Orient Handel v. U.S. Fid. & Guar. Co.

• Court: California Court of Appeals
• Writing for the Court: McCLOSKY; WOODS, P.J., and KINGSLEY
• Citation: 192 Cal.App.3d 684,237 Cal.Rptr. 667
• Parties: Orient HANDEL, et al., Plaintiffs, Cross-Defendants, and Appellants, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, Defendant, Respondent and Cross-Complainant. B007459.
• Decision Date: 11 June 1987

Page 667

237 Cal.Rptr. 667 192 Cal.App.3d 684 Orient HANDEL, et al., Plaintiffs, Cross-Defendants, and Appellants,
v.
UNITED STATES FIDELITY AND GUARANTY COMPANY, Defendant, Respondent and Cross-Complainant. B007459. Court of Appeal, Second District, Division 4, California. June 11, 1987.
As Modified on Denial of Rehearing July 6, 1987.
Review Denied Sept. 17, 1987.

[192 Cal.App.3d 689]

Page 669

Selvin and Weiner, Paul P. Selvin and Beryl Weiner, Los Angeles, for plaintiffs, cross-defendants, and appellants.

Parkinson, Wolf, Lazar & Leo, Richard B. Wolf and Betty S. Chain, Los Angeles, for defendant, respondent and cross-complainant.

McCLOSKY, Associate Justice.

Orient Handel, a corporation, and Nassir Shokrian and Lotfollah Shokrian, as individuals and former partners in a partnership that operated a rug retailing business known as Orient Handel (appellants) appeal from the judgment rendered against them and in favor of United States Fidelity & Guaranty Company (respondent or USF & G) for insurance fraud. ¹

[192 Cal.App.3d 690] The judgment was entered on special verdicts after a jury trial on Orient Handel's complaint for breach of the duty of good faith and fair dealing, breach of contract, fraud, violation of Insurance Code section 790.03, and intentional interference with protected property rights, and on a cross-complaint brought by respondent against appellants and others for fraud.

We reverse the judgment.

CONTENTIONS

Appellants raise the following contentions: I. Respondent did not actually or justifiably rely on appellants' alleged fraud and, therefore, suffered no damages as a proximate result of such fraud; II. The judgment awarding actual and punitive damages in this case is contrary to the Insurance Code and public policy, based on an improper standard for calculating the amount of punitive damages, and was so grossly disproportionate as to raise a presumption that it was the result of passion or prejudice and must be reversed; ² III. The jury verdict on "Phase III" of trial was fatally infected by instructional and evidentiary errors, and the trial court erred by allowing respondent both to open and to close argument to the jury on "Phase II."

FACTS

The allegations of both the complaint and cross-complaint are based on the parties' conduct in making and handling a burglary and theft loss claim under a fire insurance policy issued by respondent. The burglary

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and theft occurred at the premises of Orient Handel, a retailer of oriental rugs, on February 12, 1978.

The burglars apparently gained entry to Orient Handel by breaking a hole (no larger than about 14 1/2 inches wide by 13 inches high) through a brick wall. Initially, an estimated 15 rugs valued at about $153,000 were reported stolen, but the reporting party at Orient Handel indicated that an accurate number could not be given until an inventory could be conducted. [192 Cal.App.3d 691] After checking its inventory, Orient Handel then provided police and respondent with a list of missing rugs that listed a total loss of 109 rugs at a cost of $471,519.

A number of facts and circumstances surrounding the burglary led investigating sheriff's deputies and respondent's adjusters and investigators to suspect from the outset of their investigation that the allegedly stolen rugs were not removed through the small brick hole. These were the small size both of the hole in the brick wall and of the adjoining restroom where the hole was thought to have been made, the evenly distributed and undisturbed mortar dust on the restroom floor under the hole coupled with the absence of fingerprints or footprints inside the restroom, the absence of rug fibers in the hole and the still-sharp brick edges lining the hole, the fortuitous positioning of the hole between two rugs hanging on the wall inside Orient Handel and the lack of any "great disorder in the rugs" inside Orient Handel. Another fact supporting respondent's suspicion about the burglary was that the "polling tape" from the burglar alarm monitoring Orient Handel indicated no more than 28 minutes could have elapsed during the entire course of the burglary, with 24 of those minutes occurring between 1:24 and 1:48 a.m., and another four minutes recorded between 3:10 a.m. and 3:14 a.m. Of the entire 28 minutes, however, the alarm records only indicated actual activity inside the premises for a total of 10 minutes. A time and motion study that was later conducted to simulate the burglary by removal of rugs through the hole in the wall concluded that even had there been 10 "burglars" working, removal of 109 rugs through the hole would have taken much longer than 10 minutes.

