Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of San Diego County No. 37-2007-00078565- CU-NP-CTL, Jay Bloom, Judge.
HALLER, Acting P. J.
After the home of Fred and Patricia Cohen was destroyed in the 2003 Cedar Fire, they retained a contractor on their insurer's preferred contractor list (Renaissance Restorations of San Diego, Inc. (Renaissance)) that allegedly performed substandard work and did not have sufficient financial resources to complete the rebuild job. The Cohens' insurer (Auto Club) paid for Renaissance's work and then paid a second contractor to fix the problems and finish the construction.
The complaint alleges the Cohens' home was insured by two insurance companies: Automobile Club of Southern California and Inter insurance Exchange of the Automobile Club. Because the distinction between these entities is immaterial for purposes of this appeal, we refer to the insurers collectively as "Auto Club."
The Cohens then sued Auto Club, and one of its employees, Chet Johnston, who had an alleged financial interest in Renaissance. The Cohens sought compensation primarily for the emotional distress caused by the delay in moving back into their home resulting from Renaissance's defective work. The Cohens alleged fraud, breach of the implied covenant of good faith and fair dealing, and intentional infliction of emotional distress. The trial court sustained defendants' demurrer to the Cohens' second amended complaint without leave to amend.
The Cohens appeal. We affirm.
FACTUAL AND PROCEDURAL SUMMARY
Because this appeal arises from the sustaining of a demurrer, our factual summary is based solely on the facts alleged in the second amended complaint. Under well-established appellate rules, we assume the truth of the alleged facts and all reasonable inferences from those facts. (Mills v. U.S. Bank (2008) 166 Cal.App.4th 871, 880-881.) We provide a summary of the alleged facts in this section and discuss additional allegations when relevant to a particular legal issue.
Renaissance
Renaissance was a preapproved contractor in Auto Club's "Immediate Repair Program" (IRP). Under this program, Auto Club provided a full warranty for construction work on covered losses if the insured selected a preapproved IRP contractor. In 2002, Renaissance was co-owned by defendant Johnston and Jose Benavides. Johnston, a licensed contractor, was Renaissance's responsible managing officer for state licensing purposes.
In early 2003, Benavides purchased Johnston's interest in Renaissance for about $1.1 million, payable over five years in monthly payments of $16,683.18. Benavides agreed that if he failed to pay Johnston these amounts, Johnston was entitled to a return of all shares and interest in Renaissance. Johnston agreed not to compete with Renaissance and to consult with Renaissance "on areas related to services within the insurance restoration contracting industry."
Despite leaving Renaissance in early 2003, Johnston maintained his registered contractor's license status as Renaissance's responsible managing officer with the state licensing agency. Without Johnston's license, Renaissance could not legally contract as a licensed contractor or work as an Auto Club IRP contractor. Johnston allegedly kept his Renaissance license status to facilitate his return to Renaissance if Benavides defaulted in the buy-out payments. "To hedge his options in the meantime," Johnston obtained his insurance adjuster's license.
The Fire and Initial Response
On October 26, 2003, the Cohens' home was destroyed along with many other homes in the Scripps Ranch area when the Cedar Fire swept through their neighborhood. The Cohens' home was covered against fire loss by an insurance policy issued by Auto Club. The Cohens promptly reported the loss to Auto Club and immediately began the daunting tasks of finding temporary housing arrangements for their family, salvaging what they could from the fire scene, assessing their losses, and otherwise trying to cope with the myriad of difficulties caused by the catastrophic loss.
The day after the fire, Auto Club claims representative Valentina Batholomew acknowledged receipt of the Cohens' loss report. During the ensuing claims process, Auto Club repeatedly advised the Cohens that they were responsible for selecting the construction contractor to rebuild their home and repeatedly warned them "to not get ripped off by unscrupulous or unqualified repair contractors."
The Cohens "took [these] warnings to heart" and in late October researched "how best to hire a repair contractor," including reviewing a California Department of Insurance website article that warned insureds not to " 'call anyone to repair or replace your loss without first getting instructions from your adjuster,' " and recommended that a homeowner " '[c]heck all references' of any contractor being considered for hiring, including inquiry into 'the contractor's professional reputation by talking with banks, building material suppliers, [and] the contractor's previous customers...."
Shortly after the fire, Auto Club assigned an out-of-state catastrophic loss adjuster, Don Sanderson, to work on the Cohens' claim. While Sanderson and the Cohens were meeting at the Cohens' property, Fred Cohen asked Sanderson "who the Insurer would recommend as a repair contractor. Mr. Sanderson, not being from the area, deferred the question to [the Cohens'] prior adjuster, Tina Bartholomew, who was nearby adjusting a neighbor's fire loss on behalf of [Auto Club]. Ms. Bartholomew said to Mr. Sanderson, 'Don, use Renaissance Restorations. They are on our pre-approved list.' " When Bartholomew made this recommendation, she did not state that her husband "was a registered salesperson actively working for Renaissance" on Auto Club claims or provide any information about Renaissance's financial condition.
Auto Club claims representatives then "put [the Cohens] in contact with Renaissance representatives...." Renaissance representatives thereafter assured the Cohens that "if the Cohens contracted with Renaissance to do the full rebuild, Renaissance would have the Cohen family back in their new home" one year later, by Thanksgiving. Two weeks after the fire, on November 10, the Cohens signed an initial work authorization with Renaissance for Renaissance to clear the building pad. In retaining Renaissance for this job, the Cohens relied on Auto Club's "superior experience and expertise" and trusted Auto Club's advice.
