - unless “used by the parties in a technical sense or a special meaning is given to them by usage.”  (Ibid.)

A policy provision is ambiguous if it is capable of two or more reasonable constructions.  The California Supreme Court also emphasizes that even “plain and clear” language, when considered in isolation, may be ambiguous when read in the context of the policy as a whole and the circumstances of the case.  (See, MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, 652.)

“Although examination of various dictionary definitions of a word will no doubt be useful, such examination does not necessarily yield the ‘ordinary and popular’ sense of the word if it disregards the policy’s context.”  (Id., 31 Cal.4th at 649.)  Rather, the Supreme Court in MacKinnon cautioned, a court should put itself in the layperson insured’s position, and understand how he or she might reasonably interpret the language.  (Ibid.)

The Supreme Court reaffirmed in State of Calif. v. Allstate Ins. Co. (2009) 45 Cal.4th 1008, 1018, that ambiguous provisions are to be interpreted to protect “the objectively reasonable expectations of the insured.”  (See also, e.g., Montrose Chem. Corp. of Calif. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 667 (“[W]e generally interpret the coverage clauses of insurance policies broadly (in order to protect) the objectively reasonable expectations of the insured. . .”); Silberg v. Calif. Life Ins. Co. (1974) 11 Cal.3d 452, 464.)

Finally,  provisions that purport to limit or take away coverage reasonably expected by the insured must be “conspicuous, plain and clear” to be enforceable.  (See, Haynes v. Farmers Ins. Exchg. (2004) 32 Cal.4th 1198, 1206.)

Application of the foregoing rules of contract interpretation illuminates that the ALE language in many homeowner policies arguably is ambiguous.  This undermines homeowner carriers’ insistence that before they will advance ALE, insureds must first prove out-of-pocket expense.

The coverage - by its express terms - is designed to allow insureds to “maintain” their “normal standard of living” that they “had at the time of the loss event.”

Insureds’ “normal standards of living” do not include having to pay rent out-of-pocket for another dwelling because their home is uninhabitable.  Insureds’ “normal standards of living” do not entail paying the mortgage on their home - and paying rent out-of-pocket on a comparable home or apartment. 

The implication of “normal standard of living” is that insureds’ cash flow will not be adversely affected - or decimated - by having to pay for two dwellings, after they have suffered a catastrophic loss. 

Thus, a carrier’s contentions that insureds must first pay rent for an alternative living arrangement, and that only after paying rent will they receive the benefits of this coverage, underscore the ambiguity of this ALE coverage.  More critically, such an interpretation essentially renders the coverage illusory.  (See, Scottsdale Ins. Co. v. Essex Ins. Co. (2002) 98 Cal.App.4th 86, 95.)  Many insureds cannot afford to front the costs of a rental, while also paying on their home mortgage.

Equally demonstrative that the provision is ambiguous, and the carrier’s out-of-pocket cost insistence is erroneous, is the Coverage D - Loss of Use limit in most policies.  According to the Insurance Information Institute, most ALE limits are typically at least up to 20 percent of the structure limits. 

By the carrier’s analysis, the insured must first be out-of-pocket ALE payments upwards of tens of thousands of dollars - possibly more - before the carrier’s ALE obligations are triggered.  This is not the reasonable expectation of any insured, and this does render the coverage illusory - few and far between are the insureds who could afford such an out-of-pocket expenditure. 

The carriers may say such a result is preposterous, and that insureds need only submit their expense invoices to secure incremental payments. 

Yet, in the case we tried, that is precisely what the insured did.  The insured had contacted a relocation specialist.  The specialist found a comparable home for rent, and provided the insured with invoices demonstrating the 6 month cost to lease that comparable home.  The insured in fact had nowhere else to live, and was going to move into the “comparable home” secured by the relocation specialist.  The insured presented his homeowner carrier with the relocation specialist’s invoices.

The carrier deemed such invoices inadequate because they were not receipts for actual out-of-pocket payments.  The insured’s finances were such that he could not sign a contract for the 6 month lease without some assurance from the carrier that the cost would eventually be covered and paid.  The carrier refused - the invoices were not proof of out-of-pocket payments.

