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California Court of Appeal Condemns Insurer's "Deliberate Strategy of Obstruction and Delay"

By: Kurt W. Melchior
01/05/09

Occasionally we need reminding that "[t]he function of an insurance company is more than that of premium receiver." City of Carter Lake v. Aetna Cas. & Sur. Co., 604 F.2d 1052, 1058 (8th Cir. 1979). A strong reminder is found in the Sixth District Court of Appeal's decision in City of Hollister v. Monterey Insurance Company. That case illustrates in extraordinary detail the lengths to which some insurance companies will go to avoid paying claims. It is also instructive because it applies insurance regulations not previously construed by the courts and clarifies application of the doctrine of estoppel in coverage lawsuits.

Of particular interest in the context of insurance coverage litigation is the court's application of California's fair claims practices regulations, which require insurers, among other things, 

  • To notify their policyholders of "all benefits, coverage, time limits or other provisions of [the] insurance policy,"
  • To provide necessary forms and instructions within 15 days after receiving notice of a claim, along with "reasonable assistance, included but not limited to specifying the information the claimant must provide for proof of claim,"
  • To communicate any additional benefits that might be payable to the insured, and to "cooperate with and assist the insured in determining the extent of the insurer's additional liability,"
  • To respond to any communication from the claimant within 15 calendar days; and 
  • To accept or deny a claim "immediately" upon receiving proof of claim "but in no event more than forty (40) days later."

While violations of these regulations do not by themselves give rise to a private cause of action, they are sufficient to sustain the imposition of an estoppel to prevent the insurer's reliance on a procedural condition to deny coverage. Such a result, the court explained, merely means that the insurer is equitably prevented from exploiting procedural lapses that are a product of the insurer's own failures to comply with governing law.

Here are the facts of the case: Monterey Insurance Company insured a historical building at the Hollister airport under a commercial lines policy that included a "Functional Building Valuation" endorsement. That endorsement required the insurer to pay the cost of repairing or replacing the building, but only if the City, within 180 days after a loss, "contract[ed] for repair or replacement of the loss or damage to restore the building … for the same occupancy and use…." If the City failed to act within 180 days, its recovery would be limited to the "market value" of the building.

After a fire damaged a portion of the building, the City sought to recover the building's "functional replacement value." Because the estimated "market value" of the building was $150,000, while the estimated cost of constructing its "functional equivalent" ranged from $950,000 to $2.6 million, the insurance company had a strong incentive to get around the "functional replacement" provision, and the insurance company's adjuster told the City early on that he would "fight" the City's efforts to replace the building, which indeed he did.

The court's 69-page decision describes the insurance company's "concerted campaign of intimidation" and "deliberate strategy of obstruction and delay" in great detail, ruling that substantial evidence supported the trial court's findings that, among other things:

  • The insurance company "patently failed to ‘cooperate with and assist the insured in determining the extent of the insurer's additional liability.'"
  • The insurance company "actively interfered with City's performance of the 180-day contracting condition, intentionally and in bad faith, by obstructing, delaying, and interfering with City's efforts to determine its rights under the policy."
  • The insurance company "threatened to deny reimbursement [and] the potential grounds for denial … were either meritless or nebulous to the point of invisibility."

The insurance company "at no time made or communicated a good faith determination of the cost to construct a functional replacement building…."

Holding that the insurer's conduct harmed the City by making it "practically impossible, or at least unreasonably difficult" for the City to comply with the 180-day time limit for entering into a replacement contract, the court ruled that the insurer was estopped from relying on that provision as a bar to coverage.

The court rejected the insurer's argument that estoppel is limited to situations involving fraud, explaining that the concept has not been so narrowly applied. Equitable estoppel, the court held, arises when one party engages in blameworthy or inequitable conduct that causes the other party to suffer some disadvantage that the first party should not be permitted to exploit.

Estoppel does not require fraudulent intent, especially in the insurance context. Instead, it may arise from a variety of circumstances in which the insurer's conduct threatens to unfairly impose a forfeiture of benefits upon the insured. California courts have long held that "equitable relief" may be broadly available in a proper case to relieve a policyholder from forfeiture under a contractual condition of coverage.

Estoppel does not require affirmative conduct, but can be "predicated on the insurer's failure to speak when in law or equity it is bound to do so…." The insurer's conduct in this case clearly supported the court's ruling that it should be estopped from relying on the 180-day replacement condition.

The court's decision was not predicated solely on regulatory findings. The court also held that insurers have a common law obligation to assist policyholders in recovering bargained-for policy benefits. The decision should be a valuable precedent in other cases where insurers are obdurate in claims handling or create other obstacles to the policyholder's legitimate claims. City of Hollister v. Monterey Ins. Co., 165 Cal. App. 4th 455 (2008).

Kurt W. Melchior is a litigation partner with Nossaman in San Francisco, where he chairs the Firm's insurance coverage practice group. He has over 50 years' experience litigating complex commercial matters, including class actions, antitrust, insurance coverage, health care, and professional responsibility cases. He can be reached at (415) 438-7279 or kmelchior@nossaman.com.

Thomas D. Long is a litigation partner with Nossaman in Los Angeles who focuses his practice on complex commercial disputes. He counsels private businesses and public entities on insurance issues and also represents them in coverage litigation under all types of insurance policies, including commercial general liability, property, employment practices liability, directors' and officers' and professional liability policies. He can be reached at (213) 612-7871 or tlong@nossaman.com.

Deborah E. Beck is a senior litigation associate with Nossaman in San Francisco who focuses her practice on appellate, environmental, and insurance coverage issues. She counsels private businesses and public entities on insurance issues and also represents them in complex coverage litigation under all types of insurance policies, including commercial general liability, property, employment practices liability, directors' and officers' and professional liability policies. She can be reached at (415) 438-7254 or dbeck@nossaman.com.

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