Judge: Christopher K. Lui, Case: 22STCV07906, Date: 2023-02-28 Tentative Ruling

Case Number: 22STCV07906    Hearing Date: February 28, 2023    Dept: 76

Pursuant to California Rule of Court
3.1308(a)(1), the Court does not desire oral argument on the motion addressed
herein.  As required by Rule 3.1308(a)(2), any party seeking oral argument
must notify ALL OTHER PARTIES and the staff of Department 76 of their intent to
appear and argue.  Notice to Department 76 may be sent by email to
smcdept76@lacourt.org or telephonically at 213-830-0776.  If notice of
intention to appear is not given and the parties do not appear, the Court will
adopt the tentative ruling as the final ruling.

            Plaintiff alleges that Defendant breached a real property title insurance policy to insure and indemnify Plaintiff against adverse claims made against the title to her residence when she discovered covenants recorded against her land which imposed substantial and material restrictions upon Plaintiff’s use and enjoyment of the residence. The declaration was not disclosed in the preliminary title report nor the policy issued by Defendant.

Defendant Fidelity National Title Insurance Company demurs to the Second Amended Complaint and moves to strike portions thereof.

TENTATIVE RULING

Defendant Fidelity National Title Insurance Company’s demurrer to the entire Second Amended Complaint, and the first and second causes of action therein, is OVERRULED. 

Defendant’s motion to strike is DENIED in its entirety.

Defendant is to answer the Second Amended Complaint within 10 days.

ANALYSIS

Meet and Confer

            The Declaration of David B. Owen reflects that Defendant’s counsel satisfied the meet and confer requirement set forth in CCP § 430.41.

Discussion

1.         First Cause of Action (Breach of Written Contract). 

Generally, “[a]n insured can pursue a breach of contract theory against its insurer by alleging the insurance contract, the insured's performance or excuse for nonperformance, the insurer's breach, and resulting damages.” (Citation omitted.)

(Case v. State Farm Mut. Auto. Ins. Co., Inc. (2018) 30 Cal.App.5th 397, 402.)

            Defendant argues that there was no breach of contract because the Policy expressly grants the Fidelity the option to either pay the claim or to “bring or defend an action.” (2AC, Exh. B, Page 36, ¶ 4.) Defendant argues that, as to the covenant, it elected to cure title by  retaining counsel to litigate the validity of the Declaration strictly complies with its obligations owed under the Policy, and thus there was no breach.

            Defendant also argues that, as to the encroachment, Plaintiff does not allege that she was required to remove any structure as a result of the alleged encroachment, as thus, there was no breach of the policy provision which covers loss due to a forced remove structures which encroach onto an easement or building set-back line. (2AC, Exh. B, Page 32, ¶ 23.)

            However, the 2AC alleges the following at ¶¶ 12 – 17:      

12. In early January 2021, while The Policy was in full force and effect, the plaintiff learned for the first time that on February 10, 2012, a document entitled Agreement Re: Covenants Running with the Land was recorded against the Residence in the Los Angeles County Recorder’s Office as instrument number 20120235309 (hereinafter “Declaration.”)  Said Declaration, which was executed by Gregory and Julie Doherty, prior owners of the Residence, and Carol Kurachi, a neighboring property owner, imposed substantial and material restrictions upon the plaintiff’s use and enjoyment of the Residence and in particular the rear of her home, including a swimming pool and landscaped areas adjacent to and surrounding the swimming pool.  Said restrictions rendered

the rear of her home essentially useless for the purpose intended by plaintiff or for any purpose.  A true and correct copy of said Declaration is attached hereto, incorporated herein and labeled Exhibit C.” Neither the Preliminary Title Report nor The Policy disclosed the existence of said

Declaration. Further, The Policy did not otherwise designate said Declaration as an exception under the Policy.

 13. Thereafter, in June 2021, while The Policy was in full force and effect, the plaintiff also discovered that certain improvements on the subject property wrongfully encroached upon flood control easements established by the County of Los Angeles.  Said encroachments materially affected the value of the Residence and said encroachments were not disclosed in either the Preliminary Title Report or The Policy. Further, The Policy did not otherwise designate said encroachments as an exception under The Policy.

