Avivi v. Centro Medico Urgente Medical Center

LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard

Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785

LIABILITY UPDATE
May 9, 2008

In Avivi v. Centro Medico Urgente Medical Center 2008 Daily Journal D.A.R 1609, the Second Appellate District of the California Court of Appeal held that the appropriate test for determining expert qualification in ordinary medical malpractice actions is whether the expert is familiar with circumstances similar to the subject incident; familiarity with the standard of care in the particular community where the alleged malpractice occurred, while relevant, is generally not required.

On September 5, 2004, while visiting the United States from Israel, Nurit Avivi injured her right hand and arm in a fall. At Centro Medico Urgente Medical Center, “physician assistants” (nonphysicians) set her arm in a splint and gave her pain medication. She returned to the medical center for follow-up examinations on September 6 and September 9. At these examinations, she complained about continued pain and swelling. The physician assistants gave her additional pain medication and instructed her to keep wearing the splint.

After she returned to Israel, plaintiff had her arm examined by an orthopedist, Dr. Arieh Arielli. Dr. Arielli observed that the fingers on her right hand were blue, cold and stiff. He concluded that defendants’ splint restricted the blood circulation in her right arm because it had been applied too tightly. He removed the splint and replaced it with a full cast. Dr. Arielli diagnosed plaintiff with a number of permanent injuries from the splinting of her arm.

On September 1, 2005, plaintiff brought a medical malpractice action against the medical center and Edward Rubin, M.D. (defamatory). Defendants moved for summary judgment. In support, defendants submitted the declaration of a surgeon who had practiced and taught hand surgery in the Los Angeles area for several years. According to defendants’ expert, defendants’ treatment of plaintiff was reasonable and within the standard of care in the local medical community. In opposition, plaintiff submitted the declaration of Dr. Arielli. Dr. Arielli stated he had treated thousands of fractures during his career, and had spoken with American doctors and reviewed American publications regarding the treatment of fractures in the United States. However, Dr. Arielli did not explicitly state that he was familiar with the local standard of medical care in the community where defendants treated plaintiff, and defendants objected to his declaration on that ground.

At the hearing on the summary judgment motion, the trial court ruled that Dr. Arielli’s opinion was not admissible because Dr. Arielli was not familiar with the standard of care in Southern California. Because Dr. Arielli’s was the only expert declaration plaintiff offered to dispute Dr. Lane’s declaration, the trial court ruled that plaintiff had failed to show the existence of a triable issue of fact as to defendants’ negligence and granted summary judgment. Plaintiff appealed, and the Court of Appeal reversed.

The appellate court observed that, in order to testify as an expert in a medical malpractice case, a person must have enough knowledge, learning and skill with the relevant subject to speak with authority, and he or she must be familiar with the standard of care to which the defendant was held. (Evid.Code, § 720, subd. (a); Ammon v. Superior Court (1988) 205 Cal.App.3d 783, 790-791.) An expert may base his or her opinion on any matter reasonably relied upon by experts in forming opinions about the particular subject matter in question, except when the law precludes consideration of a particular matter. (Evid.Code, § 801, subd. (b).) If the expert has disclosed sufficient knowledge of the subject to entitle his or her opinion to go to the jury, the court abuses its discretion by excluding his or her testimony. (Mann v. Cracchiolo (1985) 38 Cal.3d 18, 39.)

The trial court had excluded Dr. Arielli’s declaration because he did not demonstrate familiarity with the standard of care in Southern California. However, “[i]n 1949, the Supreme Court held that ‘[t]he essential factor’ in determining the qualification of an expert witness in medical malpractice cases ‘is knowledge of similarity of conditions; geographical proximity is only one factor to be considered.’ . . . Since then, the Supreme Court has formulated the standard of care as that of physicians in similar circumstances rather than similar locations. (See Barris v. County of Los Angeles (1999) 20 Cal.4th 101, 108, fn. 1 . . .)”

The court’s review of the law showed that, except in cases where Health and Safety Code section 1799.110 applies; i.e., emergency room treatment, the standard of care for physicians is the reasonable degree of skill, knowledge and care ordinarily possessed and exercised by members of the medical profession under similar circumstances. (Mann v. Cracchiolo, supra, 38 Cal.3d at p. 36.) “The test for determining familiarity with the standard of care is knowledge of similar conditions. . . . Geographical location may be a factor considered in making that determination, but, by itself, does not provide a practical basis for measuring similar circumstances.”

Dr. Arielli declared that he had practiced orthopedics for 27 years, had treated thousands of patients with injuries similar to [plaintiff’s], had numerous contacts with doctors from the United States regarding treatment of injuries similar to [plaintiff’s], had reviewed many publications on treatment of fractures in the United States, and that treating a fracture would be handled similarly in Israel as in the United States. Read in the light most favorable to [plaintiff], Dr. Arielli’s statements demonstrate that he was generally familiar with the standard of care for treating fractures in the United States, and with treating fractures in circumstances similar to [plaintiff’s]. It was not necessary that he also state familiarity with the standard of care in Southern California.

The appellate court concluded that, while the qualification of an expert witness requires exercise of trial court discretion, the court abused its discretion by denying qualification if the witness has demonstrated sufficient knowledge of the subject to entitle his or her opinion to go before the jury.

Because Dr. Arielli did so with respect to the treatment of fractures, the trial court improperly excluded his declaration in deciding whether plaintiff presented a triable issue of material fact. [¶] The exclusion of the sole expert relied upon by a party because of an erroneous view of his or her qualifications in a case where expert testimony is essential is an abuse of discretion, requiring reversal. . . . Here, the trial court relied on a test that has been outmoded for more than 50 years to exclude the sole expert relied upon by [plaintiff] at summary judgment. Because the court’s grant of summary judgment rested upon the exclusion of Dr. Arielli’s declaration, summary judgment was inappropriate.

----Andrea Lynn Rice

In Village Northridge Homeowners Association v. State Farm Fire and Casualty Company

LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
www.andreariceesq.com
LIABILITY UPDATE
May 2, 2008

In Village Northridge Homeowners Association v. State Farm Fire and Casualty Company 2007 Daily Journal D.A.R 18547, the Second Appellate District of the California Court of Appeal held that California Supreme Court precedents holding that a plaintiff cannot avoid a fraudulently induced contract of release without rescinding the contract and restoring the money paid as a consideration for the release (Garcia v. California Truck Co. (1920) 183 Cal. 767, 773 (Garcia )) apply only to the release of personal injury claims, and not to the settlement and release of claims arising from a contract of insurance.

The lawsuit arose from the Northridge earthquake in January 1994. Village Northridge Homeowners Association (the Association or the insured) sued State Farm Fire and Casualty Company (State Farm or the insurer), alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The complaint alleged State Farm improperly undervalued the Association’s loss, inducing it to forego proper repairs and to forego payment of amounts properly owed under the policy. The Association further alleged it “was required to sign a release and did so under compulsion and with no other option afforded to secure partial benefits owed,” and that it did not agree “that the partial payments provided fully compensated [the Association] for the actual damages and loss sustained. . . .”

The Association’s second amended complaint alleged a cause of action for fraud as well as claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The Association alleged it had spent the $1.5 million on partial earthquake repairs and was not offering to return the $1.5 million; acknowledged a credit in that amount in State Farm’s favor against the damages sought in the lawsuit; did not seek to rescind the release; and contended the release was unenforceable as the product of fraud.

State Farm demurred. The trial court sustained the demurrer without leave to amend, observing the Association chose to affirm the settlement agreement and keep the money paid by State Farm, but not to release the claims, and “[t]hey can't have it both ways.” Judgment was entered and the Association filed this timely appeal. The Court of Appeal reversed.

State Farm contended that the Association’s only option under California law for avoiding its release was to rescind the settlement agreement and return the $1.5 million to State Farm, and it could not “keep the money and sue.” “While the question is not without difficulty, we conclude that, in the circumstances of this case, State Farm is mistaken.”

The court acknowledged that in Garcia, supra, 183 Cal. 767, the Supreme Court “made it clear that rescission is essential to the extinguishment of a contract of release in a personal injury case, and that there can be no rescission without restoration of the consideration. This is not, however, a personal injury case, in which the only purpose of the releasee’s payment is to obtain a release from an inchoate tort claim. This is an insurance contract case, in which the releasee-insurer had an underlying contractual obligation to pay for damage to the insured’s dwellings caused by earthquake, and in addition a statutory obligation not to misrepresent the terms of its policy. (See Ins. Code, § 790.03.) Under these circumstances—and particularly where the consideration received by the releasor was long ago expended to repair the very damage the releasee-insurer contracted to cover—we conclude Garcia does not prevent the insured from avoiding the release without returning the consideration for which it was given.”

The court found that two general principles were relevant to the analysis. “The first is the Garcia principle: that a plaintiff in a personal injury case cannot avoid a fraudulently induced contract of release without rescinding the contract and restoring the money paid as a consideration for the release. . . . The second is the more general principle that, if a defrauded party is induced by false representations to execute a contract, the party has the option of (1) rescinding the contract and restoring any consideration received under it, or (2) affirming the contract and recovering damages for the fraud. (Bagdasarian v. Gragnon, supra, 31 Cal.2d at p. 750; Hines v. Brode (1914) 168 Cal. 507, 511-512.) We conclude the second, more general, principle applies here, permitting the Association to affirm the settlement agreement and recover damages for the fraud.”

The court acknowledged the apparent incongruity, noted by the trial court, in “affirming” a contract and yet avoiding one of its principal terms: the release. “The incongruity, however, is not as severe as may first appear. Indeed, because of the underlying insurance obligation, the circumstance is not unlike both (1) cases in which a settlement agreement and the mutual releases in it are considered separable, thus permitting the plaintiff to affirm the settlement and sue for fraud despite the release, . . . or (2) cases, as described in Garcia, applying the ‘well-recognized rule’ that one who rescinds a contract for fraud ‘is not required to restore that which in any event he would be entitled to retain.’ . . . While neither principle fits perfectly, either is more appropriately applied to a case in which an insurer has misrepresented policy limits to obtain a settlement than is a principle that requires the return of the insurance settlement monies as the price of a challenge to the insurer’s fraud.”

