California Court Holds That Insured's Voluntary Withdrawal of a Claim Precluded Causes of Action for Breach of Contract and Bad Faith
February, 2006
The California Court of Appeal for the Second District recently held that where an insured voluntarily withdraws a claim less than 45 days after first giving notice of the claim, the insurer cannot be held liable for breach of contract or extra-contractual damages for not performing any further investigation and closing its file. 1231 Euclid Homeowners Ass'n v. State Farm Fire and Casualty Co., 2006 WL 147487 (Cal. App. 2006).
Facts
Plaintiff was the homeowners’ association of a 10-unit residential condominium in Santa Monica, California. State Farm issued a policy, covering the period April 1, 1993 to April 1, 1994, that provided earthquake coverage of $1,191,000 subject to a 10% deductible. Within 12 hours after the Northridge earthquake on January 17, 1994, building inspectors from the city determined that the building was structurally safe. Within a few days, a structural engineer retained by the association’s management company found no structural damage to the building, but did discover a number of stucco and plaster cracks in the walls and ceiling. Shortly thereafter, a retired building inspector (the father of one of the residents) also inspected the building and did not note significant structural damage. He did find, however, that there was a substantial amount of cosmetic damage.
The association solicited at least five bids to make repairs to the building, none of which exceeded $13,000. Thereafter, the association submitted a claim of loss to State Farm. In order to facilitate the repairs, the association obtained a $30,200 SBA loan, after an SBA estimator apparently visited the building.
Plaintiff also received a preliminary damage inspection by an independent adjuster hired by State Farm. The adjuster asked to see all of the earthquake damage and “perused” the building exterior, hallways and stairs. He only inspected three condominium units after he was advised by the board member that those were the only three units that sustained earthquake damage. The adjuster’s opinions were consistent with those that the association previously obtained. Based on his observations and experience, the adjuster concluded that the earthquake did not cause structural damage to the building and the cosmetic damage could be repaired by patching and painting. The adjuster wrote down in his notes that he thought the repairs could be made for approximately $10,000 and did not provide a complete estimate because he felt that the total damage was far less than the $119,160.00 deductible.
The “contact person” for the association advised State Farm that the previously submitted claim was withdrawn, which State Farm confirmed via written letter. The fact of the withdrawal was not disputed or even questioned until the association filed suit nearly eight years later, just three days before expiration of the one-year revival period created by Code of Civil Procedure §340.9. The association went ahead and used the SBA loan to make the various repairs to the building. The repairs did not exceed $56,640.25, which was less than half of the deductible under the policy.
Plaintiff contended that summary judgment should be denied because questions of fact existed as to whether State Farm failed to adequately investigate the claim, which caused State Farm to deny the claim as below the deductible. The trial court rejected plaintiff’s arguments and granted summary judgment to State Farm.
Analysis
The Court of Appeals affirmed the trial court’s decision holding that the insurer was not liable for breach of either an express or implied term of the policy given plaintiff’s voluntary withdrawal of its claim in early 1994, within a few weeks after being submitted. In rendering its decision, the court examined the communications between the insured and insurer and found that the record clearly demonstrated that “State Farm had every justification to conclude that HOA had independently determined that whatever damage its building may have sustained, it did not exceed the policy deductible.” For nearly eight years before it filed suit, the plaintiff took no action except to withdraw its claim. Further, State Farm did not fail or refuse to provide demanded policy benefits. State Farm simply accepted the withdrawal and closed its file. The court held that the insured’s voluntarily withdrawal of the claim excused State Farm from any obligation to conduct any further investigation. Under the court’s analysis, the claim was effectively resolved by the withdrawal, in accordance with the relevant terms of the policy (the deductible provision).
Additionally, the court found that the insured’s claim was barred by the “notice-prejudice” rule. This rule requires that an insurer must demonstrate substantial prejudice arising from the insured’s failure to provide a timely notice and proof of loss. Downey Savings & Loan Assn. v. Ohio Casualty Co. (1987) 189 Cal.App.3d 1072, 1089. The eight year delay and the making of the repairs denied State Farm an opportunity to fully investigate the loss, which the plaintiff now claimed was over 15 times more than the amount that it actually spent in 1994. Moreover, the court determined that critical observations of the property as it existed after the earthquake would be impossible and that many unit owners who had personal knowledge of the damage had since sold their units and moved away.
Lastly, the court also found that under Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1 (Cal. 1995), because State Farm did not breach the insurance contract and did not owe any policy benefits, it could not be liable for breach of the implied covenant of good faith and fair dealing.
Learning Point:
Before an insurer stops investigating a claim and closes its file, it should make sure that there is a written record demonstrating the insured’s voluntary withdrawal of the claim. Additionally, the withdrawal of the claim must be by someone with the requisite authority to act on behalf of the insured (i.e., corporate officer, risk manager, homeowner’s association board member). Finally, the insurer should request any written reports or estimates that demonstrate that the claimed damages are below the policy deductible.•
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