 14. The aforementioned Declaration and encroachments were detrimental to the Residence and materially reduced the value and use of the same.  Had the plaintiff known of the existence of the Declaration and the Encroachment, the plaintiff would not have purchased the Residence.

 15. After the plaintiffs’ discovery of said Declaration and encroachments, the plaintiff demanded that FIDELITY provide coverage pursuant to terms of The Policy as The Policy required FIDELITY to insure and indemnify against the effects of the foregoing Declaration and encroachments.

 16. However, notwithstanding the express provisions of The Policy which required FIDELITY to indemnify the plaintiff against her loss, FIDELITY denied coverage under the policy and otherwise refused to provide the benefits under the policy or to indemnify the plaintiff for the substantial losses which she suffered as a result of the Declaration and encroachments which losses exceed the sum of $2,500,000. The basis for the FIDELITY’s denial of the claim as it relates to the Declaration was that “The Policy does not provide coverage for the Covenant because it does not invoke the Policy’s Covered Risks. In particular, the Covenant appears to be invalid since the Dohertys did yet not [sic] own the land that the Covenant purported to encumber when they executed the Covenant.”  FIDELITY, however, intentionally, improperly and without reasonable justification ignored common legal principals as well as undisputed legal authorities in maintaining its improper denial of the claim.  FIDELITY also intentionally, improperly and without reasonable justification ignored, among other things:  (a) that the Declaration was recorded as a result of a the arms-length settlement of prior protracted litigation between the plaintiff’s predecessors (the Dohertys) and their neighbor (Carol Kurachi); (b) that the Declaration was prepared by knowledgeable and competent counsel for the parties to that litigation; (c) that monetary consideration was paid by the parties for the benefits arising under the Declaration; (d) that the interest in the real property which the Declaration was intended to encumber was in fact transferred to the Dohertys as consideration for said Declaration; (e) that a formal lot-split was approved by the County of Los Angeles in accordance with the express terms of the Declaration; (f) that between the time the Declaration was recorded and the time the plaintiff acquired the Residence, no one challenged the enforceability of the Declaration; (g) that the Declaration, by its express terms, is running with the land; (h) that even if the Declaration was not enforceable as a covenant running with the land, it is very clearly enforceable as an equitable servitude; and (i) that Carol Kurachi, who owned the neighboring property and benefitted by the Declaration, made it very clear that the provisions of the Declaration would be enforced by her and that legal action would be taken if the Declaration was violated by the plaintiff. As part of its denial of the plaintiff’s claim, FIDELITY refused to indemnify the plaintiff against the cost of defending such litigation.  

17. Although FIDELITY denied coverage under The Policy, it advised the plaintiff that the only action it would take regarding the Declaration was to require the plaintiff to commence litigation against Carol Kurachi to have the Declaration declared void and unenforceable, but that FIDELITY would pay litigation expense in said action against Carol Kurachi.  Payment of this legal expense would be the only benefit provided by FIDELITY to the plaintiff under The Policy.  Toward that end, FIDELITY required the plaintiff to retain counsel which FIDELITY unilaterally selected to represent her in protracted and time-consuming litigation against Carol Kurachi to secure a judgment declaring that the Declaration is and was void notwithstanding that the Declaration is in fact valid and enforceable. Although the plaintiff advised FIDELITY that said litigation would not be brought in good faith and would create unnecessary hostilities and animosity between the plaintiff and her new neighbor at a significant cost to said neighbor, FIDELITY was indifferent and insisted

that the plaintiff retain its specially selected counsel to commence said litigation.   Additionally, said counsel who was specially selected by, retained by and paid for by FIDELITY had an irreconcilable conflict of interest in that said counsel improperly, unreasonably and without consideration of widely known and applicable common law and statutory legal principals, provided an opinion to FIDELITY, paid for by FIDELITY, which opined that the Declaration was unenforceable notwithstanding that the Declaration was in fact enforceable. FIDELITY further required the