State Farm argued that Garcia and a similar case, Taylor v. Hopper (1929) 207 Cal. 102, 276 (Taylor), controlled. In Taylor, the Supreme Court held that the remedy of affirming a compromise agreement, retaining the money received under it, and suing for fraud “does not exist in a case such as we are considering.” “But Taylor, like Garcia, was considering a personal injury case, in which plaintiff was run over by defendants’ automobile and released her claim in a compromise agreement. Taylor concluded the ‘affirm and sue’ remedy did not exist because ‘[[t]he difficulty in determining the amount of damages is insurmountable.’ (Ibid.)”

State Farm insisted that Garcia and Taylor are not “archaic decisions,” and that their holdings “comport with common sense and the strong policy in favor of settlement.” “While we do not disagree with these sentiments, we cannot agree that the Garcia/Taylor principle applies to the settlement of a claim grounded upon an insurance contract. Indeed, Taylor itself demonstrates that a personal injury settlement is very different from an insurance settlement. The principal difference, of course, is the existence of an underlying liability. In Taylor or any other personal injury claim, there may or may not be a valid negligence claim and underlying liability on the part of the defendant. . . . In an insurance settlement, by contrast, there is necessarily an underlying liability on the part of the insurer. While the scope of the insurer’s liability may be subject to dispute, the existence of its contractual obligation to pay for earthquake repairs is not.”

To summarize: The principles established in Garcia and Taylor, holding that a plaintiff cannot avoid a fraudulently induced contract of release without rescinding the contract and restoring the money paid as a consideration for the release, do not apply to a contract for the settlement and release of insurance claims, where the insurer is alleged to have induced the settlement by misrepresenting policy limits. Instead, the principle applicable to ordinary contracts – that a party induced by fraud to execute a contract has the option of rescinding it or affirming it and recovering damages for the fraud – applies. Any other conclusion would leave a defrauded insured with no practical remedy and would do nothing to discourage fraud in the settlement of insurance claims. Accordingly, the trial court erred in sustaining State Farm’s demurrer to the Association’s second amended complaint.

----Andrea Lynn Rice

Pagarigan v. Aetna U.S. Healthcare of California, Inc

LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
LA Attorney
LIABILITY UPDATE
April 25, 2008

In Pagarigan v. Aetna U.S. Healthcare of California, Inc. 2007 Daily Journal D.A.R 18666, the Second Appellate District of the California Court of Appeal held that failure to timely file an amended complaint warrants dismissal under California Code of Civil Procedure Section 472(b).

Teri, Mary, and John Pagarigan (“The Pagarigans”) sued the Aetna group of defendants for elder abuse and the wrongful death of their mother, Johnnie Pagarigan, while a resident at the Magnolia Gardens nursing home. “These Aetna entities (‘Aetna’) were to blame for their mother’s death, the Pagarigan children say, because Aetna operated the health maintenance organization responsible for Magnolia Gardens.”

The Pagarigans filed their complaint on February 26, 2001. Aetna and the other defendants filed separate demurrers, which the trial court sustained in separate orders. On the Aetna appeal, this court issued its unpublished decision on October 25, 2005. That decision reversed the judgment and remanded the case with instructions. The instructions were to sustain the Aetna demurrer with leave to amend as to the first and eleventh causes of action, to sustain the Aetna demurrer without leave to amend on the remaining counts, and for further proceedings consistent with that opinion. As to the Aetna defendants, the clerk of this court certified that the October 25, 2005 decision was final and mailed notice of the issuance of the remittitur to the parties. This notice of remittitur was on February 17, 2006. For about six weeks, nothing happened. Then on April 6, 2006, Aetna brought an ex parte motion in the trial court, asking the trial court to dismiss the Pagarigans’ case against Aetna. Aetna’s rationale was that the law gave the Pagarigans 30 days to file an amended complaint against Aetna, and the Pagarigans had not done so. The trial court heard further oral argument and then granted Aetna’s motion to dismiss the Pagarigans’ action against it.

The Pagarigans then moved to set aside this order of dismissal on the basis of mistake, inadvertence, surprise, or excusable neglect. The trial court denied the motion. The Pagarigans filed a timely appeal, and the Court of Appeal affirmed.

There are two issues. First, was the trial court right to grant Aetna’s motion to dismiss? Second, was the trial court right to deny the Pagarigans’ motion to set aside this order of dismissal on the basis of mistake, inadvertence, surprise, or excusable neglect? We answer yes to both questions.

The court observed that “The first issue concerns dismissal. A particular statute governs this issue. That statute is section 472b of our Code of Civil Procedure. We emphasize some key words of the last sentence of section 472b, which states that ‘[w]hen an order sustaining a demurrer without leave to amend is reversed or otherwise remanded by any order issued by a reviewing court, any amended complaint shall be filed within 30 days after the clerk of the reviewing court mails notice of the issuance of the remittitur.’ (Italics added.)”

The plain language of section 472b set a deadline. The plaintiffs did not meet it. The trial court correctly granted Aetna’s motion to dismiss the Pagarigans’ case against Aetna.

The Pagarigans argued that section 472b’s 30 day deadline did not apply in this case because that deadline conflicted with this court’s more specific opinion of October 25, 2005. The Pagarigans pointed to that opinion’s final section, which gave instructions for remand. “These instructions were ‘to sustain the demurrer with leave to amend as to the first and eleventh causes of action in the Pagarigans’ complaint and to sustain the demurrer without leave to amend as to the remaining counts against Aetna, and for further proceedings consistent with this opinion.’ . . .”

This supposed conflict, however, does not exist. Section 472b sets out a procedural timeline. The appellate opinion set out substantive requirements. The substantive requirements could have been met within the procedural timeline. This is especially true here because events moved in slow motion. This court filed its appellate opinion on October 25, 2005. This court’s clerk did not mail notice of the issuance of the remittitur—and hence section 472b’s 30 day clock did not start ticking—until February 17, 2006. So the Pagarigans had nearly four months to prepare for the beginning of their 30 day period for action. Once this 30 day clock began to tick, it would have been straightforward for the Pagarigans to file an appropriate pleading. This pleading could have been, for instance, a motion (1) to enter an order sustaining Aetna’s demurrer as the court of appeal had directed, and (2) for leave to file an appropriately amended complaint. Such a pleading would have complied fully with all authorities. Indeed, it would have effectuated these rules. It would have kept this case moving forward, which is the aim of section 472b. The Pagarigans’ claim of conflict has no basis.

The second question before the appellate court was whether the trial court erred when it denied the Pagarigans’ motion to set aside the dismissal of their case. The statutory authority here was section 473, subdivision b, of the Code of Civil Procedure. Section 473, subdivision b, contains two sentences that are independently pertinent. “Sentence [1] is the discretionary relief provision of section 473. Sentence [2] is that section’s mandatory relief provision. The Pagarigans’ motion relied on both provisions. Each provision raises a separate issue.”

The first issue concerned the discretionary relief provision of section 473. “Two reasons show the trial court did not abuse its discretion by declining to set aside the dismissal. [¶] First, the Pagarigans’ mistake of law was unreasonable. As the trial court remarked during argument, section 472b of the Code of Civil Procedure is ‘absolutely completely clear.’ . . . [¶] A second reason supports the trial court’s refusal to grant discretionary relief. This reason is that the Pagarigans’ inaction after remand appeared to the trial court to be ‘intentional conduct’ rather than mistake, inadvertence, surprise, or neglect. The trial court noted that the Pagarigans never asserted ignorance of section 472b. To the contrary, the Pagarigans had demonstrated their awareness of this statute by citing it. The trial court reasonably suggested that the Pagarigans had chosen to ignore this plain statute for ‘strategic advantage.’ . . . Deliberate inaction after remand is a unilateral way to attempt to help oneself to a stay. As the trial court put it, ‘[the Pagarigans] were aware of section 472b and ignored it, perhaps because they hoped to defer or postpone any further trial court proceedings until other matters were concluded at the Court of Appeal.’ ”

The court then considered the mandatory relief provision. “The mandatory relief provision of section 473 has a rather narrow application. This provision operates only where there has been a ‘resulting default judgment or dismissal entered against [the] client. . . .’ . . . Courts have considered carefully this particular use of the word ‘dismissal.’ ‘[T]he Legislature intended the word “dismissal” to have a limited meaning in the context of the mandatory provision of section 473(b).’ (English v. IKON Business Solutions, Inc. (2001) 94 Cal.App.4th 130, 148.)”

As we have just recited, however, the trial court did not believe that the failure to timely file an amended complaint was due to mistake, inadvertence, surprise, or neglect, but was instead knowing and intentional conduct. . . . Designing conduct that leads to a dismissal is not akin to a default.

----Andrea Lynn Rice

Boeing Co. v. Continental Casualty

LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
Los Angeles Appeallate Attorney
LIABILITY UPDATE
April 18, 2008

In Boeing Co. v. Continental Casualty 2007 Daily Journal D.A.R 18419, the Second Appellate District of the California Court of Appeal held that a party to an indemnity contract is incapable of alleging status as an additional insured under a commercial general liability policy where the policy requires that the insured has requested in writing that it be added.

Christmas in April USA (CIA) is a nonprofit corporation based in Washington, D.C. CIA enlists volunteers to repair and rehabilitate the homes of low-income, elderly and disadvantaged persons. CIA solicits companies such as Boeing Co. (Boeing) to encourage its employees to volunteer for reconstruction projects.

