Insurance Coverage & Bad Faith - Winter 2021

Marissa Janney v. CSAA Insurance Exchange

Insurer’s Payment of Actual Replacement Cost of Home Bars Claim for Bad Faith

(December 2021) - In Janney v. CSAA In. Exch., 70 Cal.App.5th 374 (October 15, 2021), the California Third District Court of Appeal affirmed a summary judgment in favor of CSAA Insurance Exchange (“CSAA”) in connection with a breach of contract and bad faith lawsuit filed by Peggy Baltar in connection with CSAA’s adjustment of a property loss involving the destruction of Baltar’s home as result of the Boles fire in September 2014. Baltar purchased a homeowner’s policy from CSAA that afforded dwelling coverage for property loss. Baltar contended that CSAA acted in bad faith by (1) failing to pay the total available policy limits available for the replacement of her home based on an estimate for rebuilding the home that exceeded the total available limits, (2) failing to timely pay for landscaping damages, and (3) failing to pay for the entire cost of debris removal covered by the policy.

The trial court granted CSAA’s motion for summary judgment. The trial court held that since CSAA paid the actual replacement cost of Baltar’s home, as well as the cost of landscaping after receiving information clarifying the amount owed, CSAA did not breach its contract with Baltar, and acted reasonably in adjusting her claim such that Baltar’s claim for bad faith failed as a matter of law. The trial court also found that that Baltar’s claim for additional debris removal costs was barred because the City of Weed (where the home was located) agreed to waive costs of debris removal.

The California Court of Appeal affirmed the trial court’s entry of summary judgment in favor of CSAA. The Court of Appeal reasoned as follows in connection with each of Baltar’s claims of bad faith:

  • Replacement Cost Estimate

Baltar argues disputed issues of material fact exist with respect to whether CSAA breached the insurance policy by failing to provide a complete and accurate estimate of replacement cost or adjust Baltar's replacement cost estimate. We are not persuaded. As stated previously, the loss settlement provisions of Baltar's policy entitled her to recover the “‘replacement cost’” of the dwelling “subject to the following: we will pay the cost of repair or replacement, without deduction for depreciation, but not exceeding the smallest of the following amounts: (a) The limit of liability under this policy applying to the ‘building structure’; (b) The ‘replacement cost’ of that part of the ‘building structure’ damaged for equivalent construction and use on the same premises; or (c) The amount actually and necessarily spent to repair or replace the damaged ‘building structure.’”

In Conway v. Farmers Home Mut. Ins. Co. (1994) 26 Cal.App.4th 1185 [31 Cal. Rptr. 2d 883] (Conway), the court interpreted an identical provision. The court first explained, relying on Hess v. North Pacific Ins. Co. (1993) 122 Wash.2d 180 [859 P.2d 586], that “the genesis” of such provisions was the recognition that an insured covered by a traditional policy, providing only for payment of actual cash value of the property, ‘“might not be made whole because of the increased cost to repair or to rebuild. Thus, replacement cost coverage became available. ...’ [Citation.]” (Conway, atp. 1189.) The court also adopted the Hess court’s interpretation of the various measures of loss settlement: ‘““The first measure, of course, limits the amount available for replacement to policy limits, while the second relates to a theoretical or hypothetical measure of loss: that is, the replacement cost of rebuilding the identical structure as one limit of the company's liability. This particular limitation does not require repair or replacement of an identical building on the same premises, but places that rebuilding amount as one of the measures of damage to apply in calculating liability under the replacement cost coverage. The effect of this limitation comes into play when the insured desires to rebuild either a different structure or on different premises, in those instances, the company's liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises. Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds.

““‘Finally, the third limitation of liability strengthens the requirement that liability of the company does not exist until repair or replacement is made. The purpose of this limitation is to limit recovery to the amount the insured spent on repair or replacement as yet another measure of the loss liability of the insurer. This third valuation method is intended to disallow an insured from recovering, in replacement cost proceeds, any amount other than that actually expended.” [Citation.]’” (Conway, supra, 26 Cal.App.4th at p. 1190, ; see also Everett v. State Farm General Ins. Co. (2008) 162 Cal.App.4th 649, 658 [75 Cal. Rptr. 3d 812].)

Thus, Baltar's policy entitled her to the smallest of the following three measures for the loss of her dwelling: (1) the policy limit, (2) the replacement cost for equivalent construction and use on the same premises, and (3) the amount actually and necessarily spent to replace the dwelling.

