Opinion
G043783 Super. Ct. No. 30-2009-00246749
10-19-2011
JENNIFER HODSON, Plaintiff and Appellant, v. STERLING CASUALTY INSURANCE COMPANY, Defendant and Respondent.
Carroll, Kelly, Trotter, Franzen & McKenna and David P. Pruett for Plaintiff and Appellant. Michelman & Robinson, Sanford L. Michelman, Mona Z. Hanna, Robin James and Eric J. Rans for Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
OPINION
Appeal from a judgment of the Superior Court of Orange County, Gail Andrea Andler, Judge. Affirmed in part, reversed in part, and remanded.
Carroll, Kelly, Trotter, Franzen & McKenna and David P. Pruett for Plaintiff and Appellant.
Michelman & Robinson, Sanford L. Michelman, Mona Z. Hanna, Robin James and Eric J. Rans for Defendant and Respondent.
INTRODUCTION
When the catalytic converter was stolen from her 1999 Toyota sport utility vehicle, Jennifer Hodson made a claim with her automobile insurer, Sterling Casualty Insurance Company (Sterling) under the collision and comprehensive provisions of her automobile insurance policy. Sterling denied the claim because the depreciated value of the catalytic converter was less than the amount of the deductible under the policy.
Hodson sued Sterling, on her own behalf and on behalf of putative class members, and alleged the terms of the policy and California Code of Regulations, title 10, section 2695.8, subdivision (i) (10 CCR section 2695.8(i)) did not permit Sterling to adjust her claim for depreciation. The trial court sustained Sterling's demurrer to the third amended complaint without leave to amend and granted Sterling's motion to strike the class action and punitive damages allegations and references to legal authorities.
The case turns on the issue whether Hodson sufficiently alleged the collision and comprehensive coverage provision of the automobile insurance policy or 10 CCR section 2695.8(i) did not permit Sterling to adjust her claim based on the depreciated value of the catalytic converter.
We affirm in part and reverse in part. The policy permitted Sterling to adjust claims for repair or replacement based on depreciation, but Hodson adequately alleged 10 CCR section 2695.8(i) did not permit Sterling to depreciate the catalytic converter. For that reason, Hodson adequately alleged causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair competition under Business and Professions Code section 17200. We also conclude Hodson failed to allege a cause of action for fraud, the trial court did not err by sustaining the demurrer to the declaratory relief cause of action, and the trial court should have denied Sterling's motion to strike as moot.
ALLEGATIONS OF THE COMPLAINT
The third amended complaint (the Complaint), the operative pleading, made the following allegations.
Sterling issued an automobile insurance policy (the Policy) to Hodson, insuring her 1999 Toyota 4Runner. On August 3, 2008, Hodson's vehicle was damaged when its catalytic converter was stolen. At that time, Hodson's vehicle was nine years old and had 193,174 miles on it. The next day, Hodson reported the damage to Sterling and had the vehicle repaired at a cost of $2,132.40. Hodson made a claim requesting payment from Sterling for the full cost of repairs.
A few days later, Sterling sent Hodson a letter denying payment of Hodson's claim and stating: "Our appraiser has inspected your vehicle and the damages sustained to your vehicle as a result of the above captioned loss were less than your $1,000 deductible and the betterment deductions." (Boldface omitted.) Sterling explained it reduced Hodson's claim by $1,671.74 for "Exhaust System components at 75% betterment." Sterling did not refer to any of the Policy provisions in its letter.
The Complaint alleged Sterling deducted $1,671.74 for "betterment or depreciation" from the $2,132.40 repair cost, "leaving a balance of $640.66 which was below [Hodson]'s deductible of $1,000." As a result, the Complaint alleged, Hodson absorbed the full cost of replacing the catalytic converter.
The correct balance appears to have been $460.66 ($2,132.40 minus $1,671.74 equals $460.66).
