Vu v. Prudential Property & Casualty Insurance

Opinion

In a case involving an insurance claim for damages caused by the 1994 Northridge earthquake, the United States Court of Appeals for the Ninth Circuit certified the following question to this court: “Where an insured presents a timely claim to his insurer for property damage under a policy, and the insurer’s agent inspects the property but does not discover the full extent of covered damage, does California Insurance Code § 2071 bar a claim brought by the insured more than one year after the damage was sustained but within one year of his discovery of the additional damage? Or, to put the matter differently, does Neff v. New York Life Ins. Co., 30 Cal.2d

in federal district court. Vu alleged that Prudential was estopped from invoking the one-year statute of limitations because his failure to bring an action within one year was the direct result of his reasonable reliance on Prudential’s January 1994 inspection, and on Prudential’s representation that the damage to his home fell below the $30,000 deductible. The district court granted Prudential’s motion for summary judgment, holding that the one-year statute of limitations acted as a bar to Vu’s breach-of-contract claim and to his second claim for breach of the implied covenant of good faith and fair dealing. Vu timely appealed.” (Vu v. Prudential Property & Cas. Ins. Co., supra, 172 F.3d at pp. 727-728, italics omitted.)

n. The Statute of Limitations on Insurance Claims

The ordinary statute of limitations for breach of a written contract is four years. (Code Civ. Proc., § 337.) Insurance claims for property damage, however, have a one-year limitation period. (Ins. Code, § 2071.) We explained: “The short statutory limitation period ... is the result of long insistence by insurance companies that they have additional protection against fraudulent proofs, which they could not meet if claims could be sued upon within four years as in the case of actions on other written instruments. (Code Civ. Proc., § 337.) Originally, the shortened limitation periods were inserted into policies by insurers. Some courts declared such provisions void as against public policy while other courts enforced them in order to protect freedom of contract.” (Bollinger v. National Fire Ins. Co. (1944) 25 Cal.2d 399 , 407 [ 154 P.2d 399 ].) In 1909, the California Legislature intervened in favor of a shortened period of limitation by enacting the predecessor to Insurance Code section 2071 to impose a 15-month limitation on claims under fire insurance policies. (Stats. 1909, ch. 267, § 1, p. 409.) The statute was fashioned after a New York statute governing lawsuits on fire insurance policies. “Thereafter, as insurance coverage was expanded to cover more than fire (e.g., theft, lightning and other property damage) the New York provision was broadened in 1943 by replacement of the phrase ‘after the fire’ with . . . ‘after inception of the loss.’ ” (Prudential-LMI Com. Insurance v. Superior Court (1990) 51 Cal.3d 674 , 683 [ 274 Cal.Rptr. 387 , 798 P.2d 1230 ], quoting Proc v. Home Ins. Co. (1996) 17 N.Y.2d 239 , 244 [ 270 N.Y.S.2d 412 , 217 N.E.2d 136 , 138].) In 1949, California’s Insurance Code section 2071 was amended to conform more closely to the New York law, shortening the limitation period to the one-year period of that law. (Prudential-LMI Com. Insurance v. Superior Court, supra, at p. 682.)

For years, California cases debated whether the defense of the statute of limitations was a favored or disfavored defense. In 1999, we resolved the matter: “[T]he affirmative defense based on the statute of limitations should

The Ninth Circuit has asked us whether our decision in Neff v. New York Life Ins. Co., supra, 30 Cal.2d 165 (Neff), “remain[s] good law.” (Vu v. Prudential Property & Cas. Ins. Co., supra, 172 F.3d at p. 727.) involved the doctrine of estoppel. In December 1926, Arthur Neff, the insured, became disabled by tuberculosis. He submitted a claim under his disability policy in April 1927. The insurer denied the claim, asserting that it did not appear Arthur was entitled to disability benefits. Arthur did not pursue the matter further. He died in 1937. In 1943, during his widow’s last illness, their son discovered the correspondence between the insurer and his father. The son’s lawsuit alleged that the insurer knew that Arthur was disabled within the meaning of the policy but fraudulently represented that Arthur was not entitled to policy benefits.

