Amerigraphics, Inc. v. Mercury Casualty Co., B208654.

• Decision Date: 23 March 2010
• Docket Number: No. B208654.,B208654.
• Citation: 182 Cal.App.4th 1538
• Court: California Court of Appeals Court of Appeals
• Parties: AMERIGRAPHICS, INC., Plaintiff and Respondent, v. MERCURY CASUALTY COMPANY, Defendant and Appellant.

182 Cal.App.4th 1538

AMERIGRAPHICS, INC., Plaintiff and Respondent, v. MERCURY CASUALTY COMPANY, Defendant and Appellant.

No. B208654.

Court of Appeals of California, Second District., Division Two.

March 23, 2010.

[182 Cal.App.4th 1542]

Horvitz & Levy, Lisa Perrochet, Andrea M. Gauthier; Hager & Dowling, Thomas J. Dowling and Holly C. Blackwell for Defendant and Appellant.

Osborne and Associates, William J. Osborne; The Ehrlich Law Firm and Jeffrey Isaac Ehrlich for Plaintiff and Respondent.

[182 Cal.App.4th 1543]

OPINION

DOI TODD, J.

In this insurance bad faith case, respondent Amerigraphics, Inc. (Amerigraphics), sued its insurer, appellant Mercury Casualty Company (Mercury), after Amerigraphics's business premises were flooded, and Mercury denied full coverage under the policy. There are two primary issues on appeal.

First, what is the meaning of the "Business Income" coverage in the policy which states that Mercury will pay an insured during its period of suspended business operation the "(i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred . . .; and [¶] (ii) Continuing normal operating expenses incurred, including payroll." We agree with the trial court that under the plain meaning of this policy, an insured is entitled to be paid under both subparts without having to offset the two amounts in the event operating expenses exceed net income.

Second, we consider whether an award of punitive damages that is 10 times the amount of compensatory damages and prejudgment interest was correctly calculated and comports with due process. We are satisfied that substantial evidence supports an award of punitive damages, that the amount of compensatory damages should not include prejudgment interest, and that under the circumstances of this case the amount of punitive damages should not exceed compensatory damages by more than a 3.8-to-one ratio.

FACTUAL AND PROCEDURAL BACKGROUND

The Insured, the Loss, and the Policy

Amerigraphics is a printing and graphics design company. It was founded in 1997 as a close corporation by Mark Volper and Boris and Marina Smordinsky. The company leased the first floor of an office building on Ventura Boulevard in Sherman Oaks, California. Before moving in, Volper and the Smordinskys made several tenant improvements, including repairing doors and windows, upgrading the electrical and plumbing systems, and installing modern electrical fixtures, tiles and a new ceiling, at a total cost of about $53,000. After moving in, they made additional tenant improvements between 2001 and 2002 totaling $20,133. The company did well financially from 1997 to 2000, but business fell off sharply after the September 11, 2001 attacks, and 2002 was a particularly "bad" year.

On Monday, April 14, 2003, Volper discovered that the company's premises were completely flooded. Water was cascading from the ceiling and leaking down the walls, leaving two inches of standing water. Volper and the landlord discovered that the source of the water was a broken water heater in a second-floor restroom. The water damaged all of Amerigraphics's electrical equipment, including a printer that Amerigraphics had purchased for $11,995, and a scanner that had cost $5,176.

Volper called RM Consulting, the company that had sold and serviced the equipment, to evaluate the damage. RM Consulting spent four hours working on the printer and scanner, and determined that both pieces of equipment had been irreparably water damaged.

Amerigraphics was insured under a "California Special Multi-Peril Policy" issued by Mercury in 1999 that covered damage to business personal property, which includes property used in the business and tenant improvements, and loss of business income due to business suspension. The policy had been renewed for a three-year term from October 9, 2002, to October 9, 2005, and the annual premium was $1,516. The business-interruption coverage, titled "Business Income," provides in relevant part: "We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your `operations' during the `period of restoration.' . . . [¶] . . . [¶] We will only pay for loss of Business Income that you sustain during the `period of restoration' and that occurs within 12 consecutive months after the date of direct physical loss or damage. . . . [¶] Business Income means the: [¶] (i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred . . .; and [¶] (ii) Continuing normal operating expenses incurred, including payroll."

