Court Opinion

ID: 9747802
Source: CourtListenerOpinion
Date Created: 2023-08-27 15:36:16.719732+00
Date Added: 2024-06-11T07:25:25.461480
License: Public Domain

WIENER, Acting P. J.,
Dissenting.—In 1988 Royal issued McMillin a commercial property insurance policy which, among other things, provided coverage for damage caused by the discharge of pollutants if the discharge resulted from any of a varied list of specific factors including fire, vandalism, falling objects or water damage. McMillin does not dispute that the reports furnished to Royal established that the leak which caused the contamination occurred in or before 1986. Instead it argues that no fuel spillage was detected in 1986 and the loss only manifested itself in 1988 when odors were first noticed.1 (See generally Prudential-LMI Com. Insurance v. Superior Court (1990) 51 Cal.3d 674 [274 Cal.Rptr. 387, 798 P.2d 1230].) It correctly asserts that as of January 1990, the exact cause of the leak had not been established and that Royal’s investigation had not reasonably ruled out the possibility of a covered loss. (See generally Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 406 [257 Cal.Rptr. 292, 770 P.2d 704] [burden is on the insurer to prove a claim is excluded].)
In the context of the foregoing, the majority acknowledge that an insurer has a statutory obligation to investigate an insured’s claim where the facts suggest a reasonable possibility of coverage under the policy. This obligation, however, is ephemeral in light of the majority’s conclusion. They hold that even where an insurer ignores this obligation, it will not be liable for its failure unless the investigation the insured is forced to conduct on its own ultimately demonstrates a covered loss. The result is a rule which will allow insurance companies to deny insureds the financial and emotional security they reasonably believe they are purchasing when they buy an insurance policy.
In deciding this issue of first impression, the majority conclude a duty on the part of an insurer to investigate a potential claim cannot be implied from the language of this policy and should not be implied generally as a matter of law. They are incorrect on both counts.
A
The majority say there is no “language in the policy which provides reimbursement of an insured’s investigation costs when the investigation *1225discloses no covered loss.” (Maj. opn., ante, p. 1220.) They are accurate in this limited statement. Indeed, there is no language which provides for reimbursement where the investigation discloses a covered loss, although the majority concede reimbursement is required in such circumstances. The reason for the omission is clear. Because the policy assumes the insurer will comply with its contractual obligations, reference to the insurer’s obligation to reimburse the insured for investigation costs would be surplussage.
The policy in this case reasonably implies that Royal will conduct a reasonable investigation to determine whether there is coverage. The policy requires the insured to give “prompt notice” of the loss to Royal, to describe “how, when and where” the loss occurred, and to allow Royal “to inspect the property and records proving the loss or damage.” Beyond that the insured is expressly directed to “cooperate” with Royal “in the investigation or settlement of the claim.” (Italics added.) I see no way of reading these provisions other than to imply an obligation to reasonably investigate a potential claim. (See, e.g., Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1265 [10 Cal.Rptr.2d 538, 833 P.2d 545] [insurance policy must be interpreted consistent with the objectively reasonable expectations of the insured]; Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 270 [54 Cal.Rptr. 104, 419 P.2d 168].) And since the principal purpose of the investigation is to determine whether there is a covered loss, it would be objectively unreasonable to interpret the duty to investigate as being contingent on whether there is coverage.
B
Having found no contractual duty as a matter of fact, the majority then reject any suggestion that a duty to investigate should be implied as a matter' of law, accepting Royal’s argument that it is obligated to pay the costs of investigation only if the investigation ultimately shows a covered loss. McMillin responds that the duty to investigate in first party policies should be analogized to the duty to defend in third party policies as analyzed in Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263. The insurer in Gray argued it had an obligation to defend the insured only if the third party lawsuit ultimately established coverage under the policy. Justice Tobriner’s now-landmark opinion rejected this contention, explaining that an insured “would reasonably expect a defense by the insurer in all personal injury actions against him. If he is to be required to finance his own defense and then, only if successful, hold the insurer to its promise by means of a second suit for reimbursement, we defeat the basic reason for the purchase of the insurance. In purchasing his insurance the insured would reasonably expect that he would stand a better chance of vindication if supported by the resources and expertise of his insurer than if compelled to handle and *1226finance the presentation of his case. He would, moreover, expect to be able to avoid the time, uncertainty and capital outlay in finding and retaining an attorney of his own.” (Id. at p. 278.)