By 1947, when we decided Neff, it was already well settled that “an unconditional denial of liability by the insurer after the insured has incurred loss and made claim under the policy gives rise to an immediate right of action.” (Bollinger v. National Fire Ins. Co., supra, 25 Cal.2d at p. 404.) It was also clear that under some circumstances a misrepresentation or concealment by a defendant might bar it from raising the defense of the statute of limitations. (Neff, supra, 30 Cal.2d 165 , 169; see Pashley v. Pacific Elec. Ry. Co. (1944) 25 Cal.2d 226 , 229-232 [ 153 P.2d 325 ]; Kimball v. Pacific Gas & Elec. Co. (1934) 220 Cal. 203 , 210 [ 30 P.2d 39 ].) The issue in Neff was how to treat the insurer’s allegedly false communication that the insured was “ ‘not entitled to any benefits under [the] policy.’ ” (Neff, supra, at p. 168.) Was this an unconditional denial of liability that would start the running of the statute of limitations? Or was this a misrepresentation of fact on which the insured reasonably relied, and thus a misrepresentation that could furnish a basis for estopping the insurer from raising a statute of limitations defense?

This court viewed the insurer’s communication as a denial of liability, not a misrepresentation of fact. Affirming the judgment for the insurer, the Neff majority said: “Under the circumstances[,] the conclusion is inescapable that

Plaintiff argues that developments in the law since Neff call for reconsideration of that decision. He points out that although Neff itself recognized that “an insurer has the duty of exercising good faith in its dealings with the insured” (Neff supra, 30 Cal.2d at p. 172), later cases have built upon this premise and declared that an insurer and its insured have a “special relationship” (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654 , 685 [ 254 Cal.Rptr. 211 , 765 P.2d 373 ]; see Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390 , 401 [ 97 Cal.Rptr.2d 151 , 2 P.3d 1 ]; Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566 , 575 [ 108 Cal.Rptr. 480 , 510 P.2d 1032 ]; Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654 , 659 [ 328 P.2d 198 , 68 A.L.R.2d 883 ]). Under this special relationship, an insurer’s obligations are greater than those of a party to an ordinary commercial contract. (Chase v. Blue Cross of California (1996) 42 Cal.App.4th 1142 , 1152 [ 50 Cal.Rptr.2d 178 ].) In particular, an insurer is required to “give at least as much consideration to the welfare of its insured as it gives to its own interests.” (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809 , 818 [ 169 Cal.Rptr. 691 , 620 P.2d 141 ].) Cases have referred to the relationship between insurer and insured as a limited fiduciary relationship (see Gibson v. Government Employees Ins. Co. (1984) 162 Cal.App.3d 441 , 449-450 [ 208 Cal.Rptr. 511 ]); as “akin to a fiduciary relationship” (State Farm Fire & Casualty Co. v. Superior Court (1989) 216 Cal.App.3d 1222 , 1226 [ 265 Cal.Rptr. 372 ]); or as one involving the “qualities of decency and humanity inherent in the responsibility of a fiduciary” (Frommoethelydo v. Fire Ins. Exchange (1986) 42 Cal.3d 208 , 215 [ 228 Cal.Rptr. 160 , 721 P.2d 41 ]).

The insurer-insured relationship, however, is not a true “fiduciary relationship” in the same sense as the relationship between trustee and

Consequently, even as the California cases expanded upon the significance of the special relationship between insurer and insured, they have not viewed those cases as undermining the Neff decision. For example, in Love v. Fire Ins. Exchange, supra, 221 Cal.App.3d 1136 , the plaintiffs’ house sustained subsidence damage in 1981 caused by third party negligence. They filed a claim, which the insurer denied on the ground that the policy did not cover such damage. In 1988, the plaintiffs discovered the policy did cover subsidence damage when caused by third party negligence. They brought suit, alleging that the insurer should be estopped from asserting a statute of limitations defense because it had fraudulently concealed that the policy provided coverage for their damage.

Citing Neff, the Court of Appeal in Love affirmed a judgment for the insurer. It said: “It is undisputed that the Loves knew the operative facts (i.e., their home was damaged and the causes of damage included third party negligence) .... [T]hey admit being told unequivocally in 1981 their claim was denied for lack of coverage. [The insurer] neither ‘misrepresented’ nor ‘concealed’ any facts (as opposed to pertinent law or legal theories) . . . .” (Love v. Fire Ins. Exchange, supra, 221 Cal.App.3d at p. 1145.) In a footnote, Love distinguished the estoppel cases cited by the plaintiffs, explaining that in those cases “the defendants’ nondisclosures and/or misrepresentations effectively concealed the facts upon which the cause of action rested, not the legal theories supporting the complainants’ claims.” (Id. at pp. 1145-1146, fn. 5.)