On April 28, 2001, Todd Black (Black), an employee of California State University at Long Beach (CSULB), allegedly was injured while working as a volunteer on a CIA project at the home of Sam and Annie Nichols (Nichols) in Long Beach. On April 24, 2002, Black filed suit against Boeing, CSULB and Nichols (Black v. Boeing et al.). As against Boeing, Black pled causes of action for negligence, product liability and breach of implied warranty. Black asserted that Boeing was a joint venturer with CSULB and CIA on the Nichols project, his work at the Nichols home was under the direction and supervision of Boeing and Boeing supplied him with a defective step-stool.

Boeing tendered its defense in Black to Continental Casualty Company (Continental). On April 24, 2003, Continental declined the tender in a letter which stated in relevant part: “[Continental] insured [CIA] under the above-referenced policy, however, this policy does not identify [Boeing] as an additional insured. We have confirmed with our insured that they did not have a legal requirement to name [Boeing] as an additional insured nor did [Boeing] request to be added as an additional insured on [CIA’s] policy. . . . [¶] We have also confirmed that no contract exists as between your client and our insured. At this time, [Continental] respectfully rejects your request to defend and indemnify [Boeing].” Boeing defended the Black action and obtained summary judgment on August 4, 2003 on various grounds.

On January 19, 2006, Boeing sued Continental to recover its defense costs in the Black action. Boeing’s theory that it was an additional insured under CIA’s Continental policy was based on the language of the following endorsement: “The following are additional insureds: [¶] . . . [¶] 3. Any person, (other than the named insured, or any employee of the named insured) or an organization while acting as any agent for, or on behalf of the named insured, including but not limited to real estate agents, however, such coverage will be granted only on written request of the insured and for such limits as are afforded by this policy.”

Continental demurred to Boeing’s complaint. Citing the language of the additional insured endorsement, Continental contended that Boeing can qualify as an additional insured only if Boeing could establish that the insured, i.e., CIA, made a written request that additional insured coverage be extended to Boeing, and in the absence of any “allegation anywhere that any insured requested Continental provide additional insured coverage for Boeing, Boeing did not allege sufficient facts to establish that it was an additional insured.”

The trial court sustained Continental’s demurrer without leave to amend, explaining “whether only the named insured can seek coverage or someone else is entitled to seek coverage under the terms of the policy, coverage has to be requested, and a person or entity has to become an insured before they assert a right to indemnity. [¶] The company has to undertake to insure someone, and then anything which is insured under the policy gives rise to a right to demand indemnity under the policy. [¶] But someone who’s never been accepted as an insured, someone who’s never asked to become an insured, who becomes injured, can't then write a letter asking to be covered for the injury. That just isn't the way the law contemplates insurance will work, nor do insurance companies contemplate having to be liable for coverage to the world of volunteers, all of whom are unknown until after they've suffered injury.”

Boeing filed a timely notice of appeal from the judgment of dismissal. The Court of Appeal affirmed.

The appellate court noted as a preliminary matter that Boeing admittedly was not the named insured. CIA, a corporation, was the only person or entity identified in the policy as the “named insured.” “Further, section II of the policy, setting forth the policy’s ‘WHO IS AN INSURED’ provisions, is unavailing to Boeing. Under those provisions, CIA, as a corporation, was an insured, as were its executive officers and directors (with respect to their duties as officers and directors) and its stockholders (only with respect to their liability as stockholders). In addition, pursuant to Section II, the following were also insureds under the policy: CIA’s employees for acts within the scope of their employment; any person acting as CIA’s real estate manager; any person or organization having custody of CIA’s property upon death; and CIA’s legal representative upon death-none of which provisions is relevant here.”

Boeing’s case against Continental stands or falls with the application of the policy’s special endorsement for additional insureds. To reiterate, said endorsement provides in relevant part: “The following are additional insureds: [¶] . . . [¶] 3. Any person, (other than the named insured, or any employee of the named insured) or an organization while acting as any agent for, or on behalf of the named insured, including but not limited to real estate agents, however, such coverage will be granted only on written request of the insured and for such limits as are afforded by this policy.” (Italics added.)

Boeing asserted that, to trigger coverage for an additional insured, the special endorsement stated that “the insured,” not the “named insured,” must make a written request to the insurer, and here, it made such a written request to Continental. “We reject Boeing’s attempt to create an ambiguity in this regard. As discussed, ambiguity is not necessarily to be found in the fact that a word or phrase isolated from its context is susceptible of more than one meaning; the critical principle is that an insurance policy must be interpreted as a whole and in context.”

The court pointed out that paragraph B of the policy’s Common Policy Conditions stated in relevant part: “CHANGES [¶] This policy contains all the agreements between you and us concerning the insurance afforded. The first Named Insured shown in the Declarations is authorized to make changes in the terms of this policy with our consent.” (Italics added.) “Thus, solely CIA, as the named insured, had the authority to request changes to the policy, and with the consent of Continental.”

Reading Paragraph B in conjunction with the special endorsement for additional insureds, it is clear that Boeing had no standing to make written request to Continental to be named as an additional insured under the policy. [¶] Because Boeing did not qualify as an additional insured under CIA’s policy, Continental did not owe Boeing a defense in the Black personal injury action. Therefore, the trial court properly sustained Continental’s demurrer to Boeing’s first amended complaint without leave to amend.

----Andrea Lynn Rice

Johnson v. American Standard

LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard

Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
Los Angeles Appeals Attorney
LIABILITY UPDATE
April 11, 2008

In Johnson v. American Standard, Inc. 2008 Daily Journal D.A.R 4701, the California Supreme Court adopted the “sophisticated user” doctrine and defense which operates to negate a manufacturer’s duty to warn of a product’s potential danger when the plaintiff has (or should have) advance knowledge of the product’s inherent hazards. The court held further that the relevant time for determining user sophistication is when the sophistication user is injured and knew or should have known of the risk.

Plaintiff was a trained and certified heating, ventilation, and air conditioning (HVAC) technician. Plaintiff sued various chemical manufacturers, chemical suppliers, and manufacturers of air conditioning equipment, including defendant American Standard, Inc. Plaintiff specifically alleged that he brazed refrigerant lines on an evaporator that defendant had manufactured in 1965 that contained R-22 refrigerant, creating and exposing him to phosgene gas and causing him to develop pulmonary fibrosis. The causes of action against defendant included negligence, strict liability failure to warn, strict liability design defect, and breach of implied warranties. In each cause of action, plaintiff’s theory was that defendant knew that servicing the evaporator would create harmful phosgene gas, but defendant failed to provide plaintiff with an adequate warning. (See Anderson v. Owens-Corning Fiberglas Corp. (1991) 53 Cal.3d 987, 1002 (Anderson ).)

Defendant moved for summary judgment on the ground, inter alia, that it had no duty to warn about the risks of R-22 exposure because it could assume that the group of trained professionals to which plaintiff belonged, and plaintiff himself, were aware of those risks. The trial court granted summary judgment. The Court of Appeal affirmed and held that because plaintiff’s theory was the same in all causes of action, i.e., product liability through the failure to warn, the sophisticated user defense should apply to plaintiff’s complaint in its entirety. The California Supreme Court granted review and affirmed as well.

The Court pointed out that, generally speaking, manufacturers have a duty to warn consumers about the hazards inherent in their products. “. . . Anderson made it clear that ‘[w]hatever may be reasonable from the point of view of the manufacturer, the user of the product must be given the option either to refrain from using the product at all or to use it in such a way as to minimize the degree of danger.’ . . . Conversely, when a sufficient warning is given, ‘the seller may reasonably assume that it will be read and heeded; and a product bearing such a warning, which is safe for use if it is followed, is not in defective condition, nor is it unreasonably dangerous.’ (Rest.2d Torts, § 402A, com. j, p. 353.)”

The Court observed that the sophisticated user defense exempts manufacturers from “their typical obligation to provide product users with warnings about the products’ potential hazards.” The defense, if successfully argued, acts as an affirmative defense to negate the manufacturer’s duty to warn. “Under the sophisticated user defense, sophisticated users need not be warned about dangers of which they are already aware or should be aware. . . . Because these sophisticated users are charged with knowing the particular product’s dangers, the failure to warn about those dangers is not the legal cause of any harm that product may cause. . . . The rationale supporting the defense is that ‘the failure to provide warnings about risks already known to a sophisticated purchaser usually is not a proximate cause of harm resulting from those risks suffered by the buyer’s employees or downstream purchasers.’ (Ibid.) This is because the user’s knowledge of the dangers is the equivalent of prior notice. . . .”

The Court explained that the sophisticated user defense evolved out of the Restatement Second of Torts, section 388 (section 388) and the obvious danger rule, an accepted principle and defense in California. The defense has been held to apply equally to strict liability and negligent failure to warn cases. The duty to warn is measured by what is generally known or should have been known to the class of sophisticated users, rather than by the individual plaintiff’s subjective knowledge.

The Court observed that section 388 provides that a supplier of goods is liable for physical harm the goods cause if the supplier knows, or should know, the items are likely to be dangerous, fails to reasonably warn of the danger, and “has no reason to believe that those for whose use the chattel is supplied will realize its dangerous condition.” Courts have interpreted section 388, subdivision (b), to mean that if the manufacturer reasonably believes the user will know or should know about a given product’s risk, the manufacturer need not warn that user of that risk. This is “especially [true] when the user is a professional who should be aware of the characteristics of the product.” (Strong v. E.I. Du Pont de Nemours Co., Inc. (8th Cir.1981) 667 F.2d 682, 687.) “Other jurisdictions that have adopted the sophisticated user defense have cited section 388 and the obvious danger rule as a basis for doing so. . . . While this court has not expressly adopted a sophisticated user defense, it has adopted section 388 as law in California. (See Stevens v. Parke, Davis & Co. [(1973)] 9 Cal.3d [51] at p. 64.)” The Court further pointed out that California law also recognizes the obvious danger rule, which provides that there is no need to warn of known risks under either a negligence or strict liability theory.