Hodson sent Sterling a letter requesting it set forth every reason supporting its denial of her claim. Sterling responded: "[T]he amount of the betterment/depreciation plus [Hodson's] $1000 deductible is more than the amount of repairs. Accordingly, no payment was issued." Sterling did not refer to any of the Policy provisions in its letter. Sterling enclosed an appraisal from Mega Appraisers, Inc., that referred to an adjustment for "betterment." Hodson again wrote to Sterling asking it to identify "the 'betterment' section(s) of the policy referenced in [its] letter of August 14."
In reply, Sterling identified the payment of loss provision of the Policy as the basis for depreciating the catalytic converter. Sterling also informed Hodson that it had contacted the catalytic converter's manufacturer, Toyota of North America, which had advised it the catalytic converter was expected to last for 80,000 miles or eight years. Sterling asserted, "[b]ecause Ms. Hodson's vehicle is 9 years old and has 193,174 miles on it, if used, these life expectancies would have resulted in much greater deductions than that which were already used in determining the amount of the claim."
Hodson then wrote to Sterling, "on behalf of herself and others similarly situated," demanding "payment of all sums paid for vehicle repairs exceeding the deductible stated in the policy" for betterment or depreciation. Ten days later, Sterling replied and reaffirmed its denial of coverage on the basis of the payment of loss provision.
The Complaint alleged Sterling owed Hodson payment of $1,132.40, based on $2,132.40 in repairs minus her $1,000 deductible; neither the Policy terms nor 10 CCR section 2965.8(i) permitted Sterling to reduce Hodson's claim by depreciating the catalytic converter; and Sterling acted "improperly, unlawfully, under false pretenses, falsely, fraudulently, deceptively, misleadingly and pretextually" by deducting for depreciation or betterment. The Complaint alleged: "Catalytic converters are among the category of automobile parts that federal law requires be designed and manufactured with the expectation they will last the useful life of the vehicle. Federal law does require that catalytic converters be covered by a manufacturer warranty of 80,000 miles or 8 years, but that warranty requirement does not diminish the categorization of a catalytic converter under federal law as a part that is expected to last the useful life of the vehicle." Because the catalytic converter was expected to last for the useful life of the vehicle, the Complaint alleged Sterling improperly considered the age of and mileage on Hodson's vehicle.
The Complaint asserted five causes of action: (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) false promise fraud, (4) unfair competition in violation of Business and Professions Code section 17200, and (5) declaratory relief.
Hodson sued on her own behalf and as a class representative on behalf of other Sterling policyholders whose claims had been adjusted for depreciation or betterment by Sterling. She alleged two classes, class A and class B. Class A was alleged to include "[a]ll persons insured under a Sterling automobile insurance policy within the four years preceding the filing date of this complaint whose claims for damaged or stolen property exceeded their deductible but whose claims were denied or reduced by Sterling based upon improper adjustment for betterment and/or depreciation in violation of the policy provisions." Class B was alleged to include "[a]ll persons insured under a Sterling automobile insurance policy within the four years preceding the filing date of this complaint whose claims for damaged or stolen property exceeded their deductible but whose claims were denied or reduced by Sterling based upon improper adjustment for betterment and/or depreciation in violation of [California Code of Regulations, title] 10[, section] 2695.8[, subdivisions] (i) and (j)."
Sterling demurred to the Complaint and moved to strike the punitive damages allegations, class action allegations, and references to legal authorities. The trial court sustained the demurrer without leave to amend, and, several weeks later, granted the motion to strike. Hudson timely appealed from the judgment of dismissal.
RELEVANT POLICY PROVISIONS
The relevant provisions of the Policy are as follows:
The declarations page of the Policy states: "Damage to Your Auto: . . . [¶] Actual Cash Value Less Deductible of: [¶] G. Comp / H. Collision $1000."
The Policy's insuring agreement provides: "We will provide the insurance you have selected in return for the premium due us and compliance with the policy provisions and endorsements. Your coverage appears on the attached declarations page, which is part of your policy. The declarations page, in addition to telling you which automobiles you have elected to insure, tells you the policy period and the amount and kinds of insurance you have selected."
