United States: Grebow v. Mercury Insurance Co.

(Preventative Measures Not Covered Under Homeowners Insurance Policy)

In Grebow v. Mercury Insurance Company, 241 Cal. App. 4th 564 (2015), the California Court of Appeal affirmed the trial court's grant of summary judgment to Mercury Insurance Company ("Mercury"), finding Arthur and Helen Grebows' claim for expenditures to prevent a collapse (an insurable loss) was not covered by the terms of their homeowners policy.

The Grebows purchased a superior property homeowners policy from Mercury for their residence located in Tarzana, California. The Grebows asked a general contractor to inspect the rear deck because of recurring watermarks. The contractor found severe decay in the steel beams that supported the second floor of the house, and reported that the beams and poles could no longer support the upper portion of the house, a large portion of which would fall. Upon inspection, a structural engineer agreed with the general contractor's findings. The engineer also opined the failure of the poles and beams was caused by concealed decay and corrosion. The Grebows were advised not to enter the top portion of their home until repair work was completed. The Grebows authorized the purchase of shoring material, which was installed the next day, and entered into a construction contract for the repairs. Nearly a month later, the Grebows orally notified Mercury of their claim, which they submitted in writing the following day. Mercury investigated and, approximately four months after the Grebows submitted their claim, denied the claim. The Grebows had paid approximately $91,000 to remediate their home.

The Grebows filed an action against Mercury, asserting claims of breach of contract and tortious breach of insurance contract. The Grebows filed a motion for summary adjudication regarding coverage. Mercury filed a motion for summary judgment that there was no coverage as a matter of law so Mercury was not obligated to reimburse the Grebows. The trial court denied the Grebows' motion, but granted Mercury's. The trial court then denied the Grebows' motion for new trial, and the Grebows appealed the trial court's decisions as to all three motions.

In ruling on the Grebows' appeal, the Court of Appeal noted that the general rules of contract interpretation apply to insurance disputes:

The California Supreme Court has established the following rules of interpretation: "Interpretation of an insurance policy is a question of law and follows the general rules of contract interpretation. [Citation.] 'The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the "mutual intention" of the parties. "Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. (Civ. Code, § 1636.) Such intent is to be inferred, if possible, solely from the written provisions of the contract. (Id., § 1639.) The 'clear and explicit' meaning of these provisions, interpreted in their 'ordinary and popular sense,' unless 'used by the parties in a technical sense or a special meaning is given to them by usage' (id., § 1644), controls judicial interpretation ... (id., § 1638.)"'" (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 647–648 [3 Cal. Rptr. 3d 228, 73 P.3d 1205] (MacKinnon).) Although "'"insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply." [Citation.]'" (Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070, 1074 [135 Cal. Rptr. 2d 361, 70 P.3d 351] (Rosen).) "'If possible, we infer th[e] intent solely from the written provisions of the insurance policy. [Citation.] If the policy language "is clear and explicit, it governs." [Citation.]' [Citation.]" (Id. at pp. 1074–1075.)

The Court of Appeal first considered whether the Grebows' claim would be covered as "collapse," defined under the terms of the policy as "sudden and complete breaking down or falling in or crumbling into pieces or into a heap of rubble or into a flattened mass" which does not include "settling, cracking, shrinking, bulging, expansion, sagging or bowing, nor a substantial impairment of the structural integrity of a structure or building, not a condition of imminent danger of collapse or a structure or building." The Grebows argued the deck was part of the building, and that the detachment of certain elements of the deck constituted a collapse, caused by hidden decay. Mercury asserted the plain language of the policy is inconsistent with this claim. The Court pointed to a split in authority over the scope of collapse coverage: while some courts require a complete falling down or flattening to rubble, others find a collapse when the damage has materially impaired the basic structure or integrity of the building. The policy language required the former (complete falling down) and excluded the latter (impairment), rendering the collapse clause unambiguous. The Grebows did not experience a complete falling down, as required by the terms of the policy, and various other exclusions (i.e. for corrosion, wear and tear, deterioration, and rust) also applied, precluding a finding that the Grebows' claim was covered as a collapse under the terms of the policy.

