Colony Ins. Co. v. Crusader Ins. Co.

• Decision Date: 27 August 2010
• Docket Number: No. B215274.,B215274.
• Citation: 115 Cal.Rptr.3d 611,188 Cal.App.4th 743,10 Cal. Daily Op. Serv. 12, 275
• Parties: COLONY INSURANCE COMPANY, Plaintiff and Appellant, v. CRUSADER INSURANCE COMPANY, Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

188 Cal.App.4th 743 115 Cal.Rptr.3d 611 10 Cal. Daily Op. Serv. 12,275 2010 Daily Journal D.A.R. 14,792 COLONY INSURANCE COMPANY, Plaintiff and Appellant, v. CRUSADER INSURANCE COMPANY, Defendant and Respondent. No. B215274. Court of Appeal, Second District, Division 4, California. Aug. 27, 2010.

**613 Murchison & Cumming and Bryan M. Weiss, Los Angeles, for Plaintiff and Appellant.

Lewis Brisbois Bisgaard & Smith, Raul L. Martinez, Los Angeles; Robie & Matthai, James R. Robie, and David J. Weinman, Los Angeles, for Defendant and Respondent.

**614 MANELLA, J.

*746 Both Colony Insurance Company (Colony) and Crusader Insurance Company (Crusader) insured a building in Los Angeles, which became the subject of a tenant lawsuit. In this case, Colony sought a declaration that Crusader improperly refused to defend the tenant lawsuit. Colony further sought an equitable share of defense costs incurred in defending the tenant litigation. In this appeal, Colony argues that Crusader failed to investigate public records as required by Crusader's internal underwriting guidelines. As a result, according to Colony, Crusader waived the right to challenge misrepresentations made by its insured and was estopped from denying a defense in the tenant lawsuit based on the insured's misrepresentations. Colony forfeited this argument by failing to raise it until after trial in its objections to the trial court's statement of decision. Moreover, the argument fails on the merits, as Crusader's internal guidelines, standing alone, created no enforceable rights on Colony's part. Colony also argues but fails to show that Crusader engaged in improper post-claims underwriting. We affirm the judgment in favor of Crusader.

FACTUAL AND PROCEDURAL BACKGROUND

Rao Yalamanchili is the president of Positive Investments, Inc., which controlled 721 Westlake Avenue, LLP. From December 2001 through July 2005, 721 Westlake Avenue, LLP owned an apartment building located at 721 Westlake Avenue, in the City of Los Angeles (the Building). From December 17, 2003 to December 17, 2004, Crusader insured the Building. After that, Colony insured the Building.

1. Inspections of the Building

On February 25, 2002, a code enforcement unit of the City of Los Angeles's Housing Department issued a two-day order to repair " 'critical habitability violations' " at the Building. The deficiencies included the failure to provide a sufficient hot water supply to the kitchen and bathroom fixtures. On April 30, 2002, an inspector from the City of Los Angeles's Code Enforcement Division issued a "Notice to Comply." It cited the Building for *747 trash outside the bathroom window of one unit, torn window screens, and rodents. The same report noted deficiencies in the cleanliness and in the floors and stairways. On September 5, 2002, the City of Los Angeles Code Enforcement Division issued another "Notice to Comply." The inspector documented trash outside a bathroom, a broken window, damaged bathroom walls and ceiling, and a faulty kitchen faucet in unit 206 of the Building. The inspector also documented the hazard of a storage area in the boiler room.

2. Yalamanchili's Application for Insurance

In November 2003, Yalamanchili caused an application and supplemental application for insurance on the Building to be sent to Crusader. In the supplemental application, signed by Yalamanchili on November 18, 2003, and in response to a question regarding whether a governmental department had inspected the building, Yalamanchili answered that the Building had been inspected in 1999 and 2000. Yalamanchili did not mention any inspections after 2000. In response to a question whether a governmental department had ever notified him of deficiencies or code violations, Yalamanchili answered negatively. In response to questions regarding whether the Building had been cited for code violations or cited by a regulatory **615 body within the last three years, Yalamanchili answered, " 'No.' " ¹

3. Crusader's Insurance Policy

On December 17, 2003, Crusader issued a special multi-peril liability policy that, among other things, insured claims by tenants of substandard or uninhabitable living conditions. The policy states: "By acceptance of this policy, the insured agrees that the statements in the policy declarations and the application for insurance are the agreements and representations of the insured, that this policy is issued in reliance upon the truth of such representations and that this policy embodies all agreements existing between the insured and the company or any of its agents relating to this insurance." At the time it issued the policy, Crusader had no knowledge of the insured's omissions of material information in the application and supplemental application.

