Hellinger v. Farmers Group, Inc.

In April 1994, the Hellingers hired a contractor to repair the visible damage caused by the earthquake, at a cost of $4,350. In July 1995, while gardening, Lee Hellinger noticed a large crack in the concrete foundation under the soil line. He reported this damage to Mr. Hammer and asked for an inspection.

Farmers sent a claims adjuster to inspect the damage in mid-September 1995. The Hellingers’ claim was denied in writing on November 27, 1995, citing the policy clause which requires that suit be brought within one year of the loss.

The Hellingers sued Farmers, Fire Insurance Exchange, and Mid-Century on August 26, 1996. In their original complaint, they alleged causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud. The second amended complaint alleged causes of action for breach of the covenant of good faith and fair dealing, breach of fiduciary duty, and breach of contract. The trial court sustained a demurrer without leave to amend to the second amended complaint on the ground that Farmers and Fire Insurance Exchange were not proper parties since the earthquake policy was separate from the homeowners policy they had issued. The Hellingers were then granted leave to amend to add Farmers as a defendant on an alter ego theory. (The theory was that Mid-Century had no employees and had relied upon Farmers and Fire Insurance Exchange to investigate all Northridge earthquake claims and to develop the practices and procedures for handling those claims.) The third amended complaint, naming Mid-Century and Farmers, is the charging pleading. It alleges causes of action for breach of the covenant of good faith and fair dealing, breach of contract, alter ego liability, and joint venture liability.

Mid-Century and Farmers filed a joint motion for summary judgment, or in the alternative, for summary adjudication. They based their motion on the Hellingers’ failure to file their lawsuit within one year of the date of the earthquake, and on the ground that Lee Hellinger no longer had an insurable interest when the earthquake occurred. The Hellingers opposed the motion on the sole ground that they needed a continuance pursuant to section 437c, subdivision (h) to allow completion of outstanding discovery. They pointed out that five discovery motions were then pending before the court.

The trial court granted summary adjudication on the cause of action for breach of the covenant of good faith and fair dealing and on the claim for punitive damages, and continued the hearing on the cause of action for

It may or may not be common for insurers to include a one-year limitations period in earthquake damage riders to fire insurance policies, as well as in stand-alone earthquake policies. The fact that insurers choose to include the one-year limitation in stand-alone earthquake policies does not bring those policies within the ambit of Insurance Code section 2071. For that matter, there is no legal requirement that insurers include the one-year period in homeowners policies that cover a multitude of risks besides fire, so long as it is included for fire coverage.

B. “Solely Because of the Applicable Statute of Limitations”

Section 340.9 subdivision (a) applies “[notwithstanding any other provision of law or contract'' to revive certain claims arising out of damages from the Northridge earthquake which are “barred . . . solely because the applicable statute of limitations has or had expired . . . .” (Italics added.) Does this mean that, despite the reference to “any other provision of . . . contract” only the statutory bar is affected? Or does the law apply as well to claims that are barred by the contract limitations period? Arguments are made for each alternative. Our first task is to determine which is correct.

“ ‘When uncertainty arises in a question of statutory interpretation, consideration must be given to the consequences that will flow from a particular interpretation. [Citation.] In this regard, it is presumed the Legislature intended reasonable results consistent with its expressed purpose, not absurd consequences.’ ” (Santa Clara County Local Transportation Authority v. Guardino (1995) 11 Cal.4th 220 , 235 [ 45 Cal.Rptr.2d 207 , 902 P.2d 225 ], quoting Harris v. Capital Growth Investors XIV (1991) 52 Cal.3d 1142 , 1165-1166 [ 278 Cal.Rptr. 614 , 805 P.2d 873 ].) Courts properly examine the manifest purpose of the statute as a whole in interpreting its provisions. (Santa Clara County Local Transportation Authority v. Guardino, supra, 11 Cal.4th at p. 235 [applied to initiative]; In re Marriage of Walrath (1998) 17 Cal.4th 907 , 918 [ 72 Cal.Rptr.2d 856 , 952 P.2d 1124 ] [“ ‘ “We must select the construction that comports most closely with the apparent intent of the Legislature, with a view to promoting rather than defeating the general

We conclude that the relief afforded by section 340.9 applies to both contract and statutory limitations periods.

