Opinion
B163317.
11-6-2003
STALLION JEWELRY, INC., Plaintiff and Appellant, v. CERTAIN UNDERWRITERS AT LLOYDS et al., Defendants and Respondents.
Mazursky & Schwartz, Debra J. Wegman; Kroll Law Corporation and Gerald Kroll for Plaintiff and Appellant. Carroll, Burdick & McDonough, David M. Rice, Don Willenburg; Carroll, Burdick & McDonough, Craig G. Kline and Alex Tarkian for Defendants and Respondents.
This is an insurance bad faith case in which the trial court granted summary judgment in favor of Certain Underwriters at Lloyds (Lloyds) in a bad faith action brought by appellant Stallion Jewelry, Inc. (Stallion). According to Stallion, the trial court erred because there are triable issues as to whether Lloyds correctly valued and paid Stallions theft loss, and as to whether Lloyds committed bad faith by unreasonably delaying the payment of benefits. These contentions have merit. Therefore, we reverse and remand.
Stallions contention that it should have been granted a continuance in order to conduct discovery is moot.
FACTUAL AND PROCEDURAL HISTORY
1. Background.
Lloyds issued Stallion a jewelers block insurance policy (the policy) to cover, inter alia, theft.
Paragraph 9A of the policy (Paragraph 9A) provided: "[Lloyds] shall not be liable beyond the actual cash value of the property at the time of any loss or damage and the loss or damage shall be ascertained or estimated according to such actual cash value with property deduction for depreciation, however[] caused, and shall in no event exceed the lowest figure put upon such property in the assureds inventories, stock books, stock papers or lists existing at the time of the loss or damage occurred, nor the cost to repair or replace the same with material of like kind and quality. Any antiquarian or historical value attaching to said property shall be excluded from the estimate of loss or damage."
An endorsement provided that starting March 1, 2001, the policy limits were increased to $930,000 and that "coverage is provided hereunder whilst at MJSA Exhibition in New York to a limit of . . . $1 Million and . . . $700,000 excess of . . . $300,000 to/from the show."
On March 1, 2001, unknown persons posing as armored car personnel stole over $930,000 in insured property. Stallion notified Lloyds of the loss in a timely manner. Lloyds eventually paid only $686,957 even though Stallion was demanding policy limits.
2. The pleading.
Stallion sued Lloyds. In its first amended complaint, Stallion alleged causes of action against Lloyds for breach of contract, bad faith, and violation of Business and Professions Code section 17200.
According to Stallion, Lloyds utilized selective information when valuing Stallions property in order to minimize the loss. Also, it continually revised its calculations, which resulted in substantial delays in payment. By February 2002, Lloyds had only paid $386,000.
Lloyds committed bad faith by: (1) failing to disclose that the policy provided for actual cash value benefits; (2) failing to adjust the claim properly in accordance with the promised measure of loss; (3) utilizing an overly restrictive interpretation of policy language to impose a "cost of manufacture" valuation on Stallion; (4) unreasonably reducing the benefits by $300,000 on the theory that the property was lost "to/from" an exhibition when Lloyds knew the property was not lost to/from; (5) subjecting Stallion to unreasonable demands for detailed accounting records for calculation of the "cost to manufacture" analysis; (6) subjecting Stallion to demands for multiple audits and accounting procedures; and (7) engaging in a sham adjustment in order to reduce the benefits to be paid.
Lloyds engaged in a scheme to intentionally deprive its policyholders of benefits by improperly adjusting claims.
3. Proceedings in the trial court.
Lloyds moved for summary judgment or adjudication, arguing that it satisfied its obligations under the policy when it paid $686,957 (the cost of labor and materials for Stallion to remanufacture the stolen property). Alternatively, Lloyds maintained that there was no coverage due to an exclusion for loss resulting from theft by a person to whom the insured property was delivered. In opposition, Stallion argued that the plain meaning of paragraph 9A precluded valuation of the loss based on the cost of manufacture, and that the exclusion does not apply when the delivery was obtained by trickery. Regarding the exclusion, Stallion argued that Lloyds had waived the right to rely on it.
Lloyds submitted the declaration of Keith Kinsel (Kinsel), a certified public accountant who declared that he calculated the replacement cost after reviewing Stallions books and records. He did not set forth any facts, and he did not explain his accounting method.
