Prudential-LMI Commercial Ins. v. Superior Court (Lundberg)

• Citation: 224 Cal.App.3d 389,260 Cal.Rptr. 85
• Decision Date: 27 June 1989
• Docket Number: PRUDENTIAL-LMI,No. D008934,D008934
• Court: California Court of Appeals
• Parties: Previously published at 224 Cal.App.3d 389 224 Cal.App.3d 389 COMMERCIAL INSURANCE, Petitioner, v. The SUPERIOR COURT of San Diego County, Respondent. Ralph E. LUNDBERG and Britt M. Lundberg as Trustees, etc., Real Parties in Interest.

Page 85

260 Cal.Rptr. 85

Previously published at 224 Cal.App.3d 389

224 Cal.App.3d 389

PRUDENTIAL-LMI COMMERCIAL INSURANCE, Petitioner, v. The SUPERIOR COURT of San Diego County, Respondent Ralph E. LUNDBERG and Britt M. Lundberg as Trustees, etc., Real Parties in Interest.

No. D008934.

Court of Appeal, Fourth District, Division 1, California.

June 27, 1989.

As Modified on Denial of Rehearing July 21, 1989.

As Modified July 27, 1989.

Review Granted Sept. 21, 1989.

Simon, Buckner & Haile and Stuart L. Brody, Marina Del Rey, Ramsay, Johnson & Klunder, Irvine, and William S. Loomis, Glendale, for petitioner.

No appearance for respondent.

Selwyn S. Berg, La Jolla, for real parties in interest.

HUFFMAN, Associate Judge.

Petitioner Prudential-LMI Commercial Insurance (Prudential) sought summary judgment or adjudication of issues in an insurance bad faith case filed by Ralph E.

Lundberg and Britt M. Lundberg, trustees of a family trust (the Lundbergs). Certain property owned by the Lundbergs, an apartment building, suffered progressive soil subsidence damage which the Lundbergs contend was a covered loss under a number of sequential insurance policies, one of which was issued by Prudential. Prudential denied coverage based on the Lundbergs' alleged failure to make a timely claim under the policy and based its motion for summary judgment on this theory. The trial court denied the motion in its entirety and this writ was taken. We issued an alternative writ to consider the issues of whether an insured is required to comply with an internal policy notice of claims provision and one-year suit limitations period when the claimed loss could not reasonably have been discovered within the policy period.

We hold that for purposes of assessing the timeliness of the filing of a claim and action thereon, a delayed discovery rule must be applied such that the time at which the insured is required to take action to enforce his or her rights begins to run at the point at which a reasonable person would be found to be in possession of facts placing him or her on notice of a possible defect in the property. Thus, the statutory and contractual period of the "inception of the loss" begins to run when the loss becomes reasonably observable. Such a rule promotes the policy favoring litigation on the merits over the disposition of claims on purely procedural grounds.

In the case before us, while the insureds' claim was timely under delayed discovery principles, this action was not. Therefore, Petitioner was entitled to summary judgment and the petition must be granted.

FACTUAL AND PROCEDURAL BACKGROUND

The Lundbergs built their apartment house in the early 1970's and insured it with four successive fire and extended coverage property insurers between 1971 and 1986. Prudential, the petitioner in this action, was on the risk between October 27, 1977, and October 27, 1980. ¹ It issued an "all-risk" policy which insured against "ALL RISKS OF DIRECT PHYSICAL LOSS except as hereinafter excluded." 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."

Definitions of "property damage" and "occurrence" appear only in the third party liability portion of the policy, as opposed to the first party property loss portion. They read as follows:

" 'occurrence' means an accident, including continuous or repeated exposure to conditions, which results in bodily injury, property damage or personal injury neither expected nor intended from the standpoint of the Insured;

"......................

" 'property damage' means:

(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or

(2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period." (Italics added.)