Three days after signing the initial work authorization with Renaissance, the Cohens and many other Auto Club insureds attended a "Town Hall Meeting" held by the Auto Club to discuss insurance and rebuilding issues. The meeting was conducted by various Auto Club representatives, including David Womble, who was introduced as the Auto Club's "senior claims manager with overall supervisory responsibility for the Insurer's Cedar Fire loss claims." Defendant Johnston was also at the meeting and was "introduced by [Auto Club] representatives as a highly experienced construction repair contractor who would be working for [Auto Club] reviewing and approving all repair and reconstruction contracts to make sure that the insureds were not victimized by dishonest, shoddy, unqualified or financially unsound repair contractors." Unbeknownst to the Cohens, Womble and Johnston had a close personal friendship. The Cohens were further unaware of any prior or continuing relationship between Johnston and Renaissance.
At the Town Hall Meeting, Womble and Johnston "conveyed the message... that every effort would be made by [Auto Club] to promptly deliver the benefits of their homeowners' policies to them without unnecessary delay," and "repeated warnings... to avoid contracting with unqualified, unscrupulous or financially unsound repair contractors." They also "strongly recommended that the attendees (including the [Cohens]) hire one of the Insurer's pre-approved IRP repair contractors in order to avoid contracting with unqualified, unscrupulous or financially unsound repair contractors. The stated enticement for the insureds' selection of a pre-approved repair contractor was the Insurer's promise to stand behind their IRP contractor with a warranty for any work not performed properly by the contractor."
Despite these statements, defendants each knew of (1) "financial problems already plaguing Renaissance"; (2) two pending lawsuits involving Renaissance, including one in which Auto Club was a codefendant; and (3) Johnston's continuing financial interest in Renaissance. Defendants, however, did not disclose these facts to the Cohens, even though they knew the information would be material to their decision to contract with Renaissance. Defendants also did not tell the Cohens that Auto Club hired Johnston "to do everything" he could to ensure fire victims contracted with IRP contractors to provide for proper cost controls.
Johnston allegedly failed to disclose these facts because he wanted to promote Renaissance's business to ensure he would be personally repaid on Benavides's promissory note, and/or that Renaissance would quickly default and thereby allow him to take over the business under the purchase agreement terms. Womble (acting for Auto Club) allegedly failed to disclose the negative facts about Renaissance because he knew that sharing the information would create a "major furor" and generate an immediate loss of confidence by numerous insureds who had contracted with Renaissance. The Cohens alleged that if they had known the concealed information, they would not have hired Renaissance several months later and instead "would have hired another independent contractor of their own choosing...."
During the next several months, Renaissance worked on the preparation of detailed cost estimates for a total rebuild proposal to be presented to the Cohens. At the behest of Auto Club, Johnston reviewed the Renaissance proposal and made suggested revisions to Renaissance that were incorporated into Renaissance's proposed long-form contract. During that same time, Johnston and Womble "were communicating directly with one another about their shared concerns over whether Renaissance had the financial ability to complete the Cedar Fire repair projects for [Auto Club] insureds, including the [Cohens]." On February 2, 2004, Womble asked Benavides for reassurance that Renaissance could complete the construction rebuild jobs, "irrespective of the [financial] status of Renaissance...." Benavides responded by attempting to reassure Womble that the company was capable of completing the work, but Womble then asked for more information.
Two weeks later, on February 17, 2004, the Cohens signed the final contract with Renaissance to rebuild their home. In the contract, Renaissance promised a "completion walk-through on October 15, 2004." Johnston was aware of this promised completion date based on his prior review of the bid and contract. When the Cohens signed the contract, Johnston and Womble each knew there was a substantial probability that Renaissance would be unable to complete the construction work by this date because of Renaissance's "unstable financial condition," and "yet they both intentionally withheld their knowledge from [the Cohens]."
Post-Contract Events
At some point after Renaissance began the work, various problems began to develop, including issues with the new concrete foundation slab, windows, stucco, cabinets, screens, tile, counter tops, lights, and electrical outlets. The Cohens also began receiving notices of mechanics' liens on their property and received communications from subcontractors asking why they had not been paid. After investigating, the Cohens discovered Renaissance was engaged in numerous improper practices, including not paying its workers, improperly charging for work not performed, excessively charging for work performed, and substituting lesser quality materials without authorization. The Cohens alleged Auto Club and Johnston knew about these irregularities in Renaissance's billing practices yet intentionally concealed this information from plaintiffs.
Unbeknownst to the Cohens, in September 2004, Benavides, Womble, and Johnston were having continuing conversations reflecting their concern with Renaissance's substantial financial problems. Specifically, Johnston sent an e-mail to Womble's private e-mail address describing "the decline of Renaissance over the past 20 months" and proposing that he (Johnston) partner with an existing restoration company, and that company would then take over in a "worst-case scenario" if Renaissance failed. Johnston said: "To help communicate the transition, customers could be told that the new contractor is technically the old contractor. You see, I have discovered that [Benavides] failed to replace me as the corporation's [responsible managing officer] for the contractor's license which he was required to do a year ago. Technically (and this is troubling to me) I am still the contractor of record. I could report this today to the [state licensing agency] but it would cause licensing issues for Renaissance and I did not want to make things any worse right now. I have to protect myself, however, so I need to force him to follow through on replacing me immediately should he not reconsider my offer to come back."
Two months later, in November 2004, Johnston successfully applied to become an Auto Club preapproved IRP repair contractor in the name of his new business.
