City of Hollister v. Monterey Ins. Co.

Decision Date29 July 2008
Docket NumberNo. H029296.,H029296.
Citation81 Cal. Rptr. 3d 72,165 Cal.App.4th 455
CourtCalifornia Court of Appeals Court of Appeals
PartiesCITY OF HOLLISTER, Plaintiff and Respondent, v. MONTEREY INSURANCE COMPANY et al., Defendants and Appellants.

Long & Levit, John B. Hook and Irene K. Yesowitch for Defendants and Appellants.

Law Offices of Joel Franklin, Joel Franklin; Law Offices of Vincent P. Hurley, Vincent P. Hurley; and Stephanie A. Atigh, City Attorney, for Plaintiff and Respondent.



An old municipal building at the Hollister airport caught fire. The City of Hollister (City) sought to recover the building's "functional replacement value" under an insurance policy issued by Monterey Insurance Company (MIC). The policy provided that if City wished to recover such benefits, it must enter into a contract to repair or replace the building within 180 days after the fire. Throughout this period, however, MIC refused to confirm that it would honor such a claim, raised spurious grounds for its denial, delayed in communicating basic determinations affecting coverage, refused to disclose its best estimate of the functional replacement value, permitted City to labor under misapprehensions concerning its rights under the policy, and ignored communications from City seeking clarification of these and other matters. As the time to enter into a contract neared expiration, City brought this action to declare that MIC was estopped to assert the contracting provision in light of its own failure to cooperate in City's performance of the condition. The trial court found for City, and MIC appealed. To avoid a suggestion of mootness, we will modify the judgment to reflect the trial court's manifest intentions. Finding no reversible error, we will affirm the judgment as so modified.

A. Events Before Suit

The Hollister Municipal Airport traces its origins to 1912, when an aviator took off from a pasture three miles north of the city. (Shettle, United States Naval Air Stations of World War II—Volume 2: Western States (1997) p. 91.) The site served as a crop duster's base until 1942, when the United States Navy made it an auxiliary air station. (Ibid.) In 1947 the United States deeded it to City. (Ibid.) Along with the grant went a number of wood-framed buildings constructed by the Navy. These included "Building 25," which the navy had apparently used as a post office, theater, and welfare office. The building was shaped somewhat like an E, with three wings extending northeast from a transverse element. The center wing, which is variously described in the record as an auditorium, theater, or gym, was longer and higher than the end wings. The record contains various estimates of the building's overall size, typically falling in the range of 18,000 to 19,000 square feet.1

Prior to the events giving rise to this action, Building 25 was occupied by at least three paying tenants. City was in the process of evicting a fourth tenant for nonpayment of rent. Another tenant was apparently in the process of taking up occupancy. The building was apparently also used for meetings of an airmen's association, a community club, and an Alcoholics Anonymous chapter.

The building was insured against fire under a commercial lines policy issued by MIC.2 The policy included a "Functional Building Valuation" endorsement, which obligated MIC to pay the cost to repair or replace the building, but only if, within 180 days after the loss, City "contract[ed] for repair or replacement of the loss or damage to restore the building . . . for the same occupancy and use . . . ."3 If City failed to satisfy this condition, it could only recover Building 25's "market value." The market value of Building 25 was never established, but was apparently estimated at around $150,000.4 The cost to construct a functionally equivalent building apparently remains a subject of sharp dispute; the record contains estimates ranging from $950,000 to $2.6 million.

In late 2001, about a year before the fire in Building 25, MIC's risk assessment department inspected the airport buildings and prepared what was referred to at trial as an "underwriting request" or "underwriting recommendation" It reported the presence of "peeling exterior paint" on an unspecified number of airport buildings and recommended that "all unwanted and damaged paint should be removed and buildings be repainted." MIC sent a copy of the recommendation to City, and on March 7, 2002, City's then-director of management services, Clayton Lee, returned a copy of the recommendation to MIC with a handwritten notation stating, "The City of Hollister is currently completing [a] . . . Master Plan for the renovation & rehabilitation of all facilities at the Hollister Municipal Airport. It is undetermined at this time whether or not the aforementioned facilities will be demolished or not. A determination is anticipated by the end of the spring. At this time, if the buildings will remain in use, the painting will be completed." The buildings were never repainted, but neither did City reach any decision to discontinue their use, let alone demolish them. Nonetheless, MIC renewed the policy effective July 1, 2002, increasing the number of buildings insured and the limit of liability for functional replacement coverage.

