Century Sur. Co. v. Polisso

• Decision Date: 22 May 2006
• Docket Number: No. C045334.,C045334.
• Citation: 43 Cal.Rptr.3d 468,139 Cal.App.4th 922
• Parties: CENTURY SURETY COMPANY, Plaintiff, Cross-defendant and Appellant, v. Charles A. POLISSO et al., Defendants, Cross-complainants and Respondents.
• Court: California Court of Appeals Court of Appeals

43 Cal.Rptr.3d 468

139 Cal.App.4th 922

CENTURY SURETY COMPANY, Plaintiff, Cross-defendant and Appellant, v. Charles A. POLISSO et al., Defendants, Cross-complainants and Respondents.

No. C045334.

Court of Appeal, Third District.

May 22, 2006.

Chapman, Popik & White, Susan M. Popik, David Nied, Merri A. Baldwin, San Francisco; Bonetati, Sasaki, Kincaid & Kincaid, Marilyn L. Bonetati, Orange, for Plaintiff, Cross-defendant and Appellant.

Bolling, Walter & Gawthrop, Theodore D. Bolling, Jr., Marjorie E. Manning, Sacramento; Farmer, Murphy, Smith & Alliston, George E. Murphy and Suzanne M. Nicholson, Sacramento, for Defendants, Cross-complainants and Respondents.

BLEASE, Acting P.J Century Surety Company (Century), an insurance company, appeals from the judgment after a jury awarded Charles and Therese Polisso (the Polissos) and Kinzel Glass Company (Kinzel) $637,911 in total compensatory damages and $2,015,000 in punitive damages on their cross-complaint for, inter alia, breach of contract, breach of the implied covenant of good faith and fair dealing, and malicious prosecution.

In 1996 Chuck Polisso, as "owner" of Kinzel, contracted with S.W. Allen Construction, Inc. (Allen) to install seven glass panels in an underground viewing chamber being built by the United States Forest Service at Taylor Creek near Lake Tahoe. Before the project was completed, a heavy rain storm hit the Tahoe area and caused the creek to overflow and submerge the viewing chamber, triggering a series of events that resulted in damage to the glass.

In the same year, "Chuck Polisso DBA: Kinzel Glass Co." purchased from Century a commercial lines policy for property damage liability and glass coverage in connection with the Allen contract. The policy covered not only Charles Polisso as a named insured but also his "spouse ... with respect to the conduct of a business ...."

Allen brought suit against Kinzel and "CHARLES A. POLISSO ... an individual doing business as KINZEL" for damage to the glass and the chamber. Century filed suit against Charles Polisso, Kinzel and Allen for declaratory relief on coverage issues. Thereafter, Charles and Terry Polisso, "individually and dba KINZEL GLASS CO.," counter-claimed against Century for failing to defend them in the underlying civil action by Allen and failing to pay them for damage to the glass.

On appeal, Century contends inter alia, (1) that Therese lacked standing to sue Century because she was not specifically named as a party in the Allen action or in Century's declaratory relief action, (2) the bad faith and punitive damage awards must be reversed because there was a genuine dispute as to Century's liability under the policy; and (3) the punitive damage award must be reversed because of instructional, evidentiary, and due process violations.

We disagree.

Therese, as Charles' wife, is an insured under the Century policy and Century was obligated to defend her in any action seeking liability "with respect to the conduct of a business . . . ." As Charles' wife and a co-owner of Kinzel she was personally obligated for Kinzel's debts, including any arising from the contract with Allen. For these reasons she has standing to bring the counterclaim against Century.

We also reject Century's genuine dispute claim and sustain the bad faith and punitive damage award and shall affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Underlying Claim

In 1990, Charles Polisso and his wife Therese, purchased Kinzel, a well-established glass business in Sacramento. Although the business was in Charles' name, dba Kinzel, he and Therese were co-owners and both worked in the business.

The United States Forest Service (Forest Service) contracted with Allen, to construct an underground stream profile viewing chamber at Taylor Creek near South Lake Tahoe. In August or September 1996, Charles Polisso, as "owner" of Kinzel, entered into a subcontract (hereafter contract) with Allen for $56,000 to install seven multi-layer glass panels in the viewing chamber.¹ Kinzel set the glass in its frames in mid-November 1996, and by mid-December completed the contract work. However, when it became apparent that no sealant had been applied between the metal frame and the concrete and that it was necessary to do so, a dispute arose between the Polissos and Allen as to whether the contract required Kinzel to perform that work.

