Weekly Law Resume - July 19, 2012: Insurance Coverage – Habitability Claims – Expected or Intended Damages Not Covered

by Low, Ball & Lynch

[author: Ramsey F. Kawar]

Axis Surplus Insurance Co. v. Linda Reinoso
California Court of Appeal, Second Appellate District (June 26, 2012)

Most liability policies do not extend coverage to intentional acts. In this case, landlords sued over habitability claims were not covered under their liability policy when the tenants’ claims were determined to be “expected or intended” from the standpoint of the insured landlord.

Defendant and appellant Linda Reinoso and her husband Edgar Reinoso, owned and managed about 15 rental properties in the City of Palmdale, including J-3 Apartments, a 48-unit residential property they purchased in 2003. The Reinosos also owned another 64 rental properties elsewhere in Southern California. During the 30 years prior to trial, the Reinosos had owned, operated, and managed an additional 35 properties. In the five years before this suit, Edgar had been prosecuted twice for charges concerning deficiencies at other properties. While Edgar was more involved in the day-to-day management of the various properties, including J-3, Linda had paid the bills for the J-3 Apartments.

In January of 2005, the tenants of J-3 Apartments brought an action alleging habitability deficiencies against the Reinosos and their property management company, Proud American. The tenants sought damages against all defendants in excess of $10,000,000 plus punitive damages, attorney and expert fees, and interest.

The Reinosos tendered the defense of this action to Axis Surplus Insurance Company which insured the Reinosos and Proud American under two general liability policies. Axis agreed to defend under a reservation of rights. The action settled for just over $3,000,000 with Axis contributing $2,162,500.

Axis then brought an action against the Reinosos and Proud American to recover its defense costs and settlement contribution in the amount of $2,420,000. The trial court awarded Axis $2,143,000, plus costs and interest, for settlement of claims it determined were not covered by the insurance policies at issue. This appeal was brought by Linda Reinoso who argued that she was an “innocent insured,” and that the trial court wrongly applied an objective standard, rather than a subjective standard in finding that she knew of the conditions at the property, and that the damages claimed by the tenants were thus “expected or intended” by her.

The Court of Appeals held that Linda was not covered by the Axis policy for any of the damages that were settled by Axis. First, it noted that intended, deliberate, and anticipated consequences of acts are not included within the policy, pursuant to Insurance Code Section 533 and Delgado v. Interinsurance Exchange of the Automobile Club of Southern California (2009) 47 Cal.4th 302 (Weekly Law Resume August 13, 2009). Secondly, the Court of Appeals agreed that the subjective standard–whether Linda knew of the conditions and thus the damages claimed by the tenants--was appropriate, citing Hassan v. Mercy American River Hospital (2003) 31 Cal.4th 709, 720 (“Whether injury or damage is ‘expected or intended’ under an insurance policy is determined by reference to the insured’s subjective mental state.” Ibid.)

Applying that subjective standard, the Court held that there was sufficient evidence that Linda was aware of the conditions at the J-3 Apartments, She was in a position to learn, and did learn, sufficient information about the management style of her husband and of the apartment conditions, based upon their practices at other properties and her payment of the bills. Thus the Court found that she was not an innocent insured, and that she expected the tenants to suffer injuries. Consequently, she was not covered for the damages that Axis paid on her behalf and was attempting to recover.

An additional issue raised by Ms. Reinoso was that the trial court was obligated to allocate the settlement costs based upon the amounts Axis actually paid for the indemnity of each particular insured, based on LA Sound USA Inc. v St. Paul Fire & Marine Ins. Co. (2007) 156 Cal.App.4th 1259, which had required such an allegation among the defendants. The Court of Appeals disagreed with Ms. Reinoso’s proposition. It noted that in LA Sound the court did not assume there was joint and several liability among the defendants, and in fact stated that it was “implausible” that the two individuals faced the exact same liability. Here, the trial court had concluded that Linda and Edgar were liable for the $2,143,000 paid to settle the tenants’ lawsuit. Linda conceded at trial that she was jointly and severally liable for any tort committed by Edgar, and the property was held as community property between them. She also co-managed the property which would establish joint and several liability, and lastly, she was facing a potential exposure of up to $30 million, and received the full benefit of the settlement.

The Court of Appeals affirmed that there was no coverage to Linda for the damages, and that a joint and several allocation was implicit in the trial court’s decision, and affirmed the same.


Under this subjective standard, where a carrier can show that the insured landlord had actual knowledge of the conditions that are the subject matter of the habitability claims, it may be able to defeat coverage by demonstrating that the conditions were the result of intentional acts, rather than negligence.

For a copy of the complete decision see: http://www.courts.ca.gov/opinions/documents/B228332.PDF


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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