After learning that his insurance broker had failed to immediately report the loss, Volper telephoned Mercury on Friday, April 18, 2003, and reported the loss himself. Mercury assigned the claim to adjuster Ken Brown, who called Volper the following week. Brown admitted at trial that he never discussed the available coverages under the policy with Volper, nor did he fill out Mercury's "coverage checklist" that required the adjuster to discuss the various coverages and to check off the coverages discussed and the date of the conversation.

Because the water damage had created mold and revealed asbestos, Amerigraphics was forced to find a temporary location until the remediation was completed. Volper was unable to find any property on Ventura Boulevard available on a short-term lease, but he did find space on the second floor in a building in Hollywood. Amerigraphics relocated on May 20, 2003, and Mercury paid the relocation expenses and the rent for the new premises. The same month, Volper provided Mercury with a preliminary loss evaluation listing items of business personal property worth approximately $43,000. Mercury paid $10,000 toward the business property loss.

The Investigation Relating to the Printer and Scanner

Because adjuster Brown was located in Mercury's San Diego office, Mercury hired an independent local adjusting company, Cunningham Lindsey (C-L), to investigate the claim. Volper gave C-L the report from RM Consulting stating that the printer and scanner had been irreparably damaged. C-L recommended an examination by an equipment refurbishing company. Under the policy, Mercury had the option of repairing or replacing damaged equipment. Brown's supervisor, Chris Boedecker, did not consult RM Consulting and decided that it would be "worthwhile" for Mercury to get a second opinion on the condition of the printer and scanner.

On May 20, 2003, 38 days after the loss, Mercury had a salvage company remove all the damaged equipment from Amerigraphics's premises, including the printer and scanner. The printer and scanner were then sent to Hi Tech Restoration (Hi Tech), a company which locates vendors to evaluate and repair equipment.

On June 10, 2003, Hi Tech arranged for another company, Advanced Data Products, to evaluate the printer. The report from Advanced Data Products erroneously stated that the printer had been in a fire, that its technician had installed a part provided by "the customer" (though Amerigraphics had not provided any parts), and that the technician tested the unit and found it to be "okay." Hi Tech itself tested the scanner and reported on June 10, 2003, that an "O.K. Function light test" was performed, and that the unit needed software to be tested. Amerigraphics had no software that could be used to test the scanner. Hi Tech later admitted that it was unable to perform a "complete functional test of the scanner."

Although the tests were performed in June 2003, Mercury did not advise Volper of the results until September 2003, when it provided him with the reports. At that time, Mercury took the position that the equipment had been restored to its preloss condition, and requested that Volper retake the equipment. Volper found the reports to be unprofessional and inaccurate, and refused to accept the equipment until Mercury could provide samples created on the machines demonstrating that they functioned properly. Volper later received unidentified copies of black-and-white images that were claimed to have been made on the scanner. Volper called Mercury and complained to Boedecker that "there is nothing here which indicates who, when, on which equipment" the samples were made. Boedecker agreed that this information was necessary, but Mercury was unable to obtain the information.

Ultimately, at Volper's urging, Mercury had the equipment reexamined in June 2004, more than a year after the loss. The testing report on the scanner stated that "we find the unit unable to calibrate and come to the ready state. An internal inspection and diagnostic test revealed that both the Mainboard and connecting CCD boards are defective." The report indicated that repairs would cost about $434. The printer was also found not to print properly, and its magenta ink system was not working and had to be replaced, which would cost $156.

The "Business Income" Claim

In August 2003, frustrated and concerned that he had not heard from Mercury about the status of the machines, Volper called his insurance broker, who advised him that the policy might provide coverage for Amerigraphics's "normal operating expenses" during the period the business's operations had been interrupted. Volper called Brown and told him he wanted to make a claim for normal operating expenses. Brown responded that there was no such coverage. Volper then sent Brown a letter enclosing a copy of the relevant policy page with the relevant provision circled. Brown then requested that Volper provide him with a list of the normal operating expenses Amerigraphics had incurred.

On September 17, 2003, Volper sent Brown a list of $59,467.16 in expenses incurred between April 10 and September 12, 2003. Volper's enclosure letter stated that he could provide copies of checks to document each item he had listed, and ended with the plea: ...