Opinion
No C-01-2400 VRW.
November 4, 2002
ORDER
Craig Cooper and Olive Industries, Inc, a corporation owned and operated by Cooper, bring this action against The Travelers Indemnity Company of Illinois for breach of contract and breach of the implied covenant of good faith and fair dealing. The case was tried to the court without a jury on September 9-11 and 13, 2002. The court makes its findings of fact and conclusions of law:
I FINDINGS OF FACT
1 The plaintiffs are Craig Cooper ("Cooper"), a California resident, and Olive Industries, Inc, a California corporation wholly owned and operated by Cooper. 2 Defendant is Travelers Indemnity Company of Illinois, an Illinois corporation ("Travelers"). 3 In August 1997, Cooper and his wife at the time purchased certain real property in Tahoe City, California, located at 2255 West Lake Boulevard ("the property"), including a restaurant on the premises called the Black Bear Tavern ("the tavern") as well as additional office space. 4 In November 1998, Cooper purchased a policy of property, liability and business interruption insurance ("the policy") from Travelers of a kind commonly referred to as an "all-risks" policy, which was effective from December 2, 1998 to December 2, 1999. 5 The policy issued initially to Craig and Loanne Cooper; it was subsequently amended by endorsement to name "Black Bear Tavern, Mr/Mrs Cooper DBA" as the insured. 6 The source of water for the buildings on the property was a well located on the property. 7 Placer County health authorities issued a permit for the well, and required Cooper to arrange for the well water to be tested for contaminants on a monthly basis. 8 On February 5, 1999, a test of the well water revealed high levels of coliform bacteria. 9 On February 11, 1999, additional water samples were taken for testing. 10 On February 13, 1999, water from the well tested positive for the presence of E-coli. 11 On February 17, 1999, Placer County health authorities ordered the closure of the tavern due to the E-coli contamination of the well. 12 Because the tavern was forced to close, Cooper submitted a claim for loss of business income to Travelers on or about February 17, 1999. 13 Travelers advanced Cooper $5,000, pending an investigation into the cause of the loss, and alerted Cooper to the fact that it might later determine that any losses stemming from the E-coli contamination were not covered by the policy. 14 Cooper made repeated, but ultimately unsuccessful, efforts to disinfect the well. 15 In May 1999, Travelers hired Bonkowski Associates ("Bonkowski"), a firm of water and sewer experts, to conduct an investigation of possible sources of the contamination of the well water. 16 Bonkowski took core samples of various locations on the property; Bonkowski also arranged for an inspection of Cooper's sewer lines by video camera, an inspection conducted by Roto Rooter. 17 Bonkowski's report, received by Travelers on June 2, 1999, indicated several possible sources of contamination, including: • widespread groundwater contamination • continued point source pollution by snowmelt infiltration, or • sewer line leakage. 18 Upon receipt of the report, Travelers requested additional information from Bonkowski, namely records of the Placer County Public Health Department and Environmental Department, which Bonkowski provided on July 5, 1999. 19 In June 1999, Cooper sold the tavern's liquor license for a net sum of approximately $120,000 to cover existing business debts, pay for the drilling of a new well away from the site of contamination and reopen the restaurant. 20 In July 1999, Cooper had a new well installed on the property in a location unaffected by the contamination. 21 On August 21, 1999, the restaurant reopened. 22 At the close of its investigation, Travelers concluded that there were a number of causes contributing to the contamination; on or about October 29, 1999, Travelers denied coverage on the grounds that none of these causes was a Covered Cause of Loss as defined by the policy. 23 Subsequently, in the course of litigation against the Tahoe City Public Utilities District ("TCPUD") relating to the contamination of the well, Cooper came to believe that the cause of the contamination was a faulty TCPUD manhole located in the street in front of the property. 24 Based on this new theory of contamination, Cooper asked Travelers to reconsider its decision to deny coverage in a letter from his attorney to Travelers dated December 18, 2000; Travelers asked for the opportunity to review Cooper's evidence, but informed Cooper that Travelers might still deny coverage. 25 On January 12, 2001, Travelers notified Cooper that his losses were excluded from the coverage of the policy even under the new theory of causation. 26 Plaintiffs filed this action on January 25, 2001 in state court. Doc #2, Exh #3. 27 On June 21, 2001, defendant removed the case to this court on diversity grounds. Doc #1. 28 On May 23, 2002, Cooper's former wife, Loanne Lark, originally a named plaintiff, was dismissed with prejudice by stipulation of the parties. Doc #27. 29 On August 19, 2002, the court issued an order denying plaintiffs' motion for summary judgment, and granting in part and denying in part defendant's motion for summary judgment. The court granted summary adjudication in favor of defendant on two issues: • The court determined that Travelers Property Casualty Insurance was not a proper defendant; and • The court determined that Travelers was not liable for coverage of plaintiffs' food spoilage under the food contamination provision of the policy. Doc #58. 