There is no dispute as to the policy limit: $329,700. There is also no dispute that Baltar spent $255,088 to replace the damaged home. There is a dispute over the second potential loss settlement measure, the replacement cost. As set forth in greater detail above, CSAA initially estimated the replacement cost to be $180,984.39, subject to increases for various open line items in the estimate. Not satisfied with that estimate, Baltar commissioned a second replacement cost estimate, which resulted in a replacement cost measure of $346,998.57. CSAA's large loss specialist, McMullen, later compared the competing estimates and adjusted the replacement cost measure to $227,611.93.

However, these disputed amounts for the replacement cost are immaterial to the ultimate issue of whether CSAA owes Baltar additional money under the policy for replacement of the dwelling. This is because Baltar’s replacement cost estimate exceeds the policy limit for the dwelling, making it the greatest of the potential loss settlement measures, and the policy expressly limits her recovery to the smallest of the three amounts. In theory, this policy provision limited her to the adjusted replacement cost measure of $227,611.93 since that was the smallest of the three loss settlement measures. However, CSAA ultimately paid Baltar the greater amount that she actually and necessarily spent to replace the home.

Stated simply, CSAA did not insist on paying Baltar the smaller adjusted replacement cost amount calculated by McMullen and instead paid her the greater amount she actually spent replacing the home. We agree with the trial court's conclusion that she is not entitled to more than this as a matter of law. Again, the ‘““third valuation method is intended to disallow an insured from recovering, in replacement cost proceeds, any amount other than that actually expended.” [Citation.]’” (Conway, supra, 26 Cal.App.4th at p. 1190.) There is no dispute that Baltar received the amount she actually expended.

Baltar also contended that CSAA acted in bad faith by violating the California Fair Claims Act as set forth in the California Code of Regulations, 10 CCR 2695.4 and 10 CCR 2695.9. The Court of Appeal rejected Baltar’s contentions and held as follows:

The first of these regulations provides in relevant part: “Every insurer shall disclose to a first party claimant or beneficiary, all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant. When additional benefits might reasonably be payable under an insured's policy upon receipt of additional proofs of claim, the insurer shall immediately communicate this fact to the insured and cooperate with and assist the insured in determining the extent of the insurer's additional liability.” (Cal. Code Regs., tit. 10, § 2695.4, subd. (a).) Baltar argues CSAA violated this provision by providing her with a “lowball” replacement cost estimate that “excluded entire categories of reasonable and necessary costs," thereby “refusing to advise [her] of the full amount of measure (b)” and concealing “available dwelling benefits.” The second cited regulation provides in relevant part: “If losses are settled on the basis of a written scope and/or estimate prepared by or for the insurer, the insurer shall supply the claimant with a copy of each document upon which the settlement is based. The estimate prepared by or for the insurer shall be in accordance with applicable policy provisions, of an amount which will restore the damaged property to no less than its condition prior to the loss and which will allow for repairs to be made in a manner which meets accepted trade standards for good and workmanlike construction. The insurer shall take reasonable steps to verify that the repair or rebuilding costs utilized by the insurer or its claims agents are accurate and representative of costs in the local market area. If the claimant subsequently contends, based upon a written estimate which the claimant obtains, that necessary repairs will exceed the written estimate prepared by or for the insurer, the insurer shall: (1) pay the difference between its written estimate and a higher estimate obtained by the claimant; or, (2) if requested by the claimant, promptly provide the claimant with the name of at least one repair individual or entity that will make the repairs for the amount of the written estimate. The insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and which will allow for repairs in a manner which meets accepted trade standards for good and workmanlike construction at no additional cost to the claimant other than as stated in the policy or as otherwise allowed by these regulations; or, (3) reasonably adjust any written estimates prepared by the repair individual or entity of the insured's choice and provide a copy of the adjusted estimate to the claimant.” (Cal. Code Regs., tit. 10, §2695.9, subd. (d).)

Baltar argues this provision “required CSAA to adjust the estimate submitted by Ms. Baltar [(i.e., the Romero estimate)] and send back a copy of the adjusted estimate, or to pay the estimate (at least up to policy limits). Instead of following the required approach, CSAA simply refused to consider the estimate or communicate with Ms. Baltar’s public adjuster about it.” Baltar argues CSAA’s failure to comply with both provisions caused her to “fear she would not be able to recover enough from CSAA to replace her house,” which resulted in her “build[ing] a less costly replacement house than she was entitled to build under J the contract.”

