Judge: Jon R. Takasugi, Case: 20STCV35873, Date: 2023-02-28 Tentative Ruling

Case Number: 20STCV35873    Hearing Date: February 28, 2023    Dept: 17

Superior Court of California

County of Los Angeles

DEPARTMENT 17

TENTATIVE RULING

            Defendant’s motion for summary judgment is GRANTED.

            On 9/18/2020, Plaintiffs Armien Galoyan and Zaven Simonyan (collectively, Plaintiffs) filed suit against Wawanesa General Insurance Company (Defendant), alleging: (1) breach of contract; and (2) breach of the implied covenant of good faith and fair dealing.

            Now, Defendant moves for summary judgment, or, summary adjudication in the alternative, of Plaintiff’s Complaint.

Evidentiary Objections

            In light of the ruling, the Court does not rule on the submitted evidentiary objections. (CCP § 437c, sud. (q).)

Discussion

            Defendant argues that Plaintiffs cannot state a claim because the policy excludes coverage when an insured makes a “material misrepresentation,” and requires an insured’s full cooperation before filing a lawsuit.

            The insurance policy in question here provides the following:

C. Duties After Loss

In case of a loss to covered property, we have no duty to provide coverage under this policy if the failure to comply with the following duties is prejudicial to us. These duties must be performed either by you, an “insured” seeking coverage, or a representative of either:

* * *

5. Cooperate with us in the investigation of a claim;

* * *

7. As often as we reasonably require:

a. Show the damaged property;

b. Provide us with records and documents we request and permit us to make copies; and

c. Submit to examination under oath, while not in the presence of another “insured,” and sign the name;

* * *   

H. Suit Against Us

No action can be brought against us unless there has been full compliance with all of the terms under Section I of this policy and the action is started within one year after the date of loss.

                        (SS ¶ 1.)

                        As amended through an endorsement, the policy also provides in part:

2. With respect to loss by a peril other than fire, we provide coverage to no ‘insureds’ under this policy, if, whether before or after a loss, any ‘insured’ has:

a. Concealed or misrepresented any material fact or circumstance;

b. Engaged in fraudulent conduct; or

c. Made false statements relating to this insurance.

                        (SS ¶ 2.)

To show that Plaintiffs were excluded from coverage based on these policy provisions, Defendant submitted the following evidence: 

-         On October 20, 2019, through a public adjuster, plaintiffs notified Defendant that their water supply line under the kitchen sink broke the day prior. On October 23, 2019, adjuster Irene Bernardo inspected the property and collected the damaged water supply line. (SS ¶ 3.)

-         On October 23, 2019, Defendant sent the failed water line to Diversified Products Inspection (DPI) for forensic testing and analysis. On November 7, 2019, DPI advised Defendant of the following finding:

Its failure was identified as a diagonal split in the body of the line located below the crimp sleeve. The split in the supply line’s outer jacket and inner reinforcement braiding were relatively smooth with some fraying on the braiding. These were indications that the supply line had been cut by a sharp object.

DPI also reported that the failed line showed evidence of “inward deformation indicative of extremely imposed damage.” It also provided magnified photographs.

(SS ¶ 4.)

-         DPI found no evidence that high water pressure was a cause of the loss. The photographs in DPI November 5, 2019 report show a “Brass Craft” water supply line with polymer braids. It is rated for up to 125 PSI of pressure with tolerance of approximately that amount. DPI found no evidence that the pressure exceeded 125 PSI. According to DPI, if there were prolonged pressure in excess of 124 PSI, the couplings linking the supply line to fixture would come off before the line would break. (SS  ¶ 5.)

-         During the claim, Plaintiffs’ plumber did not state that the water pressure was high at the time of the loss. Plaintiffs did not know of any water leaks, and they have no opinion as to either what the water pressure was or whether it was high at the time of the loss. (SS  ¶ 6.)

-         In January of 2020, Defendant took Plaintiffs’ recorded statements, and it obtained certain phone records. (SS  ¶ 7.)

-         On April 27, 2020 and May 11, 2020, Defendant asked Plaintiffs to produce, before their examinations under oath (EUOs), “Records of your bank statements from every account that you have a financial interest in, showing deposits and withdrawals for the period beginning July 1, 2019 through November 30, 2019.” (SS  ¶ 8.)

-         On May 22, 2020, Defendant’s counsel took plaintiffs’ EUOs. Plaintiffs collected and gave their bank records to their lawyer, Ms. Grun, before their EUOs. Plaintiffs allege that “The only documents which were not presented before the Examination Under Oath were of the bank statements since Ms. Grun was having technical difficulties on the day of the examination.” (SS ¶ 9.)