C. “Litigated to Finality”

Subdivision (d)(1) of section 340.9 makes the statute inapplicable to any claim “that has been litigated to finality in any court of competent jurisdiction” before January 1, 2001. Mid-Century argues the statute does not apply because plaintiff’s claim had been “litigated to finality” before that date in the Los Angeles Superior Court, which is a court of competent jurisdiction. This is true, according to Mid-Century, because the judgment for the insurers was rendered on November 18, 1999, before the January 1, 2001 effective date of the statute.

The statute does not define “litigated to finality.” Mid-Century argues that a trial court judgment, if rendered by a competent court, is sufficient to satisfy the requirements of subdivision (d)(1) of section 340.9. It relies on Sullivan v. Delta Air Lines, Inc. (1997) 15 Cal.4th 288 [ 63 Cal.Rptr.2d 74 , 935 P.2d 781 ]. The issue in that case was whether section 377.34, a claim survival statute, applies if the plaintiff was alive when judgment was rendered but died while the appeal was pending. The defendant had cited an earlier version of the statute which applied only when the plaintiff died “before judgment.” The defendant argued that “before judgment” meant “before final judgment” and that a judgment is not final until affirmed on appeal or until the time for appeal has passed. (Sullivan, at p. 303.) The Supreme Court agreed that one of the meanings of “final judgment” is that a judgment is not final as long as it is subject to direct attack by appeal or by

Mid-Century argues that section 340.9 violates the contract impairment clauses of both the federal and state Constitutions, which prohibit a law impairing the obligation of contracts. Article I, section 10, clause 1 of the United States Constitution provides that “No State shall . . . pass any . . . Law impairing the Obligation of Contracts, . . . “ thus making the restriction applicable to state legislation. (See Lynce v. Mathis (1997) 519 U.S. 433 , 440, fn. 12 [ 117 S.Ct. 891 , 895, 137 L.Ed.2d 63 ] [contract clause prohibits states from passing retroactive legislation impairing the obligation of contracts].) California Constitution, article I, section 9 is similar. It provides in pertinent part: “A . . . law impairing the obligation of contracts may not be passed.”

It has been established law for over a century that a legislature may revive a civil claim that is barred by the statute of limitations. The reason is that, in a civil case, there is no constitutional right of repose. (Campbell v. Holt (1885) 115 U.S. 620 , 628-629 [ 6 S.Ct. 209 , 213-214, 29 L.Ed. 483 ] [upholding provision reviving civil actions]; Chase Securities Corp. v. Donaldson (1945) 325 U.S. 304 , 314 [ 65 S.Ct. 1137 , 1142, 89 L.Ed. 1628 ] [revival of a personal cause of action which did not involve creation of title does not offend due process]; Liebig v. Superior Court (1989) 209 Cal.App.3d 828 , 830 [ 257 Cal.Rptr. 574 ] [§ 340.1]; Lent v. Doe (1995) 40 Cal.App.4th 1177 , 1183 [ 47 Cal.Rptr.2d 389 ] [similar].)

This case is different because it turns on a contractual limitations period. Mid-Century’s argument is that, to the extent section 340.9 allows a party to proceed on a claim already barred by the contractual provision, it impairs the insurer’s contractual rights.

