United States: Baldwin v. AAA Northern California, Nevada & Utah Insurance Exchange

In Baldwin v. AAA Northern California, Nevada & Utah Insurance Exchange, 1 Cal. App. 5th 545 (2016), the Court of Appeal affirmed the trial court's decision to sustain defendant AAA Northern California, Nevada & Utah Insurance Exchange's ("AAA") demurrer to plaintiff William Baldwin's ("Plaintiff") complaint without leave to amend.

In reviewing the trial court's decision on demurrer, the Court accepted the allegations of the complaint and attached exhibit as true. Plaintiff's almost new vehicle was involved in a collision and sustained structural damage as a result thereof. Both Plaintiff and the other individual involved in the collision had insurance through AAA. AAA refused to consider Plaintiff's vehicle a "total loss" – instead, AAA had the vehicle repaired, reportedly for $8,196.06, and provided Plaintiff with a rental car during the time of the repairs. Plaintiff alleges the vehicle's future resale value decreased $17,100 as a result. Plaintiff filed suit alleging negligence against the other driver, and breach of contract and bad faith against AAA. Plaintiff alleged:

AAA was obligated, under his insurance policy and that of [the other driver], either to pay him the entire pre-accident value of the pickup or to repair the pickup to its original pre-accident condition, and that AAA did neither. After repair work was completed, [Plaintiff] contends, the pickup did not match its pre-accident condition "with respect to safety, reliability, mechanics, cosmetics and performance" and its future resale value had decreased by $17,000. The rental vehicle provided him also did not match the pre-accident value of the pickup, and [Plaintiff] seeks the difference in value for the period that the pickup was under repair.

AAA demurred, on the basis that Plaintiff was essentially seeking lost market value which was excluded by the policy. The trial court agreed, and sustained the demurrer as to the causes of action against AAA. Plaintiff "did not seek leave to amend the complaint or identify further facts that might be added to an amended complaint." The trial court sustained the demurrer without leave, and ordered dismissal with prejudice as to AAA. Plaintiff appealed.

The Court noted the standard of review was de novo, and Plaintiff "bears the burden of demonstrating that the trial court erred in sustaining the demurrer."

The Court referenced established California case law that clear and explicit language in an insurance policy governs, finding that the policy language here was clear and explicit. The policy provided AAA "may" pay the loss in money or repair the damaged vehicle, and "[t]he policy's use of the term 'may' suggests AAA had the discretion to choose between the two options."

[Plaintiff] alleges generally that it was not possible to repair his almost new pickup to its original pre-accident condition and that AAA's attempted repairs did not restore the car to that standard. Other than the decline in future resale value, however, [Plaintiff] offers no specific factual allegations identifying any unrepaired damage or continuing performance issue with the insured vehicle. He does not allege that the pickup had specific mechanical problems when returned to him, was unsafe in any specific way, or had any specific cosmetic flaws. Indeed, in his opening brief, [Plaintiff] indirectly suggests the pickup may have been returned to him in a state arguably qualifying as "normal running condition," although he vaguely cautions that repaired vehicles generally "may still be dangerous," and describes anecdotal reports of others (non-parties) who experienced grave post-repair accidents.

The Court referenced California's specificity in pleading requirement, rejecting Plaintiff's general allegations as conclusory. The Court also rejected Plaintiff's reliance on "case law indicating that an insurer has an obligation to repair a damaged vehicle to its 'pre-accident safe, mechanical, and cosmetic condition,'" determining "[t]he cases do not stand for the principle that a plaintiff may rely on general allegations to meet his burden in pleading a claim for breach of contract." One of Plaintiff's cited cases, Ray v. Farmers Insurance Exchange, 200 Cal. App. 3d 1411 (1988), specifically rejected an argument that the vehicle must be restored both to its preaccident condition and market value, "reasoning that a vehicle would not qualify as a total loss if it is restored to 'its normal running condition.'" The Ray Court found that accepting the position offered by the insured there, and Plaintiff here, would defeat the insurer's "right to elect the most economical method of paying claims." The more recent decision in Carson v. Mercury Insurance Company, 210 Cal. App. 4th 409 (2012) reached a similar conclusion: repairing a vehicle to its pre-accident condition does not require restoration to its factory condition. The Carson Court also noted that this debate prompted insurers to specifically exclude coverage for diminution in value after an accident.