Appellants and respondent both hired independent claims adjusters to investigate and document the fact and extent of the claimed loss. The adjuster retained by appellants prepared a formal proof of loss for the claim, which was submitted to respondent. Respondent's adjuster found the inventory records and purchase invoices inadequate, incomplete or non-existent for the rugs listed in the proof of loss, leading that adjuster to conclude that it would be "almost impossible for the insured to factually determining his loss, if any." Subsequently, respondent hired accountants, appraisers and investigators to examine Orient Handel's records, including an inventory book, purchase book, tax returns, invoices, and financial statements. In addition, respondent had Nassir Shokrian, Lotfollah Shokrian and others examined under oath.

Respondent never expressly denied or paid the claim.

Appellants filed their lawsuit to recover the policy benefits and other damages, and respondent filed its cross-complaint for fraud, alleging appellants'[192 Cal.App.3d 692] misrepresentation and concealment as to the fact that a burglary and theft occurred and as to the amount of their loss. Both sides sought punitive damages. The jury trial was conducted in three phases with a special verdict following each phase. "Phase I" concerned the special verdict question, "Was there a burglary followed by a theft of rugs on or about February 12, 1978, at the premises of Orient Handel at 525 La Cienega in Los Angeles?"; ten jurors answered this question "Yes" and two answered it "No." "Phase II," in which no additional evidence was presented, resulted in the following special verdict: "[I]n respect to their claim of loss from the burglary of February 12, 1978, did Orient Handel or any of its owners willfully and with an intent to defraud United States Fidelity and Guaranty do either or all of the following:

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(a) Misrepresent or conceal any material fact or circumstance of the claim; or (b) Engage in any false swearing; or (c) Engage in any fraud in connection with the claim?" Ten jurors answered this question "Yes" and two answered it "No." At that point, the court ordered judgment entered in favor of respondent and against appellant Orient Handel on its complaint.

"Phase III" involved presentation of evidence and 13 days of deliberation, after which the jury reached the following special verdict: "1. What were the actual monetary damages, if any, suffered by United States Fidelity and Guaranty as a proximate result of fraud of Orient Handel or its owners? $30,535.54 2. If actual monetary damages are found in question 1 above, you may go on to answer the following: Did Orient Handel or its owners act with fraud, malice or oppression in the claim of loss? Yes 9 No 3 If actual monetary damages are found in question 1 above and you answer yes to question 2 above, you may go on to answer the following: Do you believe that punitive damages should be assessed against Orient Handel or its owners? Yes 9 and in the amount of $52,946.40 against Orient Handel $471,519.00 against Nassir Shokrian $471,519.00 against Lotfollah Shokrian No 3."

Judgment was entered on the special verdicts, and this appeal followed.

DISCUSSION

I. Proof of Fraud

Our analysis begins with the fraud cause of action alleged in respondent's cross-complaint for damages. The gravamen of the cross-complaint alleges that appellants had conspired to defraud respondent under the insurance policy in staging a burglary by breaking a hole in the wall of the insured premises and falsely reporting that they had suffered a loss of $471,519 for the purpose of inducing respondent to investigate the claim and pay policy [192 Cal.App.3d 693] benefits to them. It further alleged that appellants intended respondent to rely on their false representations and pay funds to induce respondent to investigate and pay the claim. It further alleged that respondent relied on those false representations and on appellant's concealment of material facts to pay investigators, experts, attorneys and others to determine whether or not Orient Handel had, in fact, suffered a loss compensable under the policy. ³

"The elements of fraud, which give rise to the tort action for deceit, are (1) misrepresentation (false representation, concealment or nondisclosure); (2) knowledge of falsity (or 'scienter'); (3) intent to defraud, i.e., to induce reliance; (4) justifiable reliance; and (5) resulting damage. [Citations.]" (4 Witkin, Summary of Cal.Law

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(8th ed. 1974) Torts, § 446, p. 2711; see Civ.Code, §§ 1709, 1710.)

A. Subject of Misrepresentation

Generally, the misrepresentation must be a material and knowingly false representation of fact. (Hobart v. Hobart Estate Co. (1945) 26 Cal.2d 412, 422, 159 P.2d 958; Block v. Tobin (1975) 45 Cal.App.3d 214, 219, 119 Cal.Rptr. 288; 4 Witkin, supra, § 447, p. 2711.) As seen from the allegations of its cross-complaint, respondent alleged appellants' material misrepresentations of two facts in connection with their claim for policy benefits: (1) the fact that a burglary loss and theft had occurred; and (2) the amount of that loss. In its special verdict, the jury expressly found that there was a [192 Cal.App.3d 694] burglary and theft of rugs from the...