Opinion
No. C 01-0539 WHA
September 10, 2001
INTRODUCTION
In this insurance-coverage dispute, this order DENIES defendants' motion to dismiss all causes of action against Theresa McCormack, MOOTS defendants' petition to confirm an appraisal award and motion to dismiss the cause of action for fraud against Legion Insurance Company, and REMANDS this action to San Francisco Superior Court. The hearing is VACATED.
STATEMENT
On June 13, 2000, plaintiff Gunther Gopp filed suit against defendant Legion Insurance Company in San Francisco Superior Court. He alleged that damage resulting from a fire on one of his properties was covered under insurance policy CP2-0989472 and that Legion failed to pay his claim. On February 1, 2001, Legion removed this action based on diversity jurisdiction and filed a motion to dismiss on February 22, 2001. In response, Mr. Gopp filed an amended complaint, which alleged causes of action against Theresa McCormack (erroneously spelled "Teresa" in the complaint), who is a citizen of California, and moved to remand the action to state court. Defendants then filed a motion to dismiss, which was granted in part, and all the causes of action against Ms. McCormack were dismissed. Given the possibility that Ms. McCormack could be an indispensable party, plaintiff was allowed leave to amend with the caveat that the Court would reserve judgment on whether Ms. McCormack was indispensable. Plaintiff filed an amended complaint stating the details of Ms. McCormack's alleged role in this action. Defendants have now moved to dismiss all causes of action against Ms. McCormack. Additionally, they seek to dismiss plaintiffs fraud claim against Legion and to confirm an appraisal award related to the claims at issue.
As in his last complaint, plaintiff has named Ward North American, Inc., as a defendant, but has not asserted any causes of action against it. Plaintiff acknowledges that Ward was erroneously named (Opp. 2, n. 1).
The amended complaint alleges the following. Plaintiffs building sustained fire damage on June 13, 1999. Thereafter, Legion hired Ms. McCormack, an independent adjustor, to handle plaintiffs claim. On September 16, 1999, Ms. McCormack falsely told plaintiff that he was not entitled to payment for carpet damage that occurred in the fire. On October 14, 1999, she and plaintiff agreed on a partial loss of $61,438.23 minus the $5,000 deductible. On November 8, 1999, however, she sent plaintiff a letter stating "total damage is $31,571.60" (Compl. ¶ 22). Some time before December 8, 1999, she offered plaintiff $17,000 to settle his claim. On December 7, 1999, she sent plaintiff an "offer to settle in the form of a partial payment proof of loss in the amount of $19,230.15" (ibid.).
In December of 1999, after plaintiff refused to accept these offers, an appraisal hearing was scheduled pursuant to the appraisal provision in his insurance policy. On January 21, 2000, Ms. McCormack wrote plaintiff "informing him that he was not to contact any witnesses that McCormack and/or Legion had involved in adjusting the claim" and that he should not be "advocating his position regarding the claim to his appraiser" (id. ¶ 26). Pursuant to the terms of his insurance policy, however, plaintiff should have been allowed to contact any witnesses he wanted to and to advocate his position to the appraiser. In reliance on these representations, plaintiff did not properly prepare his appraiser, was unable to effectively develop evidence for the appraisal hearing, and was induced into accepting a partial payment of $56,438.23, which did not cover all of his damages. On March 20, 2000, Ms. McCormack wrote plaintiff about the upcoming appraisal and falsely claimed that he was raising issues for the appraisal that he had not previously raised with her. At the same time, she wrongfully accused him of being in breach of the cooperation claim of his insurance policy, causing him to believe that Legion would deny coverage. Furthermore, neither she nor Legion ever informed him of his rights at the appraisal hearing, which included the right to an attorney, to issue subpoenas, and to take depositions. As a result, he was not able to effectively present his case.
In January of 2000, plaintiff inquired about coverage for his elevator. In her response, Ms. McCormack failed to inform plaintiff that he had code-upgrade coverage, which was applicable to the elevator. She did not inform him of the code-upgrade coverage until May of 2000, which was after the appraisal hearing.
