Genuine Dispute Over Cause of Damage and Insureds’ Demolition Before Inspection Negate Bad Faith and Elder Abuse Claims

Christopher Kendrick and Valerie A. Moore | Haight Brown & Bonesteel LLP | June 28, 2016

In Paslay v. State Farm General Ins. Co. (No. B265348, filed 6/27/16), a California appeals court found triable issues of fact regarding whether State Farm breached its contract in paying a water loss, but affirmed summary adjudication for the insurer on bad faith and elder abuse claims based on the genuine dispute doctrine.

In Paslay, a roof drain failed during a heavy rain, causing water to enter a bedroom ceiling and damage other parts of the house. State Farm arranged for the insureds to live in a rented residence, made payments for some of the repairs, but denied coverage for certain work undertaken in the master bathroom, replacement of drywall ceilings, and installation of a new electrical panel. The insureds alleged that was bad faith. They also alleged that State Farm had committed elder abuse (Welf. & Inst. Code, §§ 15610.07, 15610.30), by prematurely forcing them to move back into the house which was still under construction because one of the insureds was 80 years old.

During the initial inspection, Mr. Paslay had expressed concern about mold because of peeling wallpaper in the master bathroom. He also expressed concern about asbestos in the ceilings. State Farm responded by citing a sublimit on mold losses and requesting an estimate from the insureds’ contractor on asbestos abatement in ceilings damaged by the water intrusion. State Farm also learned that the only upgrade work that would be required by the Los Angeles Department of Building and Safety was installation of hard-wired smoke detectors.

State Farm estimated approximately $83,000 for water damage; $4,200 for smoke detectors and $6,500 for the bathroom wallpaper. Mr. Paslay, a former insurance adjuster, submitted an estimate for $273,000. Meanwhile, the insureds’ contractor had proceeded to remove drywall ceilings throughout the house although no estimate had been submitted for the parts damaged by water intrusion. State Farm also learned that the insureds had obtained a building permit listing a complete remodel of the bathroom, and on re-inspection discovered that the bathroom had been stripped to the studs. Further, the insureds’ estimate included replacement of the main electrical panel.

State Farm only agreed to certain repairs and paid an undisputed amount, but the insureds contended that the refusal to pay for all of the work was bad faith. They claimed that stripping the bathroom was necessitated by discovery of additional water damage. Regarding the ceiling removal, the insureds claimed to have pointed out other areas of water intrusion damage to State Farm’s adjuster, and claimed that ceiling removal had been required in other places to assess the damage because access was limited. The insureds also contended that the electrical panel was determined as hazardous, and had to be upgraded as a condition to performing the repairs. Regarding alternative living expense and elder abuse claims, the insureds contended that State Farm had cut off rental payments causing the landlord to re-rent the leased house, forcing them to move back to the insured premises prematurely.

While finding triable issues of fact on the breach of contract claim, the court entered summary judgment for State Farm on the bad faith and elder abuse claims. The court said that the character of the water damage to the bathroom and whether it was subject to the mold sublimit was a triable issue of fact. As to the ceilings, the possibility of water damage to other areas outside the bedroom, the limited access, and the fact that current code requirements called for thicker drywall, making spot-patching impractical, all posed triable fact issues.

But the Paslay court rejected a claim that the electrical panel posed a triable issue of fact. The policy’s optional ordinance or law provision covered “b. loss to the undamaged portion of the dwelling caused by enforcement of any ordinance or law if…. (1) the enforcement is directly caused by the same Loss Insured endorsement….” The court found this inapplicable, stating: “State Farm presented evidence (1) that the 100 amp panel was inadequate for the house’s power usage prior to the leak in the master bathroom, (2) that city officials did not ask the Paslays to install the new panel, and (3) that the sole electricity-related change to the house required by city officials under the building code — namely, the installation of smoke detectors — did not materially increase the load on the 100 amp panel. On that showing, the panel’s replacement was not due to repair-related enforcement of the building code, and thus constituted an independent upgrade to the house.”

Further, the Paslay court rejected the insureds’ reliance on Los Angeles Building Code section 913405.1.2, which states that repairs “may be made provided … no hazardous conditions … are continued or created in the remainder of the building as a result of such work.” The court said that “nothing in the record suggests that the hazardous condition presented by the 100 amp panel was ‘continued or created’ in the house ‘as a result of’ the repair work.”