Although they acknowledge the superficial similarity between the duty to defend in third party policies and a duty to investigate in first party policies, the majority assert that conceptual differences between first and third party policies argue against implying an investigative duty for insurers. The majority’s analysis does not withstand scrutiny.
It is true that differences between first and third party coverage have resulted in different rules of policy interpretation. In first party policies, a bilateral contractual relationship between insurer and insured is at issue. In third party policies, the direct beneficiary of the contract is an unrelated third party who has been injured. Thus in Garvey v. State Farm Fire & Casualty Co., supra, 48 Cal.3d 395, the considerations supporting the broad coverage rules of concurrent causation applicable to third party policies (see State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94 [109 Cal.Rptr. 811, 514 P.2d 123]) did not compel a similar approach for first party policies.
But Garvey’s interpretive dichotomy applies to coverage questions. (See, e.g., Chu v. Canadian Indemnity Co. (1990) 224 Cal.App.3d 86, 94 [274 Cal.Rptr. 20] [“The Garvey court recognized that coverage questions must be analyzed differently, depending on which type of coverage the insured invokes.”].) Coverage for a loss specified in the policy is not the issue in this case. Rather, we are asked to decide the preliminary question whether the insurer is obligated to pay for the costs of an investigation reasonably necessary to determine whether coverage exists. Garvey explains that interpretive rules in third party policies may be different because the purpose of the policy is to indemnify the insured for tort liability to a third party. (48 Cal.3d at pp. 406-407.) But the broad duty to defend independent of ultimate coverage which was recognized in Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263 does not inure to the benefit of the third party.2 It directly and exclusively benefits the insured. Thus the considerations identified in Garvey simply do not justify any distinction in the interpretation of policy provisions which directly benefit the insured. (Cf. Fireman’s Fund Ins. Co. v. Aetna Casualty & Surety Co. (1990) 223 Cal.App.3d 1621, 1628 [273 Cal.Rptr. 431] [“Garvey neither holds nor suggests that all legal principles developed in first party cases are inapplicable in third party cases.”].)
Moreover, the same practical considerations which led the Supreme Court in Gray to recognize a duty to defend irrespective of ultimate coverage impel *1227even more strongly the recognition of an implied contractual duty to investigate in first party cases. By refusing to do so, the majority create an unnecessary tension between the statutory duty to investigate recognized in Insurance Code section 790.03, subdivision (h)(3), and the insured’s rights under the insurance policy. Nothwithstanding this tension, responsible insurers committed to performing in an ethical manner will continue to investigate a claim if there is a reasonable possibility of coverage under the policy. But if a less committed insurer refuses to investigate or performs an inadequate investigation, many insureds will not have the resources to complete an investigation on their own. Without an investigation, coverage cannot be established. Thus, where a legitimate question as to coverage exists, the insured is of limited means and the necessary investigation involves significant expense, the majority’s rule provides an economic incentive for insurers to forgo the investigation, deny coverage, and incur the minimal risk that the insured can later establish coverage and sue for reimbursement. And even in those cases in which insureds are able to pursue their rights against recalcitrant insurers, I see little benefit to the public or the judicial system by a rule which encourages another unnecessary round of litigation seeking extracontractual and punitive damages.
Courts do more than decide discrete cases affecting the interests of the parties to a particular lawsuit. In the insurance area in particular, we must recognize that our decisions affect the ways companies draft policies, structure their procedures, and interact with their insureds. In deciding cases we have an obligation to create rules which clarify the obligations of insurers and insureds fairly and reasonably. Unfortunately, the majority’s discussion confuses rather than clarifies the obligations of insurers under California law, creating a significant potential for abuse of California’s insurance consumers.
A petition for a rehearing was denied November 1, 1993, and appellant’s petition for review by the Supreme Court was denied February 3, 1994. Kennard, J., and Arabian J., were of the opinion that the petition should be granted.

Contrary to Royal’s assertion, the trial court did not expressly base the grant of summary judgment on a conclusion that the loss was manifested before the Royal policy period. Indeed, McMillin conceded a lack of coverage and the specific reason was irrelevant in view of the court’s conclusion that a reasonable investigation had been done and no additional investigation would have revealed any possibility of coverage.

Indeed, recognition of a duty to defend on the part of the insurer probably makes it less likely that the third party plaintiff will recover from the insured.