Prieto v. State Farm Fire & Casualty Co.

• Decision Date: 30 November 1990
• Docket Number: No. B,B
• Citation: 225 Cal.App.3d 1188,275 Cal.Rptr. 362
• Court: California Court of Appeals Court of Appeals
• Parties: Jose PRIETO et al., Plaintiffs and Appellants, v. STATE FARM FIRE AND CASUALTY COMPANY et al., Defendants and Respondents. 045657.

Page 362

275 Cal.Rptr. 362

225 Cal.App.3d 1188

Jose PRIETO et al., Plaintiffs and Appellants, v. STATE FARM FIRE AND CASUALTY COMPANY et al., Defendants and Respondents.

No. B 045657.

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

Nov. 30, 1990.

As Modified on Denial of Rehearing

Dec. 28, 1991.

Thon & Beck and Karl W. Schoth, Pasadena, for plaintiffs and appellants.

Wolf & Leo, Jeffrey H. Leo, Lynda B. Goldman, Los Angeles, Horvitz & Levy, Peter Abrahams and Douglas G. Benedon, Encino, for defendants and respondents.

FUKUTO, Associate Justice.

Jose and Elizabeth Prieto appeal from the order dismissing their insurance bad faith and intentional infliction of emotional distress action against State Farm Fire and Casualty Company and its investigator after the trial court sustained demurrers to the second amended complaint without leave to amend. We agree with the trial court that plaintiffs' action is governed by the one-year statutory limitation for suits on fire insurance policies. However, in light of a recent Supreme Court decision concerning application of that statute, the order of dismissal must be reversed, to allow plaintiffs to amend to show, if they can, that their action is not barred.

FACTS

This action was filed April 5, 1988. Plaintiffs' primary cause of action was against State Farm, for breach of the implied covenant of good faith and fair dealing. In their second amended complaint, plaintiffs alleged State Farm insured their business premises in Whittier, known as "La Casita del Pollo." On July 13, 1986, the business was destroyed by a fire. Plaintiffs complied with the conditions of their policy and demanded benefits under it. On April 6, 1987, a day less than a year before suit was commenced, State Farm mailed plaintiffs a letter refusing to pay any sums under the policy, "on the sole ground that plaintiffs planned, staged, and intentionally set the fire of July 13, 1986...." State Farm did so notwithstanding its actual or constructive knowledge that plaintiffs did not intentionally set the fire, which was caused by grease that continued burning, due to a faulty gas valve, even though sprinklers functioned. Plaintiffs in fact attempted to extinguish the blaze and summoned the fire department. State Farm also knew or should have known that plaintiffs were exonerated by the fire department from any intentional involvement in the fire and were never criminally charged for it.

Plaintiffs alleged that despite its knowledge, State Farm refused and continues to refuse "to pay any benefits or sums under the policy," and that this refusal violates the implied covenant of good faith and fair dealing, for various factual and legal reasons (set forth in the margin). ¹ As a result, plaintiffs have suffered losses "including indebtedness, loss of business income, inventory, fixtures, and assets, emotional distress, attorney's fees, loss of credit, and severe family discord." Plaintiffs also claimed entitlement to punitive damages.

A second cause of action, for intentional infliction of emotional distress, was asserted against both State Farm and codefendant Southern California Insurance Service Investigations, Inc. ("ISI"), which allegedly conducted an investigation leading to State Farm's conclusions about the fire. In this cause of action, plaintiffs incorporated by reference the allegations of the first cause, and alleged that all defendants instigated or ratified State Farm's conduct, and knew or should have known that it "would create the distinct probability of causing emotional distress to plaintiffs." Nonetheless, in disregard of this probability, State Farm denied coverage, and plaintiffs thereby suffered severe emotional distress, embarrassment, and loss of reputation, by dint of the charge of arson, the resulting financial loss, and "the collapse of [plaintiffs'] business." Plaintiffs again prayed punitive damages.

State Farm and ISI both demurred generally to this complaint. ² State Farm's demurrer was based principally on the one-year limitation period for actions on fire insurance policies, prescribed by Insurance Code section 2071. The trial court agreed that this section barred the action. The court accordingly sustained the demurrers without leave to amend and dismissed. ³

DISCUSSION

Section 2071 of the Insurance Code prescribes as part of the standard form for fire insurance policies in California the following limitation of action: "No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with, and unless commenced within 12 months next after inception of the loss." Plaintiffs do not dispute that this limitation applies to their policy with State Farm, to the extent of the clause's legal reach. Primarily at issue is whether the provision applies to plaintiffs' "bad faith" and emotional distress causes of action, commenced more than 12 months after the fire that initiated plaintiffs' loss.