Seven months later, in June 2005, Auto Club "pulled Renaissance off the Cohens' job and agreed to make another contractor available to the Cohens to complete the rebuild." Auto Club then for the first time told the Cohens about Johnston's prior involvement with Renaissance, and suggested the Cohens retain Johnston's new company to complete the construction job. The Cohens discussed this possibility with Johnston, but after Johnston demanded that the Cohens first release Auto Club from any legal liability as a condition precedent to his completing the rebuild of the Cohens' home, the Cohens rejected this demand and eventually retained their own qualified and competent contractor to finish the job. Because of Renaissance's "shoddy workmanship" and use of "inferior materials," the new contractor was required to "undo" all of the work and then perform "a rebuild-of-the-rebuild," which took substantial time. Under its warranty, Auto Club paid for all work performed by Renaissance and by the second contractor.
Lawsuit
Two years after Renaissance left the job, the Cohens filed suit against Auto Club and Johnston, alleging fraud, breach of the implied covenant of good faith and fair dealing, and intentional infliction of emotional distress. The next day, the Cohens filed a first amended complaint, which was substantially similar to the original complaint, but included a few additional factual allegations.
The Cohens also sued Womble, but later dismissed Womble from the lawsuit based on the parties' stipulation.
The court then sustained Auto Club's demurrer with leave to amend. The court stated that the Cohens had not alleged facts "with sufficient specificity" to support a viable fraud cause of action; the allegations did not show grounds for recovery on the bad faith claim under Rattan v. United Services Automobile Assn. (2000) 84 Cal.App.4th 715 (Rattan); and the Cohens had not alleged the requisite elements of an intentional infliction claim.
The Cohens then filed a lengthy second amended complaint, asserting the same three causes of action, but adding numerous additional facts to the complaint. These allegations, summarized above, centered on Auto Club's and Johnston's failure to disclose material information about Renaissance, including Renaissance's financial problems, the fact a lawsuit had been previously filed against Renaissance, and Renaissance's relationship with Johnston. The Cohens also added allegations that Johnston had been hired by Auto Club not only as a construction consultant, but also to secretly assist Auto Club "in the actual adjusting of [their] Cedar Fire loss claims...."
With respect to damages, the Cohens acknowledged that Auto Club paid the entire "additional expense of the rebuild as an IRP warranty item," but alleged they suffered damages because they "were not able to occupy their new home until April 2006," despite that Renaissance had promised a complete rebuild by November 2004. They claimed the construction work remained "ongoing," and they have not been "compensated for the value of the substantial delay caused by... [the] intentional nondisclosures." The Cohens alleged defendants' wrongful acts resulted in their "emotional distress, anxiety, worry, sleeplessness, embarrassment, physical illness, and loss of the enjoyment of their lives as individuals, as husband and wife, and as a family."
The court sustained the demurrers of Auto Club and Johnston, finding the second amended complaint did not allege sufficient facts to support the causes of action. With respect to the fraud claim, the court found the complaint did not allege facts showing defendants "intended to defraud plaintiff and in fact induced plaintiffs into retaining Renaissance." On the bad faith claim, the court stated the Cohens failed "to state sufficient facts to establish [Auto Club's] conduct was related to the benefits under the insurance policy, rather than a collateral obligation," citing Rattan, supra, 84 Cal.App.4th 715. On the intentional infliction of emotional distress claim, the court found the complaint "fails to allege sufficient facts showing outrageous conduct." The court rejected the Cohens' request for leave to amend, stating the court had provided the Cohens with an opportunity to cure the defects, and they have not stated "how the pleadings could be amended" to support their causes of action.
The Cohens appeal.
DISCUSSION
I. Review Standard
"A demurrer tests the legal sufficiency of the complaint. [Citation.] Therefore, we review the complaint de novo to determine whether it contains sufficient facts to state a cause of action. [Citation.] 'We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.' [Citation.]" (Grinzi v. San Diego Hospice Corp. (2004) 120 Cal.App.4th 72, 78.) When the trial court sustains a demurrer without leave to amend, the appellate court will assume as true all facts that may be implied or inferred from those expressly alleged, to determine whether they state a cause of action on any available legal theory. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
The trial court exercises its discretion in deciding whether to grant leave to amend. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.) Absent a reasonable possibility that the pleading defects can be cured by amendment, the trial court does not abuse its discretion by denying leave to amend. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) The appellant carries the burden of proving an amendment would cure any defect. (Ibid.)
II. Fraud Claim
A. Overview
In their second amended complaint, the Cohens alleged defendants Auto Club and Johnston knew of certain negative facts about Renaissance's financial status and capability to perform the rebuild work and about Renaissance's relationship with Johnston, but intentionally failed to disclose these facts because they did not want to dissuade the Cohens from selecting Renaissance as their contractor, and that if the Cohens had known these facts, the Cohens would not have entered into a construction contract with Renaissance.
The trial court found these allegations did not support a fraud cause of action based primarily on its conclusion that the Cohens did not adequately allege the intent element of the fraud claim. We do not reach the intent issue because we conclude the Cohens failed to allege a basis for finding defendants had a duty to disclose negative information about Renaissance and/or about Johnston's relationship with Renaissance.
