Source: http://harp.org/spray.htm
Timestamp: 2019-04-24 11:46:52+00:00

Document:
Spray, Gould & Bowers v. Associated International Insurance Co.
ASSOCIATED INTERNATIONAL INSURANCE COMPANY, Defendant and Respondent.
David Yaffe, Judge. Reversed and remanded for further proceedings.
Watkins & Stevens, Steven B. Stevens; Mazursky, Schwartz & Angelo and Christopher E. Angelo for Plaintiff and Appellant.
Bryan Cave LLP, William I. Chertok and Richard C. Ochoa for Defendant and Respondent.
Plaintiff Spray, Gould & Bowers is a law firm ("SG&B" ) which appeals the trial court's summary judgment in favor of the defendant Associated International Insurance Company ("AIIC" ), based on the contract limitations period stated in the subject insurance policy.
We hold that an insurer's direct violation of duly promulgated administrative regulations issued by the California Insurance Commissioner, requiring the insurer to notify a claimant insured of time limits pertaining to the claim, may provide the basis of an estoppel against the insurer's assertion of a contract limitations defense.
The trial court's summary judgment is reversed and the matter is remanded for further proceedings.
On September 16, 1996, SG&B filed its complaint, alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief. The complaint alleged that SG&B had suffered loss as a result of the Northridge Earthquake on January 17, 1994, that claim on SG&B's contract of insurance with AIIC had been timely made, and that AIIC had wrongly refused to pay, together with subsidiary supporting allegations. On January 6, 1997, AIIC filed its answer, raising inter alia a contract limitations affirmative defense.
2. The Summary Judgment Motion Proceedings.
On May 19, 1997, AIIC filed its motion for summary judgment, or in the alternative, for summary adjudication. The facts adduced in support of the summary judgment motion were the following. AIIC had sold to SG&B a Combined Business Interruption and Extra Expense Insurance Policy (the "Policy" ), with an effective period of September 2, 1993 to September 2, 1994. The Policy contained a contractual limitations clause. That clause (entitled "Suit." ) provided that "no suit, action or proceeding for the recovery of any claim under this policy shall be sustainable in any court of law or equity unless the same shall be commenced within twelve (12) months next after discovery by the insured of the occurrence which gives rise to the claim, provided however, that if by the laws of the State within which this policy is issued such limitation is invalid, then any such claims shall be void unless such action, suit or proceeding be commenced within the shortest period of time permitted by the laws of such State." The loss occurred on January 17, 1994. The loss was discovered by the insured on January 17-18, 1994. The insured made claim under the policy on November 21, 1994. On April 18, 1995, AIIC denied the claim. The action below was filed on September 16, 1996. AIIC contended that under the computation standards set forth in Prudential-LMI Com. Insurance v. Superior Court (1990) 51 Cal.3d 674, approximately 10 months of the 12-month limitation period elapsed between January 18, 1994 (the discovery of the loss) and November 21, 1994 (the date of the claim), the period was then tolled until April 18, 1995 (the date of denial of the claim), and thus the filing of the action an additional 17 months later on September 16, 1996, was untimely because of a net elapsed period of approximately 27 months, past the contract limitations limit of 12 months.
In its opposition argument, SG&B principally contended that AIIC had failed to notify SG&B of the time limit for filing an action on the policy (other than of course the admitted existence of the policy provision), and that in light of SG&B's lack of actual knowledge of the time limit, AIIC should be estopped from relying on the policy limitations provision.
On July 11, 1997, AIIC filed a reply and evidentiary objections, in essence denying the applicability of section 2695.4(a), under traditional contract and estoppel principles, to the limitations dispute. AIIC did not dispute its alleged violation of the regulation.
b. The Trial Court's Order And Judgment.
The trial court agreed with AIIC, essentially on the grounds that the stated (and presumably intended) consequence of a regulatory violation was solely administrative action by the Insurance Commissioner. The trial court granted the summary judgment motion, and on September 22, 1997, entered judgment for AIIC. SG&B filed this timely appeal.