plaintiff to execute a retainer agreement employing the same counsel to represent the plaintiff in litigation against her neighbor although there was no legal basis for the litigation as the Declaration was in fact fully enforceable, thus mandating payment of her claim under the Policy by the FIDELITY.  The net result of FIDELITY’s actions in denying the plaintiff’s claim was to force the plaintiff to initiate malicious and protracted litigation with her innocent neighbor and to prevent the

plaintiff from using her property in violation of the Declaration since her neighbor threatened litigation against her if the plaintiff violated the Declaration.  As alleged above, FIDELITY refused to indemnify the plaintiff against the legal expense which would have been incurred in litigation against her. FIDELITY took the foregoing actions in denying the claim solely to avoid paying the plaintiff the damages which she suffered as a result of her inability to utilize the Residence as alleged herein.

(Bold emphasis added.) 

Given the allegation that Defendant outright denied coverage, such that it would not pay for loss of property value due to the covenant recorded against the land, Plaintiff has pled facts sufficient to state a cause of action for breach of contract. 

            The Policy is attached as Exhibit B to the 2AC and states in pertinent part as follows:

OWNER’S COVERAGE STATEMENT

This Policy insures You against actual loss, including any costs, attorneys’ fees and expenses provided under this Policy. The loss must result from one or more of the overed Risks set forth below. This Policy covers only Land that is an improved residential lot on which there is located a one-to-four family residence and only when each insured named in Schedule A is a Natural Person.

COVERED RISKS

            5.  Someone else has a right to limit Your use of the Land.

            . . .

23. You are forced to remove Your existing structures which encroach onto an easement or over a building set-back line, even if the easement or building set-back line is excepted in Schedule B.

(Homeowner’s Policy of Title Insurance, 2AC, Exhibit B 028, Pages 3 and 5 [bold emphasis added].)

            Defendant is correct that Plaintiff did not allege that she was forced to remove a structure that encroached on the easement, and thus that claim was not covered. However, Defendant allegedly outright denied Plaintiff’s claim based on the recorded covenant diminishing the value of Plaintiff’s property. The basis for this denial was that the covenant was not valid, and thus Plaintiff’s claim was not a covered risk. However, the language of the policy covered a risk where “[s]omeone else has a right to limit [Plaintiff’s] use of the Land.” Thus, the claim came within the language of the Policy, and Defendant’s determination that the covenant was invalid must be litigated in this action. If the trier of fact determines that the covenant is invalid and there is no other basis for Plaintiff’s use to be limited by the terms of the covenant[1], then Defendant will not have breached the contract by denying policy benefits. That determination, of course, is outside the scope of this demurrer.

            Further, the 2AC does not allege that Defendant elected to undertake the actions set forth in ¶ 4 of the Conditions (2AC, Exh. B, 036, Page 9), which states as follows:

4. OUR CHOICES WHEN WE LEARN OF A CLAIM

a. After We receive Your notice, or otherwise learn, of a claim that is covered by this Policy, Our choices include one or more of the following:

(1) Pay the claim;

(2) Negotiate a settlement;

(3) Bring or defend a legal action related to the claim;

(4) Pay You the amount required by this Policy;

(5) End the coverage of this Policy for the claim by paying You Your actual loss resulting from the Covered Risk, and those costs, attorneys’ fees and expenses incurred up to that time which We are obligated to pay;

(6) End the coverage described in Covered Risk 16, 18, 19 or 21 by paying You the amount of Your insurance then in force for the particular Covered Risk, and those costs, attorneys’ fees and expenses incurred up to that time which We are obligated to pay;

(7) End all coverage of this Policy by paying You the Policy Amount then in force, and those costs, attorneys' fees and expenses incurred up to that time which We are obligated to pay;

(8) Take other appropriate action.

b. When We choose the options in Sections 4.a. (5), (6) or (7), all Our obligations for the claim end, including Our obligation to defend, or continue to defend, any legal action.

c. Even if We do not think that the Policy covers the claim, We may choose one or more of the options above. By doing so, We do not give up any rights. 

