Eddy v. Sharp

• Decision Date: 25 February 1988
• Docket Number: No. C002768,C002768
• Citation: 245 Cal.Rptr. 211,199 Cal.App.3d 858
• Court: California Court of Appeals Court of Appeals
• Parties: Alan EDDY et al., Plaintiffs and Appellants, v. Ralph I. SHARP et al., Defendants and Respondents.

Page 211

245 Cal.Rptr. 211

199 Cal.App.3d 858

Alan EDDY et al., Plaintiffs and Appellants, v. Ralph I. SHARP et al., Defendants and Respondents.

No. C002768.

Court of Appeal, Third District, California.

Feb. 25, 1988.

E. Elizabeth Summers, Oakland, and Arnold David Breyer, Mount Shasta, for plaintiffs and appellants.

Genese Dopson Smith, Bandell & Swanson and L. Alan Swanson, Redding, for defendants and respondents.

CARR, Acting Presiding Justice.

Plaintiffs Alan Eddy and Linda Eddy (the Eddys) appeal from a summary judgment in favor of defendants Ralph I. Sharp, Inc.

dba J.M. Sharp Insurance Agency and James Sharp (Sharp) and from a denial of their motion for reconsideration. They contend there are triable issues of material fact as to whether Sharp negligently misrepresented to them the terms of a prospective insurance policy and breached a contract to insure. The contentions have merit. We shall reverse the judgment.

FACTUAL AND PROCEDURAL HISTORY

Plaintiffs are the owners of a building in downtown Yreka who rent to both residential and commercial tenants. Prior to August 1980 the building was insured by the Safeco Insurance Company. At that time they decided to change insurance agents. Defendant James Sharp is a licensed independent insurance agent. He represents the Great American Insurance Company and other insurance companies. Alan Eddy instructed his bookkeeper to call Sharp to obtain coverage similar to the coverage provided by the Safeco policy.

In response to this inquiry, Sharp's employee sent the Eddys an insurance proposal accompanied by a cover letter. The cover letter advised the Eddys that the most competitive program for the type of building and occupancy involved was a package called "Safepak" offered by the Great American Insurance Company (Great American) under its business owners program. The cover letter then described the coverage under the Safepak policy as " 'All Risk' except for the perils on the exclusion list." The insurance proposal also described the coverage as " 'All Risk' subject to All Risk Property Coverage Exclusion list attached for reference." This exclusion list contains eight exclusions. ¹ There is no exclusion listed for loss due to water backing up through drains or sewers, nor does that type of loss reasonably come within any other exclusion on the list. Nothing in the cover letter, the description of coverage in the proposal, or the exclusion list informs the reader that the policy has other exclusions not contained in the exclusion list. The proposal contains the following disclaimer: "This proposal is prepared for your convenience only and is not intended to be a complete explanation of policy coverage or terms. Actual policy language will govern the scope and limits of protection afforded."

Alan Eddy read the proposal and concluded it satisfied his needs. He instructed his bookkeeper to go ahead and order the Safepak policy. When the policy was delivered, the Eddys did not read it.

On December 17, 1982, the Yreka City sewer system adjacent to the Eddys' property became clogged during a rainstorm and sewage drained into their two basement apartments, damaging the property and resulting in the loss of their use as rentals. Great American refused to cover the resulting losses because of an exclusion in the policy for "loss ... caused by, resulting from, contributed to or aggravated by ... water which backs up through sewers or drains...."

The Eddys commenced this action on December 9, 1983, against Sharp and Great American. In the second cause of action the Eddys allege that Sharp misrepresented the terms of the Safepak policy to them with no reasonable ground for believing their representations to be true. The third cause of action seeks damages for breach of the contract to insure and the fourth cause of action seeks to reform the insurance contract. ²

Sharp answered and moved for summary judgment. The trial court granted the motion as to all three causes of action and judgment was entered in favor of Sharp.

The Eddys then sought reconsideration of the order granting summary judgment. ³ The motion was denied. This appeal is timely taken from both the judgment and the order denying the motion for reconsideration.

DISCUSSION

The Eddys contend that there are triable issues of material fact concerning their actions for negligent misrepresentation and for breach of the contract to insure. ⁴

The purpose of a motion for summary judgment is to determine if there are any triable issues of material fact, or whether the moving party is entitled to judgment as a matter of law. (Code Civ.Proc., § 437c; Powell v. Standard Brands Paint Co. (1985) 166 Cal.App.3d 357, 361-362, 212 Cal.Rptr. 395.) The affidavits of the moving party are first considered; they must contain facts establishing every element necessary to sustain a judgment in his favor. (Corwin v. Los Angeles Newspaper Service Bureau, Inc. (1971) 4 Cal.3d 842, 851, fn. 6, 94 Cal.Rptr. 785, 484 P.2d 953.) Unless the moving party presents affidavits in support of his motion which, strictly construed, comply with the statute and show that he is entitled to judgment as a matter of law, summary judgment cannot be granted even though the affidavits of the opposing party are insufficient or absent. (Ibid.) Because summary judgment is a drastic procedure, all doubts should be resolved in favor of the party opposing the motion. ( Id., at p. 852, 94 Cal.Rptr. 785, 484 P.2d 953.)