Finally, the exemplar ALE provision states that “upon” the carrier’s request, receipts must be provided.  Given that the coverage provides that the carrier may request receipts, it does not follow that insureds are only entitled to reimbursement after actual out-of-pocket payment, and provision of such receipts. 

It should be noted that many homeowner policies require, under the Section I - Property Conditions - Duties after loss provision, that the insured must send within 60 days after the carrier’s request, a “signed, sworn statement showing:. . . receipts and records that support additional living expenses. . . .”

However, an insurer claiming that it is relieved of providing ALE coverage because the insured did not fulfill the policy’s conditions bears the burden of proving the insured’s policy condition breach.  (See, Clemmer v. Hartford Ins. Co. (1978) 22 Cal.3d 865, 881 - 882 (late notice); Billington v. Interinsurance Exch. of So. Calif. (1969) 71 Cal.2d 728, 737 - 738 (breach of duty to cooperate).)

Moreover, an insured’s policy condition breach does not automatically release the insurance company from its obligations.  The insurance company must also establish prejudice resulting from the insured’s failure to comply with policy conditions.  (See, Hall v. Travelers Ins. Cos. (1971) 15 Cal.App.3d 304, 308.)  To prevail on its prejudice claim, the insurance carrier must prove there is a substantial likelihood that a trier of fact would find in the carrier’s favor if the insured had not breached the policy condition.  (See, United Services Auto. Ass’n v. Martin (1981) 120 Cal.App.3d 963, 965 - 966.)

Concomitantly, principles regarding policy interpretation are not the only method for undermining carriers’ out-of-pocket contention.

Evidence extrinsic to the policy

If the claim is in litigation, the insured should propound discovery for the homeowner carrier’s claims manual or claims handling guidelines.  Some claims handling guidelines allow advance ALE payments under certain circumstances, for lodging made necessary by loss of use of the insured dwelling. 

Further, carriers may admit through deposition or trial testimony that such advances are allowed, or have been made in the past.  Form letters to the insured may acknowledge ALE obligations, without mentioning proof of costs actually incurred.

The carrier may have a “direct bill” program, through which the insurer pays for alternative accommodations directly to the landlord, or a relocation service provider.

Carrier claims documentation or training videos may outline a company philosophy of offering help to insureds when claims are made, and when insureds are in need, regardless of technical procedures involved.

Such extrinsic evidence supports the position that the homeowner carrier does owe an obligation to advance ALE, and that at a minimum, the policy’s ALE provision is ambiguous.

Expert testimony regarding industry standards

A claims handling expert may testify regarding industry standards.  (See, Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1077.)  The insured’s claims handling expert may be of the opinion that it is the industry standard for carriers to make advance ALE payments.  Whether this standard persists, given recent trends, arguably remains to be seen.

As a practical matter, ALE advances do fulfill the insured’s objectively reasonable expectations of coverage.  (See, e.g., Olson v. American Bankers Ins. Co. (1994) 30 Cal.App.4th 816, 824 - 825.) 

Most insureds do not expect that at their greatest time of need, the insurance company will require that they fund the costs for temporary housing, when the policy purports to provide “coverage for. . . your household to maintain its normal standard of living it had at the time of the loss event.”  (See, e.g., Stamm Theaters, Inc. v. Hartford Cas. Ins. Co. (2001) 93 Cal.App.4th 531, 543 (Property policy covered structural collapse due to hidden decay - “decay” was broadly construed to include gradual deterioration, not just dry rot - this protected the reasonable expectation of the insured).)

It is true that some courts have found that insureds must first establish that they have actually incurred the ALE cost - and have paid those costs out-of-pocket.  (See, e.g., Hilley v. Allstate Ins. Co. (Ala. 1990) 562 So.2d 184.) 

In California, however, for years, the industry practice was to advance ALE coverage during claim investigation.  Because of the economic climate, and insurance carriers’ increasing reliance on language such as in the exemplar ALE provision, those days may be waning.

Emergency Services

Pursuant to the typical homeowner policy’s Section I - Property Conditions, the policy provides that in the event of a covered loss or damage to insured property, the insured should make reasonable and necessary emergency repairs or perform loss mitigation needed to protect the property from further damage.

