Calfarm Ins. Co. v. Krusiewicz

• Decision Date: 28 June 2005
• Docket Number: No. G033867.,G033867.
• Citation: 131 Cal.App.4th 273,31 Cal.Rptr.3d 619
• Court: California Court of Appeals Court of Appeals
• Parties: CALFARM INSURANCE COMPANY, Plaintiff, Cross-defendant and Appellant, v. Tadeusz KRUSIEWICZ et al., Defendants, Cross-complainants and Respondents.

31 Cal.Rptr.3d 619

131 Cal.App.4th 273

CALFARM INSURANCE COMPANY, Plaintiff, Cross-defendant and Appellant, v. Tadeusz KRUSIEWICZ et al., Defendants, Cross-complainants and Respondents.

No. G033867.

Court of Appeal, Fourth District, Division 3.

June 28, 2005.

Horvitz & Levy, Mitchell C. Tilner, Peter Abrahams, Encino; Korshak, Kracoff, Kong & Sugano, T.R. Sugano and Robert Montes, Jr., Los Angeles, for Plaintiff, Cross-defendant and Appellant.

Shields Law Offices, Jeffrey W. Shields, Irvine, and Rick A. Varner, Irvine, for Defendants, Cross-complainants and Respondents.

OPINION

FYBEL, J.

INTRODUCTION

CalFarm Insurance Company (CalFarm) appeals from a punitive damage award of $1,457,080 in favor of Tadeusz and Betty Krusiewicz (the Krusiewiczes) and a declaratory judgment holding CalFarm was obligated to pay the full amount of a binding arbitration award against CalFarm's insured. The Krusiewiczes are not CalFarm's insureds. Rather, the Krusiewiczes sued CalFarm for failing to pay a judgment they secured against Laynescape, Inc. (Laynescape), which constructed retaining walls on the Krusiewiczes' property. Laynescape failed to properly seal the retaining walls, permitting water to permeate the walls and damage the walls' exterior paint. Laynescape did not paint the retaining walls. CalFarm insured Laynescape under a policy covering damage to the paint, but containing a standard provision excluding from coverage the cost to repair the insured's faulty or defective work.

In support of reversal, CalFarm argues: (1) the Krusiewiczes lack standing to sue CalFarm for bad faith, and Hand v. Farmers Ins. Exchange (1994) 23 Cal.App.4th 1847, 29 Cal.Rptr.2d 258 (Hand), on which the Krusiewiczes assert standing, was incorrectly decided; (2) the CalFarm policy did not cover the cost of removing and replacing backfilled dirt and landscaping, which was necessary to reseal the retaining walls; (3) the evidence did not support the jury's finding that CalFarm was estopped to deny a promise to pay the full amount of the binding arbitration award; (4) CalFarm's denial of coverage was objectively reasonable and CalFarm did not otherwise act in bad faith; (5) there was no clear and convincing evidence CalFarm acted with malice, fraud, or oppression; and (6) the punitive damages are excessive.

We conclude the evidence supported the jury's finding of estoppel and, therefore CalFarm was obligated to pay all but a small portion of an arbitration award against CalFarm's insured and in favor of the Krusiewiczes.

We reverse the punitive damages, however, because promissory estoppel cannot support punitive damages and because CalFarm's denial of coverage under the policy was objectively reasonable under the unsettled nature of the law. In light of these conclusions, we do not reach the other issues.

The dissent asserts that under Hand, supra, 23 Cal.App.4th 1847, 29 Cal.Rptr.2d 258, the Krusiewiczes became third party beneficiaries of the insurance contract, entitling them to the rights of the insured, including the right to recover punitive damages for bad faith. For purposes of this opinion, we presume Hand applies and, consequently, the Krusiewiczes stand in the insured's shoes with respect to recovery for bad faith liability. But CalFarm could not be liable for bad faith if its coverage decision under the insurance policy was objectively reasonable. (Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co. (2001) 90 Cal.App.4th 335, 346-347, 108 Cal.Rptr.2d 776.) Based on the extensive legal analysis set forth below, we conclude CalFarm's coverage decision was objectively reasonable. The dissent argues the objectively reasonable standard was a question of fact decided by the jury. The objectively reasonable standard is based on an analysis of case law and is a legal question, not a factual one. In any event, the jury did not decide this issue. Finally, the dissent's legal analysis of the cases serves only to make the point that reasonable minds differ as to whether the insurer's legal position was objectively reasonable. Thus, the insured could not recover for bad faith against CalFarm. Since the insured could not recover for bad faith under the insurance policy, Hand does not permit the Krusiewiczes to recover for bad faith either.