Under "Definitions" in the "General Provisions" section, the Policy defines "Property damage" as "injury to or destruction of property including its loss of use . . . ."
"Part IV [¶] Damage To Your Car" appears on page 7 of the Policy. The insuring provision, under the heading, "Our Promise To You Part IV," states: "We will pay for loss to an automobile insured under this part for the coverage specified in the declarations. The payment will be reduced by the applicable deductible."
The definitions subpart of Part IV of the Policy defines "Comprehension" [sic] as "loss caused by other than collision and includes, but is not limited to, breakage of glass and loss caused by missiles, falling objects, fire theft or larceny, explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, riot or civil commotion." It also defines "Loss" as "direct and accidental loss or damage which occurs while the policy is in effect."
"What Is Not Covered—Exclusions Part IV" appears under "Part IV [¶] Damage To Your Car" on page 7 of the Policy. In relevant part, this subpart states: "Under PART IV, this policy does not apply to: [¶] . . . [¶] (d) loss or damage due and confined to wear and tear, deterioration or depreciation, freezing, mechanical or electrical breakdown or failure, unless such damage results from a theft covered under this part."
"Limits of Liability—Part IV" states: "(a) If the loss involves the insured automobile described in the declarations, we will pay the actual cash value of damaged or stolen property, or the amount necessary to repair or replace the property, whichever is least."
Another subpart, "Payment of Loss—Part IV," which appears on page 8 of the Policy, states: "At our option we may: [¶] (a) In exchange for the title certificate, pay the Actual Cash Value of the stolen or damaged property, at the time of the loss, taking into consideration betterment and/or depreciation, minus your deductible, minus the value of any salvage, if retained by you, the value of which is determined by competitive bid. [¶] (b) pay the amount necessary to repair or replace the property with other like kind and quality minus your deductible and depreciation. [¶] (c) in the event of a legal repossession of the auto by the loss payee, we may elect to exercise any of the settlement options of the policy or pay the net balance of the lien less late charges, unearned interest, insurance refunds, whichever is the lesser amount. [¶] (d) before settlement, return stolen property to you or to the address shown in the declarations, having repaired any damage covered; or [¶] (e) settle this claim or loss either with you or the owner of the property[.] [¶] (f) Our payment for repairs to your insured automobile will be based upon an estimate prepared by our company representative which will allow for repairs to be made in a workmanlike manner. . . ."
STANDARD OF REVIEW
"On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend, . . . [w]e give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] Further, we treat the demurrer as admitting all material facts properly pleaded, but do not assume the truth of contentions, deductions or conclusions of law." (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 865.) We independently review a ruling on a demurrer and determine de novo whether the pleading alleges facts sufficient to state a cause of action. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415.)
DISCUSSION
I.
Breach of Contract Cause of Action: Did the Policy and
10 CCR Section 2695.8(i) Permit Sterling to Depreciate
the Catalytic Converter?
Hodson's breach of contract cause of action alleged Sterling breached the Policy by deducting depreciation of the stolen catalytic converter from her claim instead of paying her the full cost of the replacement converter, less her deductible. The breach of contract cause of action was based on both the Policy and 10 CCR section 2695.8(i), both of which we must consider to determine whether Hodson stated a cause of action for breach of contract.
After reviewing principles of insurance policy interpretation in part I.A. of the Discussion, we conclude in part I.B. that the Policy permitted Sterling to depreciate the value of the stolen catalytic converter and to reduce payment on Hodson's claim accordingly. In part I.C., we conclude the Policy provision allowing Sterling to depreciate replacement parts is not an exclusion and, therefore, need not have been made conspicuous, plain, and clear within the Policy. We explain in part I.D. that California regulations permit an automobile insurer to depreciate only those replacement parts normally subject to repair and replacement during the useful life of the vehicle. Whether the catalytic converter for Hodson's 1999 Toyota 4Runner falls within that definition is an issue of fact.
