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

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, the Paslay 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.)

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June 28, 2016