SG&B contends that the trial court's granting of summary judgment is erroneous in that: (1) AIIC did not prove its initial entitlement to summary judgment, (2) a triable issue of fact was raised as to whether AIIC was estopped to assert the statute of limitations defense, and (3) the trial court applied the wrong statutory period to the implied covenant and the declaratory relief causes of action.
We agree that a triable issue of fact was raised as to whether AIIC should be estopped from raising the limitations defense, and on that basis reverse the summary judgment. In light of our holding that AIIC's violation section 2695.4(a) of the Fair Claims Settlement Practices Regulations (requiring the insurer to "disclose to" a claimant insured all policy "time limits . . . that may apply to the claim" ) may provide the basis of an estoppel against the insurer's assertion of a contract limitations defense, SG&B established a triable issue of fact as to whether it had actual knowledge of the policy time limits applicable to the claim.
b. AIIC Proved Its Initial Entitlement To Summary Judgment.
AIIC showed that SG&B discovered the loss on January 17-18, 1994, made its claim on November 21, 1994, and that on April 18, 1995, AIIC denied the claim.
Under Prudential-LMI Com. Insurance v. Superior Court, the one-year period is equitably tolled between the time that the insured notifies the carrier of the loss, and the written denial of the claim. Therefore, the period was indisputably tolled for the 10-month period between November 21, 1994 (the date of the claim), and April 18, 1995 (the date of denial). But the filing of the action came an additional 17 months later on September 16, 1996. This was a net-elapsed period of approximately 27 months, well beyond the contract limitations limit of 12 months.
2. SG&B Raised A Triable Issue Of Fact As To Whether AIIC Was Estopped To Assert The Statute Of Limitations Defense.
SG&B's major contention is that AIIC should be estopped from relying on the contract limitations defense, because (a) SG&B was unaware of the 12-month limitations period, and (b) AIIC failed to disclose the short limitations period to SG&B, despite (c) the requirement of section 2695.4(a) that "every insurer shall disclose to a first party claimant . . . all . . . time limits . . . of any insurance policy issued by that insurer that may apply to the claim presented by the claimant."
Application of equitable estoppel against the assertion of a limitations defense typically arises through some misleading affirmative conduct on the part of a defendant. There is no such affirmative conduct here. AIIC was mum on the subject of the limitations provision and any time limit governing the commencement of litigation after its denial of the claim. It is well established that mere silence will not create an estoppel, unless there is a duty to speak.
SG&B argues that a duty to speak arises from the regulation. We agree. The regulation imposes on insurers an unmistakable duty to advise its claimant insureds of applicable claim time limits. The regulation directly targets the situation presented by this appeal. The regulation's purpose is salutary, designed to alert insureds to their insurance policy obligations, and to foster equity, fairness, and plain-dealing in claims handling. The promulgation of the regulations is expressly authorized by Insurance Code section 791.10.[FOOTNOTE 6] The Regulations flesh out the statutory public policy of the Unfair Practices Act, the purpose of which is to regulate trade practices in the business of insurance. (Ins. Code, § 790.) Section 790.03(h) specifically forbids certain unfair claims settlement practices.[FOOTNOTE 7] In sum, the Commissioner's "Fair Claims Settlement Practices Regulations" represent the considered and duly promulgated public policy appropriate to the processing of its subject insurance claims in California.[FOOTNOTE 8] We see no reason not to adopt this carefully considered public policy as giving rise to a duty to speak for the purpose of applying the doctrine of equitable estoppel. To do otherwise would arbitrarily undermine an applicable industry standard, one expressly designed to insure fairness in the claims process and resolution of claims on the merits. There seems no valid reason to ignore its command.
a. Estoppel Is Not Precluded By The Limits Of The Commissioner's Regulatory Authority.