30 The policy provides for coverage of "direct physical loss of or damage to Covered Property at the premises * * * caused by or resulting from a Covered Cause of Loss;" it further provided for coverage of "the actual loss of Business Income" sustained "due to the necessary suspension of * * * `operations' during the `period of restoration.'" By the terms of the policy, to qualify for business income loss coverage, the "suspension of operations" must be "caused by direct physical loss or damage to property at the premises * * *, including personal property in the open (or in a vehicle) within 100 feet of the described premises, caused by or resulting from a Covered Cause of Loss." 31 Covered Causes of Loss, as defined by the policy, are "risks of direct physical loss unless the loss is (a) limited in Paragraph A.5 Limitations; or (b) Excluded in Section B, Exclusions." 32 One of the exclusions from coverage is "loss or damage caused directly or indirectly" by "discharge, dispersal, seepage, migration, release or escape of `pollutants' unless the release, discharge or dispersal is itself caused by any of the "specified causes of loss." 33 One of the "specified causes of loss" that creates an exception to the exclusion just described is "Water Damage," defined in the policy as "accidental discharge or leakage of water or steam as the direct result of the breaking or cracking of any part of a system or appliance containing water or steam." Losses caused by "Water Damage" are covered by the policy. 34 The parties have stipulated to the following facts relating to whether the cause of damage to the property was a Covered Cause of Loss: 1.1 As used herein, "THE PROPERTY" means the real property located at 2255 West Lake Boulevard, Tahoe City, California and owned by plaintiff Craig Cooper. 1.2 THE PROPERTY's plumbing system discharges waste into a sewer pipe (or "service line") that runs underneath the parking lot on THE PROPERTY and forms a part of Highway 89. 1.3 Underneath Highway 89, THE PROPERTY's service line discharges wastewater into a larger diameter, public sewer line ("Lateral DD") that is owned and maintained by the Tahoe City Public Utilities District. 1.4 At the intersection of THE PROPERTY's service line and Lateral DD in Highway 89, there is a manhole ("Manhole 4+91"), which is also owned and maintained by the Tahoe City Public Utilities District. 1.5 As of January 27, 1999, a blockage and/or backflow had developed in Lateral DD. 1.6 On or about January 27, 1999, as a result of the blockage and/or backflow in Lateral DD, wastewater — including effluent containing the bacteria E-Coli — filed Manhole 4+91. 1.7 Before employees of the Tahoe City Public Utility District cleared the blockage in Lateral DD and emptied Manhole 4+91, some of the wastewater that had filled the manhole escaped through its walls and/or base and entered the soil and groundwater on THE PROPERTY. 1.8 The escape of wastewater form Manhole 4+91 on or about January 27, 1999[,] was the only efficient proximate cause of plaintiff's alleged losses. 1.9 The wastewater that escaped from Manhole 4+91 on or about January 27, 1999[,] contained a "pollutant" within the meaning of the insurance policy at issue in this case. 2.0 The word "water" as used in the subject Insurance Policy under any of the definitions of "Water Damage" includes raw sewage, and includes the wastewater that escaped from Manhole 4+91 on or about January 27, 1999. 2.1 No other exclusion is triggered by the efficient proximate cause agreed to in Stipulation 1.8 above, apart from the exclusion stated in 2(1) which reads: "Discharge, dispersal, seepage, migration, release or escape of `pollutants' unless the release, discharge or dispersal is itself caused by any of the `Specified Causes of Loss.' But if loss or damage by the `specified cause of loss' results, we will pay for the resulting damage caused by the `specified cause of loss.'" See Woolfe Decl (Doc #35), Exh A. 35 The evidence fails to establish that the discharge or dispersal of pollutants into plaintiffs' well was not the direct result of breaking or cracking of the TCPUD sewer line adjacent and connected to the property. 36 The policy defines business income as "(1) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; (2) Continuing normal operating expenses incurred including payroll; and (3) Includes `Rental Value;'" payment for loss of business income is limited to the "12 consecutive months immediately following the date of direct physical loss or damage;" payment for loss of business income may also cover actual losses sustained for a period of time up to 30 days after operations resume on the property. 37 The evidence fails to establish the amount of plaintiffs' net profits or losses during the period of suspended operation. 38 The evidence fails to establish plaintiffs' costs of business operation for the period of suspended operation. 39 The evidence fails to establish that the amount, if any, of plaintiffs' losses of rental income directly resulting from the period of suspended operation. 40 The policy provides coverage for any "necessary Extra Expense [incurred] during the `period of restoration' that * * * would not have [been] incurred if there had been no direct physical loss or damage to property at the premises;" "Extra Expense" is defined as, in relevant part, an "expense incurred * * * [t]o avoid or minimize the suspension of business and to continue `operations' * * * [a]t the described premises;" such coverage is limited to the "12 consecutive months after the date of direct physical loss or damage." 41 Cooper incurred an expense of $18,000 to pay for the drilling of a replacement well sited away from the contaminated area. 42 To the extent that any of these findings of fact should more properly be characterized as conclusions of law, they shall be deemed to be such.II CONCLUSIONS OF LAW A FIRST CAUSE OF ACTION — BREACH OF CONTRACT