. . . As the Court of Appeal reasoned, the sophisticated user defense simply recognizes the exception to the principle that consumers generally lack knowledge about certain products, for example, heavy industrial equipment, and hence the dangers associated with them are not obvious. For those individuals or members of professions who do know or should know about the product’s potential dangers, that is, sophisticated users, the dangers should be obvious, and the defense should apply. Just as a manufacturer need not warn ordinary consumers about generally known dangers, a manufacturer need not warn members of a trade or profession (sophisticated users) about dangers generally known to that trade or profession.

The Court acknowledged that, under the “should have known” standard, there will be some users who were actually unaware of the dangers. “However, the same could be said of the currently accepted obvious danger rule; obvious dangers are obvious to most, but are not obvious to absolutely everyone. The obvious danger rule is an objective test, and the courts do not inquire into the user’s subjective knowledge in such a case. . . . Thus, under the sophisticated user defense, the inquiry focuses on whether the plaintiff knew, or should have known, of the particular risk of harm from the product giving rise to the injury.”

The Court also held that the relevant time for determining user sophistication for purposes of this exception to a manufacturer’s duty to warn is when the sophisticated user is injured and knew or should have known of the risk. (Crook v. Kaneb Pipe Line Operating Partnership (8th Cir.2000) 231 F.3d 1098, 1102.) “As the Court of Appeal pointed out, ‘[t]he sophisticated user defense will always be employed when a sophisticated user should have, but did not, know of the risk. Otherwise, the issue would be actual knowledge and causation.’ Therefore, the sophisticated user’s knowledge of the risk is measured from the time of the plaintiff’s injury, rather than from the date the product was manufactured. The timeline focuses on the general population of sophisticated users and conforms to the defense’s purpose to eliminate any duty to warn when the expected user population is generally aware of the risk at issue.”

----Andrea Lynn Rice

Nielsen v. Beck

LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785

LIABILITY UPDATE
April 4, 2008

In Nielsen v. Beck 2007 Daily Journal D.A.R 18193, the Second Appellate District of the California Court of Appeal held that subdivision (a)(2) of Code of Civil Procedure section 340.6, that tolls the statute of limitations if an attorney “continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred,” may apply where an attorney continues to perform services for a client even after a substitution of attorney is filed and where the attorney continued to represent the client in an unlawful detainer action which arose from advice given in a prior bankruptcy proceeding.

Robert Nielsen and William Nielsen (“the Nielsens”) owned PrimePapers, Inc. (PrimePapers), a company that cuts rolls of paper used by other commercial interests. Attorney Paul A. Beck was hired by PrimePapers and its affiliate entity, PrimePapers Louisiana (PPL) to represent PrimePapers and PPL “in connection with a number of pending legal issues, including but not limited to the defense of claims brought against the Company by various creditors and the resolution of the Company’s outstanding obligations to its creditors through a workout or Chapter 11 or Chapter 7 bankruptcy filing.” Bankruptcy proceedings were filed and on March 23, 2004, the bankruptcy court entered an order closing the case.

PrimePapers leased a building from ProLogis California I, LLC (ProLogis). The lease for that premises contained a provision whereby ProLogis would waive a large amount of rent. However, in the event of default, this “free rent” had to be paid. The Nielsens personally guaranteed the lease. Beck advised the Nielsens to stop making rent payments to ProLogis. ProLogis then filed an unlawful detainer action against plaintiffs. Beck represented plaintiffs in connection with the unlawful detainer action. On September 2, 2003, the San Bernardino trial court found against PPL on the issue of possession and against the Nielsens in the amount of $394,840.42. Beck continued to provide professional services to PrimePapers, PPL, and the Nielsens in attempts to settle the unlawful detainer case and to avoid enforcement proceedings by ProLogis, the judgment creditor.

On August 26, 2004, the Nielsens and Beck executed a substitution of attorney form to replace Beck with attorney Slates. The substitution of attorney form was returned to attorney Slates and then filed with the Superior Court on September 3, 2004. According to Robert Nielsen, at the time the substitution of attorney form was signed, he “felt very uncomfortable for [Beck] to do any more work for [him]. Everything that [Beck] touched, it continued to get worse and worse and worse.” However, after August 26, 2004, Beck continued to work for the Nielsens. In September 2004, Robert Nielsen contacted Beck by telephone concerning appropriate tactics and procedures in resolving the ProLogis claims. On October 14, 2004, Beck mailed a bill to Robert Nielsen for professional services, requesting payment of $350 for one hour of “professional services rendered.”

On September 2, 2005, the Nielsens filed this legal malpractice action against Beck. The complaint sought damages for representation with regard to the bankruptcy and ProLogis cases. Beck filed a motion for summary judgment contending that the lawsuit was barred by the one-year statute of limitations contained in Code of Civil Procedure section 340.6. In opposing the motion, the Nielsens argued that the statute of limitations was tolled under the “continuous representation” rule codified in subdivision (a)(2) of section 340.6. The trial court granted the motion for summary judgment. The Nielsens appealed from the subsequently entered judgment, and the Court of Appeal reversed.

The court observed that “Code of Civil Procedure section 340.6 does not expressly state a standard to determine when an attorney’s representation of a client regarding a specific subject matter continues or when the representation ends, and the legislative history does not explicitly address this question. (Gonzalez v. Kalu (2006) 140 Cal.App.4th 21, 28 (Gonzalez ).) However, a number of recent cases have addressed this standard.”

The court pointed out that in its recent case of Gonzalez, supra, 140 Cal.App.4th 21, an attorney abandoned a client. “[T]he crucial inquiry in abandonment cases is “when the client actually has or reasonably should have no expectation that the attorney will provide further legal services. [Citation.]” “In Gonzalez, we did not mean to suggest that the standard, which is to be viewed by the client’s perspective, is to be applied universally, in all cases. Rather, we compared abandonment cases to other types of malpractice lawsuits.”

The court found that there were triable issues of fact with regard to tolling the statute of limitations. “To satisfy the one year provision of Code of Civil Procedure section 340.6, the Nielsens’ legal malpractice case had to be filed within one year after the Nielsens discovered, or through reasonable diligence should have discovered, the negligence of Beck, unless the statute was tolled pursuant to subdivision (a)(2) because Beck continued to represent the Nielsens.”

The court acknowledged that a strong argument could be made that the statute of limitations could not extend any later than August 26, 2004, when the substitution of attorney form was executed because it demonstrated that the ongoing relationship between Beck and the Nielsens had ended and Beck would no longer be rendering legal advice. “However, there is contrary evidence from which a trier of fact could conclude that the relationship between Beck and the Nielsens had not been severed at the time the substitution of attorney form was signed, but rather, the statute was tolled through September 18, 2004. . . . On September 9, 14, and 18, 2004, Robert Nielsen placed telephone calls to Beck asking for advice. There is evidence that during these three telephone calls, Beck rendered professional services. Beck’s October 2004 billing statement requested payment for ‘professional services rendered’ and described the services Beck rendered as ‘negotiations, options and strategy. . . .’ Thus, there is evidence from which a trier of fact could conclude that there was an ongoing mutual relationship and activities in furtherance of that relationship through September 18, 2004. If the trier of fact so concludes, then the statute of limitations would not have expired because the lawsuit was filed on September 2, 2005.”

The court also rejected Beck’s contention that even if the statute was tolled with respect to the ProLogis litigation, it was not tolled with respect to the earlier representation involving the bankruptcy and reorganization of PrimePapers.

Beck’s representation in the bankruptcy case and Beck’s representation in the unlawful detainer proceedings can be seen to be intertwined and related, having overlapping purposes. The advice given by Beck in the bankruptcy case resulted in the unlawful detainer proceeding. Beck advised the Nielsens and PrimePapers to stop paying ProLogis. (Gold v. Weissman (2004) 114 Cal.App.4th 1195 [representation to file medical malpractice case continued with attorney’s agreement to file complaint with Board of Medical Quality Assurance as both had a shared, common purpose]; Baright v. Willis (1984) 151 Cal.App.3d 303 [retaining attorney to sue for damages as a result of workplace injury would include third party lawsuit as well as workers’ compensation case]; contra, Panattoni v. Superior Court (1988) 203 Cal.App.3d 1092.) Thus, even though the bankruptcy case was in a different forum than the unlawful detainer proceedings and involved different parties, from the above stated facts, a trier of fact could conclude that the representation of the Nielsens with regard to the unlawful detainer action involved the same specific subject matter as the bankruptcy action.

----Andrea Lynn Rice

Mercury Caualty Company v. Scottsdale Indemnity Company

LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
Appeals Attorney Los Angeles
LIABILITY UPDATE
March 28, 2008

In Mercury Casualty Company v. Scottsdale Indemnity Company 2007 Daily Journal D.A.R 16928, the Fourth Appellate District of the California Court of Appeal held that a statute regulating payments of defense costs by primary and excess insurers did not violate an excess insurer’s due process or equal protection rights; nor did it violate the contracts clause of the United States Constitution because the excess policy was issued after the effective date of the statute.

Mercury Casualty Company (Mercury) and Scottsdale Indemnity Company (Scottsdale) each issued automobile liability policies to the same insured. Mercury’s policy was primary, and Scottsdale’s was secondary, or “excess.” The insured was involved in an accident during the coverage period of both policies, and a lawsuit was filed against her. Mercury provided a defense to the lawsuit, which was ultimately settled. Mercury paid the limits of its policy toward the settlement, and Scottsdale paid the remaining amount. Mercury then demanded that Scottsdale reimburse it for a portion of the expense of providing the insured’s defense, in accordance with California Insurance Code section 11850.9(g). Scottsdale refused, and Mercury filed this action for declaratory relief against Scottsdale. Scottsdale answered the complaint, and denied liability on the basis that its policy did not impose upon it any duty to defend the insured in this case. Scottsdale further alleged that section 11580.9(g) is unenforceable as it violates the California and United States Constitutions, and that Mercury was barred from recovery based on the doctrine of “unclean hands.”

