State Farm Fire & Casualty Co. v. Von Der Lieth

• Decision Date: 16 December 1991
• Citation: 54 Cal.3d 1123,820 P.2d 285,2 Cal.Rptr.2d 183
• Parties: , 820 P.2d 285, 30 A.L.R.5th 786 STATE FARM FIRE AND CASUALTY COMPANY, Plaintiff, Cross-defendant and Appellant, v. Eric VON DER LIETH, et al., Defendants, Cross-complainants and Appellants. S019059.
• Court: California Supreme Court

Page 183

2 Cal.Rptr.2d 183

54 Cal.3d 1123, 820 P.2d 285, 30 A.L.R.5th 786

STATE FARM FIRE AND CASUALTY COMPANY, Plaintiff, Cross-defendant and Appellant, v. Eric VON DER LIETH, et al., Defendants, Cross-complainants and Appellants.

S019059.

Supreme Court of California In Bank.

Dec. 16, 1991.

Knapp, Petersen & Clarke, Ryan C. Knapp, Peter J. Senuty, Glendale, Horvitz & Levy, Ellis J. Horvitz and Peter Abrahams, Encino, for plaintiff, cross-defendant and appellant.

Thornton, Taylor, Downs & Becker, Clarke B. Holland, Michael F. Scully, Rogers, Joseph, O'Donnell & Quinn, Susan M. Popik, San Francisco, Robie & Matthai, James R. Robie and Pamela E. Dunn, Los Angeles, amici curiae on behalf of plaintiff, cross-defendant and appellant.

Lillick & McHose, Pillsbury, Madison & Sutro, Kenneth R. Chiate, John R. Cadarette, Jr., Berger & Norton, Michael M. Berger, Richard D. Norton and Ann E. Kelly, Los Angeles, for defendants, cross-complainants and appellants.

LUCAS, Chief Justice.

We granted review in this case to resolve a conflict in the Courts of Appeal concerning whether courts should distinguish between types of negligence when analyzing coverage in the first party homeowners property insurance context. (See Garvey v. State Farm Fire & Casualty (1989) 48 Cal.3d 395, 408-409, fn. 7, 257 Cal.Rptr. 292, 770 P.2d 704 (Garvey ).) This conflict arises from different interpretations of our observation in Garvey suggesting a property insurer may deny coverage when homeowners construct improvements on the insured premises in order to protect the property from the operation of a specifically excluded risk. (Ibid.)

As we explain, we conclude the Court of Appeal erred in reversing judgment for the insureds. In our view, the jury correctly determined that third party negligence was the efficient proximate cause of the loss and that State Farm Fire and Casualty Company therefore was liable for damages suffered by the insureds. In addition, we explain that our observation in Garvey, supra, 48 Cal.3d at pages 408-409, footnote 7, 257 Cal.Rptr. 292, 770 P.2d 704, has no application in cases involving landslide or earth movement precipitated by the negligent acts of third parties. Accordingly, we reverse the judgment of the Court of Appeal and remand the cause for further proceedings consistent with this opinion.

I. FACTS

The Von Der Lieths (cross-complainants and insureds, hereafter insureds) are homeowners in the Big Rock Mesa area of Malibu, California, an area that has experienced massive landsliding for several years. Insureds purchased their home in 1976. In fall 1983, the County of Los Angeles (hereafter the County) informed them that an incipient landslide might be developing on the mesa. They subsequently noticed cracking in the interior and exterior walls, patio, and front steps of their home.

Since 1976, plaintiff State Farm Fire and Casualty Company (State Farm) provided insureds with an all-risk homeowner's policy. At the time of the loss, the policy provided coverage for "all risks of physical loss to the property ... except for loss caused by ... settling, cracking, shrinking, bulging, or expansion of pavements, patios, foundations, walls, floors, roofs or ceilings" and for "loss resulting directly or indirectly from: ... Earth Movement ... Water Damage, meaning; ... (c) natural water below the surface of the ground, including water which exerts pressure on, or seeps or leaks through a building, sidewalk driveway, foundation, swimming pool or other structure." Because the policy did not expressly exclude coverage for losses caused by the negligence of third parties, such negligence was a covered risk. (Garvey, supra, 48 Cal.3d at p. 408, 257 Cal.Rptr. 292, 770 P.2d 704.)

In April 1984, insureds submitted a claim to State Farm for damage to their house. On December 15, 1985, State Farm paid insureds $14,075.71, to cover physical damage to the dwelling only. State Farm informed insureds that this initial payment did not include payment for "soil work or stabilization of site upon which this structure is situated." Insureds, through their counsel, demanded the policy limits of $231,000 based on their belief that in order to stabilize the ground underneath their home, the entire mesa required stabilization.

