Where an insurer presented evidence that there was a “genuine dispute” about the predominant cause of building damage, the insurer did not act in bad faith by relying on one expert’s “final” opinion, even though that opinion differed somewhat from the insurer’s other experts’ “preliminary” opinions. (501 East 51st Street, Long Beach-10 LLC v. Kookmin Best Insurance Co., Ltd. (2020) — Cal.App.5th —-)
Facts
501 East 51st Street, Long Beach-10 LLC (the “LLC”) purchased an apartment building. After purchasing the building, the LLC purchased property insurance from Kookmin Best Insurance Co., Ltd. (“Kookmin”). The policy covered damage caused by accidental discharge of water from a plumbing system, but excluded damage caused by settlement and earth movement.
While the policy was in force, an underground water main ruptured next to the side of the building and leaked for two to three days. The building, which was constructed in 1963, had a concrete slab floor system that showed evidence of settlement and earth movement prior to the pipe leak. Among other things, the exterior walls and interior walls had cracks (some of which had been patched); the floor slab had cracks (some of which had been patched); the floor slab was “tilted” in places (some of which had been repaired with leveling compound); and openings for doors and windows were distorted.
The LLC submitted a claim to Kookmin for damage caused by the pipe leak. The LLC retained a geotechnical engineer, who performed what he characterized as a “limited” investigation. Importantly, that investigation did not include any subsurface soil testing. Based on that limited investigation, the LLC’s geotechnical engineer concluded that the building had pre-existing damage, but that the leak “substantially contributed” to causing the pre-existing damage to become worse and causing some entirely new damage.
Kookmin retained various experts, who also conducted an initial investigation that did not include any subsurface soil testing. At least one of Kookmin’s experts initially concluded that the leak “likely” had “exacerbated” some of the pre-existing damage.
Kookmin also retained a coverage attorney to assist in determining whether the loss was covered under California’s “predominant” cause doctrine. Based on that review, Kookmin’s attorney concluded that the leak had “seriously exacerbated” the pre-existing damage, but that “further investigation” (such as review of water records) might be warranted. The attorney also suggested that Kookmin’s other experts might attempt to segregate (so that Kookmin could pay for) any portion of the damage caused by the pipe leak.
Based on Kookmin’s initial investigation, Kookmin’s claim adjuster made notes indicating Kookmin would extend coverage for a limited portion of the claimed damage. Kookmin also asked one of its consultants to prepare an estimate of the cost to prepare a portion of the damage.
Because neither the LLC’s experts nor Kookmin’s experts had purported to determine the “predominant” cause of the loss, Kookmin hired a different firm – one that specialized in geotechnical engineering – to assist. That firm submitted a proposal for investigation that included subsurface soil testing. Kookmin’s claim manager stated, in an internal email, that the firm’s proposed charges were “expensive in pursuit of coverage denial.” Other file notes indicated that claim personnel had concluded the claim “will be in litigation.”
Kookmin authorized the work that that the geotechnical engineering firm proposed to perform, including the subsurface soil testing. The geotechnical firm then concluded, in a written report, that the leak had not “contributed” at all to causing the damage. After the geotechnical firm submitted its report, Kookmin’s coverage attorney notified the LLC, in writing, that Kookmin had concluded the predominant cause of the damage was not the leak but, instead, long-term soil movement and cracking (which the policy expressly excluded).
The LLC sued Kookmin and asserted various causes of action, including breach of contract and bad faith. Kookmin filed a motion for summary adjudication of the cause of action for bad faith, asserting that it had conducted a reasonable investigation with the assistance of experts, and that there was a “genuine dispute” about the cause of the damage.
The LLC opposed Kookmin’s motion, arguing there were triable issues as to whether there really was a “genuine dispute” about the cause of the damage, and that a jury reasonably could conclude that Kookmin’s investigation was “biased.” For example, the LLC argued that, at least initially, experts on both sides agreed that the leak had caused some new damage, and that Kookmin’s claim adjuster and lawyer had suggested at least a portion of the damage was covered. The LLC also argued that Kookmin later had retained the geotechnical engineer to “pursue coverage denial” (as expressed in the claim manager’s internal email).
The trial court granted Kookmin’s motion for summary adjudication, finding that Kookmin had conducted a reasonable investigation, that there was indeed a “genuine dispute” about the predominant cause of the damage and that Kookmin had not acted in bad faith when it denied coverage. The LLC dismissed its remaining causes of action without prejudice and appealed.
Holding
The Court of Appeal affirmed. The Court noted that, where multiple causes (at least one of which is covered and one of which is not covered) converge to produce property damage, the existence of coverage for the damage depends on the “predominant” cause (sometimes called “efficient proximate” cause) doctrine. Here, Kookmin presented evidence that there was a genuine dispute about which cause was the predominant cause.
The Court of Appeal re-iterated the well-established rule that a cause of action for “bad faith” delay or denial of a property damage claim requires a showing that the insurer acted “unreasonably or without proper cause,” and that an insurer does not act in bad faith simply for advancing its side of a dispute. In addition, the Court re-iterated that the genuine dispute doctrine may apply where the insurer denies a claim based on the opinions of experts, at least in the absence of evidence the investigation was biased (e.g., that the insurer dishonestly selected experts or relied on expert opinions that were clearly unreasonable).
Ultimately, the Court of Appeal held that Kookmin had presented sufficient evidence of a reasonable investigation. The Court noted that Kookmin initially had retained experts and a coverage attorney who, at most, expressed preliminary opinions. In addition, the Court noted that the geotechnical engineer Kookmin later retained provided a “final” opinion, that there was no evidence that this opinion was dishonest or unreasonable and that, therefore, Kookmin was entitled to rely on that opinion.
Comment
The underlying fact pattern – whether building damage was caused by long-term settlement and cracking or by a sudden pipe leak – is a fairly common one. The investigation was complicated by the fact that, initially, the insurer retained certain experts who, based on limited information, expressed some preliminary opinions (e.g., that the pipe leak had “exacerbated” or even “seriously exacerbated” the pre-existing problem). Later, the insurer retained another expert who, based on more information, concluded that the pipe leak had not “contributed” at all to causing the damage.
The issue presented to the trial court and then to the Court of Appeal was not which cause was the “predominant” (or “efficient proximate”) cause. Instead, the issue was simply whether, based on the insurer’s investigation, there was a genuine dispute about coverage. Because the trial court and Court of Appeal found there was indeed a “genuine dispute,” the insurer’s position was reasonable as a matter of law.