Lewis Brisbois Appellate Team Scores Major Victory in Bad Faith Insurance Action
Los Angeles, Calif. (April 22, 2021) - Appellate Partner Raul L. Martinez and Los Angeles Partners Elise D. Klein and Celia Moutes-Lee recently secured a major win in an appeal of a bad faith insurance action. In Wexler v. California Fair Plan Association (Apr. 14, 2021, B303100) __Cal.App.5th__, Division Eight of the Second Appellate District (Los Angeles), the court held that the plaintiff, the daughter of insurance policy holders, had no standing to pursue bad faith allegations against her parents’ insurer for smoke damage to her personal possessions.
The daughter’s parents owned a home in the mountains where there was a heightened risk of fires. The parents insured their home with a California FAIR Plan Association (FAIR Plan) owner-occupied dwelling policy (the FAIR Plan Policy). The FAIR Plan Policy only insured the dwelling and its contents against damage from fire, lightning, and internal explosion with limited coverage for smoke damage. The FAIR Plan Policy also expressly disclaimed coverage for individuals not specifically named in the policy. Furthermore, the plaintiff’s name did not appear in any of her parents’ insurance documents.
After the Woolsey wildfire in 2018, the parents alleged smoke damage to their home and made claims on their FAIR Plan Policy. The plaintiff joined her parents in suing FAIR Plan on bad faith insurance allegations “founded in their dissatisfaction with how FAIR Plan handled their claim of smoke damage to [their] home’s contents.” The plaintiff alleged her personal property located within her parents’ house suffered smoke damage. The trial court sustained FAIR Plan’s demurrer to the plaintiff’s claims, and the plaintiff appealed.
In a 28-page opinion, the appellate court affirmed the trial court’s judgment, noting that the plaintiff lacked standing to sue FAIR Plan for bad faith because she did not have a contractual relationship with FAIR Plan. The plaintiff did not sign the FAIR Plan Policy, and the policy only named her parents as the insureds. Nor was the plaintiff an additional insured under the policy because the policy contained a no-coverage-for-unnamed-persons clause. The plaintiff also did not meet the requirements to be a third-party beneficiary to the FAIR Plan Policy because the plaintiff could not show that the “motivating purpose of the contract was to benefit her” and permitting the plaintiff to maintain her bad faith action was “unnecessary to effectuate the insurance contract’s objectives.” Lastly, the plaintiff misinterpreted the purpose of the insurable interest doctrine.
The plaintiff argued that her parents had no insurable interest in her personal possessions because her parents did not own those possessions, but the appellate court disagreed. The purpose of the insurable interest doctrine is to prevent gambling and moral hazard. The court noted that plaintiff’s parents were not gambling when they bought the FAIR Plan Policy because they were using the policy to reduce their personal risk. Additionally, the FAIR Plan Policy did not create a moral hazard because the FAIR Plan Policy gave the parents the ability to insure all of the items in their house. Further, there was no evidence that the parents concocted a plan to burn their daughter’s possessions in order to collect an insurance check. Therefore, the plaintiff had no standing to pursue the case.
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