Court of Appeal Holds Only “Named Insureds” May Sue for Bad Faith Under California FAIR Plan Policy

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In Wexler v. California Fair Plan Association (No. 303100, filed 4/14/21), Brooke Wexler’s parents insured their residence, which was located in a mountainous high-fire risk area, with a California FAIR Plan Association owner-occupied dwelling policy. The policy only listed Wexler’s parents and did not name Wexler, their adult child, under the policy’s “Insured Name” section. The FAIR Plan expressly disclaimed coverage for “unnamed people,” referred to by the court as the “no-coverage-for-unnamed-persons clause.”

FAIR Plan was created by the Legislature in 1968 and is a joint reinsurance association created to give homeowners in high risk areas access to basic property insurance and is a self-described “insurer of last resort.”

Wexler’s parents alleged smoke and soot from the Woolsey wildfire damaged their home and its contents in 2018 and made a claim under their insurance policy with FAIR Plan. After FAIR Plan denied their claim, Wexler and her parents sued for bad faith. Attached to their complaint were FAIR Plan documents which they contended comprised the policy. The documents emphasized the limitations of the FAIR Plan, including no coverage for liability, medical payments to others and damage to property of others. The documents stated the FAIR Plan insured the dwelling and its contents only against damage from fire, lightning, and internal explosion, with “limited’ coverage for smoke damage, but also that FAIR Plan offered numerous other forms of broadened and increased insurance for additional premium.

One of FAIR Plan’s documents entitled “Dwelling Property Policy” stated “We cover personal property usual to the occupancy as a dwelling and owned or used by you or members of your family residing with you while it is on the Described Location.”

The trial court sustained FAIR Plan’s demurrer to Wexler’s claim on the grounds she lacked standing to sue the insurer for bad faith. Wexler’s parents dismissed their claims against FAIR Plan after the ruling on the demurrer was issued and Wexler appealed. The court of appeal affirmed, holding that Wexler lacked standing to sue for bad faith because she had no contractual relationship with FAIR Plan based on its finding that she was not a signatory to the policy, was not an additional insured and was not a third party beneficiary.

The Wexler court briefly summarized the general law of insurance bad faith, discussing the landmark decision in Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683 in which the California Supreme Court held that tort remedies were available for breach of the implied covenant of good faith where a “special relationship” existed, such as that between an insurer and an insured. But the appellate court pointedly noted that the “rubric of special relationships” was widely criticized, resulting in its disappearance from court opinions and that “[w]e thus speak no further of special relationships.”

The Wexler court flatly held Wexler was not a signatory to the policy or a named insured and as such, was not a party to the contract. While stating that the policy provided insurance for Wexler’s possessions at her parent’s home, the court found the coverage was for her parents’ benefit and thus did not transform Wexler into a party to the contract.

As to Wexler’s argument that she was an additional insured, the Wexler court reiterated that FAIR Plan expressly disclaimed coverage for unnamed persons. Based on this express disclaimer, the court distinguished the FAIR Plan from policies which explicitly name classes of people as additional insureds, such as auto policies which provide coverage for “permissive users” or “any other person while occupying an insured motor vehicle.”

As to whether Wexler was a third party beneficiary under the FAIR Plan, the court cited Civil Code Section 1559 which provides “A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.” The court referenced the Supreme Court’s holding in Lucas v. Hamm (1961) 56 Cal.2d 583, 590 which held that Civil Code Section 1559 excludes enforcement of a contract by a person who benefits from the agreement in only an incidental or remote way.

The Wexler court further cited to the California Supreme Court’s decision in Goodenwardene v. ADP, LLC (2019) 6 Cal.5th 817, 826-832, which adopted a three-part test, all elements of which must be satisfied to permit a third party beneficiary action to proceed based on an evaluation of the express contract provisions and the relevant circumstances of contract formation to determine (1) whether the third party would benefit from the contract; (2) whether a motivating purpose of the contracting parties was to provide a benefit to the third party; and (3) whether permitting a third party to bring its own breach of contract action against a contracting party would be consistent with the objectives of the contract and the reasonable expectations of the contracting party.

Using the three-prong test set forth in Goodenwardene, the Wexler court first determined that Wexler was not a third party beneficiary because she could not show that a motivating purpose of the contracting parties was to benefit her. The court held it was not enough that the contracting parties knew a benefit might flow to Wexler and reasoned that if a motivating purpose behind the formation of the agreement was to benefit Wexler, the policy would have either named Wexler or would not have included the no-coverage-for-unnamed-persons clause.

The appellate court also determined that permitting a bad faith action by Wexler was unnecessary to effectuate the insurance contract’s objectives, since Wexler’s parents, the named insureds, can and did sue for bad faith regarding FAIR Plan’s handling of their claim – a claim which Wexler alleged and FAIR Plan acknowledged covered Wexler’s personal property.

Wexler further contended the policy was ambiguous because it extends coverage to her personal property in her parent’s home but also contains a no-coverage-for-unnamed-persons clause and asserted the ambiguity must be construed against the insurer. The Wexler court rejected the argument, finding the provisions unambiguously afforded coverage to Wexler’s parents for contents in their home, including contents used or owned by family members residing in the home.

The Wexler court distinguished the five cases Wexler cited in support of her ambiguity claims, all of which involved policies of insurance with broader and more varied coverage than FAIR Plan and/or additional insured endorsements.

Wexler also argued her parents had no insurable interest in the property she had in their house. The Wexler court rejected this argument, noting first that the insurable interest doctrine is a “tool insurance companies use to invalidate policies and avoid paying claims” and that an expansion of the doctrine would hurt claimants like Wexler to the advantage of insurance companies. The court noted the statutory purpose of the insurable interest doctrine “to suppress gambling and to curb moral hazard by refusing to endorse insurance policies contrary to public policy” and engaged in an amusing, albeit lengthy, discussion of the origins of the doctrine. But in conclusion, the court determined the insurable interest doctrine was inapplicable where, in its view, nothing suggested Wexler’s parents were “gambling” in purchasing the FAIR Plan – a “social bad” – and instead sought to reduce personal risk – a “social good.”

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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