The Court rejected Plaintiff's various arguments that attempted to circumvent the exclusion for diminution in value. Plaintiff argued the policy was ambiguous as the exclusion contradicts the loss provisions of the policy. The Court rejected this: "As noted, we do not find the exclusion ambiguous. Nor is it contradictory to the loss provisions. It merely limits their scope." The Court also rejected Plaintiff's argument that the exclusion may be disregarded as "fine print," finding, as a matter of law, that the language of the exclusion was conspicuous as to placement and visibility, and the language was plain and clear.

Finally, the Court rejected Plaintiff's claim that the exclusion violates public policy. Plaintiff "suggests the exclusion renders AAA's coverage inadequate and that it unreasonably denies him the benefits of the insurance contract in a way that violates public policy reflected in statute and case law," citing to subdivisions (h)(3) and (h)(5) of California Insurance Code section 790.03, which "declare as unfair claims settlement practices the failure, respectively, to follow 'reasonable standards' for promptly investigating and processing claims, or to promptly and fairly settle claims."

[Plaintiff] essentially argues that the insurance policy is fundamentally unfair and violates public policy because it allowed AAA the option of restoring his almost new vehicle to normal running condition, after an accident involving structural damage, without also requiring that it compensate him for the decrease in the vehicle's future resale value. His argument is undercut by California Supreme Court case law. In Julian v. Hartford Underwriters Ins. Co., supra, 35 Cal.4th 747, for example, the Supreme Court observed that "'[a]n insurance policy may exclude coverage for particular injuries or damages in certain specified circumstances while providing coverage in other circumstances.' [Citation.] It follows that an insurer is not absolutely prohibited from drafting and enforcing policy provisions that provide or leave intact coverage for some, but not all, manifestations of a particular peril. This is, in fact, an everyday practice that normally raises no questions ... ." (Id. at p. 759.) Thus, "an insurance policy can provide coverage for weather conditions generally, but exclude coverage for specific weather conditions such as hail, wind, or rain." (Ibid.) Applying the same logic, an insurer may cover the cost of repairing a car damaged in an accident, but exclude coverage for the accompanying decrease in the car's future resale value.

The Court also was not persuaded by Plaintiff's apparent argument "that the insurance policy here in question gives AAA an incentive to attempt superficial repairs to cars sustaining structural damage, returning unsafe cars to the roads, rather than declare them a total loss and pay out their actual (greater) pre-accident cash value," finding Plaintiff did not meet his burden of proof. The Court also noted there is a "strong public policy" in favor of allowing insurers to enforce unambiguous policy provisions. The Court also doubted the danger to the public:

The argument that literal enforcement of the policy at issue will create substantial financial incentives to effect purely cosmetic repairs, returning dangerous vehicles to the roads so as to injure the public, ignores the existence of various countervailing disincentives. These include the likelihood that the insurer would be financially responsible under the same policy for any damages resulting from future accidents of an insufficiently repaired vehicle. [Plaintiff] does not contend that AAA canceled his policy after the accident. Moreover, insurers would be liable for tort damages if, in bad faith, they directed cosmetic or superficial repairs to an insured vehicle.

The Court "reject[ed] [Plaintiff's] argument that the exclusion violated public policy and was void. As [Plaintiff's] claim for the difference in value between the rental vehicle AAA provided him and the pre-accident value of his pickup appears to rely on the same theory, it fails also."

The Court also determined Plaintiff's bad faith claim failed. Plaintiff reiterated his allegations regarding breach of contract in support of his bad faith claim. The Court determined: "These allegations do not suffice to present a cause of action for breach of the implied covenant of good faith and fair dealing because, as discussed in the previous section, AAA's alleged conduct was consistent with the express provisions of the contract." The Court also noted that Plaintiff's claim the express terms of the policy breached the implied covenant misunderstands the nature of the implied covenant. The Court concluded the bad faith claim failed as "AAA performed as promised under the insurance policy," and Plaintiff did not allege any unreasonable delay or that the pickup was defective in any specific way other than the decreased resale value. The Court also concluded Plaintiff could not state a cause of action for bad faith under the other driver's policy, as Plaintiff as third party would not have a private right of action for unfair settlement practices.

The Court found Plaintiff's proposed amendments do not satisfy his burden of demonstrating a reasonable possibility to cure the defects in the complaint: "As [Plaintiff] has failed to offer any specific factual allegations indicating that the repairs to his pickup were deficient, beyond the fact that its future resale value was less than before the accident, he did not meet his burden in seeking leave to amend his complaint."

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