We agree the $180,984.39 total amount listed in the Cronic estimate was not sufficient to enable Baltar to build an identical replacement home on the same property. This is revealed by the estimate itself, which left various line items open. However, the letter CSAA sent to Baltar, with this estimate attached, accurately informed her that she was not entitled to more than the actual cash value of the house until the house was replaced, at which point she would be entitled to recover the replacement cost from CSAA. The actual cash value had already been paid. The letter informed Baltar that CSAA was also paying her the amount listed in the Cronic estimate, that Cronic had agreed to rebuild her home for that price (subject to the open items in the estimate), and that CSAA would make additional payments for necessary “additional work” identified by the contractor during the rebuild. The letter further informed Baltar that she was entitled to choose a different contractor to build the replacement home, but that she would not automatically be entitled to additional payments solely because her chosen contractor charged more for equivalent construction.

No reasonable insured would have read this letter as a hardline replacement cost offer. Nor do we agree with Baltar that this letter and the attached estimate amounted to concealment of available benefits under the policy in violation of California Code of Regulations, title 10, section 2695.4.

CSAA then paid Baltar the difference between the amount already paid under the dwelling coverage and the amount listed in the Cronic estimate, essentially an advance on the replacement cost since Baltar was not entitled to that amount until the house was replaced. Thereafter, Baltar entered into a contract with a different contractor, J. Carleton Company, to replace the house, ultimately for $255,088. She kept this information from CSAA and instead submitted the Romero estimate listing $346,998.57 as the replacement cost value. The letter sent to CSAA, with this estimate attached, acknowledged that Baltar was entitled to only “the smallest’ of the replacement cost amounts, one of those amounts being “[t]he amount actually spent” by Baltar to replace the house. CSAA repeatedly asked for the details of the actual construction contract and was ignored. And when the amount Baltar actually spent to replace the house was finally revealed, that amount was promptly paid by CSAA. On these undisputed facts, we cannot conclude CSAA breached the insurance policy.

Nor did CSAA violate California Code of Regulations, title 10, section 2695.9, subdivision (d). As stated previously, this subdivision begins: “If losses are settled on the basis of a written scope and/or estimate prepared by or for the insurer ... .” (Ibid.') That is not how losses were settled in this case. Instead, they were settled based on the amount Baltar actually and necessarily spent to replace the house. To be sure, had CSAA insisted on paying only the amount listed in the Cronic estimate, or the adjusted amount of $227,611.93, this subdivision would apply. Because it does not, we need not determine whether CSAA’s conduct would have satisfied its provisions.

Finally, the notion that Baltar was forced to “build a less costly replacement house than she was entitled to build under the contract” is belied by the record. Even if CSAA had done precisely what Baltar claims it was required to do under the regulations she cites, i.e., supply her with a more complete replacement cost estimate in the first instance or adjust the Romero estimate she submitted and provide her with the adjusted amount to inform her “of the upper limit on the funds available for rebuilding” (SR Internal. Business Ins. Co. Ltd, v. World Trade Center Properties, LLC (S.D.N. Y. 2006) 445 F.Supp.2d 320, 333), this would not have entitled Baltar to more than she received from CSAA under the dwelling coverage. This is because CSAA did adjust the Romero estimate and came to an adjusted amount of $227,611.93. Had CSAA provided Baltar with this amount, there is no reason to think she would have built a more expensive replacement house. The opposite is true. She either would have built a cheaper replacement house, staying within that adjusted replacement cost budget, or she would have built the same house she ultimately built in the hope of receiving her actual construction costs.

In other words, the only way Baltar would have potentially been entitled to more under the dwelling coverage is if (1) the hypothetical adjusted replacement cost estimate was more than the amount Baltar ultimately spent on the replacement house, and (2) based on that upper limit of available replacement funds, Baltar actually spent a greater amount to build the replacement house. Only then would the smallest of the three amounts provided for in the policy’s loss settlement provisions have been the adjusted replacement cost estimate Baltar claims she was entitled to receive from CSAA.