In October of 2005, Scottsdale served Mercury “with what can fairly be described as a barrage of discovery demands, all designed to ferret out the extent of Mercury’s involvement in the passage of section 11580.9(g) and to establish that the Legislature’s true motive in passing the legislation was to ‘serve the private interests of a small and favored group,’ which included Mercury and other insurers who provide primary automobile liability coverage to individual consumers. Mercury declined to provide the bulk of this discovery, contending it was not reasonably calculated to lead to the discovery of admissible evidence.”

In November of 2005, Mercury moved for summary judgment, asserting that it was entitled to payment from Scottsdale pursuant to the statute. While that motion was pending, Scottsdale moved to compel further responses to its discovery. Scottsdale’s motions were denied, but the trial court granted Mercury’s motion, and Scottsdale appealed from the judgment. The Court of Appeal affirmed.

Scottsdale contended that section 11580.9(g) is invalid and unenforceable for a number of reasons. “In making these arguments, Scottsdale takes on a Gordian task. As this court has previously explained, ‘[s]tatutes are presumed to be valid and a court will not strike down a legislative enactment unless its invalidity is clearly established. Mere doubt as to a law’s validity will not support invalidating it. . . . Furthermore, judicial review of a statute does not involve a consideration of the legislation’s wisdom. . . .’ ”

The court found that “[u]nfortunately, Scottsdale had given short shrift to the statutory language in this case, and essentially skipped right to the arguments concerning its allegedly unfair and improper purpose.” “What section 11580.9(g) actually says is this: ‘Where two or more personal policies affording valid and collectible liability insurance apply to the same motor vehicle in an occurrence out of which a loss shall arise, and one policy, as defined in subdivision (a) of Section 660, is primary, either by its terms or by operation of law, and one or more of the personal policies providing liability insurance, as defined in Section 108, are excess, either by their terms or by operation of law, then the following shall apply: [¶] (1) Each insurer shall pay its share of the defense costs. Each insurer’s share of the defense costs shall be the percentage of the total defense costs equal to the amount of damage paid by that insurer as a percentage of total damages paid by all insurers whose policies apply to that motor vehicle. [¶] (2) The term ‘defense costs’ means, for purposes of this subdivision, reasonable attorney’s fees and expenses, investigation expenses, expert witness fees, and costs allowable under Section 1033.5 of the Code of Civil Procedure.’ ”

Scottsdale asserted that section 11580.9(g) violated its constitutional right to equal protection under the law. (U.S. Const., 14th Amend.) “However, contrary to Scottsdale’s arguments, there is nothing in the language of section 115880.9(g) that ‘favors’ those insurers who sell primary automobile liability policies. The statute says nothing about relieving them of pre-existing obligations to pay the cost of defending the insured, nor does it require any ‘shifting’ of a portion of that obligation onto excess insurers, who otherwise would have no duty to defend. What the legislation does say is that all insurers, whether primary or excess, must contribute to defense costs in proportion to their share of the liability covered by the individual automobile liability policy they issued. Thus, the legislation, on its face, would seem to impose the same obligation on both primary and excess carriers who offer policies covering individual automobile liability.”

Scottsdale next argued that section 11580.9(g) is “arbitrary,” because “it draws inappropriate distinctions, serves no valid purpose, and does not “meaningfully advance[ ] the stated purpose of encouraging settlement.” According to Scottsdale, the true purpose of the legislation was to provide a private benefit to Mercury and the “small group of insurers” who, like Mercury, sell primary automobile liability policies to individual consumers. Scottsdale therefore contended that the enactment of this legislation constituted a violation of its right to due process under the 14th Amendment of the United States Constitution. “Of these assertions, only one is supported by any evidence—according to the legislative history relied upon by Scottsdale, Mercury is identified as the ‘sponsor’ of the bill which ultimately became section 11580.9(g). However, that same legislative history is actually inconsistent with the assertions that Mercury ‘wrote’ the legislation and that the Legislature gave it no independent consideration—because the bill initially sponsored by Mercury was apparently quite different from the legislation actually passed.”

In any event, we cannot accept Scottsdale’s implicit assertion that there would be anything suspicious, let alone sinister, in the fact that Mercury promoted the legislation, or even had a hand in its drafting. “Special interests” have been affecting the content of our laws for as long as our Legislatures have been passing them, and while reasonable minds can (and do) disagree about whether that effect is too significant to serve the common good, no one contends that our constitutional right to petition the government should be abolished. . . . Mercury was clearly entitled to petition the Legislature in support of any proposed legislation it chose to favor. As is Scottsdale.

Finally, Scottsdale contended the trial court erred in granting summary judgment before allowing Scottsdale to complete its discovery in this case. “We are about as unpersuaded as we can be. As we have already explained, the primary flaw in Scottsdale’s arguments is that they are largely based upon unsupported assertions about the insurance industry and a flawed analysis of the effect section 11580.9(g) purportedly has on alleged ‘categories’ of insurers. None of these assertions were dependent upon information obtainable only from Mercury.”

Neither Scottsdale nor anyone else (including us) can have legislation invalidated on the basis it was unwise or ineffectual. And Scottsdale has offered nothing to show this legislation was unconstitutional. Until it does, there is no factual issue to be disputed. The trial court correctly granted summary judgment.

----Andrea Lynn Rice

Wrongful Death of a Passenger

LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
Los Angeles Attorney
LIABILITY UPDATE
March 21, 2008

In Truong v. Nguyen 2007 Daily Journal D.A.R 16643, the Sixth Appellate District of the California Court of Appeal held that the doctrine of primary assumption of risk bars a claim for the wrongful death of a passenger who died as a result of a collision between the personal watercraft she was riding and another similar watercraft owned and operated by the defendants.

Long Truong and Yen Truong (Plaintiffs), parents of Decedent Rachael Truong (Rachael), sued Cu Van Nguyen (Cu Van) and Chuong Nguyen (Chuong) (Defendants) for wrongful death after Rachael was killed in a collision between two personal watercraft on Coyote Lake. The Polaris watercraft on which Rachael was riding could carry a driver and one passenger, both in a seated position. Anthony Nguyen (Anthony) was the driver of the Polaris. On July 29, 2005, Defendants moved for summary judgment of all the claims against them. Citing Whelihan v. Espinoza (2003) 110 Cal.App.4th 1566 (Whelihan), which involved a jet ski, and Peart v. Ferro (2004) 119 Cal.App.4th 60 (Peart), which involved a Sea-Doo personal watercraft, Defendants asserted that the doctrine of primary assumption of risk applies to the recreational activity of riding personal watercraft and was a complete bar to the causes of action in the Plaintiffs’ complaint. The trial court granted Defendants’ motion for summary judgment, finding that Plaintiffs’ claims were barred by the primary assumption of risk doctrine. Plaintiffs appealed, and the Court of Appeal affirmed.

Plaintiffs contended on appeal that the primary assumption of risk doctrine did not apply in this case because Rachael was a passenger on the personal watercraft and was not engaged in an active sporting activity at the time of the accident. “Plaintiffs urge us to distinguish between ‘ordinary’ or ‘casual’ use of the personal watercraft and ‘extreme’ use such as competitions or racing and argue that the doctrine should not apply to the casual use in this case. They contend Anthony’s declaration that there are no skills required to be a passenger on a sit-down personal watercraft raises a triable issue sufficient to defeat summary judgment. We conclude the court properly granted summary judgment of the claims against Cu Van because the doctrine of primary assumption of risk applies and is a complete defense. . . .”

The appellate court observed that the California Supreme Court examined the doctrine of assumption of risk in the seminal cases of Knight v. Jewett (1992) 3 Cal.4th 296, 305-315 (Knight) and Ford v. Gouin (1992) 3 Cal.4th 339 (Ford), and recently revisited the doctrine in Shin v. Ahn (2007) 42 Cal.4th 482 (Shin) and examined the question “whether the primary assumption of risk doctrine should apply to noncontact sports, such as golf.”

In Shin, the Court had held that the primary assumption of the risk doctrine applies to golf, and that being struck by a carelessly hit ball is an inherent risk of the sport. The Court had summarized the applicable rule, stating: “In Knight . . ., we considered the duty of care that should govern the liability of sports participants. We recognized that careless conduct by coparticipants is an inherent risk in many sports, and that holding participants liable for resulting injuries would discourage vigorous competition. Accordingly, those involved in a sporting activity do not have a duty to reduce the risk of harm that is inherent in the sport itself. They do, however, have a duty not to increase that inherent risk. [Citation.] Thus, sports participants have a limited duty of care to their coparticipants, breached only if they intentionally injure them or ‘engage[ ] in conduct that is so reckless as to be totally outside the range of the ordinary activity involved in the sport.’ This application of the primary assumption of risk doctrine recognizes that by choosing to participate, individuals assume that level of risk inherent in the sport.”

The appellate court pointed out that since the decision in Knight, which involved a recreational game of touch football, “our state Supreme Court and appellate courts have examined the applicability of the primary assumption of the risk defense in a wide variety of cases involving sports and recreational activities. In Ford, supra, 3 Cal.4th 339, the companion case to Knight, the Supreme Court expanded the doctrine and applied it to the noncompetitive, nonteam sporting activity of waterskiing.”

Plaintiffs attempted to differentiate the present case from Whelihan, supra, and Peart, supra, arguing that the primary assumption of the risk doctrine did not apply because Rachael was just a passenger on the watercraft. Plaintiffs distinguished between “ordinary” or “casual” use of the personal watercraft and “extreme” use like professional exhibitions or racing, and argued that the assumption of the risk doctrine should not apply to the casual use in this case. The appellate court rejected this argument.