B. Cohens' Fraud Claim Against Auto Club
The Cohens' fraud cause of action against Auto Club is based on a concealment theory. To prevail on this claim, a plaintiff must show the defendant concealed or suppressed a material fact and the defendant was under a duty to disclose the fact to the plaintiff. (Kaldenbach v. Mutual of Omaha Life Ins. Co. (2009) 178 Cal.App.4th 830, 850.) There is generally no duty to disclose facts absent a fiduciary or confidential relationship. (See Schauer v. Mandarin Gems of California, Inc. (2005) 125 Cal.App.4th 949, 960.) Although an insurer has certain heightened duties, an insurer-insured relationship is not a fiduciary or confidential one. (See Vu v. Prudential Property & Casualty Ins. Co. (2001) 26 Cal.4th 1142, 1150-1151; Tran v. Farmers Group, Inc. (2002) 104 Cal.App.4th 1202, 1212; Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1150.) Thus, the insurance relationship does not, in and of itself, give rise to a duty to disclose on the part of the insurance company. (Love, at p. 1150.)
In attempting to establish a duty in this case, the Cohens rely primarily on an exception that requires disclosure if "the defendant makes representations but does not disclose facts which materially qualify the facts disclosed, or which render his disclosure likely to mislead...." (Marketing West, Inc. v. Sanyo Fisher (USA) Corp. (1992) 6 Cal.App.4th 603, 613; see Vega v. Jones, Day, Reavis & Pogue (2004) 121 Cal.App.4th 282, 292 (Vega).) Under this exception, "[e]ven where no duty to disclose would otherwise exist, 'where one does speak he must speak the whole truth to the end that he does not conceal any facts which materially qualify those stated.' " (Vega, at p. 292; accord Rogers v. Warden (1942) 20 Cal.2d 286, 289.) "[A]ctive concealment may exist where a party '[w]hile under no duty to speak, nevertheless does so, but does not speak honestly or makes misleading statements or suppresses facts which materially qualify those stated.' " (Vega, at p. 294.) "One who is asked for or volunteers information must be truthful, and the telling of a half-truth calculated to deceive is fraud." (Id. at p. 292; see Randi W. v. Muroc Joint Unified School Dist. (1997) 14 Cal.4th 1066, 1084 (Randi W.).)
Seeking to come within this exception, the Cohens argue that Auto Club had a duty to disclose negative facts about Renaissance based on the statements made at the Town Hall Meeting, during which Womble and Johnston "strongly recommended that the attendees (including [the Cohens]) hire one of [Auto Club's] pre-approved IRP repair contractors in order to avoid contracting with unqualified, unscrupulous or financially unsound repair contractors." According to the Cohens, "[t]he stated enticement for the insureds' selection of a pre-approved repair contractor was the Insurer's promise to stand behind their IRP contractor with a warranty for any work not performed properly by the contractor."
These allegations do not support a duty to disclose under the volunteered-information exception. The purpose of the exception is to recognize that "half of the truth may obviously amount to a lie, if it is understood to be the whole." (Prosser & Keeton, Torts (5th ed. 1984) § 106, p. 738, italics added.) Thus, a person volunteering information has a duty to disclose additional known facts when the recipient of the information would reasonably understand that the volunteered information was intended to be a complete disclosure of information about the topic, and the concealed information was necessary to make the disclosed information accurate.
Defendants' statements made at the Town Hall Meeting do not come within this rule. There is nothing in the alleged statements or the surrounding circumstances showing a reasonable insured would have understood Auto Club was purporting to provide a list of advantages and disadvantages of retaining Renaissance or any other contractor on the IRP list. The fact that Auto Club urged insureds during a group meeting to use the IRP contractors would not suggest to a reasonable insured that the insurer was intending to identify all relevant information about each contractor on the list. As the Cohens concede, Auto Club repeatedly made clear that it was each insured's responsibility to select a building contractor, and the stated "enticement" for using a contractor on the IRP list was that the insurer would provide a full warranty of the contractor's work. It is undisputed that Auto Club fully complied with its warranty by accepting full responsibility for Renaissance's alleged defective work. Moreover, the Cohens do not allege that at the Town Hall Meeting the Auto Club representatives made any specific representations about Renaissance or made any attempt to direct the Cohens to this particular contractor.
Imposing a duty to disclose all material information about each contractor under these circumstances is inconsistent with the purposes underlying the volunteered-information exception. Auto Club's statements offering to warranty the work of IRP contractors and encouraging its insureds to select a contractor from this list did not amount to a half-truth under which more complete information would be expected.
In this regard, this case resembles Linear Technology Corp. v. Applied Materials, Inc. (2007) 152 Cal.App.4th 115. In that case, a semiconductor manufacturer (Linear) brought an action against three equipment suppliers, alleging the suppliers sold equipment to Linear that later was the source of a patent infringement claim against Linear. (Id. at p. 120.) In its fraud claim, Linear alleged that during the negotiations over the equipment purchase, the suppliers had actual knowledge about litigation in which a different purchaser was successfully sued for a patent infringement on the same equipment, but failed to disclose this information to Linear. (Id. at p. 131.) In concluding that this allegation did not support a fraud cause of action on a half-truth concealment theory, the court rejected Linear's argument that the equipment suppliers had a duty to disclose "based on [the suppliers'] affirmative representation" and warranty that the use of the equipment would not result in a claim of patent infringement. (Id. at p. 133.) The court stated that this warranty did not "amount to a misrepresentation of fact" because "it was only a promise to take remedial steps upon the occurrence of a specified event, a prediction relating to the transaction between respondents and this purchaser." (Ibid.)
