Desai v. Farmers Ins. Exchange

• Decision Date: 26 July 1996
• Docket Number: No. B093653,B093653
• Citation: 47 Cal.App.4th 1110,55 Cal.Rptr.2d 276
• Court: California Court of Appeals Court of Appeals
• Parties: , 96 Cal. Daily Op. Serv. 5556, 96 Daily Journal D.A.R. 9067 Narendra DESAI, Plaintiff and Appellant, v. FARMERS INSURANCE EXCHANGE et al., Defendants and Respondents.

Page 276

55 Cal.Rptr.2d 276

47 Cal.App.4th 1110, 96 Cal. Daily Op. Serv. 5556,

96 Daily Journal D.A.R. 9067

Narendra DESAI, Plaintiff and Appellant, v. FARMERS INSURANCE EXCHANGE et al., Defendants and Respondents.

No. B093653.

Court of Appeal, Second District, Division 2, California.

July 26, 1996.

Review Denied Nov. 20, 1996.

[47 Cal.App.4th 1114] Harold E. Griffin, Santa Monica, for Plaintiff and Appellant.

Cooper, Kardaras & Scharf, Gerald G. Knapton and Linda Chalison, Pasadena, for Defendants and Respondents.

BOREN, Presiding Justice.

An insured sued his real property insurer and insurance agent for breach of contract and negligence, claiming that the defendants failed and refused to provide him with the

100 percent replacement cost coverage he had requested and which the agent assured him he was receiving. On demurrer, the trial court concluded that the insured could not state a cause of action against his insurer because the policy limits were less than the cost of replacing structures destroyed by an earthquake and fire. We conclude that the reasonable expectations of the insured would be that he was completely covered for the replacement cost of the structures, regardless of the policy limits. Accordingly, we reverse the court's order of dismissal in favor of the insurer.

ALLEGATIONS

Narendra Desai purchased real property in Santa Monica in 1991. To safeguard his investment, Desai sought to purchase earthquake, fire and hazard insurance. Desai informed an insurance vendor, Carol Sacramone Insurance Agency, that he wanted 100 percent coverage for the cost of repairing or replacing improvements to the property, including any increases for inflation. Sacramone told Desai that Farmers Insurance Group offered the type of insurance Desai wanted, and orally represented that the policy provided "100% coverage for the costs of repairs and/or replacement of the improvements to the property including any and all increases in costs of repair or rebuilding in the event of a loss."

In reliance upon the representations of Sacramone and based on the understanding that the policy provided 100 percent replacement coverage in the event of a loss, Desai purchased a Farmers insurance policy through Sacramone, effective November 4, 1991. Before the policy issued, Sacramone personally inspected the property to determine the amount of coverage needed to meet and fulfill Desai's stated requirements. The policy was renewed annually through February 22, 1994.

On January 17, 1994, two of the structures on Desai's land were completely destroyed by an earthquake. On February 22, 1994, a third structure damaged in the earthquake was destroyed by fire. The total loss sustained by Desai was $546,757. Desai made a claim of loss on his policy with Farmers. Farmers agreed to pay Desai $158,734 on the grounds that this sum was the limit of its liability for the loss.

Desai instituted this lawsuit on January 17, 1995. In his first amended complaint, he asserts a cause of action for negligence against Sacramone for advising him to purchase insurance from Farmers when the coverage for which he paid was not what he told Sacramone he needed. As a consequence of this negligence, Desai was unable to rebuild the structures which were destroyed. Desai also makes a respondeat superior claim against Farmers for Sacramone's negligence. Finally, Desai alleges a cause of action against Farmers for breach of contract.

DISCUSSION

1. Appealability

Desai has appealed from the trial court's April 13, 1995, order sustaining Farmers' demurrers without leave to amend. The order sustaining the demurrers is not an appealable order. (Lavine v. Jessup (1957) 48 Cal.2d 611, 614, 311 P.2d 8.)

The record on appeal also contains an order of dismissal as to Farmers pursuant to Code of Civil Procedure section 581, subdivision (f)(1). The dismissal operates as a final judgment with respect to Farmers, and is separately appealable. (Seidner v. 1551 Greenfield Owners Assn. (1980) 108 Cal.App.3d 895, 901, 166 Cal.Rptr. 803.) In the interests of justice and economy, we shall treat the notice of appeal as incorporating the order of dismissal.

