Prudential-LMI Com. Insurance v. Superior Court, PRUDENTIAL-LMI

• Decision Date: 01 November 1990
• Docket Number: PRUDENTIAL-LMI,No. S011415,S011415
• Citation: 798 P.2d 1230,51 Cal.3d 674,274 Cal.Rptr. 387
• Court: California Supreme Court
• Parties: , 798 P.2d 1230 COMMERCIAL INSURANCE, Petitioner, v. The SUPERIOR COURT of San Diego County, Respondent; Ralph E. LUNDBERG as Trustee, etc., et al., Real Parties in Interest.

Page 387

274 Cal.Rptr. 387

51 Cal.3d 674, 798 P.2d 1230

PRUDENTIAL-LMI COMMERCIAL INSURANCE, Petitioner, v. The SUPERIOR COURT of San Diego County, Respondent;

Ralph E. LUNDBERG as Trustee, etc., et al., Real Parties in Interest.

No. S011415.

Supreme Court of California,

In Bank.

Nov. 1, 1990.

As Modified Dec. 13, 1990.

Ramsay, Johnson & Klunder, William S. Loomis, Simon, Buckner & Haile, Stuart L. Brody, and Alan G. Buckner, for petitioner.

Gibson, Dunn & Crutcher, John L. Endicott, Fred F. Gregory, Deborah A. Aiwasian, Horvitz & Levy, Barry R. Levy, Mitchell C. Tilner, Robie & Matthai, James R. Robie, Pamela E. Dunn, Rogers, Joseph, O'Donnell & Quinn and Susan M. Popik, as amici curiae on behalf of petitioner.

No appearance for respondent.

Selwyn S. Berg, for real parties in interest.

Peter J. Kalis, Martin & Leaf and Ron Leaf, as amicus curiae on behalf of real parties in interest.

LUCAS, Chief Justice.

Petitioner Prudential-LMI Commercial Insurance (Prudential) and real parties in interest (plaintiffs), each seek review of a Court of Appeal decision issuing a writ of mandate directing summary judgment in favor of Prudential. The action involves progressive property damage to an apartment house owned by plaintiffs and insured over the years by successive insurers, including Prudential. We granted review to address three issues: (i) when does the standard one-year limitation period (hereafter one-year suit provision) contained in all fire policies (pursuant to Ins.Code, § 2071) ¹ begin to run in a progressive property damage case; (ii) should a rule of equitable tolling be imposed to postpone the running of the one-year suit provision from the date notice of loss is given to the insurer until formal denial of the claim; and, (iii) when there are successive insurers, who is responsible for indemnifying the insured for a covered loss when the loss is not discovered until several years after it commences? The last issue can be resolved by placing responsibility on (a) the insurer insuring the risk at the time the damage began, (b) the insurer insuring the risk at the time the damage manifested itself, or (c) all insurers on the risk, under an allocation (or exposure) theory of recovery.

As explained below, we hold that the one-year suit provision begins to run on the date of inception of the loss, defined as that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered. We also hold that this limitation period should be equitably tolled from the time the insured files a timely notice, pursuant to policy notice provisions, to the time the insurer formally denies the claim in writing. In addition, we conclude that in a first party property damage case (i.e., one involving no third party liability claims), the carrier insuringthe property at the time of manifestation of property damage is solely responsible for indemnification once coverage is found to exist.

As we explain further below, we emphasize that our holding is limited in application to the first party progressive property loss cases in the context of a homeowner's insurance policy. As we recognized in Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 405-408, 257 Cal.Rptr. 292, 770 P.2d 704, there are substantial analytical differences between first party property policies and third party liability policies. (Ibid.) Accordingly, we intimate no view as to the application of our decision in either the third party liability or commercial liability (including toxic tort) context.

BACKGROUND

1. The Policy

Plaintiffs, as trustees of a family trust, built an apartment house in 1970-1971 and insured it with four successive fire and extended coverage property insurers between 1971 and 1986. Prudential insured the risk between October 27, 1977, and October 27, 1980. It issued an all-risk homeowner's policy which insured against "ALL RISKS OF DIRECT PHYSICAL LOSS except as hereinafter excluded." The policy insured for both property loss and liability.