The dimensions of the constitutional argument were most recently and fully discussed by our Supreme Court in Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805 , 814-815 [ 258 Cal.Rptr. 161 , 771 P.2d 1247 ], The court observed: “ ‘[A]ll presumptions and intendments favor the validity of a statute and mere doubt does not afford sufficient reason for a judicial

The court cited Exxon Corp. v. Eagerton (1983) 462 U.S. 176 [ 103 S.Ct. 2296 , 76 L.Ed.2d 497 ]. That case reviewed a statute that prohibited increases on oil and gas prices even as to sellers with contracts which expressly allowed them. “The [Eagerton] decision explained that ‘[although the language of the Contract Clause is facially absolute, its prohibition must be accommodated to the inherent police power of the State “to safeguard the vital interests of its people.” [Citations.] This Court has long recognized that a statute does not violate the Contract Clause simply because it has the effect of restricting, or even barring altogether, the performance of duties created by contracts entered into prior to its enactment. [Citation.]’ ” (Calfarm Ins. Co. v. Deukmejian, supra, 48 Cal.3d at p. 828.) This summary is entirely congruent with the Supreme Court’s appraisal of the Legislature’s power, in limited circumstances and in a circumscribed manner, to invalidate provisions of a contract.

The California cases on contract impairment are firmly rooted in established federal precedent. In a leading case, Home Bldg. & L. Assn. v. Blaisdell (1934) 290 U.S. 398 [ 54 S.Ct. 231 , 78 L.Ed. 413 , 88 A.L.R. 1481 ], the Supreme Court upheld a Minnesota Depression-era statute that empowered trial courts to extend the period of redemption from foreclosure “for such additional time as the court may deem just and equitable.” (Id. at p. 417, fn. 1 [54 S.Ct. at p. 232].) The Blaisdell court ruled that the reserved police power to impair contracts “must be consistent with the fair intent of the constitutional limitation of that power.” {Home Bldg. & L. Assn. v. Blaisdell, supra, 290 U.S. at p. 439 [54 S.Ct. at p. 240].) It concluded: “It cannot be maintained that the constitutional prohibition should be so construed as to prevent limited and temporary interpositions with respect to the enforcements of contracts if made necessary by a great public calamity such as fire, flood, or earthquake. [Citation.]” (Ibid.) The key holdings in Blaisdell are: “(1) The Contract Clause is not an absolute prohibition; contracts are made subject to the state’s police power; and, in an emergency, this reserved power may be exercised directly to prevent the strict enforcement of the contract, in order to safeguard the public interest. (2) The exercise of the power must be of a character appropriate to the emergency and reasonable in its conditions', and the Minnesota law, being reasonable, temporary and limited to the emergency, does not violate either the Contract or the Due Process Clause.” (8 Witkin, Summary of Cal. Law (9th ed. 1988) Constitutional Law, § 1083, pp. 656-657.)

The power of the government to enact legislation which impairs a contract also was recognized in Norman v. B. & O.R. Co. (1935) 294 U.S. 240 [ 55

Once the court has determined that a state regulation constitutes a substantial impairment, it moves to the second step of the analysis: whether the state has “a significant and legitimate public purpose behind the regulation, [citation] such as the remedying of a broad and general social or economic problem. [Citation.] Furthermore, since [Home Bldg. & L. Assn. v. Blaisdell, supra, 290 U.S. 398 ] the Court has indicated that the public purpose need not be addressed to an emergency or temporary situation. [Citations.] . . . The requirement of a legitimate public purpose guarantees that the State is exercising its police power, rather than providing a benefit to special interests.” (Energy Reserves Group v. Kansas Power & Light, supra, 459 U.S. at pp. 411-412 [103 S.Ct. at pp. 704-705].)

The third step in the analysis is whether the adjustment of “ ‘the rights and responsibilities of contracting parties [is based] upon reasonable conditions and [is] of a character appropriate to the public purpose justifying [the legislation’s] adoption.’ [Citation.] Unless the State itself is a contracting party [citation] ‘[a]s is customary in reviewing economic and social regulation, . . . courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure.’ [Citation.]” (Energy Reserves Group v. Kansas Power & Light, supra, 459 U.S. at pp. 412-413 [103 S.Ct. at p. 705], bracketed material in original except omitted citations and fns.)

We proceed to apply this test to the statute to the case before us. In doing so we need not and do not consider the validity of the statute in situations other than the one presented here. Thus, we do not consider the limitation in the exception clause that revives settled claims in cases where the insured was not represented by California counsel (§ 340.9, subd. (d)(2)), as that circumstance is not before us.

