Insurer Not Required to Pay Twice When Contractor Cashes Jointly Payable Check Under Authority Granted in Construction Contract

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In Jozefowicz v. Allstate Ins. Co. (No. G055643, filed 5/28/19), a California appeals court held that Allstate was not required to pay the insured where his contractor negotiated a jointly payable check under a lost or stolen check provision of the Commercial Code, because the insured’s construction contract had authorized the contractor to cash the check, which negated a requirement for application of the statute.

In Jozefowicz, the insured entered a construction contract that contained a term appointing the contractor as “my representative in fact to endorse and deposit in its account any Insurance Company checks or drafts relating to this Proposal and Work Authorization.” Further, “I direct that Allstate Insurance include the name of [the contractor] on any checks or drafts relating to this Proposal and work Authorization.”

Allstate was provided a copy of the contract and initially issued a check payable to both the insured and the contractor, which was sent to the insured. But he never cashed it, having gotten into a dispute with the contractor over the work. The contractor contacted Allstate and requested that the check be reissued and sent directly to the contractor. Allstate did so and the contractor deposited the check.

The insured sued the contractor and the bank, alleging causes of action for conversion, fraud, breach of contract, and unjust enrichment. He also named Allstate, alleging causes of action for recovery of a lost, destroyed, or stolen check pursuant to California Commercial Code sections 3309 and 3310(b)(4), and for declaratory relief.  However, the court granted summary judgment for Allstate on the ground that the insured could not satisfy the elements of a statutory claim under section 3309.

The appeals court affirmed. Section 3309 provides that: “(a) A person not in possession of an instrument is entitled to enforce the instrument if (1) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred, (2) the loss of possession was not the result of a transfer by the person or a lawful seizure, and (3) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.”

Allstate argued that by virtue of the construction contract the insured had expressly instructed Allstate to include the contractor on all checks and notified Allstate that the contractor was permitted to deposit all checks. Accordingly, the loss of possession was the result of a transfer and/or a lawful seizure (negating the second element of the statute). For his part, the insured argued that the contract term failed to comply with the requirements of Probate Code section 4121(c) for a power of attorney, because that code section requires a power of attorney to be notarized or witnessed by two people.

The court agreed with Allstate, finding that the lost check statute did not apply. The court said that although the second check had been sent directly to the contractor, the insured was in constructive possession under the first element of section 3309 because he was listed as a joint payee. (Citing Crystalplex Plastics, Ltd. v. Redevelopment Agency (2000) 77 Cal.App.4th 990.) However, because the contractor had the right to negotiate the check under the construction contract, its deposit of the check constituted a “transfer,” thus negating the second element of the statute.

As to the insured’s argument that the contract term was not a proper power of attorney, the Jozefowicz court said that the Probate Code provisions concerning powers of attorney only apply to durable powers of attorney, statutory powers of attorney under the Uniform Statutory Form Power of Attorney Act, and powers of attorney that specifically incorporate the Probate Code provisions. But the Probate Code provisions explicitly do not apply to “[a] power of attorney to the extent that the authority of the attorney-in-fact is coupled with an interest in the subject of the power of attorney.” (Citing Bonfigli v. Strachan (2011) 192 Cal.App.4th 1302, 1309.)

The Jozefowicz court said that the purpose of this particular contract term was to provide security for the contractor to be paid. “Accordingly, it was an agency coupled with an interest. For that reason, the parties were not required to observe the formalities of the Probate Code in creating a valid agency relationship. Moreover, because this type of agency relationship did not create fiduciary duties, Jozefowicz’s argument that the agency was terminated by a breach of fiduciary duty is unavailing.” Thus, summary judgment was affirmed for Allstate.

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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