As noted above, we are concerned here only with the first party property loss portion of plaintiffs' policy. It insured against all risks of direct physical loss subject to the terms and conditions set forth in the policy which provided definitions and general policy provisions explaining to the insured the coverages and exclusions of the policy. The specified exclusions included loss "caused by, resulting from, contributed to or aggravated by any earth movement, including but not limited to earthquake, mudflow, earth sinking, rising or shifting; unless loss by fire or explosion ensues, and this Company shall then be liable only for such ensuing loss."

The policy contained several standard provisions adopted from the "California Standard Form Fire Insurance Policy" and section 2071, entitled "Requirements in case loss occurs." The provisions in relevant part required the insured to: "give written notice ... without unnecessary delay, protect the property from further damage ... and within 60 days after the loss, unless such time is extended in writing by this company, the insured shall render to this company a proof of loss, signed and sworn to by the insured, stating the knowledge and belief of the insured as to the following: the time and origin of the loss, [and] the interest of the insured and all others in the property...." In the same section of the policy, the provision entitled "When loss payable," required the insurer to pay the amount of loss for which the company may be liable "60 days after proof of loss ... is received by this company and ascertainment of the loss is made whether by agreement between the insured and this company expressed in writing or by the filing with this company of an award as [otherwise provided in the policy--i.e., pursuant to the policy arbitration and appraisal provisions]."

Plaintiffs' policy also contained the standard one-year suit provision first adopted by the Legislature in 1909 as part of the "California Standard Form Fire Insurance Policy." (See §§ 2070, 2071.) It provided: "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." ² With this background in mind, we turn to the facts underlying this claim.

2. The Facts

While replacing the floor covering in an apartment unit in November 1985, plaintiffs discovered an extensive crack in the foundation and floor slab of the building. In December 1985, they filed a claim with their brokers who immediately notified Prudential and the other companies that had issued insurance policies on the property during plaintiffs' period of ownership. Prudential conducted an investigation of the claim, which included an examination Prudential sought summary judgment and, alternatively, summary adjudication of 16 issues arising out of the complaint, contending there was no evidence any loss was suffered during its policy period and hence it could not be required to indemnify plaintiffs. Prudential observed that carpeting had been installed in 1982, covering the area later damaged, but asserted that at the time of installation (nearly two years after Prudential's coverage had ended), plaintiffs observed no damage or evidence of cracking. Prudential also claimed that because plaintiffs filed suit 20 months after filing their claim, the action was barred by the standard one-year suit provision contained in its policy, pursuant to section 2071.

[798 P.2d 1234] under oath of plaintiffs in February 1987. Prudential concluded the crack was caused by expansive soil that caused stress, rupturing the foundation of the building. In August 1987, shortly before receiving formal written notice that their claim had been denied under the policy's earth movement exclusion, ³ plaintiffs sued Prudential, the four other insurers[51 Cal.3d 681] that had insured the property between 1971 and 1986, and their insurance brokers or agents, alleging theories of breach of contract, bad faith, breach of fiduciary duties and negligence.

The court denied the motion in its entirety, stating that triable issues existed as to whether the earth movement exclusion applied, whether the damage occurred during the policy period, and when the crack first appeared. Prudential sought a writ of mandate to review the denial of the motion, arguing only that the action was time-barred because plaintiffs failed to comply with the policy's notice-of-claim requirement and one-year suit provision.

The Court of Appeal issued a peremptory writ of mandate directing the trial court to vacate its order denying the insurer's summary judgment motion and to enter another order granting the relief requested. In so holding, the court adopted a "delayed discovery" rule: The one-year suit provision begins to run when damage to property is sufficient to put a reasonable person on notice of the possibility of property loss. It determined that a delayed discovery rule must be applied to the policy requirement that a claim be made without unnecessary delay. The court explained that to rule otherwise would require claimants to pursue their rights under the policy even if still "blamelessly ignorant" of the objective facts underlying the claim. (See also, e.g., April Enterprises, Inc. v. KTTV (1983) 147 Cal.App.3d 805, 827, 195 Cal.Rptr. 421 [delayed discovery rule applied in breach of contract suit when cause of action concealed by defendant].)

Thus, the policy requirement of notice of loss without unnecessary delay, and the further provision calling for the commencement of suit within 12 months from the "inception of the loss," were relaxed in cases of continuous and progressive loss by the application of a delayed...