-         On October 19, 2019, the day of the loss, Plaintiffs left their home at or before 10:00 a.m. Before leaving, they locked their doors and activated their alarm system with a motion detector. Besides their children, no one else had a house key or knew their alarm code. Plaintiffs did not discover evidence of forced entry, and their alarm system did not go off. If someone cut their water supply line, Plaintiffs have no suspects. Before returning to their house, Plaintiffs went to a sushi restaurant approximately 4.5 miles from their home. They paid for their meal at 1:54 p.m. They don’t remember if they stayed after paying. After their meal, Plaintiffs drove home. Plaintiffs collectively estimate a range of between approximately 15 and 40 minutes to drive from the restaurant to their house. If they went straight home, they estimate that they would have arrived at their home by approximately 2:30 p.m. When Plaintiffs arrived home, they allege that they saw water gushing out from under their kitchen sink. Plaintiffs did not shut off their water upon discovering the loss. At 3:12 p.m. on October 19, 2019, Plaintiffs made their first phone call about the loss. Water continued to come out until a plumber arrived between approximately 3:31 p.m. and 3:40 p.m. When the water loss happened, Simonyan knew how to turn the water off under his sink. (SS ¶¶ 10-16.)

-         During the EUOs, Defendant reserved its right to continue the EUOs because plaintiffs had not produced the requested financial records. (SS ¶ 17.)

-         On June 10, 2020, Defendant wrote to Plaintiffs’ counsel to request the missing financial records. On June 11, 2020, Plaintiffs’ counsel sent bank statements that were redacted and covered up the individual bank transactions. Defendant contends that this failed to comply with Defendant’s request for bank records “showing deposits and withdrawals.” It also contends that this created substantial prejudice. It had no away to verify if Plaintiffs made purchases in between paying for sushi and discovering the loss. Defendant also contends that it could not use the redacted records to ask questions at a second EUO about the redacted deposits and withdrawals. (SS ¶ 18.)

-         On August 13, 2020, Defendant denied the claim. Among other things, Defendant alleged that Plaintiffs made material misrepresentations of fact in the presentation of their claim, and it alleged that they failed to cooperate with Defendant’s investigation by refusing to produce unredacted financial records. (SS ¶ 19.)

-         In denying the claim, Defendant relied upon DPI’s November 7, 2019 finding that “the supply line had been cut by a sharp object.” (SS ¶ 23.)

-         On November 2, 2020, Defendant asked Plaintiffs to provide a competing expert opinion regarding the failed water supply line. (SS ¶ 24.) During the claim, Plaintiffs did not respond with an alternative report for Defendant to consider. Plaintiffs have no opinion as to why their water supply line failed. During the claim and before filing their lawsuit, no one that they hired offered an opinion as to why the water supply line failed. (SS ¶ 25.)

-         No Defendant employee involved with the claim determinations had authority over operating procedures that affect a substantial portion of the company. Examples of such operating procedures include the terms of policy coverage, the wording of a claims manual, and where and to whom Defendant sold policies. (SS ¶ 29.)

California courts recognize that a cooperation clause, like the one in Defendant’s policy, is a material part of the contract: “[A] condition of a policy requiring the cooperation and assistance of the assured . . . is material to the risk and of the utmost importance in a practical sense.” (Belz v. Clarendon America Ins. Co. (2007) 158 Cal. App. 4th 615, 626.) The cooperation clause provides an insurer the means “to decide upon [its] obligations” and “to protect itself against false claims.” (Id. at p. 617.)

It is also established that an insured who fails to comply with any insurer’s EUO and record requirements violates the policy’s cooperation clause and forfeits coverage. (See, e.g., Brizuela v. CalFarm Ins. Co. (2004) 116 Cal. App. 4th 578, 590 (“An insured’s compliance with a policy requirement to submit to an examination under oath is a prerequisite to the right to receive benefits under the policy.”). An EUO is also “a condition precedent to any claim, and the refusal to submit to such an examination causes a forfeiture of any rights under the policy.” (Id. at p. 590; California Fair Plan Ass’n v. Superior Court (2004) 115 Cal. App. 4th 158, 161–63 (same); Brizuela, supra,  116 Cal. App. 4th at p. 590 (“[W]hen an insured fails to comply with the insurance policy provisions requiring an examination under oath and the production of documents, the breach generally results in a forfeiture of coverage, thereby relieving the insurer of its liability to pay, and provides the insurer an absolute defense to an action on the policy.”)

Finally, California courts have also held that insurance companies have a broad right to ask questions about financial records at an EUO. For example, in Abdelhamid v. Fire Ins. Exch. (2010) 182 Cal. App. 4th 990, 1002, the Court of Appeal affirmed summary judgment and found that the insured breached his cooperation obligations by refusing to produce requested financial records, even though the insured showed up for an EUO and answered questions about the claim. In Ram v. Infinity Select Ins. (N.D. Cal. 2011) 807 F. Supp. 2d 843, 859–60, summary judgment was granted for the insurer after the insured breached the duty to cooperate by failing to produce full financial records. The Court there concluded that the insurer’s inability to examine those records made “it difficult if not impossible to determine whether Plaintiff had motive to file a false claim.”