(Bold emphasis added.)

           Here, the 2AC did not allege that Defendant chose to bring or defend a legal action. Rather, Defendant required Plaintiff to sue in her own name and would not pay for a defense if Plaintiff was counter-sued. (2AC, ¶¶ 16, 17.) Plaintiff has sufficiently pled that Defendant did not act in accordance with its contractual obligations.

“A demurrer must dispose of an entire cause of action to be sustained.” (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal. App. 4th 97, 119.) As such, because Plaintiff has sufficiently plead a breach of contract claim based upon the denial of the claim arising out of the recorded covenant, the demurrer to the first cause of action is OVERRULED.

2.         Second Cause of Action (Bad Faith Denial of Insurance Coverage).

            Defendant argues that, because Plaintiff has failed to sufficiently plead a breach of contract, there can be no bad faith breach.

            However, as discussed above, the breach of contract cause of action is sufficiently pled.

Defendant argues that there are no facts that Defendant’s determination of coverage was unreasonable or in bad faith. Defendant also argues that it cannot be held liable for bad faith where there is a genuine dispute regarding coverage.

 “ The law implies in every contract, including insurance policies, a covenant of good faith and fair dealing. ‘The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the agreement's benefits. To fulfill its implied obligation, an insurer must give at least as much consideration to the interests of the insured as it gives to its own interests. When the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.’ [Citation.]” (Wilson, supra, 42 Cal.4th at p. 720.)

 “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.’ [Citation.] To protect its insured's contractual interest in security and peace of mind, ‘it is essential that an insurer fully inquire into possible bases that might support the insured's claim’ before denying it. [Citation.] 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.’ [Citations.]” (Wilson, supra, 42 Cal.4th at pp. 720–721.)

As noted,  an insurer's denial of or delay in paying benefits gives rise to tort damages only if the insured shows the denial or delay was unreasonable. “[A]n insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured's coverage claim is not liable in bad faith even though it might be liable for breach of contract.” (Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co. (2001) 90 Cal.App.4th 335, 347 [108 Cal. Rptr. 2d 776] (Chateau Chamberay).) “This ‘genuine dispute’ or ‘genuine issue’ rule was originally invoked in cases involving disputes over policy interpretation, but in recent years courts have applied it to factual disputes as well. [Citations.]” (Wilson, supra, 42 Cal.4th at p. 723.)

 “The genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured's claim. A genuine dispute exists only where the insurer's position is maintained in good faith and on reasonable grounds. [Citations.] Nor does the rule alter the standards for deciding and reviewing motions for summary judgment. ‘The genuine issue rule in the context of bad faith claims allows a [trial] court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer's denial of benefits was reasonable—for example, where even under the plaintiff's version of the facts there is a [*1028]  genuine issue as to the insurer's liability under California law. [Citation.] … On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably.’ [Citation.]” (Wilson, supra, 42 Cal.4th at pp. 723–724, fn. omitted.)

“Thus, an insurer is entitled to summary judgment based on a genuine dispute over coverage or the value of the insured's claim only where the summary judgment record demonstrates the absence of triable issues (Code Civ. Proc., § 437c, subd. (c)) as to whether the disputed position upon which the insurer denied the claim was reached reasonably and in good faith.” (Wilson, supra, 42 Cal.4th at p. 724.)

When determining if a dispute is genuine, we do “not decide which party is ‘right’ as to the disputed matter, but only that a reasonable and legitimate dispute actually existed.” (Chateau Chamberay, supra, 90 Cal.App.4th at p. 348, fn. 7.) A dispute is legitimate if “it is founded on a basis that is reasonable under all the circumstances.” (Wilson, supra, 42 Cal.4th at p. 724, fn. 7.) “This is an objective standard.” (Bosetti v. United States Life Ins. Co. in City of New York (2009) 175 Cal.App.4th 1208, 1237 [96 Cal. Rptr. 3d 744].) “Moreover, the reasonableness of the insurer's decisions and actions must be evaluated as of the time that they were made; the evaluation cannot fairly be made in the light of subsequent events that may provide evidence of the insurer's errors. [Citation.]” (Chateau Chamberay, at p. 347.)

