Crusader Insurance Company ("Crusader") and Colony Insurance Company ("Colony") both insured a building in Los Angeles, which became the subject of a tenant lawsuit. Positive Investments, Inc. was the named insured and owner of the building. Crusader insured the building from 2003 to 2004 and Colony insured the building thereafter.
Before Crusader issued its policy, in 2002, the City of Los Angeles's Housing Department cited Positive Investments for "critical habitability violations" on three separate occasions at the building. Positive Investments did not disclose these citations to Crusader in its policy application. It also represented that no governmental department had ever notified it of deficiencies or code violations, and that the building had not been cited for code violations within the last three years.
Based on the representations in the insurance application, Crusader issued a special multi-peril liability policy that, among other things, insured claims by tenants of substandard or uninhabitable living conditions. At that time, Crusader had no knowledge of Positive Investment's misrepresentations.
The tenants in the building sued Positive Investments. Crusader originally agreed to defend the action under a reservation of rights. The tenants amended their complaint and attached the three 2002 citations. Crusader then denied coverage for the lawsuit because of Positive Investment's "material 'misrepresentations and/or concealments' in the insurance application."
Colony then sued Crusader for a declaration that Crusader improperly refused to defend the lawsuit and equitable contribution of a portion of the defense costs in the underlying litigation. The trial court found that Positive Investments "failed to provide information 'clearly and unambiguously called for in the Crusader Supplemental Application and Application,'" and Crusader reasonably relied on those representations. Finally, the court concluded "Crusader would not have insured the Building if it had known of the 2002 notices."
Colony objected to the proposed statement of decision arguing that Crusader "had waived its right to deny coverage or was estopped from denying coverage, based on its alleged failure to follow its own internal guidelines in investigating the statements made" in the insurance application. The guidelines provide: "'[f]or all new and renewal quotes, the regional manager, the general manager, or the underwriting manager must attempt to verify, by accessing public records, the existence or lack of any citation issued against the subject building.' The Guidelines further provided that "[i]f you need assistance in verifying public records, you must pass the file on to the general manager or the underwriting manager. This verification is necessary despite the manner in which the application form is answered." The trial court stated that these objections should have been raised earlier in the proceeding and refused to modify its decision. The trial court entered judgment for Crusader and Colony appealed. The Court of Appeal affirmed.
On appeal, Colony argued that Crusader failed to investigate public records as required by Crusader's guidelines. Colony argued that Crusader, therefore, waived the right to challenge misrepresentations made by its insured and was estopped from denying a defense in the tenant lawsuit based on the insured's misrepresentations.
The Court of Appeal held Colony forfeited this argument by failing to raise it until after trial in its objections to the trial court's statement of decision. Colony's objection was a concealed effort to raise a new argument that was not litigated at trial. The trial court, therefore, was under no obligation to address it.
Notwithstanding Colony's failure to properly raise the argument, the Court of Appeal also dismissed the argument on the merits, because Colony could not establish Crusader was estopped or waived the right to rely on Positive Investments' insurance application.
Estoppel's first required element is that "the party to be estopped must be apprised of the facts." Colony presented no evidence that "Crusader had actual knowledge, imputed knowledge, or inquiry knowledge of the three 2002 citations." The court expressly found Crusader first learned of the citations when the tenants amended their complaint and attached the citations.
The Court of Appeal rejected as irrelevant Colony's argument that Crusader's own guidelines required investigation. Colony had no rights to enforce Crusader's internal Guidelines. Moreover, Crusader's policy states: "By acceptance of this policy, the insured agrees? that this policy embodies all agreements existing between the insured and the company or any of its agents relating to this insurance." As such, Colony's attempt to rely on Crusader's alleged noncompliance with its own guidelines failed.
The Court of Appeal also rejected Colony's argument that Crusader waived its right to deny coverage based on the misrepresentations because it failed to follow its guidelines. The record failed to support this argument because Crusader did not intentionally relinquish a known right. Crusader had no knowledge of the citations and it denied the claim shortly after becoming aware of their existence. Crusader's conduct was consistent with an intent to enforce a right precluding a finding of waiver.
Crusader's purported failure to follow its guidelines also did not result in waiver. Insurance Code section 336 provides: "The right to information of material facts may be waived, either (a) by the terms of insurance or (b) by neglect to make inquiries as to such facts, where they are distinctly implied in other facts of which information is communicated." Positive Investments' insurance application contained no facts that would have alerted Crusader — either expressly or impliedly — to the 2002 citations. Nor was there any evidence that Crusader had information the application's representations were untrue prior to issuing the insurance. "Crusader did not waive the right to information of material facts by neglecting to make inquiry."
The Court rejected Colony's unsupported assertion that Crusader waived its right to assert the misrepresentations because it allegedly failed to follow its guidelines. On the contrary, "[a]n insured who withholds information and then blames the insurer for not discovering it is at best exhibiting gamesmanship." Such a finding would mean that Crusader's guidelines could rewrite the statutes expressly permitting insurers to rely on insured's representations. Finally, Colony presented no evidence that a more thorough investigation would have led Crusader to discover the 2002 citations. As such, Colony could not establish waiver.
The Court of Appeal dismissed Colony's final argument that Crusader improperly engaged in post-claims underwriting. Post-claims underwriting means "the rescinding, canceling, or limiting of a plan contract due to the plan's failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on or with an application before issuing the plan contract." This practice is prohibited by statute in the context of health insurers and by public policy in the context of automobile insurers. The Court stated that since this case did not involve a health services plan or automobile coverage, the prohibition on post-claims underwriting is inapplicable.
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