While replacing the floor covering in one of the apartment units in November 1985, the Lundbergs discovered an extensive crack in the foundation and slab floor of the building. In December 1985 they filed a claim with their insurance agents or brokers, CFK, who, as requested, presented their claim to Prudential and several other past and present insurers. Investigation thus far has revealed the cause of the crack was expansive soil which caused When Prudential did not pay their claim, the Lundbergs on August 26, 1987 (more than one and one-half years after the damage was discovered), filed this bad faith insurance action (later amended) against their four past insurers and their insurance brokers or agents, alleging theories of bad faith, breach of fiduciary duties, breach of contract, and negligence. In pertinent part in their amended complaint filed February 11, 1988, they alleged:

stress, rupturing the foundation of the building.

"On or about November of 1985, Plaintiff suffered a loss compensable under the terms of said policies in that the structural integrity of said Apartment was destroyed by a crack in the foundation.

"......................

"While the insurance policies, and each of them, hereinabove described, were in full force and effect, damage occurred to the structural integrity of said Apartments."

Prudential sought summary judgment and, in the alternative, adjudication of 16 issues on the amended complaint, contending there was no evidence any loss was suffered during the period of time its policy was in effect, and in any case the action was barred by a contractual provision required to be contained in any such policy of fire and other insurance pursuant to Insurance Code sections 2070 and 2071. This provision, commonly referred to as a "one-year suit provision," appears in Prudential's policy in the following statutorily prescribed form:

"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

Under the policy, the requirements for the making of claims include written notice of any loss "without unnecessary delay" and proof of loss within 60 days after the loss.

At the hearing on the summary judgment motion, the court first continued the matter pursuant to Code of Civil Procedure section 437c, subdivision (h), ³ for further evidence on the issue of whether the damage occurred during the policy term. Further papers were filed, including the Lundbergs' declaration from a mathematician regarding statistical inferences on the chances a particular insurer's policy should be held to afford coverage during the periods in question. ⁴ The court then denied the motion in its entirety, stating triable issues existed as to whether the earth movement exclusion applied, whether the damage occurred during the policy period, and on what date the crack appeared. No issues were summarily adjudicated, on the stated grounds there was still ongoing discovery in the matter. Since the trial court declined Prudential's request for an order embodying the reasons for the ruling and since the parties could not agree on the form of the order, a copy of the reporter's transcript was attached to the order eventually formalizing the ruling.

Prudential sought mandamus relief from the denial of the motion, specifying the sole basis of the requested relief was its argument that the Lundbergs failed to comply with the notice of claim requirement and one-year suit provision; the additional grounds for summary judgment raised below (relating to causes of the loss and whether such causes are covered perils) are not argued to this court. No claim is raised regarding the court's refusal to summarily adjudicate issues.

The Lundbergs' response included a demurrer to Prudential's petition on the grounds of failure to state sufficient facts, ⁵ "invited error" in the preparation of the formal order, ⁶ and the existence of an adequate remedy at law in the form of a future motion upon completion of discovery. Further, the Lundbergs' attorney seeks fees of $9,562.50 on unspecified grounds. ⁷

We issued an alternative writ on this and two similar petitions ⁸ and have received supplemental briefing.

DISCUSSION

To resolve the complex issues presented we must address the issue of whether a progressive property damage loss such as, but not limited to, land subsidence is qualitatively different from other forms of property damage compensable under a property damage policy, such that the usual rules for determining timeliness of a claim and action thereon should be altered. We are accordingly required to interpret the meaning of the contractual and statutory term "inception of the loss" in light of our determination of the question framed above. We confine our analysis of these issues to the timeliness question, since this petition does not present and we do not decide whether this claim is covered or excluded by the Prudential policy sued upon.

Although we find the Lundbergs' claim was timely, their action was not. However, such determination does not render the petition moot. The issues presented are of statewide importance and the matter has been well briefed; there is little consistency in rulings on these issues in the trial courts. We therefore address the merits of both the timely claim and the timely action requirements.

We conclude on these facts that a delayed discovery rule must be applied to the policy requirement that a claim be made without unnecessary delay and any action thereon be accordingly filed within one year after "inception of the loss." To rule otherwise would require claimants to act in protection of rights under the...