A.
Principles of Insurance Policy Interpretation
Interpretation of an insurance policy is a question of law, and the ordinary rules of contract interpretation apply. (Powerine Oil Co., Inc. v. Superior Court (2005) 37 Cal.4th 377, 390.) The fundamental goal of contract interpretation is to give effect to the mutual intention of the parties, which is to be inferred, if possible, solely from the written terms of the contract. (Ibid.) The contract language governs if it is clear and explicit. (Ibid.) The same rules of construction apply to standard form policy provisions. (Id. at p. 391.)
"While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply. [Citation.] The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. [Citation.] If contractual language is clear and explicit, it governs. [Citation.] On the other hand, '[i]f the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it.' [Citations.] This rule, as applied to a promise of coverage in an insurance policy, protects not the subjective beliefs of the insurer but, rather, 'the objectively reasonable expectations of the insured.' [Citation.] Only if this rule does not resolve the ambiguity do we then resolve it against the insurer. [Citation.] [¶] In summary, a court that is faced with an argument for coverage based on assertedly ambiguous policy language must first attempt to determine whether coverage is consistent with the insured's objectively reasonable expectations. In so doing, the court must interpret the language in context, with regard to its intended function in the policy. [Citation.] This is because 'language in a contract must be construed in the context of that instrument as a whole, and in the circumstances of that case, and cannot be found to be ambiguous in the abstract.' [Citations.]" (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264-1265.)
B.
The Policy Language
Hodson argues the terms of the Policy required Sterling to pay her the replacement cost of the stolen catalytic converter without deduction for depreciation because the Policy allows depreciation only for claims for replacement of the entire vehicle. Sterling argues the Policy permits it to reduce payment of a claim for a replacement part by the amount of depreciation, and deduction for depreciation is not limited to claims for replacement of the entire vehicle.
We start our analysis of the Policy language with its insuring agreement. It states that Sterling will provide the selected insurance in exchange for payment of the premium and compliance with the Policy provisions. It then states, "[y]our coverage appears on the attached declarations page, which is part of your policy. The declarations page, in addition to telling you which automobiles you have elected to insure, tells you the policy period and the amount and kinds of insurance you have selected." Hodson's claim for the stolen catalytic converter fell within collision and comprehensive coverage. The declarations page for the Policy states: "Damage to Your Auto: . . . [¶] Actual Cash Value Less Deductible of: [¶] G. Comp / H. Collision $1000." (Italics added.)
The Policy defines "Comprehension" [sic] to mean "loss caused by other than collision and includes . . . theft or larceny."
The Policy's insuring agreement together with the declarations page establish Hodson selected collision and comprehensive insurance providing coverage for actual cash value rather than replacement cost. An actual cash value policy pays the insured the fair market value of the property at the time of the loss. (Fire Ins. Exchange v. Superior Court (2004) 116 Cal.App.4th 446, 462.) In contrast, a replacement cost policy pays the insured the replacement cost of the lost or damaged property regardless of its fair market value and without deduction for depreciation. (Id. at p. 464.)
Part IV of the Policy specifically deals with collision and comprehensive coverage. The first sentence of Part IV states: "We will pay for loss to an automobile insured under this part for the coverage specified in the declarations." The declarations page specifies coverage for actual cash value, not replacement cost.
In Part IV of the Policy, the subpart called "Limits of Liability—Part IV" states: "(a) If the loss involves the insured automobile described in the declarations, we will pay the actual cash value of damaged or stolen property, or the amount necessary to repair or replace the property, whichever is least." (Italics added.) This provision supports Sterling's right to adjust claims based on depreciation in several ways.