Stallion objected that Kinsels declaration lacked foundation and contained hearsay. Also, Debra J. Wegman (Wegman), counsel for Stallion, submitted a declaration stating that Kinsel "concedes that his calculation of [Stallions] damages was based on valuing the raw materials used in the manufacturing process, and adding the cost of labor. [¶] . . . On July 26, 2002 I served notice of the taking of Mr. Kinsels deposition in this action, and I served him with a subpoena. . . . Shortly thereafter, defense counsel Alex Tarkian informed me that Mr. Kinsel would not appear for his deposition, because defense counsel Craig Kline was unavailable. Since the motion was not served until August 6, 2002, I did not know that the deposition would be necessary to oppose it. [¶] . . . Mr. Tarkian has informed me that I will not be permitted to depose any witness, including Mr. Kinsel, until after Mr. Kline is available after the hearing in this motion. A brief continuance is necessary to procure the necessary discovery and have this matter decided on a complete record[] per [Code of Civil Procedure section 437c, subdivision (h)]."
To explain the deficiency of the benefits paid, the owner of Stallion, Paul Tovmassian (Tovmassian), declared: "The total amount of money paid by defendant to me under this loan agreement is significantly less than the wholesale cost of replacing the stolen property. If I were to utilize the funds provided by defendant to me thus far to remanufacture the inventory, I would lose valuable time spent in the manufacturing process which I could otherwise spend in manufacturing goods for sale and satisfying orders from customers."
The trial court rejected Lloydss theory that Stallions claims were barred by the exclusion. However, the trial court stated: "The plain meaning of the insurance clause at issue controls here. The plain meaning allows [Lloyds] to elect the lower of, one, the value listed in the insureds inventory or, two the cost to repair. [Lloyds] did pay the lower cost to repair or replace and is entitled to summary judgment on that basis." Regarding the objection to Kinsels declaration, the trial court stated: "[T]he evidence is sufficient, and [Stallion] offers no evidence to show that Kinsels method was unfair or mistaken for any other reason than that the premise upon which it was based was a valid premise." When Stallions counsel raised the bad faith issue, the trial court stated that "[t]here is no evidence of bad faith given the fact that they made the payment of [$686,000.]."
The trial court granted Lloydss motion, implicitly denying Stallions request for a continuance. This timely appeal followed.
STANDARD OF REVIEW
An order granting summary judgment is reviewed de novo. (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476.) "We first identify the issues framed by the pleadings, since it is these allegations to which the motion must respond. Secondly, we determine whether the moving party has established facts which negate the opponents claim and justify a judgment in the movants favor. Finally, if the summary judgment motion prima facie justifies a judgment, we determine whether the opposition demonstrates the existence of a triable, material factual issue. [Citation.]" (Torres v. Reardon (1992) 3 Cal.App.4th 831, 836 (Torres).) "[W]e construe the moving partys affidavits strictly, construe the opponents affidavits liberally, and resolve doubts about the propriety of granting the motion in favor of the party opposing it." (Szadolci v. Hollywood Park Operating Co. (1993) 14 Cal.App.4th 16, 19.)
We must uphold the trial courts ruling if it is correct on any ground, regardless of the reasons the trial court gave. (Biljac Associates v. First Interstate Bank (1990) 218 Cal.App.3d 1410, 1419.)
DISCUSSION
I. Breach of contract.
A. The rules for interpreting insurance policies.
Policy terms must "`be interpreted according to the plain meaning which a layman would ordinarily attach to them." (Desai v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1116-1117 (Desai).) In other words, they must be construed in their ordinary and popular sense. (Kazi v. State Farm Fire & Casualty Co. (2001) 24 Cal.4th 871, 879.) "Any ambiguous terms are resolved in the insureds favor, consistent with the insureds reasonable expectations. [Citation.] Ambiguous terms are those capable of two or more reasonable constructions. [Citation.]" (Ibid.)
B. Interpretation of paragraph 9A.
It is Lloydss position that replacement cost can only mean the historical cost of the raw materials and labor necessary for the insured to remanufacture the goods that were stolen. This is so, argues Lloydss, because paying the insured the cost of the goods on the open market would allow the insured to remanufacture the goods at zero cost and thereby obtain a double profit. However, we disagree that the ordinary layperson would attach this meaning to paragraph 9A.
The policy does not define replacement cost, and nowhere does it state that Stallions benefits can be limited to the historical cost of manufacture. We note that paragraph 8A of the policy requires the insured to keep an itemized list of the inventory and a separate list of all travellers stock "in such manner that the exact amount of loss or damage can be accurately determine[d] therefrom by [Lloyds]", but it does not require the insured to keep records of manufacturing and labor costs. Because the policy obligates the insured to keep records that evidence actual cash value but not its own historical cost of production, an ordinary layperson would not expect replacement cost to refer to the historical cost of manufacture. Moreover, if an insured had to remanufacture what was stolen at its historical cost, it might have to obtain materials at a greater present day cost and therefore never be made whole. Additionally, it would have to interrupt its business or, at the very least, hire additional employees on a temporary basis, which would result in increased overhead, payroll, and workers compensation insurance obligations. A serious interruption could well drive an insured out of business and thereby render the paid for insurance impotent. Simply put, the ordinary layperson would not adopt an interpretation of paragraph 9A that reduced it to nothing more than a subsidy for self help at the historical cost.