We reach a similar conclusion in this case. The fact that Auto Club encouraged its insureds at a Town Hall Meeting to select a contractor from its approved contractor list (which included Renaissance), and that it would warranty the work of these contractors, does not mean that it had the duty to disclose all known facts about each contractor on the list. As in Linear, this warranty merely provided the Cohens with the assurance that construction problems caused by Renaissance would be the responsibility of the insurer.
The Cohens' reliance on Vega, supra, 121 Cal.App.4th 282 is misplaced. In Vega, a shareholder in a company acquired in a merger transaction brought a fraud action against the law firm that represented the acquiring company. (Id. at p. 287.) The law firm contended it had no duty to disclose the terms of the third party investment to an adverse partyin the merger transaction. (Ibid.) The reviewing court held the complaint stated a fraud cause of action on a concealment theory, based on the court's conclusion that the law firm affirmatively undertook the obligation to disclose the financing transaction and provided information that did not include material terms of the transaction. (Id. at p. 292.) The court explained that the law firm "specifically undertook to disclose the transaction and, having done so, is not at liberty to conceal a material term. Even where no duty to disclose would otherwise exist, 'where one does speak, he must speak the whole truth to the end that he does not conceal any facts which materially qualify those stated.' " (Ibid.) In this case, the Cohens do not allege any circumstances under which Auto Club "specifically undertook" to disclose Renaissance's qualifications to perform the rebuild work at the Cohens' home.
This case is also distinguishable from Randi W., in which the court held that letters of recommendation for an instructor that extolled his rapport with students and urged his employment but omitted reference to complaints about his improper contact with female students amounted to actionable "false and misleading" representation. (Randi W., supra, 14 Cal.4th at p. 1084.) In this case, there are no allegations that at the Town Hall Meeting the Cohens asked Auto Club about the qualifications of Renaissance and that Auto Club gave the Cohens any information in which a reasonable person would expect a full account of the contractor's qualifications.
We are also unpersuaded by the Cohens' reliance on their allegations that while they were initially meeting with Sanderson (the out-of-town adjuster) at their property, Sanderson asked Auto Club claims representative Bartholomew, who was evaluating losses at a nearby home, for a contractor recommendation, and she said: "Don, use Renaissance Restorations. They are on our pre-approved list."
As with the statements at the Town Hall Meeting, Bartholomew's statements did not arise under circumstances where the recipient of the information would expect the claims representative to disclose all relevant facts, including negative ones, about Renaissance. The alleged facts show that this information was given in an informal setting and, unlike Vega and Randi W., Bartholomew did not expressly or impliedly represent that she was providing full disclosure of facts surrounding Renaissance's fitness to perform the work. Further, there is no allegation that Bartholomew had any knowledge of financial problems with Renaissance or Johnston's relationship with Renaissance; instead, her sole alleged undisclosed information was that her husband was a sales representative for Renaissance. The Cohens do not suggest that this information was a material fact that should have been disclosed at that time. The Cohens acknowledge they were satisfied with the manner in which Renaissance cleared the building pad in November 2003, and do not allege any damage associated with their initial contract with Renaissance.
In their reply brief, the Cohens argue that an insurer has a duty to inform an insured of certain rights and obligations under an insurance policy, citing Davis v. Blue Cross of Northern California (1979) 25 Cal.3d 418 and Westrick v. State Farm Insurance (1982) 137 Cal.App.3d 685. We agree that in certain situations an insurer owes a duty to disclose certain facts about insurance policy terms. In Davis, for example, the court held the insurer should have made the insured aware of an arbitration provision buried in an "obscure" location of which the insurer had reason to know the insured was unaware. (Davis, at pp. 429, 426-431.) Similarly, the Westrick court held the defendants could be held liable for an insurance agent failing to disclose facts about immediate coverage for a recently purchased truck in response to a specific inquiry about coverage. (Westrick, at pp. 691-693.)
These principles have no application in this case. There was no allegation in the second amended complaint that Auto Club failed to disclose information about the policy or the policy terms. The Cohens did not allege the Auto Club policy required the insurer to provide the Cohens with a qualified contractor, and the Cohens admit they were repeatedly made aware that it was their responsibility to select their own contractor, and they had a full opportunity to independently select a contractor of their choice. Moreover, the Cohens did not allege that they directed any specific inquiries about Renaissance to Auto Club before they made the decision to retain the contractor for the rebuild job.
Conclusion
In this case, the insurer agreed to be fully responsible for a selected contractor's defective work to repair covered losses, and it is undisputed the insurer satisfied this contractual obligation. The plaintiffs now seek to hold the insurer additionally responsible in tort for not disclosing information about the selected contractor's financial condition and/or not informing the insureds about the financial relationship between one of its employees and a contractor on the list. Absent additional facts showing the insurer made false representations about the contractor's fitness to perform the work or its employee's personal interest in the entity, this proposed extension of tort liability for what is essentially a contractual warranty obligation is not justified and is unsupported by policy considerations. Imposing an affirmative disclosure duty under these circumstances would provide a strong disincentive for an insurer to maintain any form of contractor warranty program and thus "deprive less sophisticated insureds who have suffered a catastrophic loss valuable protection from incompetent or unscrupulous contractors." (Rattan, supra, 84 Cal.App.4th at p. 723.) The court did not err in sustaining the demurrer on the Cohens' fraud claim against Auto Club.
C. Cohens' Fraud Claim Against Johnston
We reach a similar conclusion with respect to the Cohens' fraud claim against Johnston. The Cohens did not plead any facts showing Johnston made an affirmative representation to the Cohens that would create a duty to disclose additional facts. Although the Cohens allege that Johnston reviewed Renaissance's bid proposal for the rebuild, they acknowledge that Johnston performed this task "at the behest" of Auto Club and communicated directly with Renaissance regarding this review, and they do not claim Johnston made any affirmative representations to them in the context of this evaluation. Under these circumstances, Johnston had no duty to disclose facts about Renaissance to the Cohens.