Here as below, defendants adduce several recent cases strongly indicating that plaintiffs' pleaded claims must be considered "on the policy" and hence covered by section 2071. In Lawrence v. Western Mutual Ins. Co. (1988) 204 Cal.App.3d 565, 251 Cal.Rptr. 319, Division Five of this court dealt with an action for homeowners policy benefits and bad faith. The damage began and was discovered sometime before 1983, but the plaintiff did not present a claim until 1985, after receiving legal advice that the policy might cover his loss. Suit was filed three weeks after the insurer denied coverage, based in part on the provisions of section 2071, which appeared in the policy.

Affirming a summary judgment on grounds of this limitation, the court first reiterated that the 12-month period under section 2071 was and is fair and enforceable. (204 Cal.App.3d at p. 571, 251 Cal.Rptr. 319.) The court then held that "inception of the loss," as provided therein, occurs at the time of the damage or of its discovery, not when the plaintiff later becomes aware of his legal rights. (Id. at pp. 571-573, 251 Cal.Rptr. 319.) This meant that plaintiff's claim for recovery under his policy was time-barred. It also meant that the additional tortious bad faith claim, alleging misrepresentations in the policy, was barred as well: it "relate[d] to the complete denial of the claim on the underlying policy," and was "fundamentally a claim on the policy...." (Id. at p. 575, 251 Cal.Rptr. 319.)

The same result obtained on similar facts in Abari v. State Farm Fire & Casualty Co. (1988) 205 Cal.App.3d 530, 252 Cal.Rptr. 565. There the court affirmed a demurrer based on the section 2071 limitation where the pleaded facts showed the loss occurred and was discovered well more than a year before suit. The court further held the plaintiff's concurrent causes of action for bad faith and unfair insurance practices were as vulnerable under the limitation as his breach of contract claim. The court rejected plaintiff's argument that these causes were not "on the policy," because plaintiff sought by them to recover essentially the same damages. The bad faith and related claims thus were "a transparent attempt to recover on the policy...." (205 Cal.App.3d at p. 536, 252 Cal.Rptr. 565.)

Lawrence and Abari were recently followed in Magnolia Square Homeowners Assn. v. Safeco Ins. Co. (1990) 221 Cal.App.3d 1049, 1063, 271 Cal.Rptr. 1. Affirming a declaratory judgment that an insurer had no duty to indemnify because the section 2071 policy limitation had expired before suit, the court also affirmed dismissal of the insured's cross-complaint for bad faith and breach of fiduciary and statutory duties. The court found these causes to be subject to section 2071, because "the essence of those claims is an attempt to recover '[d]amages for failure to provide benefits under subject contract of insurance.' "

In opposition to these authorities, plaintiffs rely on two antecedent cases. One of them is plainly distinguishable, factually and legally. In Murphy v. Allstate Ins. Co. (1978) 83 Cal.App.3d 38, 147 Cal.Rptr. 565, the plaintiffs sued their fire insurer for bad faith, intentional infliction of emotional distress, and fraud, arising out of the insurer's provision of unskilled and unlicensed personnel to repair fire damage, and a subsequent attempt to minimize the amounts payable to plaintiffs and divert them to the unlicensed contractors. The court declined to apply section 2071's limitation to the bad faith cause of action because the alleged breaches of covenant derived from activities "long after the fire loss and related to the repair and restoration of plaintiffs' home and personal property and the employment of persons and firms to do that work, the institution and prosecution of the interpleader action." (83 Cal.App.3d at p. 49, 147 Cal.Rptr. 565.) In short, although the claims arose out of the contractual relationship, the damages were not attributable to a risk covered by the policy, and hence the action was not one "on the policy." (Ibid.) For the same reasons, section 2071 did not bar the emotional distress claim based upon the same facts. (Id. at p. 50, 147 Cal.Rptr. 565.)

On its overall facts and on those that were legally dispositive, the Murphy case is distinct from the present one, and it provides no direct support for plaintiffs' position. The distinction was noted in the Lawrence and Abari cases, supra. As Lawrence stated, in Murphy "a subsequent event occurred after the initial policy coverage was triggered which was the basis for the cause of action.... In contrast, Lawrence's allegation of tortious bad faith relates to the complete denial of the claim on the underlying policy." (204 Cal.App.3d at p. 575, 251 Cal.Rptr. 319; accord, Abari, supra, 205 Cal.App.3d at p. 536, 252 Cal.Rptr. 565.) The same is true here.

Plaintiffs' other principal authority, Frazier v. Metropolitan Life...