United States: Vardanyan V. AMCO INS. Co.

(Error to Instruct the Jury that a Property Loss Must Be Caused by a Specifically Listed Peril, and Only a Specifically Listed Peril, to Find Coverage)

In Vardanyan v. AMCO Insurance Company, 243 Cal. App. 4th 779 (2015), the Court of Appeal reversed and remanded for retrial the plaintiff's causes of action for breach of contract and bad faith, except for plaintiff's punitive damages claim.

Plaintiff owned a rental house, insured by the defendant. In 2010, plaintiff submitted a claim to defendant for water damage and mold. Defendant sent an adjuster to inspect the following day, who noted that the house seemed to be settling, possibly due to a water leak. Plaintiff informed the adjuster the tenants had told him of the damage a few months before, and he waited to report the claim until they moved out. At the adjuster's recommendation, an engineer inspected the home. The engineer's report found multiple leaks in the roof, gutters in disrepair, and downspouts that deposited water at the base of the home's walls, but which had come disconnected. There was also evidence of a faucet or hose spraying the wall for a significant length of time; a toilet and bathtub were both leaking; and the floor beneath the bathtub had sunk two and a half inches. One of the bedrooms had a depression in the floor, measuring eight inches deep and five to six feet across; there was also water damage to a closet, the kitchen, a utility room, and the living room (where the floor was separating from the wall). There was evidence of past termite infestation. The engineer opined that the home suffered from faulty construction, and the damage was caused by water leaks, contributed to by the poor construction, termite damage, and decay.

The defendant denied plaintiff's claim, citing multiple policy exclusions. Plaintiff retained a public adjuster, then filed suit against the defendant, alleging breach of contract and bad faith. Plaintiff claimed the policy provided coverage for the damage as collapse. Both sides presented evidence as to the causes of the loss — and both indicated there were multiple causes of the loss. Plaintiff requested a jury instruction regarding the efficient proximate cause doctrine, and defendant requested an instruction placing on plaintiff the burden to prove that only covered causes of loss caused the damage, and there would be no coverage if the cause was other than one listed in the policy. When the trial court indicated its intention to give defendant's proposed instruction, plaintiff indicated this instruction was tantamount to a directed verdict for defendant because there was no dispute that there were additional causes of the loss other than those listed in the policy. Defendant moved for a directed verdict, which the trial court granted and from which plaintiff appealed.

The policy provided that it would cover direct physical loss except for collapse "other than as provided in Other Coverage 9." Other Coverage 9 provided coverage for collapse "caused only by one or more of the following," which included hidden decay; hidden insect or vermin damage; weight of contents, equipment, animals or people; weight of rain which collects on a roof; and use of defective material or methods in construction. The policy also contained exclusions for earth movement, water damage, neglect, faulty workmanship, and faulty maintenance. Plaintiff asserted the policy provided coverage for the loss as collapse caused by hidden decay and hidden insect damage.

The Court determined the efficient proximate cause doctrine applies to resolve questions of coverage where a loss is caused by multiple risks, when at least one is covered by the policy and others are not. The Court quoted Sabella v. Wisler, 59 Cal. 2d 21 (1963) for the proposition that: "In determining whether a loss is within an exception in a policy, where there is a concurrence of different causes, the efficient cause—the one that sets others in motion—is the cause to which the loss should be attributed, though the other causes may follow it, and operate more immediately in producing the disaster." The Court noted "an insurer cannot contract around the efficient proximate cause doctrine to give broader effect to its policy exclusions."

Plaintiff contended that the policy provides coverage if the predominate cause of the loss is a peril listed in Other Coverage 9. Defendant contended the use of "only" in Other Coverage 9 means the loss is covered if and only if a covered loss — and no other peril — contributes to the loss. The trial court agreed with the defendant, that plaintiff would need to establish that only a covered cause of loss contributed to the loss. The Court noted that a similar argument had been rejected in Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747 (2007), where the court was concerned that insurers would attempt to contract out of the efficient proximate cause doctrine. Relying on the principle that insurance provisions are to be interpreted as a reasonable insured would understand them, the Court rejected the defendant's interpretation, finding a reasonable insured would understand the policy to provide coverage where the predominant cause is covered under the policy:

We conclude plaintiff's interpretation of the Other Coverage 9 provision is the correct interpretation, consistent with the efficient proximate cause doctrine. A policy cannot extend coverage for a specified peril, then exclude coverage for a loss caused by a combination of the covered peril and an excluded peril, without regard to whether the covered peril was the predominant or efficient proximate cause of the loss. Other Coverage 9 identifies the perils that are covered when the loss involves collapse. If any other peril contributes to the loss, whether the loss is covered or excluded depends upon which peril is the predominant cause of the loss. To the extent the term "caused only by one or more" of the listed perils can be construed to mean the contribution of any unlisted peril, in any way and to any degree, would result in the loss being excluded from coverage, the provision is an unenforceable attempt to contract around the efficient proximate cause doctrine.

The Court determined the trial court should have used CACI No. 2306, as requested by the plaintiff, rather than defendant's special instruction. The Court also agreed with plaintiff that defendant's special instruction improperly placed the burden of proof regarding the Other Coverage provision on plaintiff, rather than on defendant. While the insured must prove facts to establish that the loss falls within the policy's insuring provisions, the insurer then must bear the burden to prove that the loss is specifically excluded.

[The following summarizes unpublished portions of the Court's decision.]

Finally, plaintiff asserted that the reversal and remand also required a reversal and remand on his punitive damages claim. Initially, the Court noted that it could order a retrial of some issues, while declining to do so for others. Plaintiff had a full and fair opportunity to present evidence in support of the punitive damages claim. After hearing the evidence, the trial court concluded there was insufficient evidence from which the jury could find malice, oppression or fraud. The Court reviewed the evidence presented by plaintiff to determine (1) whether the claim representative and/or her manager could be considered "managing agents," and (2) whether their actions could satisfy the clear and convincing standard for punitive damages. The Court ultimately concluded that, while the claim process may have included some improprieties, it "does not rise to the level of reprehensibility necessary to support an award of punitive damages," therefore, "there is no evidence of sufficient substantiality to support a verdict in favor of the plaintiff on his claim for punitive damages."

Finally, the Court then addressed defendant's request to review the denial of motions in limine and special jury instructions, assertedly for guidance upon retrial. The Court determined:

It is appropriate for the reviewing court to address an issue that is not necessary to resolution of the appeal when the issue is fully argued by the parties in their briefs on appeal, the court decides the appeal on a ground that does not require a ruling on that issue, but it is clear from the discussion before the reviewing court that the issue is likely to require resolution on retrial.

The Court noted that both of the issues raised by defendant were "beyond the scope of the issues raised by plaintiff's appeal" and were not briefed by plaintiff for the appeal. The Court "decline[d] to roam so far afield from the issues actually presented by plaintiff's appeal challenging the bases for the directed verdicts."

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