AIIC contends that estoppel based on violation of the regulation is inappropriate because the regulations themselves state the applicable sanctions: administrative action against the insurer's license and/or monetary penalties.[FOOTNOTE 9] We disagree that the stated regulatory penalty necessarily ends the inquiry into extra-administrative effect to the insurance regulations. No established legal doctrine precludes wider effect.[FOOTNOTE 10] The failure of the Insurance Commissioner to adopt an estoppel sanction in the regulations cannot be taken ipso facto as a decisive expression of the Commissioner's desire to limit the effect of regulatory violation to administrative sanctions. The Commissioner might well have considered only that administrative sanctions represented the limit of his regulatory authority. The Commissioner's failure to arrogate additional authority to himself cannot be seen as a tacit effort to retrench from the positive command and salutary effect of the Insurance Regulations.
The object and purpose of the time limit disclosure requirement contained in the regulations is to preserve claims for resolution on the merits: to remedy the trap for the unwary. Yet the limit of the Commissioner' s administrative authority is to impose monetary penalties and adverse licensure action in order to coerce future compliance. Therapeutic as this may be, its effect is prospective only. The after-the-fact administrative sanction does nothing to rectify the very wrong the regulation was designed to prevent. Only if the courts, through their equitable powers, require compliance with the regulation will its purpose of claim preservation be achieved. It would be a perverse irony for government to take down an insured's valid complaint, and duly note the insured's evidence, with an eye only toward the next victim. To coldly inform the insured that the insurer will be called to account, but that the insured's claim will stand denied as untimely, is a deplorable inequity to be redressed.
If we allow an insurer to rely upon a preclusive policy provision as to which it was required, but did not, give the insured special notice, then we effectively place a premium upon insurer disregard of the regulation which imposed the requirement. The subsequent imposition by the Commissioner of an administrative sanction may or may not induce future compliance, but we will have succeeded in encouraging the insurer to regard the question of regulatory compliance as a day-to-day business decision unrelated to the consequences of violation which might flow in a judicial proceeding to resolve a particular claim. Such a result will not necessarily cause insurers to adopt and implement a practice of compliance. In short, it is simply unacceptable for an insurer to take advantage of its own misconduct and thereby succeed in defeating an otherwise legitimate claim because the insured did not comply with a policy time limit of which it was not actually aware due to the insurer's failure to provide the required notice. The Commissioner's "Fair Claims Settlement Practices Regulations" state a considered public policy, and deserve to be given practical and equitable effect.
b. Estoppel Is Not Precluded By Moradi-Shalal.
AIIC contends that SG&B's arguments implicitly contravene the Supreme Court's rationale in Moradi-Shalal v. Fireman's Fund Ins. Companies, supra, 46 Cal.3d 287, that California's Unfair Practices Act (Ins. Code, § 790.03, subd. (h)) does not provide a private cause of action against insurance companies (in a third-party case). In Zephyr Park v. Superior Court (1989) 213 Cal.App.3d 833, 836-838, Moradi-Shalal was extended to first-party claims. However, Moradi-Shalal speaks only to whether the Unfair Practices Act creates a private right of action, and not to whether the Regulations might form the basis of an estoppel where they are violated. Nothing in Moradi-Shalal suggests that insurer violations of the Unfair Practices Act or its enabling regulations may not have consequences short of an independent private right of action. Indeed, in Moradi-Shalal, the court stated, "apart from administrative remedies [under section 790.03], the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as fraud, infliction of emotional distress, and (as to the insured) either breach of contract or breach of the implied covenant of good faith and fair dealing." (46 Cal.3d at pp. 304-305, italics added.) Accordingly, estoppel against the assertion of a limitations defense is not precluded by the holding or rationale in Moradi-Shalal or Zephyr Park.
c. Estoppel Is Not Inconsistent With Waller v. Truck Ins. Exchange, Inc.
AIIC also contends that SG&B's arguments implicitly contravene the Supreme Court's holding in Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 34, to the effect that an insurer is not estopped from asserting valid coverage defenses not mentioned in the denial of a claim, where no detrimental reliance is shown by the insured. But Waller is distinguishable because SG&B has raised a triable issue of fact on the element of detrimental reliance, through its declarations asserting lack of actual knowledge of the time limit applicable to its claim. Furthermore, Waller simply did not deal with the affirmative duty to speak imposed by the Fair Claims Settlement Practices Regulations.
d. Estoppel Is Not Precluded By SG&B's Arguable Constructive Knowledge.
e. Estoppel Is Not Precluded By Any Prior Precedent.