In their opening appellate brief, the Cohens focus on their case against Auto Club and do not provide any specific basis for reversing the judgment with respect to their fraud claim against Johnston. In their reply brief, the Cohens argue that Johnston was responsible for Renaissance's alleged defective work because he improperly maintained his status as the registered managing responsible officer with the state licensing agency. However, by raising this new legal theory for the first time in the reply brief, the Cohens have waived their right to assert it on appeal. (Alfaro v. Community Housing Imp. System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1393, fn. 23.)
D. No Reasonable Probability Cohens Could Amend to Allege Duty to Disclose
The Cohens argue that they should be given the opportunity to amend their complaint on the fraud claim. However, they do not propose any specific amendment that would support a disclosure duty. They state only that they could add facts showing Auto Club breached its duty "by fraudulently manipulating" the processing and payment of the Cohens' claim. However, this allegation does not support the Cohens' fraud claim as it is alleged in the complaint, nor does this new proposed theory of fraud liability meet the standard required for pleading fraud with specificity. To plead a fraud claim, the plaintiff must allege " ' "facts which 'show how, when, where, to whom, and by what means the representations were tendered.' " ' " (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 993.) The Cohens did not identify any misrepresentations in their opening brief that meet this pleading requirement.
In their reply brief, the Cohens state for the first time that they could amend the complaint to add an allegation that in June 2003, Auto Club wrote a letter "to its insured homeowners introducing Renaissance as a licensed general contractor and IRP participant," and stating that Renaissance had " 'passed an extensive qualifying process' " and had " 'agreed to comply with the guidelines of the Program.' " Even assuming this proposed amendment is timely (see infra at Part V), this allegation does not show the Cohens read this letter, or relied on the letter in making their decision to retain Renaissance, or that Auto Club had any information in June 2003 about Renaissance's alleged financial problems. At the time, Johnston was not yet employed by Auto Club.
III. Insurance Bad Faith
The Cohens next contend the court erred in sustaining the demurrer on their tort claim that Auto Club breached the duty of good faith and fair dealing.
A covenant of good faith and fair dealing is implied in every insurance contract. (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818.) "[T]he covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct that frustrates the other party's rights to the benefits of the agreement." (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 36, italics added (Waller).) The courts recognize a tort claim for breach of the covenant, but have held that the claim cannot " 'be endowed with an existence independent of its contractual underpinnings' " (ibid.), and thus "cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement" (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350). Thus, a tort cause of action for insurance bad faith requires that " '(1) benefits due under the policy must have been withheld; and (2) the reason for withholding benefits must have been unreasonable or without proper cause.' " (Progressive West Ins. Co. v. Yolo County Superior Court (2005) 135 Cal.App.4th 263, 278; Love v. Fire Ins. Exchange, supra, 221 Cal.App.3d at p. 1151.)
In this case, the Cohens did not satisfy the first factor because they did not allege Auto Club breached any provision of the insurance policy or that it failed to pay contractual benefits due under the insurance policy or under the IRP warranty. The Cohens conceded Auto Club paid all the benefits owed under the insurance policy and warranty, including for the second contractor to fix and repair the alleged problems resulting from Renaissance's work and for the associated relocation costs. Without a breach of the policy, there is no viable bad faith action against their insurer. (See Waller, supra, 11 Cal.4th at p. 36.)
On appeal, the Cohens suggest Auto Club breached its contractual obligation to provide prompt policy coverage because its conduct resulted in a delay in rebuilding their home. However, the Cohens are essentially complaining about faulty construction/rebuild work, which then caused substantial delays in the rebuilding process. They do not allege Auto Club's payment of policy benefits was delayed or that coverage decisions caused any delays. The fact that the Cohens selected a contractor under the IRP warranty program, and that contractor allegedly turned out to be incompetent does not mean that Auto Club denied or delayed benefits under the policy.
Moreover, even if the Cohens had alleged a breach of the warranty promise under the IRP, this court has held that a breach of a warranty under a preferred contractor program cannot support a bad faith tort claim. (Rattan, supra, 84 Cal.App.4th at pp. 721-723.) In Rattan, the insureds' home was damaged by a fire, and pursuant to their insurer's suggestion, the insureds hired one of the insurer's " 'preferred contractors,' whose work [the insurer] agreed to guarantee." (Id. at p. 717.) After the contractor performed defective work, the insurer paid for a second contractor to complete the repairs. The insureds subsequently found additional deficiencies resulting from the work of the first contractor, and sued their insurer for breach of the insurance contract and for bad faith. (Id. at p. 718.) At trial, the insureds requested the court to instruct the jury on agency principles, i.e., that the first contractor was an agent of the insurer, thus making the insurance company "responsible for the incompetence and delays of " the contractor under a tort theory of breach of the covenant of good faith and fair dealing. (Id. at p. 721.) The court declined to give the instruction, and the jury subsequently found the insurer did not breach the contract. (Id. at p. 719.)
The jury was not specifically asked to reach a determination on a bad faith claim. (Rattan, supra, 84 Cal.App.4th at p. 721.)