On Saturday, November 23, 2002, a fire occurred in Building 25, damaging a portion of it. The cause was ultimately determined to have been accidental. City reported the fire to its insurance broker on Monday, November 25. The broker immediately notified MIC. MIC retained independent adjuster Roger Anderson, who wrote to city management services director Lee that "this claim was received November 25, 2002 . . . ." Anderson visited the fire scene, and on November 27 gave two senior MIC adjusters his opinion that Building 25 was a total loss. They told him that given the size of the loss "and what was involved," they would "have their own large loss adjuster take care of" the claim. Shortly after this conversation, Anderson asked Lee to "provide some documentation on the leases or loss of income issue . . . ." Lee provided that information within a few days of the request, and Anderson forwarded it to MIC.

On December 2, 2002, senior MIC adjuster Harve John Hagerty II assigned the claim to general adjuster Jack Boczar.5 In testimony, Boczar agreed that a general adjuster's job is "to review coverage and determine damage and attempt to settle insurance claims . . . ." Boczar visited Building 25 with an engineer, Charles Swensen, on December 3, 2002. While there, according to Boczar, they were approached by a man who introduced himself as a demolition contractor. He expressed the desire "to present the winning bid to demolish the building," and said that "he had been working on a presentation like that prior to the loss." According to Boczar, the contractor said that the building had been "scheduled to be demolished" before the fire and that "the only reason it hadn't [already] been demolished . . . was that the city didn't have the funds to do so." Boczar testified that further details were provided by a janitor, who said that the building had been scheduled for demolition, that "the former airport manager had an airport master plan that called for dealing with the buildings at the airport," that about four years before the fire "some engineers looked at the building and set up some requirements for repairs to be effected at the building," that the repairs "were never effected," and that about two years later "another set of engineers or city engineer looked at the building and determined that since the original repairs had not been effected . . ., that the building was now not economically repairable and was going to be . . . was being considered for demolition in the airport master plan."6 Boczar attributed similar information to other unidentified persons at the scene. He testified that a group of people working on planes in a hangar "said the same thing that everybody else told me, that the building was an eye sore [sic], and that it was scheduled to be demolished." "Everybody that I spoke to at the loss location told me the same story, that it was common knowledge that this building was going to be demolished. Everyone I spoke to." These conversations were not recorded in his notes, he said, "because it was common knowledge. Everybody told me the same thing."

Boczar further testified that while at the scene he encountered the tenant who had been in the process of eviction at the time of the fire. As he recalled the conversation at trial, the tenant told him he was being evicted, but did not tell him the reason.

On December 4, 2002, Boczar wrote a note to his file describing his visit to the site and related developments. He made no mention of the tenant's being evicted. He did write, however, that during his "investigation" he had "found that this structure had been slated for demolition for the past two to three years," that the airport manager "had been obtaining bids to effect the demolition for the past two years," and that "[t]he demolition was not completed prior to his retirement due to the lack of city funds." He also noted the presence in the file of the underwriting recommendation in which Clayton Lee had alluded to the possibility of demolishing some of the airport buildings; Boczar described this as a "note in our underwriting file . . . that discusses the knowledge of the possible demolition of the building." He further opined that a "functional replacement" for Building 25 would consist of a metal building including a gym with fir flooring. He wrote that he had asked Swensen to "obtain pricing" for structure of 19,084 square feet in this configuration.

Also on December 4, 2002, Boczar met with City's deputy director of public works, Lawrence Jackson. According to Boczar, he told Jackson "what [he] had learned about Building 25 from people at the loss site,"...

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