The California Court of Appeal has ruled that a named insured’s spouse had standing to sue a CGL insurer for breach of contract and bad faith, even though the spouse was not a named defendant in the underlying suit. (Century Surety Company v. Polisso (2006) 43 Cal.Rptr.3d 468)
Facts
Charles Polisso and his wife, Therese, jointly owned a sole proprietorship known as “Kinzel Glass Company.” Century Surety issued a general liability policy to “Chuck Polisso dba Kinzel Glass Company.” The policy did not expressly name Therese as an insured, but did provide liability coverage for a named insured’s “spouse … with respect to the conduct of a business….”
A contractor filed a civil action against “Kinzel” and “Charles Polisso, an individual doing business as Kinzel” for damage allegedly caused by glass installed by Kinzel. Therese was not named as a defendant in the suit.
Century Surety initially denied Charles’ tender of defense based on “care, custody and control” and “faulty work” exclusions. Later, after receiving coverage advice from counsel, Century Surety reversed its position and agreed to defend Charles under a reservation of rights.
Century Surety filed a declaratory relief action against Kinzel and Charles, but not Therese. In turn, Charles and Therese filed a cross-complaint against Century Surety for breach of contract and bad faith. At trial, the jury found that Century Surety acted in bad faith by filing a declaratory relief action when Century Surety’s internal documents reflected it knew it had a duty to defend. The jury also found Century Surety had engaged in numerous delays in paying defense costs. The jury awarded Charles and Therese $637,911 in damages for Century Surety’s breach of contract and bad faith, and $2,015,000 in punitive damages.
Holding
The Court of Appeal affirmed, finding that Century Surety had breached the terms of the insurance contract by failing to defend Charles, that both Charles and Therese had standing to sue Century Surety, and that Century Surety was liable to both Charles and Therese for breach of contract and bad faith. The Court reasoned that, even though Therese was not named as a defendant in the underlying action, she qualified as an insured because she was Charles’ spouse. The Court also reasoned that, because Charles and Therese jointly owned the business as community property, the community estate would be liable for any money judgment arising from the underlying action. Therefore, the Court found there was a potential that Therese, through her community estate interest, could be legally obligated to pay damages as a result of the underlying action.
Moreover, the Court found the “genuine dispute” defense did not preclude liability on the bad faith and punitive damage claims because there was no genuine dispute as to Century Surety’s obligation to defend Charles and Therese. The Court noted that Century Surety’s coverage counsel had advised that assertions of fact relayed by the Polissos’ attorney created a potential for coverage and a duty to defend under Century Surety’s policy.
Finally, the court also found that there was coverage under a first-party property installation floater which provided coverage for damage to the window Kinzel had installed and that a flood exclusion did not apply because the glass was damaged before the flood occurred.
Comment
This case points out that in those instances where an insurer engages in multiple acts of unreasonable conduct during the processing of a claim, the “genuine issue” doctrine might not insulate the insurer from extra-contractual exposure.