- Where an Insurer's Conduct Effectively Precludes an Insured from Complying with a Policy Condition, the Insurer is Estopped from Relying on That Condition to Deny Coverage
- October 25, 2008
- Law Firm: McCormick, Barstow, Sheppard, Wayte & Carruth LLP - Fresno Office
City of Hollister v. Monterey Insurance Company, 165 Cal.App.4th 455 (2008)
A building at the Hollister Municipal Airport was insured against fire under a commercial lines policy issued to the City of Hollister by Monterey Insurance Company (“MIC”). The policy included a “Functional Building Valuation” endorsement that obligated MIC to pay the cost to repair or replace the building if, within 180 days after a loss, the City contracted for repair or replacement of the loss or damage to restore the building for the same occupancy and use. However, if the City failed to meet that condition, it could only recover the “market value” of the building. The “market value” of the building was estimated to be approximately $150,000 while the cost to construct a functionally equivalent building would have been between $950,000 and $2.6 million.
In late 2001, MIC’s risk assessment department inspected the airport buildings and recommended that peeling exterior paint be removed and the buildings be repainted. In March 2002, the City responded to the recommendation by indicating that, although it was considering demolishing the buildings, the painting would be completed if the buildings were to remain in use. However, the painting was never completed and no decision was ever reached regarding the continued use of the buildings. Nevertheless, MIC renewed the policy, increasing both the number of buildings insured and the limit of liability for functional replacement coverage. The next year, a portion of a building that was previously inspected by the risk assessment department was damaged by fire. The City notified its broker of the fire within two days and the broker immediately notified MIC of the loss. After receiving notice of the loss, MIC retained an independent adjuster to visit the fire scene. The adjuster opined that the building was a total loss. The claim was subsequently assigned to general adjuster Jack Boczar. Boczar visited the location and later testified that he had been approached by several individuals indicating that the building had been scheduled for demolition. However, when Boczar met with City officials, they denied that any demolition had been scheduled. Furthermore, City officials testified that when Boczar clarified the functional replacement provisions of the policy, the City made it very clear that it wanted to move forward with the functional replacement of the building. They noted that Boczar indicated at that time that he would fight any attempt to obtain benefits pursuant to the endorsement since the building was being considered for demolition.
Although the City retained counsel to assist it in pursuing the claim, MIC engaged in certain conduct, i.e. refusing to indicate whether or not it would honor the endorsement if the City entered into a contract to repair or replace the building and failing to timely respond to correspondence, that delayed the handling of the claim. MIC’s failure to advise the City of its position regarding the applicability of the endorsement made it impossible for the City to enter into a contract to replace the building. Although MIC granted the City an extension of 60 days in which to enter into a reconstruction contract, MIC continued its delaying tactics. The City therefore proposed an additional extension which MIC refused. As such, the City was unable to comply with the policy condition.
Thereafter, the City commenced an action for declaratory relief against MIC seeking a judicial determination of its rights and duties under the policy and requesting that it be allowed to complete the public bidding process and execute a construction contract to build a functional replacement. The trial court concluded that MIC was estopped from relying on the 180-day time limitation in the policy and found that the City was entitled to coverage under the functional replacement endorsement. MIC moved to set aside the judgment or modify it in certain respects. The City opposed the motion but offered to stipulate that it was entitled to functional replacement coverage as long as it entered into a contract to replace the building within 180 days after notice of the amended judgment. This offer was accepted by MIC. The court denied the motion to vacate, but modified the judgment in accordance with the stipulation. MIC appealed.
THE COURT’S RULING
On appeal, the court noted that an insurer bears a common law obligation to assist the insured in recovering bargained-for policy benefits. The 180-day requirement was clearly a condition precedent to the City’s right to recovery under the endorsement. However, the court found that there was sufficient evidence before the trial court to find that MIC’s conduct supported an equitable estoppel as it failed to cooperate with and assist the insured in determining the extent of the insurer’s liability. In fact, the Court of Appeal determined that the trial court could have properly found that MIC actively interfered with the City’s performance of the 180-day contracting condition, in bad faith, by delaying and interfering with its efforts to determine its rights under the policy. The court noted that there was nothing in the policy that would allow MIC to deny the claim based on the mere fact that the City had planned to demolish the building. Furthermore, there was no substantial factual basis for the demolition defense. The court also concluded that once MIC had told City officials that it would fight a claim for functional replacement value, it assumed an affirmative duty to inform the City once MIC decided not to fight the claim. This is something MIC had not done as of the commencement of trial. The court further found that MIC’s conduct in this regard caused the City to suffer harm as it was unable to enter into a contract for the replacement of the building within the 180 days required by the policy. The judgment was therefore affirmed with a modification to the effect that the 180-day period would begin to run when the appellate court’s opinion was final and the time to seek review from the California Supreme Court had expired.
THE EFFECT OF THE COURT’S RULING
Where an insurer's conduct, including its failure to cooperate with the insured in obtaining policy benefits, prevents an insured from complying with a policy condition, the insurer will be estopped from relying on the condition to deny or limit coverage.