A. Severity of the Impairment

This phase of the analysis involves “assessing the severity of the impairment, since that assessment ‘measures the height of the hurdle the

Mid-Century argues the impairment is severe because section 340.9 “grants insureds a new right to claim lapsed contract benefits while wiping out the insurers’ existing contractual right to repose from stale claims.” It claims this impairment is massive because each of the 600,000 persons or entities who filed earthquake claims would be entitled to bring another claim. It also argues that there are others who may never have submitted a claim, but who will come within section 340.9 as long as they contacted their insurer. Mid-Century argues that insurers will be “practically defenseless to challenge the claims after the passage of time,” and cites the “specter of bad faith suits” in adjusting resubmitted claims to argue that “many insurers will be forced to pay skyrocketing amounts to settle what could be meritless claims.” It concludes: “Section 340.9 thus presents a virtually strict liability situation for insurers.” These arguments greatly overstate the case.

There is nothing before us to support Mid-Century’s claim that vast numbers of insureds would be rendered eligible to avail themselves of the section 340.9 extension. The reference to 600,000 persons apparently is to the gross number of claimants. We are concerned with a subset of unknown size: those who were insured but did not settle by written agreement when represented by California counsel and who contacted an insurer’s representative before January 1, 2000. Because that date is one year before the effective date of the statute, the size of the subset is severely circumscribed. Thus, it does not apply to an insured who waited until section 340.9 was enacted to contact an insurer’s representative. It is certainly no less speculative to posit, as we assume the Legislature did, that many if not most insureds who suffered earthquake damage are satisfied with the treatment they received by their insurer and have no wish to engage in litigation at this point. It also is important to recall that the statute revives the time period in which claims may be brought for one year, and that it does not affect any other defense which the insurers may have.

Mid-Century devotes part of its briefing to the provision applying the extended statute of limitations to settlements not signed on behalf of plaintiff by a California licensed attorney. (§ 340.9, subd. (d)(2).) But, as we have pointed out, that is not an issue in this action.

In Calfarm Ins. Co. v. Deukmejian, supra, 48 Cal.3d 805 , a contract clause challenge was made to Proposition 103, an initiative enacted in 1988 which made fundamental changes in the regulation of automobile and other types of insurance. (48 Cal.3d at p. 812.) The extensive regulation of the insurance

In applying these principles to this case, we weigh the degree of impairment to determine the magnitude of the public interest required to justify the impairment. (Calfarm Ins. Co. v. Deukmejian, supra, 48 Cal.3d at p. 830.) We agree that reviving contract-barred claims constitutes an impairment of contract. But the impairment goes to the remedy for a breach of the insurance contract, rather than to its core provisions. Insurers will still have available all applicable defenses to such revived claims other than the limitations defense.

B. Public Purpose

As we have discussed, Senate Bill No. 1899 was introduced “to bring needed relief to the victims of the Northridge earthquake. According [to the author, Senator Burton], the one-year statute of limitations that is current law under Insurance Code section 2071 has barred victims from being fairly compensated for their losses. He claims that numerous homeowners and homeowners associations were mislead about the extent of damage done as a result of the earthquake, and that once they learned the truth they were prohibited by the statute from filing a claim” (Sen. Com. on Judiciary, Analysis of Sen. Bill No. 1899 (1999-2000 Reg. Sess.) as amended May 9, 2000, pp. 2-3.)

We are satisfied that section 340.9 is supported by what the Legislature could reasonably view as significant, compelling, and legitimate state interests. It is within the power of the Legislature to protect California’s citizens from improper handling of their earthquake insurance claims. This purpose satisfies the public purpose portion of the constitutional test.

C. Reasonable and Appropriate Statute

The third step in the analysis is to assess whether the adjustment of “ ‘the rights and responsibilities of contracting parties [is based] upon reasonable conditions and [is] of a character appropriate to the public purpose justifying [the legislation’s] adoption.’ [Citation.] Unless the State itself is a contracting party [citation] ‘[a]s is customary in reviewing economic and social regulation, . . . courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure.’ [Citation.]” (Energy

Mid-Century argues that section 340.9 is neither reasonable nor necessary to the avowed purpose of the statute. Mid-Century argues the statute is unreasonable because it is overinclusive in that it indiscriminately revives all Northridge earthquake claims, without distinction between: (1) diligent insureds and those who were not; and (2) insurers who committed misconduct and those who did not. Mid-Century also argues the statute is unnecessary because existing law already provides mechanisms for the legal and equitable extension of the contractual limitations period in appropriate circumstances.