On appeal, we held the trial court did not err in refusing the agency instruction. (Rattan, supra, 84 Cal.App.4th at pp. 721-723.) We reasoned that the insurer's agreement to guaranty the contractor's work was separate and distinct from the insurance contract (id. at p. 721), and "enforcement of the guarantees does not require the availability of a remedy in tort" (id. at p. 722). We explained that tort recovery for breach of an implied covenant of good faith and fair dealing in an insurance contract was " 'a major departure from traditional principles of contract law,' " and our high court has admonished that courts should take " 'great care' " in extending this theory to other areas of the law. (Id. at p. 722, citing Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 690.) We found no justification for expanding the bad faith tort doctrine to an insurer's breach of a contract to guaranty the work of a preferred contractor. (Rattan, supra, 84 Cal.App.4th at pp. 721-723.) We concluded that an insured's contractual remedies were sufficient to adequately compensate the insured, and that expanding the tort to the guaranty contract could reduce the likelihood that insurers would offer such a guaranty, which can provide substantial benefits to insureds. (Id. at pp. 722-723.)
Thus, under Rattan, if an insurer guarantees the contractor's work, a breach of that obligation subjects the insurer to liability for breach of contract but not for tortious bad faith. (Rattan, supra, 84 Cal.App.4th at pp. 722-723.) The Cohens say they do not question Rattan's "logic or holding," but argue that the decision is inapplicable here for several reasons. We are unpersuaded.
First, the Cohens suggest that, unlike in Rattan, the IRP warranty was part and parcel of their insurance policy and therefore a breach of a promise under that program can support a tort claim under traditional insurance bad faith concepts. The argument is unsupported. As in Rattan, the Cohens concede that the IRP warranty benefit was not included in the insurance policy terms, and under the IRP, Auto Club agreed only to cure defects in the contractor's workmanship, and did not agree to become the contractor's insurer. Under such circumstances, as in Rattan, any promises made under the IRP warranty were "collateral" to the insurance contract. (Rattan, supra, 84 Cal.App.4th at p. 723.)
Second, the Cohens attempt to rely on qualifying language in the Rattan decision to suggest that their case is materially different. At the end of the discussion of the bad faith issue, the Rattan court noted that "we fully accept that where an insurer has used an agent to determine when to pay benefits, the agent's derelictions might support liability in tort" and "recognize[d] that the line between decisions which involve payment of benefits and the use of those benefits may in some circumstances be difficult to discern." (Rattan, supra, 84 Cal.App.4th at p. 723.) The Cohens argue that this case falls within this exception because they allege that Johnston "secretly" acted as Auto Club's "de facto claims adjuster for the Cedar Fire loss claims...." However, the alleged bad faith conduct was not related to Johnston's alleged role as a "secret" claims adjuster. Although the Cohens alleged that Johnston reviewed Renaissance's bid proposal, there was no allegation that Johnston made a determination as to when to pay benefits and/or that benefits owed under the policy were delayed, or that any such determination was improper.
Third, the Cohens argue that this case arose after a demurrer was sustained, whereas Rattan presented the issue only in the context of reviewing the court's denial of a proposed jury instruction. However, the Rattan rationale applies regardless of the stage of the litigation. Where, as here, a plaintiff is seeking to hold an insurer liable in tort for a promise made as part of the contractor's separate warranty program, that tort claim fails as a matter of law. (Rattan, supra, 84 Cal.App.4th at pp. 721-723.) Instead, the plaintiff is limited to a contract remedy.
Fourth, the Cohens contend that unlike in Rattan, they do not merely "locate [Auto Club's] culpability in a contractor's poor workmanship" and instead base their bad faith claim on Auto Club's "calculated, multiple, and coordinated falsifications." We agree with the Cohens that Rattan does not address the issue of an insurer's liability for material misrepresentations or concealments, and concerns only a bad faith claim based on a breach of the implied covenant of good faith and fair dealing. Thus, if the Cohens had been able to adequately plead and prove a fraud claim, they would be entitled to recover on the claim. However, as we have discussed in the previous section, the Cohens' allegations do not support a fraud claim.
The Cohens' reliance on Major v. Western Home Ins. Co. (2009) 169 Cal.App.4th 1197 is also misplaced. In Major, unlike here, the insurer breached the insurance contract by unreasonably delaying payment of insurance benefits owed under the terms of the policy. (Id. at pp. 1204-1205.) The insurer, without proper cause, delayed payment of benefits under the " 'other structures' " coverage for more than five months, which the claims handler admitted at trial was " 'wrong.' " (Id. at p. 1207.) The insurer also repeatedly failed to pay mortgage benefits. This court rejected the insurer's contention that the unpaid or delayed benefits were " 'courtesy benefits' " not contemplated under the insurance contract, and held that the insurer was contractually bound to pay the increased coverage limits under the terms of the policy. (Id. at p. 1213.)
The Cohens do not identify any facts that could be added to their complaint to establish a viable bad faith claim. Thus, they have not met their burden to show the court erred in refusing to grant them leave to amend.
IV. Intentional Infliction of Emotional Distress
The Cohens contend the court erred in sustaining the demurrer on their intentional infliction of emotional distress claim.
The tort of intentional infliction of emotional distress requires (1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff's suffering severe or extreme emotional distress; and (3) the plaintiff's injuries were actually and proximately caused by the defendant's outrageous conduct. (Hughes v. Pair (2009) 46 Cal.4th 1035, 1050; Potter v. Firestone Tire & Rubber Co. (1993) 6 Cal.4th 965, 1001.) In this case, the court sustained the demurrer based on its conclusion that the Cohens' allegations do not support that defendants' conduct was "outrageous." The Cohens challenge this conclusion.
