California Court of Appeals: Insurer Liable for Settlement Negotiated by Insured

by Saul Ewing Arnstein & Lehr LLP

San Diego Apartment Brokers, Inc. v. California Capital Ins. Co., No. D062945, 2014 WL 1613449 (Cal. Ct. App. Apr. 22, 2014).

California Court of Appeals affirms a jury verdict finding an insurer liable for settlement costs of its insured when the insurer refused to defend its insured in bad faith.

San Diego Apartment Brokers (“Brokers”) managed The Pines Apartments, an apartment complex located in El Cajon, California.  After receiving complaints from residents, Brokers barred bicycle riding in the complex’s parking lot and other common areas.  Despite the change in policy, a tenant’s child continued to ride his bicycle in prohibited areas.  Brokers’ manager issued verbal and written warnings to the tenant, Jose Urista, which went unheeded.  Brokers eventually served Urista with an eviction notice for failure to comply with the new policy.  Not long after receiving the notice of eviction, Urista sued Brokers, alleging that the eviction was wrongful and discriminatory.  Raising claims of negligence and violations of the Federal Fair Housing Act, Urista alleged that, as a result of the notice of eviction, he suffered from depression, sleep loss, humiliation, severe emotional distress, and bodily injury.

Once served with Urista’s complaint, Brokers tendered a claim for defense to its general liability insurer California Capital Insurance Company (“CCIC”).  At this point, Brokers had not yet evicted Urista, but had taken the precautionary step of refusing Urista’s rent payment, so as not to invalidate the eviction notice.  After Brokers submitted the complaint to the carrier for review, CCIC’s senior branch manager contacted Brokers’ attorney to inform him that CCIC would not defend Brokers because Urista had not been evicted and did not allege a bodily injury caused by an occurrence.  In response, Brokers’ coverage attorney, Brian Worthington, argued that a defense was required, noting that Urista’s complaint sought recovery for wrongful eviction; Urista’s family had moved out, potentially signifying constructive eviction; and Urista’s complaint contained allegations of bodily injury.

After an evaluation of the claim by its own coverage attorney, CCIC again determined that it had no duty to defend Brokers under the policy, citing four reasons: 1) Urista did not claim a separate physical injury; 2) Broker’s actions leading to the incident were decisions, not accidents; 3) a wrongful eviction had not taken place; and 4) even though Urista’s family had moved out, Urista’s continued residence precluded coverage.  As a result of CCIC’s denial, Brokers was forced to defend the claim on its own.  Eventually, Brokers settled the suit with Urista for $20,000, despite Brokers’ belief that the claim held no merit.

After the settlement with Urista, Brokers sued CCIC for breach of contract and bad faith.  The court granted Brokers’ motion for summary judgment on the issue of CCIC’s duty to defend and the case proceeded to trial.  The jury found that CCIC breached its duties under the insurance policy and its duty of good faith and awarded Brokers $30,552.  CCIC appealed from the verdict.

On appeal, CCIC, in addition to disputing whether the jury properly determined that there was coverage under the policy, challenged the jury’s finding bad faith for CCIC’s refusal to defend Brokers.  CCIC argued that it had not acted in bad faith because there was a genuine coverage dispute.  CCIC specifically noted that it had relied on an opinion by Orloff, its coverage attorney, in denying Brokers’ claim for a defense.  The court rejected CCIC’s argument and found that the jury’s finding was supported by credible evidence.

First, the court noted that Brokers’ expert witnesses testified that Urista’s allegations of wrongful eviction and bodily injury were “clearly potentially covered lawsuits” that deserved a defense.  According to the court, this testimony was sufficient to support the jury’s finding that CCIC’s decision not to defend was unreasonable.  The court also rejected CCIC’s argument that its denial was not in bad faith because there was a genuine coverage dispute evidenced by CCIC’s reliance on the opinion of its coverage counsel.   

The court explained that the jury could have found bad faith if Orloff’s opinion was unreasonable or “if CCIC could not reasonably believe Orloff’s opinion was correct” and that the record supported both factual findings.  Orloff’s assessment of Urista’s claim contradicted the findings of CCIC’s senior claims manager, who had already reviewed Urista’s complaint.  Further, Brokers presented expert testimony that Urista’s claims were clearly pleaded, but simply ignored in Orloff’s report.  Even more tellingly, Orloff had testified during deposition that he was not acting as a neutral evaluator, but as a “forceful advocate for CCIC” in determining the applicable coverage.  These factual findings supported the jury’s determination that CCIC could not have reasonably relied on Orloff’s coverage assessment, and that its refusal to defend Brokers was not taken in good faith.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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