ANALYSIS Ms. McCormack's Liability
The threshold issue in this case is whether Ms. McCormack can be held personally liable for any of her alleged acts. Plaintiff contends that there are two separate avenues of liability: fraud and conspiracy. In Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 574 (1973), the California Supreme Court addressed a somewhat analogous problem. In that case, the court refused to impose liability for conspiracy to breach the covenant of good faith and fair dealing on an independent insurance adjustor, who was acting within the scope of his employment. The court explained: "the non-insurer defendants were not parties to the agreements for insurance; therefore, they are not, as such, subject to an implied duty of good faith and fair dealing. Moreover, as agents and employees of the defendant insurers, they cannot be held accountable on a theory of conspiracy." Id. at 576. The court explicitly noted, however: "we need not consider the possibility that [the defendants] may have committed another tort in their respective capacities as total strangers to the contracts of insurance." Ibid. This holding was subsequently elaborated on in Doctors' Co. v. Superior Court, 49 Cal.3d 39 (1989), in which the court refused to find an independent-contractor expert liable for conspiracy to breach the covenant of good faith and fair dealing. The court explained: "the Gruenberg-Wise rule does not preclude the subjection of agents to conspiracy liability for conduct which the agents carry out as individuals for their individual advantage and not solely on behalf of the principal." Id. at 47. Neither of these two decisions, however, addressed when adjustors may be held liable for other torts, or conspiracy to commit other torts. Indeed, Gruenberg expressly left this question undecided.
In Younan v. Equifax Inc., 11 Cal.App.3d 498 (1980), however, a court of appeal held that an independent adjustor may be held individually liable for fraud and conspiracy to commit fraud. The plaintiff in Younan alleged that an independent adjustor, a doctor, and an insurer all conspired to defraud him of disability benefits. According to the plaintiff, the adjustor selected a doctor who had previously agreed to provide a false evaluation. Once the doctor had given his false evaluation, the insurer denied coverage. The court rejected the argument that Gruenberg immunized the adjustor from fraud or conspiracy liability. It held:
The law imposes the obligation that every person is bound without contract to abstain from injuring the person or property of another, or infringing upon any of his rights. This duty is independent of the contract and attaches over and above the terms of the contract. . . .
A cause of action for conspiracy will lie against agents and employees of insurers even though the former are not parties to the agreement of insurance when they join the insurer in a conspiracy to defraud the insured. As such, they are jointly liable with those with whom they conspire to commit the tort. The Gruenberg decision is fully consistent with our holding.
Id. at 511. The court further held that while an agent is liable for false representations, an agent cannot be held liable on the theory of breach of fiduciary duty (also known as constructive fraud) absent a special relationship.
The facts pleaded here state valid causes of action for fraud and conspiracy against Ms. McCormack. Part of plaintiffs fraud claim appears to be based on fiduciary duty: specifically, his allegations regarding Ms. McCormack's failure to inform him about the code-upgrade provision in the policy, her failure to inform him about his rights during the appraisal hearing, and her refusal to offer him a fair settlement for his claim. All these duties stem from plaintiffs contract with Legion. As an individual, Ms. McCormack had no affirmative duty to provide him with any information. Nor has plaintiff alleged that he and Ms. McCormack had a special relationship, giving rise to such a duty. If anything, he has alleged that there was an antagonistic relationship between them. Legion is correct that the foregoing allegations do not state a cause of action for fraud against her. Contrary to Legion's view, however, plaintiff has alleged more than bad-faith or constructive-fraud theories of fraud and conspiracy liability against Ms. McCormack. Plaintiff has alleged that she made affirmative misrepresentations — she told him "not to contact any witnesses that McCormack and/or Legion had involved in adjusting the claim," and not to explain his position to his appraiser when he was allowed to do so, as part of a scheme to defraud him of a fair appraisal hearing (Compl. ¶ 26). He further alleges that he relied on this statement, and this prejudiced his case at the appraisal hearing. Under Younan, this states causes of action for conspiracy and fraud.