2. Standard of Review

An appellate court reviews a ruling sustaining a demurrer without leave to amend de novo, exercising independent judgment on whether a cause of action has been stated as a matter of law. (Hoffman v. State Farm Fire & Casualty Co. (1993) 16 Cal.App.4th 184, 189, 19 Cal.Rptr.2d 809.) All facts properly pleaded are deemed admitted, and we are not concerned with a plaintiff's possible inability to prove the claims made in the complaint at trial. (Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125, 271 Cal.Rptr. 146, 793 P.2d 479; 3. Breach of Contract Claim

Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 572, 108 Cal.Rptr. 480, 510 P.2d 1032.)

In 1994, the year Desai sustained his insured loss, his annual statement from Farmers showed that the "Amount of Insurance" was $150,000 for loss or damage to structures (from fire, for example) and $150,000 for earthquake loss or damage to structures. Farmers relies on general policy conditions stating that it is only responsible for (1) "the replacement cost of ... the building," or (2) "the amount actually and necessarily spent to repair or replace the damaged building," or (3) "the limit of liability" under the policy, whichever is smaller. The smallest amount was the $150,000 policy limit, which is what Farmers paid.

Desai contends that the policy is not nearly so clear-cut as Farmers suggests. In support of his contention, Desai points to a policy provision guaranteeing payment of replacement costs. The policy contains a "Value Protection Clause" which provides: "We [Farmers] may increase the limits of insurance to reflect changes in costs of construction and personal property values. Any such increase will be made on the renewal date of this policy or on the anniversary date of 3-year policies paid annually. If a Replacement Cost provision forms a part of this policy, we guarantee that the limits of insurance meet the replacement cost requirements."

Elsewhere within the policy or accompanying literature, Farmers announces the following to its policyholders: "Your policy contains a very important feature called Value Protection. Value Protection provides automatic protection against inflation so that the coverage amounts are increased as the costs of replacing your home or Personal Property increase. Value Protection guarantees to meet all minimum insurance-to-replacement cost requirements if any are present in your policy. Subject to the amount of your policy limits and all policy provisions, depreciation will not be applied to most building losses.... The enclosed premium notice includes the increased amounts of insurance and premium, based on the applicable indexes for your property and your area. If there has been no increase in amounts of insurance this is because the applicable indexes did not show an upward adjustment for this period." (Italics added.)

For the reassuring guarantees and "extended coverage" of the Value Protection plan, Desai alleges that he paid an extra $108 annually in premiums.

"We begin with established principles applicable to the interpretation of insurance policies. Words used in an insurance policy are to be interpreted according to the plain meaning which a layman would ordinarily attach to them. Courts will not adopt a strained or absurd interpretation in order to create an ambiguity where none exists. [Citations.] [p] On the other hand, 'any ambiguity or uncertainty in an insurance policy is to be resolved against the insurer and ... if semantically permissible, the contract will be given such construction as will fairly achieve its object of providing indemnity for the loss to which the insurance relates.' [Citations.] The purpose of this canon of construction is to protect the insured's reasonable expectation of coverage in a situation in which the insurer-draftsman controls the language of the policy." (Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 807-808, 180 Cal.Rptr. 628, 640 P.2d 764.) The insurer-draftsman will not be rescued from the consequences of the imprecise terminology used in the insurance contract, especially where it would defeat the reasonable expectations of the insured. (Id. at p. 811, 180 Cal.Rptr. 628, 640 P.2d 764.)

Farmers would like for the policy limits language of the contract to be read in isolation, without reference to other provisions. This is not the correct way to construe insurance policies, however. "The principles governing interpretation of insurance contracts are familiar and well settled.... Each clause of the contract must be considered with reference to every other relevant clause and the clauses construed together in order to ascertain the intent of the parties. Similarly, in construing the meaning of a specific policy provision we do not view the provision in isolation but in the context of other relevant The "Value Protection Clause" in Desai's policy seriously undermines the purported liability cap stated elsewhere in the policy. Farmers guarantees to meet replacement cost requirements, and promises automatic protection by increasing coverage levels as the cost of replacing the insured property increases. ¹ A reasonable policyholder could readily construe that to mean that he or she need not demand increased coverage each year because Farmers would "automatically" take increased costs into account in fixing the coverage and premium. Increased coverage is hardly "automatic" if the insured has to research the matter himself, then demand changes in the policy. Moreover, the "guarantee" to meet replacement cost requirements makes it appear that Farmers is willing to gamble that it correctly fixed the cost of replacing the property when it drew up the contract and set the premium amount. Desai alleges that he paid over $100 per year...