The California Court of Appeal, Second Appellate District, affirmed the trial court’s summary adjudication ruling in favor of the insurer regarding alter ego and other vicarious liability theories, but reversed the trial court’s summary adjudication ruling on the causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair competition under Business & Professions Code section 17200 et seq. The Court held that the insurer was required to show prejudice in order to deny coverage based on the insured’s failure to provide a proof-of-loss statement. The Court also held that the insurer had waived the defense of late notice by failing to specifically object. Finally, the Court held an unfair competition claim based on bad faith was not barred, even though the alleged conduct might also constitute a violation of the Unfair Insurance Practices Act, for which there is no private cause of action per Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, 304.
This case arises out of an August 2009 fire in Southern California. The fire destroyed 250 square miles of forest and 89 homes in Southern California. Ocie E. Henderson, Anthony Wallace, Roscoe and Edna M. Allen, and John and Sharon Billingslea (“Plaintiffs”) owned homes located near the fire line. Although none of their homes were burned by the fire, Plaintiffs claimed their homes sustained damage from smoke, soot, and ash from the fire.
Plaintiffs were insured against first-party property loss by Fire Insurance Exchange (“FIE”) and made claims under their respective FIE policies for the damage to their homes. The FIE policies provided that, as a condition to coverage, Plaintiffs had to provide timely notice of loss to FIE. The policies also required Plaintiffs to provide a signed, sworn proof-of-loss notice within 60 days of a request by FIE. The policy also had a no-action clause prohibiting any action against FIE unless Plaintiffs fully comply with all policy terms and conditions.
FIE sent Plaintiff Henderson a written request for submission of the proof of loss. Plaintiff Henderson failed to provide the proof of loss within sixty (60) days, and FIE denied his claim for failure to comply with the proof of loss condition. FIE also requested proof of loss statements from Plaintiffs Roscoe and Edna Allen. Plaintiffs Roscoe and Edna Allen failed to provide the statements with sixty (60) days of the request. FIE denied their claims on the ground that that there were insufficient levels of smoke, ash, and/or soot, but also reserved its right to deny coverage on any grounds.
Plaintiffs John and Sharon Billingslea did not make a claim under their policy for nearly one year after the fire. FIE requested a proof of loss form from them, but subsequently denied the claim because there were insufficient levels of smoke, ash, and/or soot present in the home. FIE also reserved its right to deny coverage on any other grounds.
Plaintiffs sued FIE (and other related insurance entities) for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair competition. FIE moved for summary adjudication of the breach of contract and bad faith claims based on the failure by Plaintiffs Henderson, Wallace, and Roscoe and Edna Allen to submit proofs of loss, and based on Plaintiff John and Sharon Billingslea’s delayed notice of their claim. The trial court granted summary adjudication, finding that the failure to submit proofs of loss barred coverage; the late notice of claim barred coverage; and the unfair competition claims were barred per Moradi-Shalal, supra, 46 Cal.3d at 304. The trial court also granted summary adjudication in favor of FIE as to alter ego and other vicarious liability theories.
The Court of Appeal affirmed the summary adjudication as to alter ego and other vicarious liability theories, but reversed in all other respects. The Court found that breach of the proof of loss condition required a showing of prejudice by FIE. The Court also found that breach of the proof of loss condition was similar to breach of other policy conditions that California courts have held require a showing of prejudice by the insurer (e.g., notice of loss provision, cooperation provision, provision in uninsured motorist insurance coverage requiring statement under oath by insured). The Court concluded the purpose of a proof of loss condition is to assist the insurer’s investigation of claims and to detect fraud. These purposes were not adversely affected by an insured’s late submission, absent a showing of prejudice.
With respect to late notice, the Court, citing Insurance Code section 554, found FIE’s general reservation of rights did not constitute a specific objection permitting FIE to rely on untimely notice of loss as a defense to coverage.
Finally, the Court concluded that Moradi-Shalal does not bar an unfair competition claim based on an insurer’s bad faith, even though the conduct in question may also constitute a violation of the Unfair Insurance Practices Act (which do not constitute private causes of action per Moradi-Shalal, supra, 46 Cal.3d at 304). The Court reasoned that, since courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, including those based on breach of the implied covenant of good faith and fair dealing, an unfair competition claim based on those actions is not an end-run around Moradi-Shalal.
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