4. Underlying Litigation against Positive Investments

In November 2005, Positive Investments was sued by tenants at the Building in a lawsuit captioned Mendoza v. Positive Investments, Inc. (Super.Ct. L.A. County, No. BC343415)( Mendoza). Crusader agreed to defend the action under a reservation of rights. On June 1, 2006, the *748 tenant-plaintiffs amended their complaint and attached the above-described citations dated February 25, 2002, April 30, 2002, and September 5, 2002. This was the first time Crusader learned of these citations.

On October 6, 2006, Crusader denied coverage for the claim arising from the tenants' lawsuit. Crusader's stated basis for denial was material "misrepresentations and/or concealments" in the insurance application.

5. Colony's Lawsuit against Crusader

On May 10, 2007, Colony sued Crusader for declaratory relief and equitable contribution. In its complaint, Colony sought a declaration that the misrepresentations or concealments in the application were not material. In its equitable contribution cause of action, Colony sought payment from Crusader for a portion of the defense costs in the underlying litigation.

In a bench trial, Colony sought to establish that the challenged misrepresentations were made in response to questions that were vague and ambiguous. Colony also claimed that the information omitted from the application and supplemental application was not material.

Yalamanchili testified that he understood the insurance company was entitled to rely on the accuracy of the information provided in his application for insurance. Yalamanchili and his broker conceded that the 2002 citations should have been included in the application. Yalamanchili admitted that the underlying litigation concerned the very citations that had not been disclosed in the insurance application. Both Yalamanchili and his insurance broker disputed the meaning of the term "violation" and sought to distinguish a violation from a recommendation by the city. Colony's expert, Frank Raab, testified that the violations were not material.

Mark Neiman, vice-president of Unifax, which underwrote Crusader's insurance policies, testified that Crusader had special guidelines for apartment buildings over 24 units and 40 years old, including the Building. Those internal guidelines (Guidelines) **616 required that "[f]or all new and renewal quotes, the regional manager, the general manager, or the underwriting manager must attempt to verify, by accessing public records, the existence or lack of any citation issued against the subject building." The Guidelines further provided that "[i]f you need assistance in verifying public records, you must pass the file on to the general manager or the underwriting manager. This verification is necessary despite the manner in which the application form is answered."

Neiman testified that he attempted to comply with the Guidelines by accessing a Web site called, "Neighborhood Knowledge Los Angeles." *749 According to Neiman, "Neighborhood Knowledge Los Angeles" identified inspections conducted by the City of Los Angeles. However, Neiman acknowledged that at the time he checked the Web site, he was unaware of the ability to click on links from the Web site to access additional information. Additionally, the Web site was current only through June 30, 2002, and listed inspections only through January 2000. Neiman testified if the three 2002 citations had been revealed, he would not have approved the risk of insuring the Building.

Defense witnesses testified that none of the documented violations were minor.

6. Court Findings

A detailed statement of decision contained the following findings among others. Yalamanchili failed to provide information "clearly and unambiguously called for in the Crusader Supplemental Application and Application," specifically, the notices issued in February, April, and September of 2002. Crusader reasonably relied on Yalamanchili's statements in the application denying the issuance of any notices of deficiencies in the Building. Crusader would not have insured the Building if it had known of the 2002 notices.

After trial, Colony filed objections to the court's proposed statement of decision. Colony argued that Crusader had waived its right to deny coverage or was estopped from denying coverage, based on its alleged failure to follow its own internal Guidelines in investigating the statements made in Yalamanchili's application.² In response, Crusader noted that Colony's objections were "based on contentions which were not advanced in Colony's trial brief, or at trial" and argued that the statement of decision "need not be modified based on anything in Colony's objections."

The court entered judgment in favor of Crusader.³ Colony timely appealed from the judgment.

DISCUSSION

Statutes governing the relationship between an insurer and its insured require that "[e]ach party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract and as to which he makes no warranty, *750 and which the other has not the means of ascertaining." (Ins.Code, § 332.) " Materiality is to be...