Here, Defendant submitted evidence that it requested for bank records to be produced at the EUO that showed deposits and withdrawals for the period beginning 7/1/2019-11/30/2019. Plaintiffs failed to produce financial records at the EUO. Then on 6/10/2020, Defendant wrote to request the missing financial records. The next day, Plaintiffs produced heavily redacted bank records which prevented Defenadnt from seeing the details of their transaction history. Defendant submitted evidence that with the records provided they were unable to verify if Plaintiffs’ version of events was true at a second EUO. As a result, 8/13/2020, Defendant denied the claim.

Defendant’s evidence supports a reasonable inference that Plaintiffs breached their duty to cooperate by failing to produce responsive financial records. While Plaintiffs attempted to cure their breach by sending unredacted bank statements on 9/29/2020—11 days after filing suit against Defendant—section H of the policy provides that “[n]o action can be brought against us unless there has been full compliance with all of the terms under Section I of this policy….” Defendant’s evidence also supports a reasonable inference that Plaintiffs cannot show bad faith because there was a “genuine dispute” as to whether or not coverage existed and as to Plaintiffs’ cooperation obligations under the policy.

Accordingly, the burden shifts to Plaintiffs to disclose a triable issue of material fact.

In opposition, Plaintiffs argue that there are triable issues of fact as to whether or not they failed to cooperate under the policy. In support, Plaintiffs submitted evidence that:

-         At the 5/22/2022 EUO, Defendant’s counsel was provided with Plaintiffs’ bank records. However, rather than take the time to review them, WGI counsel’s responded: “I know. And I do want them. I just don’t want to take up the time now to talk about all of them.” (SS ¶ 17.)

-         During the EUO, Defendant’s counsel reserved her right to conduct more EUOs as necessary once she had received the bank statements. Neither Plaintiffs nor Defendant’s counsel objected. (Grun Decl., ¶¶  6-7.)

-         Plaintiffs produced the redacted bank records in June 2020. At no time after the production of these redacted bank records did Defendant seek to conduct additional EUOs or reach out to Plaintiffs’ counsel requesting unredacted bank records. (Grun Decl., ¶¶  8-9.)

-         After receiving the denial letter, but prior to filing the action, Plaintiffs’ counsel sent unredacted bank records to Defendant’s counsel. At no time after production of the unredacted bank records did Defendant seek to conduct additional EUOs. (Grun Decl., ¶  11.)

-         On 1/19/2023, Plaintiffs’ counsel forward a failure analysis report prepared by Mr. Dana Medlin of EAG Laboratories to Defendant’s counsel.

First, as a preliminary matter, Defendant did not contend that Plaintiffs did not produce any bank records at the EUO. Rather, they stated that Plaintiffs brought bank records which were redacted in such a way that they could not be used for their stated purpose, i.e., to show deposits and withdrawals from 7/1/2019-11/30/2019. The full quote from Defendant’s counsel is consistent with this: “I know. And I do want them. I just don’t want to take up the time now to talk about all of them. I’d like to look at them unredacted.” (Plaintiffs’ Exh. 1, p. 50: 23-25, emphasis added.) Moreover, as noted by Defendant in reply, Plaintiffs admitted in sworn discovery responses that they did not produce their bank statements to Defendant because Ms. Gunn was having technical difficulties on the day of the examination. (Wawanesa NOL Exhs. 26 A-B, special inter. resp. no. 1, pg. 3, lines 20-21); Benavidez v. San Jose Police Dep’t (1999) 71 Cal. App. 4th 853, 863 (affirming exclusion of declaration that contradicted prior discovery responses). While the Court gives Plaintiffs the benefit of the doubt that they were not intentionally trying to mislead the Court, Plaintiffs’ selective quotation of Ms. Winston’s statement, particularly in light of their previous discovery responses, is misleading.

Second, the Court agrees with Defendant that the failure analysis report is insufficient to show a triable issue of material fact. The law is clear that an "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." (Chateau Chamberay Homeowners Ass'n v. Associated Ins. Co. (2001) 90 Cal. App. 4th 335, 347; Troutt v. Colorado Western Ins Co. (9th Cir. 2001) 246 F. 3d 1150, 1161 (" In evaluating the evidence to see if there was any unreasonable conduct by the insurer, 'it is essential that no hindsight test be applied."'); (Austero v. National Cas Co. (1978) 84 Cal. App. 3d 1, 32.)  Plaintiff’s own evidence indicates that the report offering some alternative explanation for the water supply line failure was not produced until January 2023. The claim was denied in January 2020, and this suit was initiated in September 2020.  As such Plaintiffs have not submitted any evidence that Defendant was aware of, or that Plaintiffs offered, an alternative explanation for the water supply line break at the time of denial.