The appellate court found support for its analysis in Whelihan, supra, where the Court of Appeal concluded that jet skiing is “the type of sporting activity that meets the criteria governing application of the doctrine of primary assumption of risk.” The Whelihan court explained: “As a matter of common knowledge, jet skiing is an active sport involving physical skill and challenges that pose a significant risk of injury, particularly when it is done—as it often is—together with other jet skiers in order to add to the exhilaration of the sport by racing, jumping the wakes of the other jet skis or nearby boats, or in other respects making the sporting activity more challenging and entertaining.” In response to the Whelihan plaintiff’s argument that the trial court erroneously assumed “ ‘that the litigants were contestants in some sort of consensual competition event and/or spectator sport,’ ” that court noted that “the doctrine applies equally to competitive and noncompetitive but active sports.”

The court in the present matter pointed out that, while the vessel at issue in Whelihan was a “jet ski,” “[b]oth the stand-up models like the original Jet Ski and the sit-down style personal watercraft like the Polaris and the Yamaha are open to the elements; their riders are not protected by a hull or a cabin. Riders of both types of vessels wear flotation devices in the event they fall from the personal watercraft. The parties in Whelihan operated their vessels at high speeds in close proximity to one another while executing turns and other maneuvers. In Ford v. Polaris Industries, Inc. (2006) 139 Cal.App.4th 755, 760 (Polaris ), there was evidence that when a Polaris personal ‘watercraft is accelerating and encounters a wave, the passenger can “get some lift” off the seat, and if the passenger is not well coupled to the craft he or she may lose balance and roll off.’ In that case, the passenger suffered serious internal, orifice injuries after being ejected off the back of the vessel into the stream of water thrust by the jet nozzle. (Ibid.) Regardless of the statistics in the NTSB report regarding the frequency of injuries involving personal watercraft, given the nature of the vessel and the manner in which it is used, the Whelihan court was correct to conclude that the activity of ‘jet skiing’ presented a significant risk of injury.”

In urging the court to reject Peart, Plaintiffs attacked the “fundamental factual underpinning of the case,” arguing that there was no evidence that sit-down personal watercraft are essentially identical to stand-up personal watercraft. “However, Plaintiffs also refer us to footnote 5 of the [Peart] opinion where the court stated: ‘In deposition testimony undisputed by appellants, respondent Ferro described stand-up jet skis and sit-down Sea-Doos as almost identical in terms of similarity of engines, and manner of forward propulsion, turning, slowing down and general maneuvering. The only difference mentioned by Ferro—aside from that between standing and sitting—was with regard to what happens when one falls off. . . .’ Thus, there is no merit to Plaintiffs’ claim that there was no factual support for the [trial] court’s conclusions.”

----Andrea Lynn Rice

Michel v. Moore & Associates

LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
Los Angeles Appellate Attorney
LIABILITY UPDATE
March 14, 2008

In Michel v. Moore & Associates, Inc. 2007 Daily Journal D.A.R 16495, the Second Appellate District of the California Court of Appeal held that a real estate broker may be liable to a buyer on a theory of negligent nondisclosure.

Mike Kirkpatrick was a real estate agent working for defendant Larry Moore & Associates Realtors, Inc. (Moore), a licensed real estate broker. Sometime around the beginning of 2000, he inspected a home in Rolling Hills Estates owned by a friend’s parents. Hoping to become the listing agent if the parents decided to sell their house, he took notes of the property’s defects, including possible water leaks, cracked interior walls, and damage to the pool. If he won the listing, he planned to use his notes to identify needed repairs and possible disclosure to potential buyers.

About six months later in June 2000, the house was on the market. Kirkpatrick, who had not received the sellers’ listing, showed the house to plaintiffs Carl and Sydne Michel, who were represented by agent Nicola Lagudis (Lagudis), a colleague of Kirkpatrick also working for Moore. During the home tour, Kirkpatrick did not point out any of the defects from his notes. Plaintiffs submitted an offer to buy the house. Plaintiffs and the sellers shortly thereafter agreed on the terms of sale and entered escrow. At the end of July, plaintiffs’ agent Lagudis visually inspected the property and gave plaintiffs her obligatory transfer disclosure statement (“TDS”). The TDS noted that cracks had been patched and painted. The TDS did not, however, disclose some of the defects listed in Kirkpatrick’s notes. Although mindful of his notes as he reviewed the TDS, he did not tell Lagudis about them, nor did he augment her TDS with anything from those notes. The Michels thus never knew the contents of Kirkpatrick’s notes before escrow closed.

Plaintiffs started remodeling their backyard and pool. To do so, they needed a permit, which required a soil engineer to inspect their property. The engineer discovered poor top soil and fill had caused significant instability and ground movement on the property. Upset by the engineer’s report, the Michels met with Kirkpatrick in January 2001. They told him about the soil instability and cracks in the walls, which would likely cost about half a million dollars to fix. Kirkpatrick replied he had seen during his inspection before the house was put on the market cracks big enough to slip a coin into. Hearing about his notes for the first time, the Michels asked for a copy, which Kirkpatrick gave them.

In September 2002, the Michels sued Moore. They alleged causes of action for violation of Civil Code section 2079 for Moore’s failure to competently inspect the property. They also alleged a cause of action for fraudulent concealment for the failure of Lagudis’s TDS to disclose defects known by Moore. And, finally, they alleged a cause of action for negligent nondisclosure in Moore’s not telling the Michels about problems Moore knew about the property.

The case went to trial. Before the Michels’ opening statement, Moore moved for a judgment of nonsuit on the Michels’ cause of action for negligent nondisclosure. Moore argued California law required that Moore’s negligence involve an affirmative assertion, but negligence in failing to disclose a fact was not actionable. The court granted Moore’s motion. Trial proceeded only on the Michels’ causes of action for violation of Civil Code section 2079 (section 2079) and fraudulent concealment. The jury returned a verdict for Moore on both causes of action. Rejecting the claim under section 2079, the jury found Moore did not fail to conduct a reasonably competent and diligent visual inspection of the property, and did not fail to disclose to the Michels any material fact about the property that an investigation would reveal. Similarly rejecting the claim for fraudulent concealment, the jury found Moore did not conceal or suppress any material fact from the Michels. The court entered judgment for Moore. This appeal from the grant of nonsuit followed, and the Court of Appeal reversed.

The court found that the court’s dismissal of the Michels’ cause of action for negligent nondisclosure was error because that cause of action involved elements different from the Michels’ section 2079 and fraudulent concealment causes of action. (Karoutas v. HomeFed Bank (1991) 232 Cal.App.3d 767, 771 [recognizing negligent nondisclosure where bank did not disclose soil instability to buyer purchasing property after bank foreclosed on the property].) “For those latter two causes of action submitted to the jury, Lagudis may very well have been competent in her visual inspection of the property in preparing her TDS for the Michels AND Kirkpatrick may very well have had no fraudulent intent in not telling the Michels about his inspection and notes before escrow closed—circumstances justifying the jury’s verdict for Moore on the section 2079 and fraud causes of action—but that does not mean Moore did not injure the Michels by not telling them before they bought their house about Kirkpatrick’s notes.”

The court observed that a broker has a fiduciary duty to its client. (Civ. Code, § 2079.24; Field v. Century 21 Klowden-Forness Realty, supra, 63 Cal.App.4th at p. 25 [“a broker’s fiduciary duty to his client requires the highest good faith and undivided service and loyalty”].) The fiduciary duty is greater than the negligence standard of due care under section 2079. (Section 2079.2 [standard of care is of a “reasonably prudent real estate licensee”].) “Thus a broker can be professionally competent under section 2079 without satisfying the greater duty of a trusted fiduciary. As Field, supra, explained, ‘the fiduciary duty owed by brokers to their own clients is substantially more extensive than the nonfiduciary duty codified in section 2079.’ ”

A fiduciary must tell its principal of all information it possesses that is material to the principal’s interests. (L. Byron Culver & Associates v. Jaoudi Industrial & Trading Corp. (1991) 1 Cal.App.4th 300, 304; 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, § 794, p. 1149; 2 Miller & Starr, Cal. Real Estate (3d ed.2000), §§ 3.25, p. 120, 3:27, p. 149, 4:17, p. 41.) A fiduciary’s failure to share material information with the principal is constructive fraud, a term of art obviating actual fraudulent intent. (Civ. Code, § 1573.)

[Plaintiffs’] negligent nondisclosure/constructive fraud theory relieved them of the burden of needing to prove [defendant] intended to defraud them, a much easier row to hoe than proving actual intent to defraud for fraudulent concealment.

Defendant Moore argued that no difference existed between the Michels’ causes of action for negligent nondisclosure and violation of section 2079 because the statute codifies a claim for common law negligence. “Hence, [defendant] concludes, the jury’s rejection of the Michels’ cause of action for violation of section 2079 necessarily decided in [defendant’s] favor the question of [defendant’s] common law negligence. . . . [However, defendant’s] conclusion does not follow because it rests on a flawed premise. Section 2079 codifies a negligence standard of care for one particular task that the law imposes on brokers—the obligation (by a seller’s agent) to visually inspect the property and disclose the results of that inspection to the buyer. [Plaintiffs’] cause of action for negligent nondisclosure rests, in contrast, on Moore’s fiduciary duty to disclose material information within its possession. It was immaterial how the fiduciary obtained the information; it has a duty to disclose the information to its principal. [Plaintiffs’] two causes of action were not the same: As Field, supra, 63 Cal.App.4th 18, observed, ‘the fiduciary duty owed by brokers to their own clients is substantially more extensive than the nonfiduciary duty codified in section 2079.’ ”

----Andrea Lynn Rice

Edmondson Property Management v. Kwock

LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
Appellate Attorney Los Angeles
LIABILITY UPDATE
March 7, 2008

In Edmondson Property Management v. Kwock 2007 Daily Journal D.A.R 15967, the Fifth Appellate District of the California Court of Appeal held that a landlord’s obligation to indemnify its property manager under a Type II indemnity agreement did not bar an equitable contribution claim brought by the landlord’s insurer against the manager’s insurer.