Second, the Court of Appeal considered whether the Grebows' claim was covered as mitigation. In an aside, the Court noted that, while Mercury did not specifically make the argument, even if there was a collapse, the exclusion would have precluded coverage. The Grebows argued the mitigation clause of the policy entitled them to reimbursement of their costs as mitigation. Mercury argued the clause only applied after a loss occurs, so the Grebows' claim was not one for mitigation. The Court again found this clause to be unambiguous: the duty to mitigate arises after a loss to which the insurance applies. Because the only possible loss would be collapse, which did not occur as defined by the policy, the Grebows' claim was not recoverable as mitigation. The Court further determined that to read the policy as argued by the Grebows would make all maintenance calculated to prevent what would ultimately be an insurable loss reimbursable by the insurer, and the parties could not have intended to convert the homeowners insurance policy into a maintenance agreement.

The Grebows also argued Mercury had an obligation to reimburse them based on "sue and labor" clauses. However, a "sue and labor" clause "applies when a party takes steps to prevent an imminent loss that would be covered it if occurred, such as a collapse." Additionally, the mitigation clause in the policy is not the same as a "sue and labor" clause – the mitigation clause only applies after a loss. Next the Grebows contended they had a common law duty to prevent an imminent insurance loss, and Mercury had a corresponding duty to reimburse for such costs. The Court distinguished the case law on which the Grebows relied – the first as dictum, the second as relying on a "sue and labor" clause not present in the policy. After considering the conflicting authorities on this subject generally, the Court concluded: "absent a provision that provides for reimbursement, the insurer has no obligation to reimburse an insured for costs to prevent an imminent insurable occurrence from occurring." The Court then declined to consider such a provision as an implied term of the policy:

To imply an obligation to reimburse an insured for preventive acts would result in uncertainty as to when such an obligation can be enforced. For example, if an insured has a hole in his or her roof, should he or she be able to obtain reimbursement for preventing water damage by fixing the roof? If a tree is leaning ominously toward a house, is the cost of removing the tree reimbursable? All maintenance is geared towards preventing an insurable loss. To have to litigate the point at which maintenance becomes a reasonable step to prevent an imminent insurable loss is an undesirable way to deal with insurance coverage. Moreover, if insurers are responsible for such reimbursement, they will either raise the cost of insurance or attempt to insert even more explicit clauses precluding such exposure.

The Court also rejected the use of quasi-contract remedies (i.e. unjust enrichment and restitution) here because of the existence of the insurance contract.

Third, the Court of Appeals considered the Grebows' argument that Mercury was estopped from denying coverage due to its knowledge of ongoing repairs and delay in communicating its denial. The Court distinguished the Grebows' cited case law, Reliance Ins. Co. v. The Escapade, 280 F.2d 482 (5th Cir. 1960), wherein the insurer "at least implied there would be coverage if the insured mitigated losses and the insured relied upon the insurance agent's requirement of preventive work." The Court found Reliance not applicable: "Mercury did not demand anything of the Grebows or suggest that the claim would be covered if the Grebows mitigated prospective damages. Also in that case the damages had already occurred. Mercury took no action upon which the Grebows could or did rely. So estoppel is not applicable."

Fourth, the Court of Appeals considered the Grebows' claim for tortious breach of contract. Absent a claim for breach of contract, the Grebows could not establish a breach of the implied covenant of good faith and fair dealing. The Court determined the trial court properly granted summary judgment to Mercury and properly denied the Grebows' motion for summary adjudication.

Finally, the Court of Appeals considered the Grebows' arguments in support of their motion for a new trial, which was based on a claim of an error of law and triable issues of fact. The Court determined the Grebows "essentially reargued" the issues raised in the motions for summary adjudication and summary judgment, and "introduced no new facts." The Court also affirmed the denial of the motion for new trial.

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