The Paslay court also ruled that there was no fact issue regarding alternative living expense, because the policy only covered “costs you incur….” and the insureds presented no evidence of incurring or trying to incur further expense, having merely moved back into the insured premises, which they admitted was livable, when the lease expired on the rental house.

In then dismissing the bad faith claim, the court cited numerous authorities for the proposition that “an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured’s coverage claim is not liable in bad faith, even though it might be liable for breach of contract.” Further, an insurer may obtain summary adjudication of a bad faith cause of action “by establishing that its denial of coverage, even if ultimately erroneous and a breach of contract, was due to a genuine dispute with its insured.” (Citing Bosetti v. United States Life Ins. Co. in City of New York (2009) 175 Cal.App.4th 1208, 1237.)

As to the claim that all of the repairs were covered and thus should have been paid, thePaslay court stated that “the record discloses only a genuine dispute regarding the extent of the damage and required repairs [and] ‘[w]here the parties rely on expert opinions, even a substantial disparity in estimates for the scope and cost of repairs does not, by itself, suggest the insurer acted in bad faith.’” (Citing Fraley v. Allstate Ins. Co. (2000) 81 Cal.App.4th 1282, 1293.)

The Paslay court also found State Farm’s investigation reasonable as a matter of law because the insureds had prevented the insurer from investigating some of the damage: “Generally, the reasonableness of an insurer’s conduct ‘must be evaluated in light of the totality of the circumstances surrounding its actions.’ [] Thus, the adequacy of the insurer’s claims handling is properly assessed in light of conduct limiting the insurer’s investigation by parties with an interest in policy benefits.” (Citing Blake v. Aetna Life Ins. Co. (1979) 99 Cal.App.3d 901, 905-906 [failure to supply critical information negates bad faith].)

“Here, the Paslays curtailed State Farm’s ability to investigate the damage in the master bathroom and to the ceilings, notwithstanding the policy provisions regarding their ‘[d]uties [a]fter [l]oss,’ which included an obligation to ‘exhibit’ the damage property ‘as often as [State Farm] … require[d].’ Viewed in the light most favorable to the Paslays, the record shows that … during inspections of the house, the parties discussed asbestos abatement to the damaged ceilings, and [the insured] ‘expressed [his] concern that if water had intruded into the walls of the master bathroom, the potential for the development of mold existed.’ In a letter [the adjuster] noted [the insured’s] ‘feel[ing] there may be a potential for mold,” set forth the $5,000 mold coverage limit, and stated: ‘[W]e are currently in the process of awaiting the estimate from your contractor regarding the asbestos abatement for the ceiling damaged as a result of the water loss.’ …

[B]efore submitting any estimate regarding asbestos abatement, the Paslays removed the ceilings. At approximately the same time, [the insured and his contractor] examined the master bathroom for hidden water damage, and removed cabinets, fixtures, and other parts of the bathroom. [The insured] phoned [the adjuster], learned that he was unavailable, and requested an immediate investigation of the newly discovered damage. By the time [the adjuster] arrived at the house two days later, the debris from the master bathroom had been discarded. At some point, [the adjuster] was sent photographs displaying piles of debris. [The adjuster] subsequently informed the Paslays that the demolition of the bathroom ‘down to the framing’ prior to any agreement on the scope of work was prejudicial to State Farm.

On this record, there are no triable issues regarding the adequacy of State Farm’s investigation, as the Paslays removed the damaged property before State Farm had an opportunity to conduct a full assessment of the Paslays’ proposals and contentions. The record shows only that State Farm did what it could to assess the claimed losses before denying them. In our view, even if those denials were mistaken, nothing suggests that State Farm acted in bad faith. Summary adjudication was therefore proper on the bad faith claim.”

The Paslay court then rejected the elder abuse claim because the applicable statute only applies when a person or entity “[t]akes, secretes, appropriates, obtains, or retains real or personal property of an elder” for “a wrongful use or with intent to defraud, or both,” as well as “by undue influence….” (Welf. & Inst. Code, §§ 15610.30(a)(1); (a)(3).) The Paslay court said that “[t]he issue thus presented is whether a merely incorrect denial of policy funds under the circumstances shown here may constitute a ‘wrongful use’ of those funds, for purposes of an elder abuse claim.” But the court found that its dismissal of the bad faith claim was also dispositive of the elder abuse claim:

“[W]e conclude that [under the elder abuse statute] wrongful conduct occurs only when the party who violates the contract actually knows that it is engaging in a harmful breach, or reasonably should be aware of the harmful breach. The evidence before the court did not raise a triable issue whether those circumstances obtain here. As explained above, notwithstanding the existence of triable issues regarding policy benefits due the Paslays, there is no evidence that State Farm acted in subjective bad faith or unreasonably in denying additional benefits.”