The Krusiewiczes did not sue CalFarm for breach of an agreement to arbitrate; they sought to enforce the arbitrator's award against CalFarm under a claim of promissory estoppel, not breach of contract or bad faith breach of an insurance contract. The pertinent issue in assessing bad faith is whether CalFarm's assessment of coverage under the contract of insurance was objectively reasonable. In contrast, the Krusiewiczes' claim of promissory estoppel was based upon representations made by CalFarm at a settlement conference regarding an agreement to arbitrate, not the terms of an insurance contract. The dissent argues that the insurance contract was amended by the agreement to arbitrate and therefore supports an action for bad faith. There was never an argument in the trial court that the insurance contract was so amended and it was not.

Punitive damages are not recoverable under a claim of promissory estoppel. The Krusiewiczes sought punitive damages only on their bad faith breach of insurance contract cause of action and do not contend they can recover punitive damages under their promissory estoppel claim. The dissent cites no authority permitting recovery of punitive damages under a theory of promissory estoppel or under the dissent's theory of bad faith breach of an agreement to arbitrate by amendment. No such authority exists and we are not convinced it should.

FACTS

I. Laynescape Fails to Properly Seal Retaining Walls It Constructed on the Krusiewiczes' Property.

In April 1996, the Krusiewiczes hired Laynescape to perform extensive landscaping work on their property, including the construction of thousands of feet of retaining walls. The Krusiewiczes hired another contractor to paint the exterior of the retaining walls. Behind the retaining walls, soil was backfilled, and irrigation systems and landscaping were installed by Laynescape and other contractors.

Because Laynescape failed to apply the proper number of coats of sealant to the back of the walls, water seeped through the walls and caused the paint on the exterior side to blister and peel. Repainting the walls alone would not prevent future damage. To prevent paint damage from reoccurring, the back of the walls had to be resealed, which required removing the backfilled soil and landscaping, and replacing the soil and landscaping after the walls had been resealed. The Krusiewiczes claimed the remedial costs were $712,844, including $533,762 to remove and replace the backfilled soil and landscaping.

II. CalFarm Accepts Laynescape's Tender of Defense Subject to a Reservation of Rights.

The Krusiewiczes sued Laynescape and its owner, Layne Kubo, for breach of contract, negligence, fraud, and unfair competition. Laynescape and Kubo tendered their defense to CalFarm, which had insured Laynescape under a "special multi-peril" policy (the Policy). The Policy insured Laynescape against liability for property damage caused by the insured, but excluded coverage for damage "to that particular part of any property, not on premises owned by or rented to the insured, [¶] ... [¶] ... the restoration, repair or replacement of which has been made or is necessary by reason of faulty workmanship thereon by or on behalf of the insured." In other words, the Policy provided coverage for damages to the work product of others caused by the insured, but excluded coverage for damages to the work product of the insured and for the costs of repairing the insured's defective work.

In a letter dated May 1, 2001, CalFarm notified Laynescape and Kubo that CalFarm agreed to provide them with a defense through Attorney Douglas DeGrave of the firm of Parker Stanbury, with a reservation of rights to contend the Policy did not cover some causes of action.

In a letter dated May 31, 2001, CalFarm's coverage attorney, Ralph Laird, explained the only basis for potential coverage was "the allegation of damage to the paint on the exterior of the subject retaining wall." The Laird letter further explained, "CalFarm denies that it has any obligation to indemnify you ... for any liability imposed against you other than for property damage to the property or work of others" and, therefore, "there is no potential coverage under the insurance policy for repair or replacement of the retaining wall."

James Aleschus, a CalFarm litigation specialist, had been assigned to handle Laynescape's claim. As early as May 2001, Aleschus believed coverage existed under the Policy to repair the damage to the paint on the retaining walls. Aleschus made a note in the claim file on October 6, 2001 that "[o]ur expert says the repair should be to drill weep holes at the bottom of the walls to let the water out, sand blast and repai[n]t," at a total cost to repair of $73,459.20.

III. CalFarm Assesses Coverage Under the Policy in Light of Laynescape's Admission of Fault.

Kubo admitted during his deposition on October 22, 2001 he had failed to apply three coats of sealant to the retaining walls as the architectural plans required. DeGrave advised Aleschus that in light of Kubo's deposition testimony, "[i]t is now clear that the insured was negligent in his construction of the walls. That negligence has caused resulting damage in the form of peeling paint. We must determine the proper repair method. In light of the facts as we now know them, simply boring weep holes into the walls would be inappropriate. [¶] I have instructed our expert to immediately provide us with a new cost of repair estimate."

On October 23, 2001, after receiving DeGrave's report, Aleschus noted in the claim file: "This makes a huge difference. We know water behind the walls is passing thru and causing the...