While Legion does not address plaintiffs allegation regarding what Ms. McCormack allegedly told him about communicating with his appraiser, Legion maintains that plaintiff cannot claim that he relied on any representations by Ms. McCormack regarding his right to call witnesses at the arbitration proceeding, since a letter from the appraisal umpire, dated January 18, 2000, informed him that he could call witnesses (Gillen Decl., Exh. E, at 2). Furthermore, Legion argues that excerpts from the transcript of the appraisal hearing that it submitted with its reply brief, show that plaintiff called witnesses at the proceeding. This evidence, however, does not preclude a cause of action for fraud. Plaintiff does not allege that Ms. McCormack told him not to call any witnesses. Rather, he alleges that Ms. McCormack told him "not to contact any witnesses that McCormack and/or Legion had involved in adjusting the claim" (Compl. ¶ 26). That he called witnesses at the hearing does not make this allegation "demonstrably false" as Legion contends. Nor does the umpire's general request in the letter for the parties to advise him of "the identity of the witnesses and experts that they wish to have testify" (Gillen Decl., Exh. E, at 2), make relying on Ms. McCormack's alleged statement unreasonable as Legion suggests. Her statement was allegedly made on January 21, 2000, three days after the umpire's letter was sent. It would be entirely reasonable for plaintiff to have assumed that she was clarifying or explaining the rules to him. Plaintiff has adequately pled detrimental reliance, since not contacting the witnesses who adjusted the claim could have been highly prejudicial to plaintiffs ability to introduce evidence and cross-examine witnesses at the appraisal proceeding, and not explaining his position to his appraiser could have deprived him of an advocate necessary to make the appraisal work fairly.
Finally, Legion contends that California's litigation privilege immunizes Ms. McCormack from liability. California Civil Code Section 47 creates an evidentiary privilege for statements made in any (i) legislative proceeding, (ii) judicial proceeding, (iii) "other official in proceeding authorized by law." California courts have extended this privilege to statements made before such proceedings. Edwards v. Centex Real Estate Corp., 53 Cal.App.4th 15, 34 (1997). Edwards set forth a four-part test for the admissibility of such statements: (i) "the communication must have been made preliminary to a proposed judicial or quasi-judicial proceeding. That is, a lawsuit or some other form of proceeding must actually be suggested or proposed, orally or in writing;" (ii) the proposal must be in good faith; (iii) the contemplated proceeding must be imminent; and (iv) the proceeding must be proposed in order to resolve the dispute. Id. at 34-35. Furthermore, the litigation privilege does not prevent the introduction of statements to prove a course of conduct, as long as the cause of action is not based entirely on otherwise privileged communications. Old Republic Ins. Co. v. FSR Brokerage, Inc., 80 Cal.App.4th 666, 686 (2000). Here, plaintiff has alleged that bad faith and misrepresentations occurred before the appraisal was imminent. Other facts, such as which witnesses he presented at the hearing, how they testified, and testimony from his appraiser, would be an independent evidentiary basis for his fraud claim. According to the complaint, Ms. McCormack's alleged statements after appraisal was imminent were part of an ongoing pattern of bad faith and misrepresentation, making the later statements admissible to prove a course of conduct. Moreover, in order for the litigation privilege to attach before litigation, the litigation must be proposed in good faith. Edwards, 53 Cal.App.4th at 34. Plaintiff has sufficiently alleged that Legion did not seek to conduct the appraisal hearing in good faith. At the pleading stage, it would be inappropriate to dismiss this cause of action based on an evidentiary privilege.
CONCLUSION
Dismissing Ms. McCormack as a defendant would be highly prejudicial, possibly fatal, to plaintiffs case. The heart of his case is that the appraisal proceeding was fraudulent. If the facts plaintiff has alleged prove true, Legion will undoubtably argue that Ms. McCormack was not authorized to make the misrepresentation on its behalf, and that Legion had nothing to do with the statement. This would expose plaintiff to the possibility of an empty-chair defense. Since Ms. McCormack is a citizen of California, diversity jurisdiction does not exist. Accordingly, this action is REMANDED to San Francisco Superior Court. Defendants' petition to confirm the appraisal award and motion to dismiss the cause of action for fraud against Legion are MOOT. The hearing is VACATED.
IT IS SO ORDERED.