So far as we know, no other California appellate court has passed on the subject of an estoppel based in part on the Insurance Commissioner's Fair Claims Settlement Practices Regulations. However we find it appropriate under the facts of this case.
The trial court's judgment is reversed and the matter is remanded for further proceedings consistent with the views expressed herein. SG&B shall recover its costs on appeal.
We concur: KLEIN, P.J., CROSKEY, J.
FN1. All further statutory references are to the California Administrative Code unless otherwise specified.
FN2. Even though the time limit disclosure requirement of section 2695.4(a) was retained in the 1997 amendments to the regulations (operative May 10, 1997, Register 97, No. 2), we consider only the language of the regulations in place at the time of the events in question.
FN3. California Administrative Code, section 2695.4(a) provides in pertinent part: "Every insurer shall disclose to a first party claimant or beneficiary, all benefits, coverage, time limits, or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant." (Italics added.) Certain classes of insurance, such as workers' compensation and medical malpractice, are excepted from the regulations.
FN5. SG&B does not dispute AIIC's reading of the policy. AIIC does not dispute SG&B's reading of the regulation, nor seriously dispute SG&B's showing of lack of actual knowledge of the 12-month limitations provision, based on the record developed below.
FN6. Insurance Code Section 790.10 provides: "The commissioner shall, from time to time as conditions warrant, after notice and public hearing, promulgate reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article."
FN7.Insurance Code Section 790.03(h) defines unfair methods of competition and unfair and deceptive acts or practices, and with reference to "unfair claims settlement practices" includes "knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices: . . . (15) Misleading a claimant as to the applicable statute of limitations."
FN8. AIIC does not contend that the regulations have been other than duly promulgated.
FN9. As already noted, section 2695.4 is part of the California Unfair Claims Settlement Practices Regulations. At the time of the events involved in this appeal, the specified consequences of a regulatory violation was set forth in section 2695.15: "Penalties. Any licensee who violates any regulation contained in this subchapter shall be subject to all applicable monetary penalties or other administrative actions within the jurisdiction of the Commissioner including, but not limited to, suspension or revocation of an insurer's certificate of Authority or license or revocation or suspension of an agent's license." Section 2695.15 was repealed in 1997, and some of its provisions repromulgated in section 2695.12. The range of penalties available to the Commissioner remained as specified in the Insurance Code. Neither the regulations nor the Insurance Code forbid extra-administrative effect for violations of section 2695.4.
FN10. Indeed, extra-administrative effect of regulatory pronouncements is hardly unprecedented. The influence of safety regulations has long been projected outside the administrative arena into their respective zones of operation under the negligence per se doctrine by shifting the burden of proof in personal injury cases (see Evid. Code, § 669(a)(1)), and by establishing prudent norms and customs, and standards of care. (Cf. California Service Station etc. Assn. v. American Home Assurance Co. (1998) 62 Cal.App.4th 1166, 1175-1177 [Insurance Commissioner's regulation requiring insurers to furnish dividend disclosure statement to workers' compensation policy purchasers (10 Cal. Code of Regulations, § 2505), did not create negligence duty of care or establish presumption of negligence under negligence per se doctrine, because authority to legislate the imposition of such a duty not delegated to the agency by the Legislature, distinguishing the possible relevance of such regulations to standards of care operating within an independently established duty of care].) Of course, any theory of new or expanded insurer liability, based upon a violation of regulations promulgated to enforce the provisions of Insurance Code section 790.03, may well be confronted with the authority of Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, and its progeny.
FN13. In light of the disposition, we need not reach other contentions presented by the parties. Our disposition is without prejudice to a AIIC's pursuit of a new summary judgment motion if AIIC can establish actual knowledge on the part of SG&B. On this record a triable issue exists as to actual knowledge.
FN*. Assigned by the Chairperson of the Judicial Council.

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