A typical Section I - Property Conditions - Emergency Services provision states as follows:

                        “1.       Emergency Services

                                    In the event your covered property sustains covered loss or damage, you should protect the property from further damage.  You should make any reasonable and necessary emergency repairs or perform loss mitigation needed to protect the property from further damage (hereinafter ‘emergency services’).  We will reimburse the reasonable costs you incur for necessary emergency services for covered loss or damage to mitigate or abate the cause of the loss or damage.”

Many carriers - and empirical experience indicates increasingly so - require insureds to pay out-of-pocket for emergency services or repairs after a catastrophic loss.  Only after proof of the insured’s payment will the carrier reimburse for such expense.

This repair requirement includes the insured paying out-of-pocket for items such as board up, or dry out of a home saturated by fire-extinguishing water.  Immediate dry out is particularly important to prevent the formation of harmful mold.

After a catastrophic calamity, insureds often are at a loss - financially, mentally, and emotionally - to find, make arrangements with, and pay for emergency services providers who can assist them with making such repairs.  Many insureds are not equipped to make the repairs themselves. 

           

While insurance carriers may interpret their policy’s emergency services provisions as requiring out-of-pocket payments by the insured, this essentially leaves the insured to his or her own devices after a covered loss. 

This is not what the California Department of Insurance envisions as demonstrated by the Regulations promulgated pertaining to covered loss.  The California Fair Claims Settlement Practices Regulations, section 2695.4, states that: “Every insurer shall disclose to a first party claimant. . . all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant.”  (See, Fair Claims Settlement Practices Regulations, California Administrative Codes, Title 10, Chapter 5, subchapter 7.5, §§ 2695.1, et seq.; see, 10 CCR § 2695.4(a).)

Indeed, it is the custom and practice in the California insurance industry for an insurance company to offer the insured, for example: emergency board-up where a home has been damaged and left exposed to vandalism; or dry out services where a home has been saturated with water.  Expert trial testimony regarding such custom and practice should be offered. 

Conversely, the insurance industry’s argument that insureds must first pay out-of-pocket is often asserted at trial through the testimony of insurance company executives and training personnel.  This testimony leaves the jury with the distinct - and very distasteful -  impression that the carrier’s interpretation of its own obligations would result in only the wealthy being protected by insurance. 

Reimbursement after insureds pay for their own losses is not what insurance is about - this does not give effect to the reasonable expectations of any insured.

Dwelling Restoration Scopes And Repair Estimates

Similarly, many carriers will prepare dwelling restoration scopes and repair estimates with zeroes (or an “as incurred” requirement) for: temporary fencing; temporary power; temporary toilets; architectural fees; permit costs; asbestos testing fees; etc.

In the standard homeowner policy (with the possible exception of language regarding code upgrades), there is no language that allows an insurance company to estimate literally nothing for these cost items. 

The typical homeowner policy is written on a replacement cost basis.  The carrier is required to estimate the true cost to repair and restore the insured’s home.  This is called Replacement Cost Value (“RCV”).  Based on specified criteria (see, e.g., Ins. C. § 2051(b)(2); Regulations, § 2695.9(f)(1)), the carrier makes various deductions for physical depreciation.  RCV minus allowable depreciation equals Actual Cash Value (“ACV”).

By having zeroes in its dwelling restoration scopes and repair estimates, the carrier is able to reduce the ACV payment to its insured.  This is significant - the zeroes allow the carrier to underpay ACV, inuring to the insured’s detriment in a myriad of ways.  For example, an undervalued and underpaid ACV may make it more difficult for the insured to find a reputable, qualified general contractor willing to commit to perform the home repair work, as proscribed by the insurance company’s estimate.

It is important that the insured have a qualified general contractor prepare a complete dwelling scope and repair estimate that includes, inter alia, numbers for the “zero” items in the insurance company’s estimates.  It is vital that the insured or his or his representatives understand and insist on the protections afforded in the Regulations, section 2695.9(d)(1), (2), and (3).

Conclusion

The above presents just some of the ways insurance companies are progressively, and improperly, narrowing their obligations under their homeowner policies.  Viau & Kwasniewski hopes this article will provide some nuts and bolts ideas to help defeat improper carrier contentions, and ease the pain of your clients/insureds.