We consider first the cause of action for negligent misrepresentation. In this state, negligent misrepresentation is a form of deceit defined as: "The assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true." (Civ.Code, § 1710, subd. 2.) To be actionable as deceit, the representation must have been made with the intent to induce the recipient to alter his position to his injury or his risk. (Gagne v. Bertran (1954) 43 Cal.2d 481, 488, 275 P.2d 15.) The defendant's intent to induce the plaintiff to alter his position can be inferred from the fact that defendant knew the plaintiff would act in reliance upon the representation. (Ibid.)

As is true of negligence, responsibility for negligent misrepresentation rests upon the existence of a legal duty, imposed by contract, statute or otherwise, owed by a defendant to the injured person. (Hale v. George A. Hormel & Co. (1975) 48 Cal.App.3d 73, 86, 121 Cal.Rptr. 144.) The determination of whether a duty exists is primarily a question of law. (Weirum v. RKO General Inc. (1975) 15 Cal.3d 40, 123 Cal.Rptr. 468, 539 P.2d 36.)

"One party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated, ... facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts." (Rest.2d Torts, § 551, subd. (2)(e); Wells v. John Hancock Mut. Life Ins. Co. (1978) 85 Cal.App.3d 66, 72, fn. 8, 149 Cal.Rptr. 171; Westrick v. State Farm Insurance (1982) 137 Cal.App.3d 685, 691, fn. 3, 187 Cal.Rptr. 214.) Since " '[i]t is a matter almost of common knowledge that a very small percentage of policy-holders are actually cognizant of the provisions of their policies ... and [t]he insured usually confides implicitly in the agent securing the insurance, ...' " (Raulet v. Northwestern etc. Ins. Co. (1910) 157 Cal. 213, 230, 107 P. 292, Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 783, 157 Cal.Rptr. 392, 598 P.2d 45), an insurer's duty includes the duty "reasonably to inform an insured of the insured's rights and obligations under the insurance policy." (Davis v. Blue Cross of Northern California (1979) 25 Cal.3d 418, 428, 158 Cal.Rptr. 828, 600 P.2d 1060.) The courts of this state have found the insurer has a duty to advise its insureds of the availability of and procedure for initiating arbitration ( id. at p. 428-429, 158 Cal.Rptr. 828, 600 P.2d 1060); to notify the insured of a 31-day option period in which to convert his group insurance policy into individual coverage after termination (Walker v. Occidental Life Ins. Co. (1967) 67 Cal.2d 518, 523-524, 63 Cal.Rptr. 45, 432 P.2d 741); to advise an assignee of a life insurance policy taken as security for a loan to the insured that the policy is worthless ( Wells v. John Hancock Mut. Life Ins. Co., supra, 85 Cal.App.3d at pp. 71-72, 149 Cal.Rptr. 171); and to inform the insured of relevant exclusions in the policy. ( Westrick v. State Farm Insurance, supra, 137 Cal.App.3d 685, at p. 692, 187 Cal.Rptr. 214.)

In this case it is an undisputed fact that James Sharp is an independent insurance agent. He represents several insurance companies including the Great American. If an insurance agent is the agent for several companies and selects the company with which to place the insurance or insures with one of them according to directions, the insurance agent is the agent of the insured. (3 Couch on Insurance (2d ed. 1984) § 25:112, p. 477; Robinson v. Franwylie (1978) 145 Ga.App. 507, 512-513, 244 S.E.2d 73.) Where the agency relationship exists there is not only a fiduciary duty but an obligation to use due care. (1 Witkin, Summary of Cal.Law (8th ed. 1973) Agency and Employment, §§ 84-85, pp. 704-705.) Sharp owed a duty of due care to the Eddys under agency principles. (United States Liab. Ins. Co. v. Haidinger-Hayes, Inc. (1970) 1 Cal.3d 586, 594, 83 Cal.Rptr. 418, 463 P.2d 770; Rest.2d Agency, § 379, p. 177.)

The Eddys assert that by the provisions of sections 780, 781 and 790.03 the Legislature has made it clear that insurance agents and brokers have the duty to fully and accurately disclose the provisions of the policies they obtain for the insured. Insurance Code section 780 provides in relevant part: "An insurer...