Third, the only evidence Plaintiffs submitted to show that they submitted the unredacted bank records prior to filing suit is a statement in counsel’s declaration that “[a]fter receiving the denial letter but prior to filing this action, I sent unredacted bank records to Ms. Winston, counsel for WGI.” (Grun Decl., ¶ 11.) However, the declaration does not allege a date that these records were sent and Defendant’s evidence directly contradicts Plaintiffs’ counsel’s contention:

-         On August 13, 2020, Defendant denied the claim. (WUF No. 19). Later that day, Plaintiffs’ counsel wrote Defendant to ask, “Please show me the authority which states that Defendant can deny a claim based on redacted bank statements.” (NOL Ex. 23, pgs. 373-4; WAWA1538-9; Roberta Winston Dec. ¶ 7).

-         On August 24, 2020, Defendant advised that the unredacted bank records still had not arrived: “Your client did provide some records that were redacted. We discussed that and I asked they produce unredacted copies. They never came.” (italics added) (NOL Ex. 23, page 373; WAWA001538; Winston Dec. ¶ 7).

-         On September 18, 2020, 25 days later, Plaintiffs sued Defendant. (WUF No. 20).

-         On September 29, 2020, 11 days after serving their lawsuit, Plaintiffs’ counsel wrote Defendant and advised, “I have enclosed a copy of the bank statements with only redaction of the account numbers.” (italic added) (with bank records attached) (NOL Ex. 24, page 378; WAWA000542; Winston Dec. ¶ 8).

Again, given this clear timeline, and Plaintiffs’ lack of support for its contention that it provided the bank statements prior to filing suit (indeed, they do not even allege the specific date they claim to have sent the records), it is difficult not to reach the conclusion that Plaintiffs are advancing misleading statements in an attempt to manufacture a triable issue of material fact.

Defendant had a right to question Plaintiffs about their unredacted bank records at their EUOs. It is also established that an insured who fails to comply with any an insurer’s EUO and record requirements violates the policy’s cooperation clause and forfeits coverage. (Brizuela, supra, 116 Cal. App. 4th at p. 590) (“An insured’s compliance with a policy requirement to submit to an examination under oath is a prerequisite to the right to receive benefits under the policy.”) Here, the undisputed evidence establishes that Defendant twice requested unredacted bank records, which it had a right to request, and Plaintiffs failed to produce them until 9/29/2020. By that time, the only reasonable inference supported by the evidence is that Plaintiffs had already filed suit. The policy in question clearly provided that no action could be brought against Defendant unless there had been full compliance with all of the terms of the policy. (See Section H of the Policy.) As such, the only reasonable inference supported by the evidence is that Plaintiffs failed to comply with the EUO requests despite an obligation to do so and then filed suit, in violation of section H of the policy. Importantly, even assuming Plaintiffs had provided their bank statements prior to filing of the action, Plaintiffs’ date of filing suit would still violate the Fair Claims Practices Act by prematurely cutting off Defendant’s right to respond. As explained by Defendant in reply:

Even if the Court were to ignore plaintiffs’ September 29, 2020 submission regarding the bank records, and accept plaintiffs’ counsel’s new allegations to the contrary, it still would not matter. Under the Fair Claims Practices Act, Wawanesa had 40 days to accept or deny the claim after plaintiffs submitted the requested “proof of claim.” (10 Cal. Code Regs. § 2695.7). Wawanesa could then ask for 30-day extensions of time to adjust the claim and take a new EUO “until legal action is served.” (Id. at § 2695.7(c)(1)). Thus, even if plaintiffs sent the unredacted records the day Wawanesa denied the claim, it had 40 days, or until September 20, 2020, to decide whether to pay the claim, deny it, or ask for another EUO. Plaintiffs’ decision to sue on September 18, 2020 terminated Wawanesa’s statutorily allotted time to respond. Thus, it is of no consequence if plaintiffs are allowed to contradict their admission that they provided their unredacted records on September 29, 2020.

                        (Reply, 5:21-6:3.)

            In sum, the Court concludes no triable issue exists as to the breach of contract cause of action. As a result, Plaintiffs have necessarily failed to disclose a triable issue as to the bad faith cause of action. Plaintiffs did not offer any evidence that Defendant unfairly ignored expert evidence or rejected expert opinions when it denied the claim in 2020 and bad faith can only be based upon what the insurer knew at the time the claim was denied. (Jordan v. Allstate Ins. Co. (2007)  148 Cal. App. 4th 1062, 1073.)

            Based on the foregoing, Defendant’s motion for summary judgment is granted.

It is so ordered.

Dated:  February     , 2023

   Hon. Jon R. Takasugi
   Judge of the Superior Court

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