Finally, the Paslay court then affirmed summary adjudication on the insureds’ claim for punitive damages, saying that “In the absence of an independent tort, punitive damages may not be awarded for breach of contract….” (Citing Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 61.)

Costs Incurred to Repair Property Other Than Insured’s Defective Work Itself Are Covered Damages

Amy B. Briggs, Christine Spinella Davis and David B. Killalea | Manatt Phelps & Phillips LLP | December 4, 2015

Why it matters: A Florida federal court ruled that an insurer owes $23 million in indemnification to its insured, a general contractor, for repairs made to fix deficient subcontractor work at a luxury condominium tower because the repairs addressed ongoing damage to nondefective property. The court held that even though the CGL policy does not provide coverage for the repair of defective work itself, it does require coverage for repairs if the work causes damage to an otherwise nondefective completed property, which was evident in this case. The court reasoned that even if the predominant objective of the repair effort was to fix the instability caused by the defective subcontractor work, it is undisputed that the same effort was required to put an end to ongoing damage to otherwise nondefective property, e.g., damage to stucco, penthouse enclosure, and critical concrete structural elements.

Detailed discussion: Pavarini Construction Company was the general contractor for construction of a large condominium complex in Florida. Pavarini hired a subcontractor for the installation of concrete masonry unit walls and certain reinforcing steel and a second subcontractor for the supply and installation of reinforcing steel within the cast-in-place concrete columns, beams, and sheer walls.

The work performed by both subcontractors was seriously deficient. A significant amount of reinforcing steel was either omitted entirely or improperly installed throughout the building, including within important concrete structural elements, resulting in destabilization throughout the building. Stucco debonded and cracked on the walls, concrete elements cracked, and the penthouse enclosure on the roof also cracked, leading to water intrusion.

When the building owners served Pavarini with a formal demand to repair all of the damage, the company turned to American Home Assurance Company and ACE American Insurance Company. ACE denied coverage. American Home ultimately chipped in $2 million.

Pavarini incurred more than $25 million in costs relating to the remediation efforts. Pavarini argued that none of the costs included the repair of defective work itself but were for damage to otherwise nondefective building components. In response, ACE told the court that the bulk of the repair work was a repair of the defectively installed steel.

The U.S. District Court agreed with Pavarini.

The policy defined “property damage” as “all physical injury to tangible property, including all resulting loss of use of that property,” and includes “[l]oss of use of tangible property that is not physically injured.” It also excluded from coverage “[p]roperty damage to ‘your work’ arising out of it or any part of it and included in the products-completed operations hazard.” The “your work” exclusion did not apply, however, “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

The question, therefore, was whether the subcontractors’ defective work caused covered “property damage,” the court stated, answering in the affirmative. “[I]f the defective work causes damage to otherwise non-defective completed product, i.e., if the inadequate subcontractor work caused cracking in the stucco, collapse of the penthouse enclosure, and cracking in the critical concrete structural elements, [Pavarini] is entitled to coverage for the repair of that non-defective work.”

In the case of the condominium building…

To finish reading this article

Bio-Concrete – Concrete that can “Heal” Cracks

Roy Shelley | Rogers Townsend | May 15, 2015

The construction industry is nothing if not innovative. Dutch researchers have found a way to mix bacteria into concrete in order to repair cracks. The bacteria remain  dormant until water (entering through a crack) dissolve a plastic encapsulation, whereupon the bacteria grow and consume a calcium lactate additive. This growth cycle produces limestone which closes the cracks.

Obviously more testing is needed; there would likely be a limit on the size of cracks which could be “healed” in this way, and there would likely be a difference in the strength of a healed crack vs. a traditionally-repaired crack, but it holds promise for addressing smaller cracks that allow water intrusion and slow deterioration.

Fascinating stuff. From a legal perspective, these types of innovations touch on more than just the construction field – patent law, environmental law, and general liability issues are all potentially implicated.

But now Dr. Bruce Banner has hope for finding a bride. (+5 for getting that reference.)

via Bio-Concrete – concrete that can “heal” cracks |.