First, the "Limits of Liability" of Part IV confirms collision and comprehensive coverage is for actual cash value. Second, by using the terms "insured automobile," "damaged or stolen property," and "the property" within the same sentence, the limits of liability provision indicates "property" or "the property" is not the same as "the insured automobile." The Policy's definitions part includes a definition for "property damage" as "injury to or destruction of property including its loss of use" but does not define the term "the property." Part IV of the Policy, which covers collision and comprehensive, has its own definitions subpart which includes a definition of "insured automobile" ("an automobile described in the declarations") but also has no definition for "the property." If the terms "insured automobile," "property" and "the property" were intended to have the same meaning of the insured automobile as a whole, the limits of liability provision would have used the defined term "insured automobile" throughout. If the term "property" or "the property" meant only the insured vehicle as a whole, theft of a catalytic converter would not constitute a covered loss under the Policy.
Accordingly, a reasonable interpretation is the term "property" or "the property" in the limits of liability subpart of Part IV means any property insured by the Policy, which would include the insured automobile and its component parts.
Finally, the limits of liability provision states that Sterling will pay the insured the actual cash value of the damaged or stolen property, or the cost to repair or replace, whichever is less. As such, Sterling agreed to pay Hodson the actual cash value of the stolen catalytic converter or the amount necessary to repair or replace the stolen catalytic converter, whichever was less. The actual cash value of the catalytic converter, reflected in the depreciated value, was substantially less than the replacement cost and less than Hodson's deductible.
Thus, the limits of liability provision, reasonably interpreted, means if the loss involves the insured automobile—in other words, the loss is to or related to the insured automobile—Sterling will pay for, or repair or replace, the damaged or stolen property—the automobile, a stolen or damaged part, other insured property—as the case may be.
Next, we turn to the payment of loss provision. Sub-subpart (b) of the payment of loss provision, broken down grammatically, requires Sterling to (1) "pay the amount necessary to repair . . . the property with other like kind and quality minus your deductible and depreciation," or (2) "pay the amount necessary to . . . replace the property with other like kind and quality minus your deductible and depreciation." (Italics added.)
Hodson argues the term "the property" means the insured vehicle as a whole and, therefore, Sterling may depreciate for claims of loss of the entire vehicle. Sterling argues "the property" means any insured property—the insured automobile and its component parts—and, therefore, it could adjust Hodson's claim for depreciation.
Although an insurance policy provision is considered to be ambiguous when it is capable of at least two reasonable constructions, language in a policy must be interpreted as a whole and under the circumstances of the case, rather than in the abstract. (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 648.) "Courts will not strain to create an ambiguity where none exists." (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18-19.) Only if the language and context of the policy do not resolve an asserted ambiguity will courts invoke the principle that ambiguities in insurance policies are generally construed against the insurer to protect the insured's reasonable expectation of coverage. (County of San Diego v. Ace Property & Casualty Ins. Co. (2005) 37 Cal.4th 406, 415.)
The payment of loss provision must be read in context with the Policy as a whole, most particularly for our purposes with the insuring agreement, declarations page, and the limits of liability subpart of Part IV. Those all establish the Policy provides coverage for actual cash value, not replacement cost. Interpreting "the property" in the payment of loss subpart to only the insured automobile as a whole would convert the Policy to a replacement cost policy for replacement parts and some repairs under collision and comprehensive coverage. We concluded that for the limits of liability subpart of Part IV of the Policy, the terms "property" and "the property" must refer to the insured automobile, its component parts, and any other property covered by the Policy. Under the "'same meaning rule,'" words used in a certain sense in one part of the contract are given the same use in another part of the same contract. (Mirpad, LLC v. California Ins. Guarantee Assn. (2005) 132 Cal.App.4th 1058, 1069.) The term "the property" in the payment of loss provision should have the same meaning and would include the stolen catalytic converter.