Believing that Kinzel had not completed its contract, Allen withheld payment, so the Polissos retained the services of attorney Robert Granucci to help them collect from Allen. Granucci agreed to write a letter but suggested the Polissos assist Allen with the additional work to facilitate payment. They agreed to do this, sent some of their workers to complete the additional work, and then left town for a family vacation.

While the Polissos were away, a heavy rainstorm hit the Tahoe area over the New Years holiday, which caused Taylor Creek to overflow and flood the viewing chamber. The chamber was submerged with floodwater for three-days, causing solvents left in the chamber by another contractor to spill into the flood water, which had deposited a film on the glass panels that remained after the water subsided.

The Polissos returned to Sacramento on January 3, 1997, and learned about the flood. Charles drove to the site on January 10th to view the chamber and was informed Allen was holding Kinzel responsible for the damage to the glass² and for delaying completion of the contract. Charles notified his insurance broker about the claim that day. Subsequent clean-up efforts by Allen's workers scratched the glass, causing further damage.³

The Forest Service formally rejected the glass panels on February 18 and requested that Allen submit a proposal for the replacement or correction of the rejected work.

B. The Insurance Policy

At the time of the flood, Kinzel was insured under a package Commercial Lines Policy, issued by Century, an Ohio corporation, for the period October 17, 1996, to October 17, 1997. The policy had two parts pertinent to our discussion. The first provided coverage for third-party commercial general liability (CGL), which obligated Century to indemnify the insured for property damages the insured became legally obligated to pay to a third party as defined by the policy, and to defend any suit seeking those damages. The policy excluded coverage for damages incurred prior to completion of the Allen contract.

The second part of the policy provided "all risk" first-party coverage under an Inland Marine Installation Floater endorsement (Installation Floater or floater), which covered damage to the glass up to $15,000. Coverage ceased when the glass was installed and became a permanent part of the building and did not cover damage caused by flood water or by faulty or defective materials or workmanship.

We shall discuss the provisions of the policy in greater detail where pertinent to our discussion.

C. Century's Bad Faith Denial of Benefits

Otis Hess, Century's senior claims attorney, supervised the Polissos' claim. Management of coverage issues was assigned to Charles Winkelman.

Rory Green, an independent insurance adjuster, was assigned to investigate the claim. Sometime after January 22, Green interviewed Charles who advised him that Kinzel had completed the contract work by mid-December and that the contract did not include sealant work between the metal frames and the concrete building. Green prepared a report for Century, dated February 7, 1997, in which he noted there was a dispute between Kinzel and Allen over who was responsible for sealing the metal frames to the cement, but also noted that regardless of who was at fault for the leaky windows, "no damage was sustained as the result of any faulty workmanship." In a subsequent report, Green informed Century that Allen was making an additional claim against Kinzel for the post-flood scratches on the glass.

On March 18, 1997, Allen filed suit against Kinzel (Allen action), for breach of contract and negligence based upon allegations of delay, defective work and materials, and failure to repair and replace damaged and defective work. Allen served the Polissos on March 28th and Therese immediately forwarded the complaint to their insurance broker.

In early April 1997, Winkelman requested a coverage opinion from Century's coverage attorney, Callie O'Hara and advised her that according to the Polissos, Kinzel completed the work specified in the contract by mid-December. In late June, O'Hara sent Winkelman her opinion, advising that the policy did not provide coverage under either the CGL or floater and there was no duty to defend.

Meanwhile, the Polissos had not heard from Century about their answer in Allen. Fearing it would not be filed on time, Therese faxed O'Hara a letter on June 30, reiterating that Kinzel's work under its contract was complete at the time of the flood, and requested that O'Hara contact her before the time to file their answer expired.

O'Hara spoke to Granucci that same day and advised him there was no coverage and that Century would not be filing a cross-complaint on behalf of the Polissos. Granucci expressed surprise and asked her to provide the facts she was relying on in denying coverage. O'Hara also sent Winkelman a letter advising him that Granucci had confirmed that Kinzel's work was complete at the time of loss and asked Winkelman to contact her to "discuss the implications of this assertion."

The following day, Century sent a denial letter to Charles. The reasons stated for denying coverage under the CGL policy was that it did not provide coverage for indemnity or defense for damage to personal property in the custody or control of the insured, damage to real property the insured was still working on, and damage to property resulting from Kinzel's faulty work, and there was no coverage under the floater because it did not cover damage to the glass from flooding and...