However, there is no evidence in this record suggesting that CSAA was required to adjust the Romero estimate to somewhere between the $255,088 that Baltar actually spent and the $329,700 policy limits. None of the declarations submitted by Baltar in opposition to summary judgment support such a conclusion, even if we view Herndon's declaration in its entirety, as Baltar urges us to do. The closest Baltar comes is her own declaration, in which she states that she “did not have enough money to make the new house as nice as the old house,” specifically pointing out that the house she lost in the fire was “framed out of redwood,” had “granite counter tops in the kitchen and bathroom,” and had nicer cabinets, windows, and tile work. She also admits, however, that the replacement house she had built is “a little bit bigger than the old house.” CSAA's evidence, undisputed by Baltar, establishes the replacement house was actually significantly larger than the original house. Baltar was entitled to build a larger replacement house. But her insurance policy did not require CSAA to pay for a replacement house that was both significantly larger and also “as nice” as the original house. We conclude Baltar's evidence does not create a triable issue of material fact with respect to whether her insurance policy entitled her to more than she actually spent to build the replacement house. It did not.

  • Landscaping Costs

Baltar's policy entitled her to additional coverage for “trees, shrubs, plants or lawns, on the ‘residence premises.’” The policy provides: “The limit of liability for this coverage shall not exceed 5% of the limit of liability that applies to the dwelling as shown in the Declarations for Coverage A for all trees, shrubs, plants and lawns nor more than $500 for any one tree, shrub or plant, including expense incurred for removal.”

As Baltar accurately observes, it is undisputed that CSAA's contractor, Cronic, estimated the landscaping loss to be $7,111.06 in November 2014. She also notes that CSAA's large loss specialist, Williams, testified in his deposition that CSAA considered such losses payable upon occurrence of the loss rather than upon replacement. CSAA concedes in this appeal that this amount should have been paid in November 2014. However, when the matter was brought to CSAA's attention during Baltar's deposition, Williams immediately reviewed the landscaping receipts she provided and CSAA paid her $12,095.80 for the landscaping loss. There is no evidence in this record suggesting this delay in payment was anything other than inadvertent. Nor is there any evidence that the full amount owed was not ultimately, albeit belatedly, paid by CSAA. Moreover, the undisputed facts also reveal that Baltar is at least partially to blame for the length of the delay in payment. CSAA repeatedly sought information from Baltar regarding the replacement of her home. Baltar ignored these requests until October 2016. However, because many of the receipts she ultimately provided were difficult to read, CSAA asked Baltar to supply the total amounts paid on the various receipts submitted. That was also ignored. Had Baltar provided CSAA with the requested information at any time before 2018, the record strongly suggests they would have been immediately paid.

In any event, we need not determine whether CSAA's inadvertent delay in payment of landscaping losses amounted to a breach of the insurance policy because Baltar has presented no evidence that she suffered any damages as a result of the alleged breach. Her appellate argument that she suffered damages is not evidence of damage suffered. (See Fuller v. Tucker (2000) 84 Cal.App.4th 1163, 1173 [101 Cal. Rptr. 2d 776] [“Argument of counsel is not evidence.”].)

  • Debris Removal

Baltar further argues there is a material factual dispute regarding whether CSAA breached the insurance policy by failing to pay the full amount for debris removal. In response, CSAA points out that Baltar was paid $13,037.58 for debris removal in November 2014, based on the Cronic estimate, and argues there is no evidence that she incurred additional costs for debris removal. CSAA acknowledges the Romero estimate lists $62,008.29 as the amount charged by the City of Weed for debris removal, but argues this does not “indicate if the amount listed was actually incurred, expended or billed to [Baltar].” In any event, CSAA argues Baltar is “not personally liable for any amounts incurred by the City for debris removal from her property” because the city informed all property owners they were required to pay only the amount they received from their respective insurers that was specifically ‘“designated for debris removal.’”

The city attorney's office later confirmed “the City of Weed has waived any request for the cost of debris removal [from property owners] in excess of the insurance proceeds that are specifically for debris removal.” Accordingly, CSAA argues, the undisputed evidence establishes that Baltar was paid $13,037.58 for debris removal and that was the only amount she was required to pay the city for debris removal. The trial court agreed with this reasoning in granting summary judgment with respect to this issue. We do the same.

The Court of Appeal concluded as follows relative to Baltar’s claims of bad faith:

In sum, CSAA’s settlement of the dwelling coverage did not violate the implied covenant of good faith and fair dealing. Nor did the company’s failure to pay more for debris removal than Baltar established she was obligated to pay for such removal. And finally, we need not determine whether CSAA’s delay in payment of landscaping costs amounted to bad faith because “a bad faith action” requires the plaintiff “to establish actual financial loss” and Baltar “cannot show [she] suffered any cognizable injury in either contract or tort.” Emerald Bay Community Assn v. Golden Eagle Ins. Corp. (2005) 130 Cal.App.4th 1078, 1096 [31 Cal. Rptr.3d 43].)

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