We do not agree. As applied to this case, section 340.9 is a reasonable and appropriate statute because it is limited in both time and application. First, to restate the obvious, the statute applies only to damages caused by a specific incident: the Northridge earthquake of 1994. It is operative for a single year. Only insureds who had contacted their insurers before January 1, 2000 (i.e., well before the statute was enacted) are eligible for its benefits. And, the statute does not apply to claims litigated to finality. Applying the deference due a legislative enactment, we conclude that application of the statute to the plaintiff does not impermissibly impair the defendants’ contract rights.

Mid-Century also argues that section 340.9 violates its right to due process by destroying a vested contract right to repose of stale claims. In Campbell v. Holt, supra, 115 U.S. 620 , the Supreme Court found no vested right of repose: “We can see no right which the promisor has in the law which permits him to plead the lapse of time instead of payment, which shall prevent the legislature from repealing that law because its effect is to make him fulfill his honest obligations.” (Id. at p. 629 [6 S.Ct. at p. 214].) Our discussion of the impairment of contract issue applies as well to the due process claim. (See Home Bldg. & L. Assn. v. Blaisdell, supra, 290 U.S. at p. 448 [54 S.Ct. at pp. 243-244]; Addison v. Addison (1965) 62 Cal.2d 558 , 566 [ 43 Cal.Rptr. 97 , 399 P.2d 897 , 14 A.L.R.3d 391 ].)

Finally, Mid-Century argues that even if section 340.9 applies, it revives only plaintiff’s contract claim, not his claims for bad faith and punitive damages. This argument is based on the clause limiting the scope of the statute to “any insurance claim for damages arising out of the Northridge

The problem with this analysis is that the tort causes of action are based on the insurance policy and thus come within section 340.9 because they constitute “any insurance claim for damages arising out of the Northridge earthquake ‘ “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” (Rest.2d Contracts, §205.)’” (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342 , 371-372 [ 6 Cal.Rptr.2d 467 , 826 P.2d 710 ]; see also Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390 , 400 [ 97 Cal.Rptr.2d 151 , 2 P.3d 1 ] [scope of duty of good faith and fair dealing depends upon purposes of particular contract because covenant “ ‘is aimed at making effective the agreement’s promises’ ”].) x

The court in New Plumbing Contractors, Inc. v. Nationwide Mutual Ins. Co. (1992) 7 Cal.App.4th 1088 [ 9 Cal.Rptr.2d 469 ] explained the nature of tort claims arising from an insurance contract. Whether an insurer has a fiduciary relationship with its insureds is unsettled in California (id. at pp. 1095-1096) but “[e]ven assuming a fiduciary-type relationship exists, neither the duty nor the covenant of good faith and fair dealing extends beyond the terms of the insurance contract in force between the parties. . . . The carrier’s duty is to deal in good faith and fairly in discharging duties under the contract. [Citations.]” (Id. at p. 1096.)

We are satisfied that the claims for bad faith and punitive damages are “insurance claim[s] for damages arising out of the Northridge earthquake” within the meaning of section 340.9.

V

Plaintiff raises other issues in support of his argument that his claim is not barred under the one-year limitations period in the contract. In view of our conclusions with respect to the application of section 340.9 to this litigation, it is not necessary to decide those issues. We do not reach them.

The judgment of the trial court is reversed. Plaintiff Jay Hellinger is to have his costs on appeal.

Vogel (C. S.), P. J., and Curry, J., concurred.

A petition for a rehearing was denied September 14, 2001, and the opinion was modified to read as printed above. Respondents’ petition for review by the Supreme Court was denied January 29, 2002.