A personal injury action was filed after a seven-year-old child fell off the roof of a storage shed located adjacent to the apartment she shared with her mother and on property owned by Lin Kwock (Kwock). Kwock employed Edmondson Property Management (Edmondson) to manage the apartment complex where the child lived. Both Kwock and Edmondson were named as defendants in the personal injury action. Kwock was insured by California Capital Insurance Company (Capital). Edmondson was an additional insured under the Capital policy by virtue of its role as property manager. Additionally, Farmers Insurance Group (Farmers) insured Edmondson under a general business liability policy. Capital defended Kwock and Farmers and Capital shared the defense of Edmondson in the personal injury action. Ultimately, the lawsuit settled within Capital’s policy limits, but Farmers refused to contribute to the settlement, claiming that the indemnity provision of the property management agreement rendered its coverage excess and to require contribution would be to nullify the indemnity agreement.

Edmondson filed a cross-complaint in the personal injury action against Kwock for indemnification, subrogation, and declaratory relief, asserting that the indemnity provisions of the property management contract governing their relationship required Kwock to fully indemnify Edmondson. The personal injury action settled pursuant to a negotiated agreement in which Capital paid $550,000 to the plaintiffs. The agreement, while disclaiming all liability for the child's injuries, apportioned the liability as follows: $50,000 from Kwock and $500,000 from Edmondson. Capital negotiated the agreement on behalf of both Kwock and Edmondson, and the agreement resolved all claims against these two individuals. The agreement did not resolve the cross-complaint filed by Edmondson against Kwock.

Capital then filed an action against Farmers seeking subrogation, contribution, and indemnity for the amount paid to settle the personal injury action. Farmers filed a cross-complaint seeking equitable subrogation and indemnification for the amounts it expended in defense of the personal injury action. The two were consolidated and tried before the trial court on a stipulated statement of facts and documentary evidence.

In its judgment, the trial court found (1) that the indemnity provision in the property management agreement was a “Type II” provision, indemnifying Edmondson only for passive negligence; (2) because Edmondson had knowledge that the child had played unsupervised on the roof of the shed and had not acted to prevent the fall, its alleged negligence was active, not passive, and the indemnity provision did not apply; (3) that Farmers’s policy was not intended to be an excess policy; (4) both policies bore the same level of liability; and (5) each was liable for 50 percent of the settlement paid. Farmers appealed, and the Court of Appeal affirmed.

The appellate court noted that a “Type II” provision was classified as a “general” indemnity clause in Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622. “It is characterized that way because it does not explicitly address the issue of the indemnitee’s negligence. (Id. at p. 628.) These clauses may be interpreted to cover an indemnitee’s passive negligence, but generally will not include an indemnitee’s active negligence. (Ibid; see also MacDonald & Kruse, Inc. v. San Jose Steel Co. (1972) 29 Cal.App.3d 413, 419-420.)”

The “crux of the issues” presented on appeal was whether the indemnity provision found in the property management contract precluded Capital from seeking contribution from Farmers for the settlement paid. The appellate court observed that, generally, when multiple insurance carriers insure the same insured and cover the same risk, each insurer may assert a claim against a coinsurer for equitable contribution when it has undertaken the defense or paid a liability on behalf of the insured. Equitable contribution is not a matter of contract and exists independently of the insured’s rights under the policy. “ ‘It is not based on any right of subrogation to the rights of the insured, and is not equivalent to “ ‘standing in the shoes’ ” of the insured . . .’ ” (Hartford Casualty Ins. Co. v. Mt. Hawley Ins. (2004) 123 Cal.App.4th 278, 288.)

Farmers rested its contrary argument on the indemnity provision in the property management agreement. It argued that Farmers and Capital did not equally and concurrently share the liability generated by the child's injury because, pursuant to the negotiated indemnity provision, Kwock assumed the obligation of providing insurance for this particular risk, making Capital the primary insurer and Farmers the excess insurer. “According to Farmers, to hold otherwise would nullify the indemnification provision of the property management agreement. . . . In other words, although Farmers’s policy was written as a primary policy, the contract between Kwock and Edmondson defeats an equitable claim for contribution.” The Court of Appeal rejected this argument.

The appellate court looked to the language of the agreement negotiated between Edmondson and Kwock. The contract provided in a section titled “Owner’s Obligations” as follows: “Owner shall indemnify and save the Agent harmless from any and all costs, expenses, attorney’s fees, suits, liabilities, damages from or connected with the management of the property by Agent, or the performance or exercise of any of the duties, obligations, powers, or authorities herein or hereafter granted to Agent. [¶] Owner shall not hold Agent liable for any error of [judgment], or for any mistake of fact or law, or for anything which Agent may do or refrain from doing hereinafter, except in cases of willful misconduct or gross negligence.”

The court agreed with the trial court that the cited language is a general-indemnity provision and did not expressly address whether Kwock would fully indemnify Edmondson against third-party claims generated as a result of Edmondson’s own negligence. It also agreed with the trial court that the second quoted paragraph did not convert the general language of the first paragraph into an express agreement to indemnify even in cases of active negligence.

The court went on to reject Farmers’s argument that whether the indemnity provision was a Type II or Type I provision was a red herring in this case because the underlying action settled without a determination of the liability issue. “[T]he insurance company seeking to defeat a claim of equitable contribution must prove that the indemnification agreement would bar any recovery between the insureds before it can successfully claim equitable contribution would negate the negotiated contract between the insureds.”

In the absence of any contractual provision converting Farmers’s primary policy to an excess policy, we agree with the trial court and will affirm its application of the general rules of equitable contribution. Since both Farmers and Capital issued primary insurance policies covering the same risk at the same level of insurance, Farmers must pay its fair share of the liability paid by Capital in settlement of the personal injury action. The trial court apportioned the responsibility to 50 percent for each party. The apportionment has not been challenged on appeal, and we see no reason to disturb the trial court's conclusion that this is a fair apportionment.

----Andrea Lynn Rice

Romero v. Pacific Gas & Electric Company

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LIABILITY UPDATE
February 29, 2008

In Romero v. Pacific Gas & Electric Company 2007 Daily Journal D.A.R 15957, the Third Appellate District of the California Court of Appeal held that a tortfeasor waives the protection of the “one action rule” when it enters into a settlement of a wrongful death action that does not include an heir who has been made a nominal defendant in the action pursuant to section 382 but has not been served.

The son of plaintiff Jose Romero and Linda Brekelmans was killed in an accident involving defendant Pacific Gas & Electric Company (PG & E). Linda Brekelmans brought a wrongful death action against PG & E, naming but not serving her husband as a nominal defendant under Code of Civil Procedure section 382. She settled the action with PG & E without the participation of Romero and it was dismissed. Romero then brought this action for wrongful death against PG & E. Romero appealed from the judgment of dismissal after the trial court sustained PG &E’s demurrer without leave to amend. The Court of Appeal reversed.

A cause of action for wrongful death is authorized by Code of Civil Procedure section 377.60. That statute has been interpreted to authorize only a single action, in which all the decedent’s heirs must join. Any heir who does not consent to be joined as a plaintiff in the wrongful death action must be named as a defendant pursuant to Code of Civil Procedure section 382. (Salmon v. Rathjens (1907) 152 Cal. 290, 295.) If an heir is not included in the original wrongful death action, the heir may not subsequently bring an independent action against the tortfeasor unless the tortfeasor had knowledge of the existence of the heir at the time of the settlement. (Valdez v. Smith (1985) 166 Cal.App.3d 723, 726-727.)

The court observed that a tortfeasor waives the protection of the one action rule by settling with less than all the known heirs if such heirs are not a party to the action. (Valdez v. Smith, supra, 166 Cal.App.3d 723 at p. 731.) An heir named as a nominal defendant under section 382 but not served with a summons and complaint is not properly joined in the action, and accordingly is not a party to the action. (Ruttenberg v. Ruttenberg (1997) 53 Cal.App.4th 801, 804.) “Nevertheless, PG & E argued that it was protected by the one action rule because Romero was ostensibly joined in the action, and PG & E had no knowledge that Romero had not been served. It seeks implied reliance on the bare inference that because Romero was named as a nominal defendant under section 382 that it could act as if he had elected not to seek recompense for the wrongful death of his son. We disagree. . . . A person named as a nominal defendant and properly joined is ‘in reality, [a] plaintiff [ ] in the case.’ (Watkins v. Nutting (1941) 17 Cal.2d 490, 498, 110 P.2d 384.) . . .”

The court noted that, in this case, Romero was not served and was not a party to the action. “It is not a defense to the waiver rule that the defendant was unaware that a known heir joined as a nominal defendant was not served. The defendant has the burden and the means of determining whether an heir has been served and accordingly its failure to do so does not take the case out of the rule of the Valdez case. Moreover, the naming of an heir as a nominal defendant is notice of the existence of the heir sufficient to bring the case within Valdez v. Smith, supra.”

The court pointed out that the one action rule does not apply if the tortfeasor voluntarily elects to settle the case with less than all of the heirs, having knowledge of the omitted heir’s existence and status as an heir. (Valdez v. Smith, supra, 166 Cal.App.3d at p. 731.) Valdez held that “when . . . the defendant in a pending action has actual knowledge of the existence, identity and status of an omitted heir and fails to have said omitted heir made a party to the action, a settlement and dismissal with prejudice of the pending action will not bar a subsequent action by the omitted heir against the defendant.”

