The California Court of Appeal, Fourth Appellate District, reversed an order granting summary adjudication to an insured where the underlying action concerned a former credit union employee's misappropriation of cash. The trial court held the insured suffered "property damage" from the "loss of use" of the money that was misappropriated. The insurer had asserted money was not tangible property and did not fall under "property damage" as defined in the policy. The court of appeal reversed, and held the "loss of use" provision did not apply because the underlying action was for the replacement value of the money misappropriated.
State of California Advanced Network, Inc. ("ANI") contracted with Mission Federal Credit Union ("Mission") to service cash distribution machines ("CDMs") at a Mission branch by delivering cash to the branch. After delivery, an ANI employee would remove cash from the CDMs and replenish them. It was later discovered that the ANI employee designated to replenish the cash from the CDMs had stolen approximately $2 million in cash from Mission.
Mission made a demand for the stolen cash to its fidelity bond holder, Cumis Insurance Society, Inc. ("Cumis"), which Cumis paid. Cumis subsequently sued ANI in federal district court for equitable subrogation, breach of contract, negligence and respondeat superior liability for the employee's torts. The employee pleaded guilty to misappropriation in a separate federal criminal case.
ANI had a CGL policy with Peerless Insurance Company ("Peerless"), which covered third party "property damage," defined as "[p]hysical injury to tangible property, including all resulting loss of use of that property." Peerless denied coverage under the policy, asserting there was no "property damage" within the meaning of the policy because money is not considered to be tangible property, and the theft of money was not an "occurrence" because it was not "accidental."
ANI paid $1 million to Cumis to settle the action and then sued Peerless for breach of contract and breach of the implied duty of good faith and fair dealing. Both parties moved for summary judgment or summary adjudication. The trial court denied Peerless's motion, holding that cash is tangible property and the employee's theft of cash was unforeseen and unintended. The trial court further held there was "property damage" because Mission sustained a "loss of use" of the money. The trial court granted summary adjudication in favor of ANI.
At the following trial, Peerless again asserted the underlying action was not for loss of use of stolen cash, but was for the replacement value of the cash. Peerless relied on Collin v. American Empire Ins. Co. (1994) 21 Cal.App.4th 787 for support. In Collin, the appellate court held the conversion of furniture was not covered as "loss of use" property damage under a CGL policy because, the court held, "loss of use" only applies when deprivation of the property was "temporary." The Collin court held "loss of use" of property is different from "loss" of the property. "Loss of use" is determined with reference to the rental value of similar property which the plaintiff can hire for use during the period when she is deprived of the use of her own property. The conversion of property is the taking or deprivation of property, and damages recovered in this action were not for loss of use damages but for the value of the property itself.
The trial court rejected Peerless's arguments at trial, directed a verdict in favor of ANI, and awarded it $750,000 in damages for Peerless's failure to indemnify. The jury found in favor of ANI on the issue of bad faith, awarding $2 million in punitive damages, attorney fees and Brandt fees. Peerless moved for judgment notwithstanding the verdict ("JNOV") or a new trial. The trial court denied the JNOV but conditionally granted the motion for a new trial based on the excessive punitive damage award, and pending ANI's acceptance of a reduction. In the meantime, Peerless filed a writ of mandate to the appellate court on the "loss of use" coverage issue.
On review, the appellate court reviewed Collin, as well as several other opinions adopting the holding of Collin. It agreed that "loss of use" and "loss" are not interchangeable for insurance purposes. Coverage for "loss of use" does not apply to an underlying action where the claimant seeks only the replacement value of converted property.
The appellate court held the underlying action did not seek "loss of use" damages because the cash ANI's employee stole was irretrievable and the underlying action was for the replacement value of the cash. The appellate court held because neither the underlying complaint nor any extrinsic facts showed the potential for coverage under the policy, Peerless had no duty of defense or indemnity toward ANI.
ANI contended that even if the underlying action did not claim any "loss of use" under the policy, Peerless was equitably estopped from denying coverage because Peerless initially did not expressly mention the "loss of use" prong. A valid claim of equitable estoppel consists of (1) a representation or concealment of material facts, (2) made with knowledge, actual or virtual, of the facts (3) to a party ignorant, actually and permissibly, of the truth (4) with the intention, actual or virtual, that the ignorant party act on it, and (5) that party was induced to act on it.
The appellate court rejected ANI's arguments, holding that Peerless sufficiently put ANI on notice by raising the "loss of use" coverage defense in its summary adjudication motion, its petition for writ of mandate to the appellate court, and in a joint trial readiness report. The appellate court reversed the trial court's judgment and directed the trial court on remand to enter judgment for Peerless.
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