The payment of loss provision is, at best, sloppy in its use of terms. For example, sub-subpart (a) states: "In exchange for the title certificate, pay the Actual Cash Value of the stolen or damaged property, at the time of the loss, taking into consideration betterment and/or depreciation, minus your deductible, minus the value of any salvage, if retained by you, the value of which is determined by competitive bid." Here, "property" appears to refer to the insured automobile as a whole because payment of actual cash value is made in exchange for the title certificate. Sub-subpart (c) states, "in the event of a legal repossession of the auto by the loss payee . . . ," yet "auto" neither is a defined term nor used elsewhere under collision and comprehensive coverage. Sub-subpart (d) states, "before settlement, return stolen property to you . . . , having repaired any damage covered," and sub-subpart (e) provides that Sterling may "settle this claim or loss either with you or the owner of the property." Sub-subpart (f) states, "[o]ur payment for repairs to your insured automobile will be based upon an estimate . . . ."
Yet, sloppiness does not necessarily create an unresolvable ambiguity. Interpreting "property" and "the property" to include the insured automobile's component parts and any other insured property is both more reasonable and more workable than the narrower definition of the insured automobile as a whole.
In support of her interpretation of the payment of loss provision, Hodson refers to definitions provided for uninsured motorist coverage under part III.1. There, for purposes of uninsured motorist coverage, the Policy defines "property damage" as "[l]oss or damages to the insured automobile caused by collision with an uninsured motor vehicle" and defines "loss or damages" as the lesser of "(a) [t]he amount necessary to repair or replace the property or portion damaged" or "(b) [t]he actual cash value of the property or portion damaged." While these definitions apply only to uninsured motorist coverage, they also tell us the Policy will define the property as the insured automobile if that is the intent.
Read in the context of the Policy as a whole, the terms "property" and "the property" in the payment of loss provision for collision and comprehensive coverage must mean the insured automobile, its component parts, and any other property insured under the Policy. A reasonable insured would not expect the Policy to provide replacement cost coverage for stolen parts. Thus, the Policy permitted Sterling to replace the stolen catalytic converter with "other like kind and quality minus . . . deductible and depreciation."
Hodson argues Lebrilla v. Farmers Group, Inc. (2004) 119 Cal.App.4th 1070 (Lebrilla) supports her position by reasoning that depreciation may not be considered when calculating the cost of repairs based on replacement parts. In Lebrilla, the plaintiffs sought statewide class certification in a suit against an automobile insurer. (Id. at p. 1072.) The plaintiffs alleged the insurer had a companywide policy of installing certain sheet metal parts, such as hoods and fenders (known as "crash parts"), that were not manufactured by the original equipment manufacturer (OEM) and, as a result, the plaintiffs and the class members received substandard repair work that failed to restore their damaged vehicles to preloss condition. (Id. at pp. 1072-1073.) The issue on appeal was whether the trial court erred by denying the plaintiffs' motion for class certification, or, more precisely, "whether a class can establish imitation crash parts are uniformly not of like kind and quality as OEM parts." (Id. at p. 1077.)
In deciding that issue, the Court of Appeal addressed whether the policy term requiring replacement parts of "like kind and quality" meant the proper comparison was between the value of the non-OEM part and the depreciated, prerepair value of the vehicle or of the part being replaced. (Lebrilla, supra, 119 Cal.App.4th at pp. 1076, 1081-1083.) The court agreed with the reasoning of Foultz v. Erie Ins. Exchange (Pa.Ct.Common Pleas Mar. 13, 2002 No. 3053) 2002 WL 452115 (Foultz) that "'age and use of an individual Class Member's OEM parts is not pertinent to determining whether the replacement parts are of "like kind and quality." Rather, "like kind and quality" centers on the original parts' OEM status alone, and an analysis may focus on the quality of OEM parts and Contested Crash Parts in general.'" (Lebrilla, supra, at p. 1083.) Based on the latter interpretation, the Lebrilla court concluded the issue whether non-OEM parts are of like kind and quality as OEM parts could be decided on a classwide basis. (Ibid.)