CGL Coverage For Rip And Tear Costs

Peter M. Crofton | Smith Gambrell & Russell LLP | February 25, 2015

General contractors are all too familiar with the limitations in a CGL policy relating to defective work.  Those limitations exclude coverage for costs associated with damage caused by “your work.”  There is a limited exception to the “your work” exclusion in some CGL policies that affords coverage for damage to other work caused by defective work performed by subcontractors (the “Subcontractor Exception”).  Regardless, there is no coverage for the costs of correcting the defective work itself – only for damage to other work caused by the defective work.

Water intrusion situations provide good examples of how this coverage works.  A subcontractor’s defective installation of windows may result in water damage to carpet and drywall work performed by other subcontractors.  A general contractor’s CGL policy may cover the cost of repairing the carpet and drywall under the Subcontractor Exception.  However, the cost of correcting the defective window installation is normally not covered by the CGL policy.

One question that sometimes arises is whether a CGL policy covers the cost of tearing out and reinstalling undamaged work required to facilitate the repair of the defective work (“rip and tear costs”).  Few courts have expressly addressed this issue, and those that have are split on the coverage question.  Some courts consider the rip and tear costs as part of the cost of correcting the defective work itself and, therefore, recoverable under the policy. See, e.g., Desert Mountain Prop. Ltd. P’ship v. Liberty Mut. Fire Ins. Co., 236 P.3d 421 (Az. App. 2010) (finding the cost of removing and repairing non-defective flooring to correct defectively compacted soil is non-recoverable damage).  Other courts consider the ripping and tearing to be damage to other work that results from the defective work so that it is recoverable under the policy.  See, e.g., Dewitt Constr. Co. v. Charter Oak Fire Ins. Co., 307 F.3d 1127 (9th Cir. 2002) (finding the cost to demolish non-defective pile caps installed atop defective piles was recoverable property damage).

via CGL Coverage For Rip And Tear Costs – Real Estate and Construction – United States.

“Specified Cause of Loss” in Colorado Can Determine Whether There is Coverage

Brandee Bower | Property Insurance Coverage Law Blog | December 10, 2014

I recently came across a case in Colorado involving a suit filed by a business owner against the insurance company for damage to his building when an underground water main leak caused settling.1 The facts are:

The plaintiff owned a building where he operated a martial arts training program. He noticed a crack in the wall and reported the damage to his insurance agent. The claim was denied by the insurer based upon an exclusion for settling. Almost two years later, plaintiff again contacted his agent because the damages had increased significantly. He found out that a city water line was being repaired nearby. Water was ‘bubbling up like an artesian well’ in the basement of an adjacent building. The city found a leak and repaired it. Plaintiff told his insurance company that this leak caused his damage too, but the claim was denied. The insurance company relied on an exclusion which stated that they would not pay for damage due to settling, cracking, shrinking or expansion but if damage results from the ‘specified causes of loss’ it would be paid. The policy stated ‘specified causes of loss’ included water damage, and ‘water damage’ included “accidental discharge or leakage of water…as the direct result of the breaking or cracking of any part of a system or appliance containing water.”

This case was tried to a jury and they awarded $556,000 in actual damages plus $556,000 in punitive damages. By its verdict, the jury determined that the damage to plaintiff’s building was done by the leaking water main. In its appeal, the insurance company alleged error with the court’s ruling that the exclusion for settling did not apply if the cracking resulted from the leaking water main. The insurance company relied on Kane v. Royal Insurance Company,2 which held that an exclusion for damages caused by a flood applies regardless if it is caused by natural forces or by third-party negligence. Similar cases were cited regarding a settling exclusion being applied regardless of whether it was due to soil conditions or accidental water discharge. The plaintiff contended that the settlement exclusion should only apply to damages resulting from natural conditions over time.

By reading the policy, the appeal court found it was not clear whether the efficient cause of the settling could be from a natural occurrence or from broken pipes. It also found that the language in the Kane policy that avoided the claim of ambiguity was not incorporated in this policy. Thus, the court found that by failing to use the general language the coverage and exclusion provisions were inconsistent and ambiguous so there was coverage for the damages.

I’m sure you’ve seen it in our blogs many times, but reading your insurance policy and understanding the terms is extremely important. The use or non-use of a word or phrase can make all the difference.

1 Novell v. American Guar. And Liability Ins. Co., 15 P.3d 775 (Colo.App. 1999).

2 Kane v. Royal Ins. Co., 768 P.2d 678 (Colo. 1989).

via “Specified Cause of Loss” in Colorado Can Determine Whether There is Coverage : Property Insurance Coverage Law Blog.