Thereafter, State Farm filed a complaint in declaratory relief, asserting that insureds' policy did not cover losses caused by "earth movement or natural ground water," because those types of risks were specifically excluded under the homeowner's policy. State Farm also asserted its policy did not insure the cost of stabilizing the land under the insured premises. Insureds cross-complained for bad faith, breach of contract, and intentional and negligent infliction of emotional distress, and sought declaratory relief in their favor in the amount of the policy limits. The action was consolidated with three related suits that were settled prior to this appeal.

Insureds contended at trial that third party negligence was the efficient proximate cause of their loss. They assigned negligence to a number of individuals and entities, including the State of California, for removing a portion of the Big Rock Mesa mountain slope to construct the Pacific Coast Highway in the 1930's, and the developer of the property for failing to provide needed protection from landslide activation. Insureds also blamed a local homeowners' organization for its failure to maintain its drain systems and county-required pumping systems (specifically designed to prevent rising groundwater), and other homeowners for their failure to properly maintain their septic tank systems so that the systems did not affect the groundwater level. Finally, insureds claimed the County acted negligently in approving the project originally and in failing to compel dewatering (a comprehensive system of drains to prevent groundwater from rising) before 1983 contrary to the express recommendation of the county engineer.

Insureds presented expert testimony on the causes of the loss and on the history of earth movement in the area. Their experts testified that the recent earth movement was caused by an increase in the groundwater level due primarily to the use of septic waste disposal systems.

The evidence established that Big Rock Mesa had been the site of six ancient landslides, and minor recorded slides caused by rainfall. The testimony also showed that the mesa had been rendered less stable by the soil removal in 1933 at the base of the ocean cliff.

When the original housing tracts on the mesa were approved by the County in 1962, the County was concerned that the use of septic tank waste disposal systems might elevate the groundwater level and reactivate the prehistoric landslide activity. Nonetheless, relying on a report prepared by the developer's geologist, the County allowed the development to proceed with a septic tank system, on condition that the developer (i) install and maintain four horizontal drains, or hydraugers, in the side of the bluff to drain surface water, and (ii) create an entity responsible for maintaining the hydraugers.

In an attempt to comply with the above conditions, the developer formed the Malibu Mutual Drainage Company (hereafter MMDC), consisting of the original 70 homeowners at the time the first tract was developed. In 1973, a County engineer recommended a dewatering program that was not pursued. The MMDC dissolved in 1975, and various pumping wells on the mesa operated by the homeowners were abandoned. These actions contributed to the rise in groundwater level on the mesa.

In 1983, several homeowners formed the Concerned Citizens for Water Control (CCWC), and insureds contributed $1,100 to the organization. CCWC hired D.A. Evans, Inc., to refurbish the existing dewatering wells on the mesa, install new dewatering wells, and monitor land movement.

In December 1983, the County formed an improvement district and hired D.A. Evans, Inc., to provide landslide mitigation efforts in the area. The district installed additional horizontal drains, reactivated existing hydraugers, and monitored ground movement. At the time of trial, the district was designing a surface drainage system and continuing to pump the dewatering wells and monitor the hydraugers. The district incurred expenses of $2.8 million through the date of trial and estimated spending a total of $4 million to complete the project. The district had authority to spend up to $4.8 million, which would result in an individual assessment to the homeowners of not less than $17,606.

Insureds' home consisted of wood construction on a concrete slab, with a stucco exterior and a dry wall interior. It exhibited cracks in the walls, patio, and front steps, and a tilt of three to four inches from front to rear in the slab. Conflicting opinions were offered regarding whether the damage was the result of landslide movement or settling due to differences in the depth of the landfill under the dwelling. Insureds conceded that they had been compensated by State Farm for the physical damage to their house, not including stabilization costs.

The jury returned a special verdict finding State Farm had breached the terms of the policy by failing to pay insureds the full costs of repair due under the policy and had acted in bad faith in doing so. It awarded insureds $1,100 for reasonable costs incurred to repair their property to protect it from further damage, and compensatory damages of $55,000 for State Farm's breach of contract, breach of the covenant of good faith and fair dealing, and unfair claims practices. The jury also determined that third party negligence was the efficient proximate cause of the damage and that State Farm had not failed to pay for covered physical damage. It further decided that State Farm was not responsible under its policy for the cost of stabilizing the land beneath the dwelling. Both parties filed motions for judgment notwithstanding the...