On similar facts, the Ninth Circuit in Matsumoto v. Republic Ins. Co. (1986) 792 F.2d 869 , applying California law, also found for the insurer:

“Here, [the insurer’s] denial of the Matsumotos’ claims was, at most, an incorrect interpretation of the terms of [the] contract. We are therefore bound by Neff v. New York Life Insurance Co. [citation] wherein the California Supreme Court held that an insurer’s disclaimer, even if ‘made through fraud or mistake,’ could not toll the statute of limitations.” (Id. at p. 872, fn. omitted.) In a footnote, the Ninth Circuit observed that the Matsumotos did not argue “factual concealment.” (Id. at p. 872, fn. 3.) Many other cases have applied our decision in Neff without suggesting that Neff’s reasoning may be outmoded. (See Prieto v. State Farm Fire & Cas. Co. (1990) 225 Cal.App.3d 1188 [ 275 Cal.Rptr. 362 ]; Magnolia Square Homeowners Assn. v. Safeco Ins. Co. (1990) 221 Cal.App.3d 1049 [ 271 Cal.Rptr. 1 ]; State Farm Fire & Casualty Co. v. Superior Court (1989) 210 Cal.App.3d 604 [ 258 Cal.Rptr. 413 ]; Aban v. State Farm Fire & Casualty Co. (1988) 205 Cal.App.3d 530 [ 252 Cal.Rptr. 565 ]; Lawrence v. Western Mutual Ins. Co. (1988) 204 Cal.App.3d 565 [ 251 Cal.Rptr. 319 ]; Cardosa v. Fireman’s Fund Ins. Co. (1956) 144 Cal.App.2d 279 , 283 [ 300 P.2d 875 ].)

We therefore reaffirm our holding in Neff, supra, 30 Cal.2d 165 , that a denial of coverage, even if phrased as a “representation” that the policy does not cover the insured’s claim, or words to that effect, offers no grounds for estopping the insurer from raising a statute of limitations defense. But as we have seen, Neff and many of the cases applying Neff were careful to distinguish such a representation from a misrepresentation oí fact. The latter, they noted, could lead to an estoppel.

Here the undisputed representation is one of fact. William Leggitt, Prudential’s inspector, examined Vu’s property after the earthquake, and provided Vu with a worksheet showing the specific items of damage and the cost of repairs. Leggitt then explained to Vu that the total cost of repairs, $3,962.50, was less than the policy’s deductible amount of $30,000. Leggitt’s worksheet and explanation did not merely convey a denial of coverage, or state Prudential’s interpretation of the policy. Leggitt communicated specific facts describing the nature and amount of damage, and he advised Vu not to file a claim because the total damage Vu had incurred was less that the policy’s deductible.

On these facts, Prudential may be estopped from raising a statute of limitations defense if Vu can show that he reasonably relied on Leggett’s representation. As we explained in Benner v. Industrial Acc. Com. (1945) 26 Cal.2d 346 [ 159 P.2d 24 ]: “An estoppel may arise although there was no designed fraud on the part of the person sought to be estopped. [Citation.] To create an equitable estoppel, ‘it is enough if the party has been induced to refrain from using such means or taking such action as lay in his

On point is the decision of the federal district court in Ward v. Allstate Ins. Co., supra, 964 F.Supp. 307 , another Northridge earthquake case. Applying California law, the federal court said: “[A]fter the Plaintiffs had submitted a timely claim to Allstate, they relied on the representations of Mr. Sanchez, a purported expert and agent of Allstate, that their damage was limited to approximately $20,000. For this reason, the Plaintiffs allowed the limitations period to elapse without conducting a further investigation. This is precisely the type of situation contemplated by the estoppel doctrine. Allstate cannot be allowed to lull the Plaintiffs into sleeping on their rights, and then use the limitations period as a sword to cut down their claims.” (964 F.Supp. at p. 312.)

Prudential disputes whether Vu’s reliance was reasonable, claiming that Vu did not use due diligence to discover that his damage exceeded the deductible amount under his policy. Whether Vu’s reliance was reasonable depends on a myriad of factual questions. These may include: whether Vu himself was qualified to evaluate the damage or had to rely on an expert (see Vu v. Prudential Property & Cas. Ins. Co., supra, 172 F.3d 725 , 730-731); what Vu told the inspector about his damage; whether the inspector was qualified and, if not, whether Vu knew of his lack of qualification; whether the inspector examined the entire property and, if not, whether Vu knew the inspection was more limited; what led Vu to suspect his damage was greater than the policy’s deductible amount, and whether Vu then acted diligently after he so suspected, etc. Our role here is limited to setting out general principles of California law for the assistance of the Ninth Circuit. The application of these principles of law to the specific facts of plaintiff’s case is a matter for the federal judiciary.

IV. Conclusion

We answer the Ninth Circuit’s certified question as follows: Our decision in Neff, supra, 30 Cal.2d 165 , remains good law to the extent it holds that an