The exception to the one action rule also applies if the tortfeasor is on notice of the omitted heir’s existence, whether or not it has actual knowledge of the existence of such heirs. (Gonzales v. Southern California Edison Co. (1999) 77 Cal.App.4th 485, 491.) The court in Gonzales held that even though the deposition testimony did not confer actual knowledge of the parents’ status as an heir, it put the tortfeasors on notice and they should be held to both actual knowledge or knowledge that reasonably could be discovered through investigation. The court stated that knowledge of the heirs’ existence and status as heirs should be attributed to “wrongful death defendants that learn of the existence and identity of possible additional heirs who are not parties, yet proceed to settle in short order with those who are parties.” (Ibid.)

The only distinction between this case and Valdez v. Smith, supra, is that here the heir was named as a defendant in the prior action pursuant to section 382. However, merely naming a person as a nominal defendant under section 382 is not the equivalent of joining the person in the lawsuit. A party is not properly joined unless served with a summons and complaint. (Ruttenberg v. Ruttenberg, supra, 53 Cal.App.4th at p. 808.) Consequently, this case falls squarely under the authority of Valdez v. Smith, supra, 166 Cal.App.3d 723 and Gonzales v. Southern California Edison Co., supra, 77 Cal.App.4th 485, which hold that a defendant who is aware of the existence of additional non-party heirs may not settle the action, then invoke the one action rule.

The court pointed out that waiver of the protection of the one action rule turns on the defendant’s knowledge of the existence or possible existence of an heir. (Valdez v. Smith, supra, 166 Cal.App.3d at p. 731 [settlement of first action does not bar subsequent action where defendant had “actual knowledge of the existence, identity and status of an omitted heir and fail[ed] to have said omitted heir made a party to the action. . . .]; Gonzales v. Southern California Edison Co., supra, 77 Cal.App.4th at p. 491 [defendants may not invoke the one action rule where they “learn of the existence and identity of possible additional heirs who are not parties, yet proceed to settle in short order with those who are parties.”].) The naming of an heir as a nominal defendant manifestly puts the defendant on notice of the heir’s existence regardless whether the heir has been joined by service of process.

PG & E took the position that it could infer Romero was properly joined from the fact that he was named a defendant pursuant to section 382. “We disagree. . . . [T]he burden is on the tortfeasor wishing to avail itself of the one action rule to cause a known heir to be joined in the action.”

More importantly, since PG & E was a party to the action it would have been a simple matter for it to determine whether Romero had been served with the summons and complaint by reviewing the court’s file. As indicated in Valdez v. Smith, supra, the burden is on the tortfeasor wishing to avail itself of the one action rule to cause a known heir to be joined in the action. (166 Cal.App.3d at p. 728 [“Defendants could have made a timely objection and had the action abated or at least could have made [the heir] a party to the action. . . . [T]he failure of defendants to do so should not estop the plaintiff from bringing his rightful claim for wrongful death.”].) Where a tortfeasor wishes to avail itself of the protections of the one action rule, the burden is on the tortfeasor to ascertain whether the heirs named as defendants have been properly joined.

----Andrea Lynn Rice

Wilson v. 21st Century Insurance Company

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LIABILITY UPDATE
February 22, 2008

In Wilson v. 21st Century Insurance Company 2007 Daily Journal D.A.R 17597, the California Supreme Court held that an insurance company may be sued for bad faith if it reaches a medical conclusion about an insured’s first party claim without a good faith investigation of the claim and without a reasonable basis for genuine dispute of the claim.

An intoxicated driver made a left turn directly in front of the vehicle plaintiff Reagan Wilson (Wilson) was driving, resulting in a collision. She made a claim under her underinsured motorist coverage with her insurer, defendant 21st Century Insurance Company (21st Century). In February 2001, Donald Hall, Wilson’s attorney, told Paul Le, 21st Century’s claims examiner, that his client wanted to make a claim on her underinsured motorist (UIM) coverage. In April, after Wilson reached a settlement with the other driver for his $15,000 liability coverage, Le asked Hall to send 21st Century a demand package so he could evaluate the UIM claim.

Hall sent Le the demand letter and documentation, including medical reports from Dr. Douglas Jackson, who found no fracture degenerative change or soft tissue swelling, and those of Dr. Edward Southern, whose clinical impression was of degenerative disk changes resulting from the accident. Hall told Le that after the accident Wilson had made a long-planned trip to Europe, which was “ruined” by her injuries. At the time of the demand letter, Hall wrote, she was studying in Australia but was still experiencing pain “on a regular basis.” The general damages resulting from such an injury at Wilson’s young age, Hall asserted, exceeded the $100,000 UIM policy limits. He requested that 21st Century pay Wilson $85,000, the UIM policy benefit remaining after Wilson’s recovery of $15,000 from the other driver.

Le and Hall discussed the claim by telephone on July 6, 2001. Le asked Hall if there was any additional medical documentation for the claim. Hall said there was not, but that Dr. Southern’s report indicated disk changes that would affect Wilson later in life. Le then asked, “[w]hy is she in Australia if [her] inj[ury][is] so severe?” and observed that Wilson “is young and may not experience any pain in future from deg[enerative] disk.” Le also noted his own opinion that the “MRI does not show bulge touching the nerves.” By a memorandum dated July 9, 2001, Le sought and obtained the approval of his superior to reject Wilson’s UIM claim. Le had not attempted to contact Dr. Southern and did not speak with any other medical practitioner about the claim.

Wilson then initiated arbitration of the claim. After a diskogram was performed in June 2002, one orthopedic surgeon recommended spinal fusion surgery. In 2002, after learning of the surgery recommendation (through deposing Wilson in preparation for arbitration), 21st Century retained independent physicians to examine Wilson and review her medical records. Stephen Nagelberg, the retained orthopedic surgeon, reported to 21st Century that Wilson’s neck pain was caused by disk injuries, which resulted from the November 2000 automobile accident. He recommended surgery. Allan Chan, the claims examiner now handling the case, promptly prepared a revised evaluation of Wilson’s claim and 21st Century paid Wilson the remaining $85,000.

Wilson sued 21st Century, alleging in her second cause of action that 21st Century’s denial of benefits in July 2001, and the resulting two-year delay until the UIM claim was paid in July 2003, breached the covenant of good faith and fair dealing and caused her damages in the form of lost interest on the policy benefits, attorney fees and costs incurred to recover payment, and general damages including emotional distress. 21st Century moved for summary adjudication of this cause of action on the ground that its 2001 decision to refuse the UIM demand was, in light of the facts known to the company at the time, reasonable as a matter of law. The superior court granted the motion. The Court of Appeal reversed, holding triable issues of fact existed as to whether 21st Century had thoroughly investigated and objectively evaluated Wilson’s UIM claim before denying it. The Supreme Court granted 21st Century’s petition for review and affirmed the decision of the Court of Appeal reversing the grant of summary judgment.

The Court observed that while an insurance company has no obligation under the implied covenant of good faith and fair dealing to pay every claim its insured makes, the insurer cannot deny the claim “without fully investigating the grounds for its denial. . . . By the same token, denial of a claim on a basis unfounded in the facts known to the insurer, or contradicted by those facts, may be deemed unreasonable. ‘A trier of fact may find that an insurer acted unreasonably if the insurer ignores evidence available to it which supports the claim. The insurer may not just focus on those facts which justify denial of the claim.’ ”

Applying these principles to the facts before it, the Court agreed with the Court of Appeal that plaintiff had demonstrated a triable issue of fact as to whether 21st Century’s decision to deny her UIM claim in July 2001 was made unreasonably and in bad faith. “Wilson complained of neck pain after the accident and in subsequent weeks and months. On examination of the patient and her X-ray, Dr. Southern, an orthopedist, concluded a segment of her cervical spine was ‘obviously degenerative,’ that such a change was unusual at her age, and was probably due to her recent automobile accident. The MRI he ordered confirmed bulging disks in the vertebrae of her neck. Wilson was continuing to feel neck pain in June 2001 when, through her attorney, she made the UIM claim. [¶] Despite his receipt of this information, 21st Century’s claims examiner asserted in his internal denial memo that it was ‘unlikely’ the disk bulges were caused by the accident and that because Wilson was ‘on vacation’ in Australia her claims of severe pain should be ‘discount[ed].’ Having received approval to deny the claim, he then did so on the ground that Wilson’s pain was due only to ‘soft tissue injury superimposed by a preexisting degenerative disc disease.’ ”

Unfortunately for 21st Century’s summary judgment position, a jury could reasonably find that nothing in the material the claims examiner had received justified these conclusions. 21st Century directs us to no medical report or opinion on the basis of which the claims examiner could reasonably have ignored or disbelieved Dr. Southern’s conclusion that the changes in Wilson’s cervical spine were probably caused by her recent trauma; as far as the record reveals, the claims examiner had no basis for his contrary conclusion that such a causative link was “unlikely.” Nor is there any apparent medical basis for the claims examiner’s assertion that Wilson had “preexisting degenerative disc disease.” No such diagnosis appears in the medical reports submitted to 21st Century, and we are directed to no evidence that the company’s claims examiner had sufficient medical expertise to make such a diagnosis himself. As to the fact that Wilson was studying in Australia (not on vacation, as the claims examiner baselessly asserted) in 2001, the Court of Appeal aptly observed that “it is as possible to suffer ‘severe pain’ in Australia as in Southern California.”

The Court acknowledged that 21st Century was not obliged to accept Dr. Southern’s opinion “without scrutiny or investigation.” However, “[t]o the extent it had good faith doubts, the insurer would have been within its rights to investigate the basis for Wilson’s claim by asking Dr. Southern to reexamine or further explain his findings, having a physician review all the submitted medical records and offer an opinion, or, if necessary, having its insured examined by other physicians (as it later did). What it could not do, consistent with the implied covenant of good faith and fair dealing, was ignore Dr. Southern’s conclusions without any attempt at adequate investigation, and reach contrary conclusions lacking any discernable medical foundation. . . .”

----Andrea Lynn Rice