Garvey v State Farm Fire Casualty Co 257 Cal Rptr 292 298 Strubble v United Services Automobile Ass'n 110 Cal Rptr 828 832 Aydin Corp v First State Insurance Company 77 Cal Rptr 2d 537 540 Strubble 1 An insured bears the burden of proving that a loss falls within the basic scope of coverage afforded by the policy. , , (Cal 1989). 2 If the insured meets that burden, then the insurer bears the burden of proving that an exclusion or other limitation on coverage applies. Id. 3 If the insurance policy is an "all-risks" policy, the insurer also bears the burden of demonstrating that an exception to an exclusion from coverage does not apply. See , , (Cal App 1973) (requiring an insurer to "negative its exception * * * to its exclusion [from coverage]" in order to meet its burden of proving that a cause of loss was not covered under an all-risks policy); see also , , (Cal 1998) (applying a different rule to comprehensive general liability policies, but expressly distinguishing on the ground that it applies only to all-risks policies). 4 Because "Water Damage" forms an exception to an exclusion from coverage, defendant bears the burden of proving that the discharge or leakage from the TCPUD sewer system into plaintiffs' well was not "the direct result of the breaking or cracking" of the sewer system or any part of it. 5 By the terms of the policy, the closure of the tavern on February 17, 1999 was a necessary suspension of Cooper's operation of the tavern that resulted from direct physical damage to the property at the insured premises. The period of restoration was February 17, 1999 to August 29, 1999, excluding February 19-21, 1999. 6 The court has previously ruled that the exception to the pollution exclusion for the specified cause of loss "Water Damage" is not limited to discharge or leakage from systems on the insureds' property, and can include discharge or leakage from the TCPUD sewer system. See Sum Judg Order (Doc #58) at 12. 7 Damage to "covered property" is not required by the terms of the policy to trigger coverage of loss of business income. 8 Because defendant has not established that plaintiffs' losses were not caused by a Covered Cause of Loss, their claims are covered by the policy, and plaintiffs are entitled to any damages that they have proved are owed them under the policy. 9 Plaintiffs have failed to prove the amount, if any, of their lost business income, defined by the policy as net profits, including rental income, discounted by normal operating expenses. 10. Plaintiffs have proved that they incurred an extra expense, as defined by the policy, of $18,000 to pay for the replacement of the contaminated well. 11. Defendants owe plaintiffs the sum of $18,000 in damages.B SECOND CAUSE OF ACTION — BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
Opsal v United Services Auto Assn 10 Cal Rptr 2d 352 356-357 Guebara v Allstate Ins Co 237 F3d 987 995 Fraley v Allstate Ins Co 97 Cal Rptr 2d 386 391 Guebara 237 F3d at 992-994 Chateau Chamberay Homeowners Ass'n v Associated International Ins Co 108 Cal Rptr 2d 776 785 Guebara 237 F3d at 994 Chateau Chamberay 108 Cal Rptr 2d at 785 1 Plaintiffs must prove each of three elements to make out a claim for breach of the implied covenant of good faith and fair dealing ("bad faith"): (1) that Travelers unreasonably deprived plaintiffs of insurance benefits owed; (2) that such unreasonable conduct was the proximate cause of the claimed damage; and (3) the amount or extent of damage. 2 The test for bad faith is whether the insurer was unreasonable in denying coverage. See , , (Cal App 1991); see also , , (9th Cir 2001). 3 If an insurer denies coverage because of a genuine dispute over coverage, the insurer does not act in bad faith. See , , (Cal App 2000); , ; , , (Cal App 2001). A genuine dispute may be over legal issues or factual issues. But the genuine dispute doctrine does not apply universally to factual disputes, and must be applied to factual disputes on a case by case basis. See , ; , . 4 In this instance, a factual dispute over the cause of contamination was an integral part of a legal dispute between the parties over the scope of the pollution exclusion from coverage and the water damage exception to that exclusion; both disputes were genuine. 5 Plaintiffs have failed to demonstrate that defendant acted unreasonably in denying coverage under the policy; the court cannot, therefore, conclude that defendant violated the covenant of good faith and fair dealing. 6 To the extent that any of the foregoing conclusions of law should more properly be considered findings of fact, they shall be deemed to be such.IT IS SO ORDERED.