Unlike the trial court, we conclude that paragraph 9A is ambiguous. As a result, paragraph 9A must be interpreted to comport with Stallions reasonable expectations. In our view, Stallion could reasonably expect to be paid the lesser of the actual cash value, the value on the books, or the amount necessary to replenish its goods either from an outside source or to cover its present day cost to remanufacture the goods without losing out on current opportunities.
Lloyds cannot be heard to complain that there is no difference between actual cash value and our construction of replacement costs. While that could be true, it is not necessarily true. It is possible for replacement costs to be lesser than actual cash value. For instance, Stallion could potentially replenish its goods at a discounted price through a manufacturer and therefore pay less than it would have if it purchased the goods on the open market. Also, as Lloyds pointed out at oral argument below, actual cash value could be less than replacement cost if, for example, the market crashed and the price of gold plummeted. In any event, as Desai, supra, 47 Cal.App.4th at page 1117 stated, "The insurer-draftsman will not be rescued from the consequences of the imprecise terminology used in the insurance contract, especially where it would defeat the reasonable expectations of the insured. [Citation.]" If Lloyds had intended replacement cost to refer to the cost of manufacture and labor, then it was incumbent upon Lloyds to define its terms.
Our analysis is bolstered by the reasoning in James B. Lansing Sound, Inc. v. Nat. U. Fire Ins. (9th Cir. 1986) 801 F.2d 1560 (James B.), a federal case which interpreted California law.
Lloyds points out that James B. is distinguishable because it involved a different type of insurer election. While we acknowledge this distinction, we still find James B. to be relevant to our analysis.
In James B., the policy gave the insured the election of either paying actual cash value or making the necessary repair or replacement. The district court held "that under this provision, National had an election to pay the `actual cash value (fair market value) for the lost property, or it could pay the replacement cost. Further, the court held that replacement cost must mean JBLs replacement cost (cost for JBL to manufacture the equipment), and not Nationals replacement cost (cost for National to go into the market and purchase like equipment to replace JBLs loss), because if replacement cost were Nationals replacement cost, National would have no effective election between actual cash value or replacement costs, for both are measured by fair market value." (James. B., supra, 801 F.2d at pp. 1564-1565.)
The James B. court reversed. It concluded that the policy was "not without ambiguity. The first sentence of the clause limits Nationals liability to not more than `actual cash value or `actual cost of . . . replacing [the property] with property or material of like quality or value. The policy does not define what is meant by `actual cash value, nor does it indicate whose `actual cost is to be the measure of replacement cost." (James B., supra, 801 F.2d at p. 1565.) Then the court stated: "We agree that `actual cash value means fair market value (usually the list or wholesale price). As the district court recognized, the troubling question is whether `actual cost of replacement is to be JBLs actual cost to remanufacture or Nationals actual cost to go into the market and purchase replacement equipment. Contrary to the district courts suggestion, we are not certain that Nationals actual cost to enter the market and purchase replacement equipment is necessarily the same as fair market value. An insurance company could well possess sufficient market power to purchase replacement equipment of like quality and value at a cost below the insureds wholesale list price. We find the first sentence of the clause ambiguous with regard to the meaning of replacement cost." (Ibid.) James B. explained that because the policy gave the insurer the option of paying actual cash value or making any replacement itself, there was an implication that the insurer could not force the insured to make the replacement. (James B., at p. 1565.)
Analogous to the argument advanced by Lloyds, the insurer in James B. argued "that to award [insured] fair market value would be to give [insured] both the cost of manufacture and the profits it would have obtained on legitimate sales; [the insurer] argue[d] that the policies at issue are property loss policies and not lost profits policies." (James. B., supra, 801 F.2d at p. 1565.) James B. echoes our response to this argument, namely that because the language was ambiguous, the policy had to be interpreted to protect the interests of the insured. (Ibid.)