To be considered outrageous, a defendant's conduct must be so extreme as to exceed all bounds tolerated in a civilized community and the defendant must have intended to inflict injury, or engaged in the conduct with the realization that injury would result. (Hughes v. Pair, supra, 46 Cal.4th at pp. 1050-1051.) " ' "[I]t is for the court to determine, in the first instance, whether the defendant's conduct may reasonably be regarded as so extreme and outrageous as to permit recovery." ' " (Fowler v. Varian Associates, Inc. (1987) 196 Cal.App.3d 34, 44; accord Berkley v. Dowds (2007) 152 Cal.App.4th 518, 534.)
Although there is no doubt that the Cohens were frustrated and upset by the delays caused by Renaissance's alleged substandard construction work, the allegations pertaining to defendants' role in these delays do not constitute the type of outrageous conduct required to recover tort damages for an intentional infliction of emotional distress claim. This case differs from the decisions relied upon by the Cohens. (Younan v. Equifax, Inc. (1980) 111 Cal.App.3d 498 (Younan); Little v. Stuyvesant Life Ins. Co. (1977) 67 Cal.App.3d 451 (Little).)
In Little, the defendant disability insurer made a deliberate decision to discontinue disability benefits despite the "overwhelming" evidence showing the plaintiff was "totally disabled" and had an "almost unbelievable" negative medical history. (Little, supra, 67 Cal.App.3d at p. 457.) After purposely ignoring the undisputed evidence of the disability, the insurer then deliberately withheld information from evaluating physicians to ensure the evaluations would support the insurer's termination decision. (Id. at pp. 458-459, 462.) The plaintiff lost her home and attempted suicide. (Id. at pp. 460-461.) Under the circumstances, the court found that the decision to terminate disability benefits of a "totally disabled" insured by ignoring overwhelming evidence of the disability was "outrageous" and supported an intentional infliction of emotional distress claim. (Id. at pp. 457, 461-462.) Similar to Little, the Younan court found allegations that an insurer, a doctor, and a claims handling agency denied disability benefits by "deliberately falsify[ing] medical records" can amount to outrageous conduct supporting a tort cause of action. (Younan, supra, 111 Cal.App.3d at pp. 515-516.)
Defendants' alleged conduct in this case did not similarly rise to the level of conduct that can be said to " ' " 'exceed all bounds... tolerated in a civilized community.' " ' " (Hughes v. Pair, supra, 46 Cal.4th at pp. 1050-1051.) The Cohens allege their home was tragically destroyed by a fire. Shortly after the loss, a claims adjuster met with the Cohens, and insurance representatives then held a Town Hall Meeting at which they assured the homeowners affected by the fire that it would pay to rebuild the homes, recommended that the insureds select a contractor on the insurer's preferred list, and notified the insureds that Auto Club would guaranty all of the contractor's work. Defendants were aware that the Cohens thereafter selected Renaissance and knew Renaissance was having financial problems and may have trouble completing the project, but failed to disclose these facts. However, once the Cohens discovered the problems and found that Renaissance was not paying its subcontractors, Auto Club notified the Cohens it would pay the full costs of a replacement contractor and would continue to pay economic costs associated with the delay. Auto Club thereafter promptly complied with these promises. These alleged facts do not constitute the type of "outrageous" conduct supporting a tort claim for intentional infliction of emotional distress.
The Cohens do not identify any amendment that would support a viable intentional infliction of emotional distress claim. Thus, they have not met their burden to show the court erred in granting the demurrer without leave to amend.
V. New Arguments in Reply Brief
In their reply brief, the Cohens assert several new arguments that were not raised below and were not raised in their opening brief. For example, for the first time, the Cohens propose to amend the complaint to assert that Johnston's "hidden dual roles" in working for Auto Club while maintaining a substantial financial interest in Renaissance "constituted a deceptive and anti-competitive practice within the meaning of Business & Professions Code section 17200." The Cohens also suggest they could amend the complaint to allege that Auto Club "fraudulently concealed general features of the IRP scheme, including the requirement of participating contractors to bid and charge less than the market rate for goods and services" and that this practice "amounted to market rigging through a kickback arrangement and so violated provisions of California's Insurance Regulations and the Business & Professions Code."
We recognize that a plaintiff can establish a reasonable probability of a valid amendment for the first time on appeal. (See McGettigan v. Bay Area Rapid Transit Dist. (1997) 57 Cal.App.4th 1011, 1023-1024.) However, as a matter of fairness, courts have repeatedly observed that matters raised for the first time in a reply brief are deemed waived and will not be considered by the appellate court. (See Reed v. Mutual Service Corp. (2003) 106 Cal.App.4th 1359, 1372, fn. 11.) Points raised for the first time in a reply brief will generally not be considered unless good cause is shown for the failure to present them before. (Alfaro v. Community Housing Imp. System & Planning Ass'n, Inc., supra, 171 Cal.App.4th at p. 1393, fn. 23.) The Cohens have not provided any basis for their failure to identify their proposed new allegations or legal theories in the trial court or in their opening brief. By the time they filed the second amended complaint the Cohens had conducted substantial discovery, and they have been given a full and fair opportunity both at the trial level and on appeal to present all their factual and legal theories supporting their claims against Auto Club and Johnston. Under the circumstances, the arguments made for the first time in their reply brief have been waived.
DISPOSITION
Judgment affirmed. Appellants to pay respondents' costs on appeal.
WE CONCUR: O'ROURKE, J. IRION, J.