What is more, “[t]he ‘genuine dispute’ doctrine may be applied where the insurer denies a claim based on the opinions of experts. [Citations.]” (Fraley v. Allstate Ins. Co. (2000) 81 Cal.App.4th 1282, 1292 [97 Cal. Rptr. 2d 386].)  “As the Fraley court emphasized, where an insurer, for example,  is relying on the advice and opinions of independent experts, then a basis may exist for invoking the doctrine and summarily adjudicating a bad faith claim in the insurer's favor. [Citations.]” (Chateau Chamberay, supra, 90 Cal.App.4th at p. 348.) Still, under the genuine dispute doctrine, an expert's testimony will not automatically insulate an insurer from a bad faith claim. (Ibid.) Case-by-case analysis is required.

(Zubillaga v. Allstate Indemnity Co. (2017) 12 Cal.App.5th 1017, 1027-28.)

            Here, the 2AC pleads facts whereby a jury could find that Defendant’s denial of the claim was unreasonable and in bad faith. (2AC, ¶¶ 16, 17.) While Defendant might be able to prevail on the genuine dispute doctrine on summary judgment, at this stage of the proceedings, Plaintiff has sufficiently pled a bad faith breach of contract.

            The demurrer to the second cause of action is OVERRULED.

3.         Entire Second Amended Complaint.

            Defendant demurs to the entire 2AC on the ground that it is too vague and uncertain to state a valid claim against Fidelity. For the reasons discussed above, this is not persuasive.

            The demurrer to the entire 2AC on this ground is OVERRULED.

Motion To Strike

Meet and Confer

            The Declaration of David B. Owen reflects that Defendant’s counsel satisfied the meet and confer requirement set forth in CCP § 435.5.

Discussion

            Defendant moves to strike the following portions from the 2AC: 

1. Any and all reference to Plaintiff’s alleged reliance on any preliminary title report issued by Fidelity.  Specifically, the following portions of the SAC:

a. Page 3, Paragraph 11, the term, “the plaintiff relied upon the contents of the foregoing Preliminary Title Report and The Policy and based upon said reliance”

c. Page 4, Paragraph 12, the term “Neither the Preliminary Title Report nor The Policy disclosed the existence of said Declaration.

d. Page 4, Paragraph 13, the term, “Had the plaintiff known of the existence of the Declaration and the Encroachment, the plaintiff would not have purchased The Residence.”

            Defendant argues: A party cannot base any cause of action on their alleged reliance on a preliminary title report. Rather, pursuant to Insurance Code § 12340.11, a preliminary title report is merely an offer to sell title insurance and is not intended to be relied upon. Thus, all allegations whereby Plaintiff allegedly relied upon the preliminary title report issued by Fidelity are completely irrelevant to this litigation, lead to confusion, and are unduly prejudicial. 

            Plaintiff argues that the allegations as to the Preliminary Title Report are merely background facts and not substantive. Plaintiff argues that these facts are alleged to reflect that the Declaration is not listed as an exception to the Policy.

            There is not cause of action based upon the omission of the covenant or encroachment in the Preliminary Title Report. Rather, the allegations that the Preliminary Title Report omitted these matters is to explain why Plaintiff’s claims for loss caused by these items are covered under the Policy—they were omitted, and so Plaintiff cannot be deemed to have purchased with notice of such interests. Thus, she received real property worth less than she believed she was purchasing, i.e., loss caused by a covered claim of someone’s ability to limit Plaintiff’s use of her property. (See 2AC, ¶¶ 12 – 15.)

            As such, the allegations regarding the Preliminary Title Report are properly pled. The motion to strike is DENIED in its entirety.

            Defendant is to answer the 2AC within 10 days.