C. There is a triable issue as to breach of contract.
The purpose of a summary judgment motion is to demonstrate that trial is unnecessary. (See Torres, supra, 3 Cal.App.4th at p. 836.) According to Code of Civil Procedure section 437c, subdivision (c), a "motion for summary judgment shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law." When Lloyds filed its motion, it had to satisfy various procedural rigors, such as filing a separate statement containing the dispositive facts and references to supporting evidence. (See United Community Church v. Garcin (1991) 231 Cal.App.3d 327, 337 (Garcin).) Upon doing so, its challenge was to offer evidence that eradicated the issues raised by Stallions pleading. (Id. at p. 338 ["On a motion for summary judgment or SAI, the burden is always on the moving party to show there is no triable issue of material fact."].) Unless and until Lloydss rose up and squarely met that challenge, Stallion had no obligation to advert to triable issues. (Ibid.)
Put into simple terms, Lloyds did not meet its challenge. In fact, its motion never got out of the analytical starting gate because its points and authorities, separate statement, and supporting evidence were premised on an erroneous interpretation of the policy. As a result, Stallion offered evidence and argument on a red herring: whether Stallion was paid its historical cost. Put another way, whether Stallion was paid its historical cost in no way obviates the need for a trial on the real issue, which is whether Stallion was paid the benefits owed. Having completely missed its mark, Lloydss motion for summary judgment had to be denied.
Second, even if $686,957 theoretically equates to the benefits owed, that is not a diagnostic journey we need to take. The motion did not attempt that journey, which means it is not an issue on appeal. In any event, if Lloyds had offered evidence to support such a suggestion — which it did not — we are amply satisfied that Tovmassians declaration creates a corresponding conflict. He declared that the benefits paid were significantly less than the wholesale cost of replacing the stolen property. Also, he stated that the funds were not enough to allow him to remanufacture the stolen goods without losing pace with customer orders and normal manufacturing. That being the case, this cause of action must proceed to the next stage: trial.
II. Bad faith.
A. The applicable law.
Bad faith "signifies a breach of the covenant of good faith and fair dealing that is implied by law in every contract. Breach of this implied covenant involves something beyond breach of the specific contractual duties. It implies unfair dealing rather than just mistaken judgment. [Citation.] It is an insurers responsibility to act fairly and in good faith with respect to an insureds claim." (State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093, 1104-1105 (State Farm.) The allegations must demonstrate that the insurers conduct constitutes "`a failure or refusal to discharge contractual responsibilities, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement. Just what conduct will meet these criteria must be determined on a case by case basis and will depend on the contractual purposes and reasonably justified expectations of the parties. [Citation.]" (Id. at p. 1105.)
Various types of insurer conduct may constitute bad faith, such as failing to properly investigate a claim (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819) and unreasonably withholding payments (Delgado v. Heritage Life Ins. Co. (1984) 157 Cal.App.3d 262, 276).
"The reasonableness of an insurers claims handling conduct in a first party coverage case becomes a question of law, properly determined on summary judgment, where the evidence is undisputed and but one inference can be drawn." (Nager v. Allstate Ins. Co. (2000) 83 Cal.App.4th 284, 288.)
B. There are triable issues as to whether Lloydss deliberately frustrated the agreed upon purpose of the policy.
Stallions first amended complaint levied various allegations of bad faith against Lloyds. Nonetheless, Lloydss separate statement ignored those allegations and failed to explain, for example, why Lloyds withheld $300,000 for over a year. In any event, the separate statement is too deficient for us to evaluate whether this case presents a good faith dispute or whether Lloyds deliberately misconstrued paragraph 9A to Stallions detriment. Given the deficiency of Lloydss separate statement, and given that there is a triable issue as to whether Stallions claim was fully paid, there are triable issues regarding bad faith. In other words, this is not a case where the facts are undisputed and but one inference can be drawn in favor of Lloyds. That said, Lloyds is not precluded on remand from arguing that it acted with a good faith belief that replacement cost meant cost of manufacture and labor or that there were good faith reasons for delaying payments and its other alleged misconduct.
Although Lloyds tells us in its appellate brief that it had a good faith belief that its policy was excess to Brinkss $300,000 "other insurance," that is irrelevant to our analysis. As stated in Garcin, supra, 231 Cal.App.3d at page 337, "`[I]f it is not set forth in the separate statement, it does not exist."
III. Business and Professions Code Section 17200.
The parties did not focus on this last cause of action, either below or on appeal. Nonetheless, due to the triable issues that exist regarding bad faith, we conclude that the Business and Professions Code section 17200 cause of action should survive. (See State Farm, supra, 45 Cal.App.4th at p. 1105 ["[W]e have no trouble concluding that an insurers conduct constituting a breach of the implied covenant of good faith may also constitute an unfair business practice under section 17200"].)
DISPOSITION
Summary judgment is reversed and the matter is remanded.
Stallion shall recover its costs on appeal.
We concur: BOREN, P. J. and DOI TODD, J.