In a passage relied on by Hodson, the Lebrilla court, in discussing Foultz, stated: "On a final note, the Foultz court commented, 'Another indication that age is irrelevant to a part's kind and quality is the fact that many courts have held that depreciation, which accounts in part [for] the age of and wear-and-tear on a specific item, cannot be considered as a factor when calculating the cost[] of repairs based on parts of "like kind and quality."['] [Citation.] Depreciation is usually considered only when an insurer elects to pay the 'actual cash value' of the damaged property. By electing to repair or replace, the insurer 'elected a measure of loss that does not allow for depreciation. [Citation.]' [Citation.] Indeed, under Farmers' policy in this case, an alternative to replacing the damaged part is to pay for 'new property less an adjustment for physical deterioration and/or depreciation.'" (Lebrilla, supra, 119 Cal.App.4th at p. 1083, quoting Foultz, supra, 2002 WL 452115 at *8.)
Sterling concedes this passage "taken out of context, arguably supports Hodson," but argues it was unnecessary to the Lebrilla opinion. Nonetheless, we must address the issue whether depreciation is allowed only when the insurer elects to pay the insured the actual cash value of the damaged or stolen part, and is not allowed when the insurer elects to repair the vehicle or replace the part. To resolve that issue, we must return to the language of the Policy. It states, under the limits of liability subpart of Part IV, "we will pay the actual cash value of damaged or stolen property, or the amount necessary to repair or replace the property, whichever is least." The payment of loss provision of Part IV of the Policy states Sterling will "pay the amount necessary to repair or replace the property with other like kind and quality minus your deductible and depreciation." The Policy thus gave Sterling the option to pay Hodson the actual cash value of the catalytic converter, or the amount necessary to repair the vehicle or replace the catalytic converter, less depreciation.
Sterling could have cut short this lengthy analysis and might even have averted this lawsuit by carefully drafting a policy provision that precisely and unmistakably gave it the ability to depreciate the value of replacement parts in paying collision and comprehensive claims. Drafting such a provision would not be difficult. A potential modification of sub-subpart (b) of the payment of loss provision in Part IV of the Policy might provide that Sterling would, at its option, pay the amount necessary "to repair or replace the property or damaged part with other of like kind and quality, less depreciation, whichever is less" minus the deductible. (Cal. Automobile Insurance Law Guide (Cont.Ed.Bar 2d ed. 2011) § 7.14, p. 198 (rel. 1/11).) However, "the test is not whether a policy could be written better, from a customer service perspective, after the fact, but instead whether, as written, it is ambiguous in the first instance." (Baker v. National Interstate Ins. Co. (2009) 180 Cal.App.4th 1319, 1338.)
C.
The Payment of Loss Provision Is Not an Exclusion.
Hodson argues, to the extent the payment of loss provision of Part IV of the Policy permits depreciation, it is an exclusion that must be set forth conspicuously in the Policy. We conclude the payment of loss provision is not an exclusion.
"[T]o be enforceable, any provision that takes away or limits coverage reasonably expected by an insured must be 'conspicuous, plain and clear.' Thus, any such limitation must be placed and printed so that it will attract the reader's attention. Such a provision also must be stated precisely and understandably, in words that are part of the working vocabulary of the average layperson. The burden of making coverage exceptions and limitations conspicuous, plain and clear rests with the insurer." (Haynes v. Farmers Ins. Exchange (2004) 32 Cal.4th 1198, 1204, citations omitted, italics added.)
A "deduction" is different from an "exclusion." An exclusion in an insurance policy "excepts certain events or conditions from coverage." (Black's Law Dict. (9th ed. 2009) p. 646, italics added.) "The purpose of exclusions is to completely eliminate coverage for certain types of losses." (Cal. Automobile Insurance Law Guide, supra, § 5.3, p. 131 (rel. 1/11).) In contrast, a "deduction" means the "act or process of subtracting or taking away." (Black's Law Dict., supra, at p. 475.)
The Insurance Code draws a distinction between a deduction and an exclusion. Insurance Code section 11580.06, subdivision (h) provides: "The word 'terms' when used with reference to a policy or endorsement includes the provision of coverage, exclusions, restrictions, conditions, deductions, and limits." (Italics added.) Insurance policies customarily refer to a "deduction for depreciation" rather than an exclusion for depreciation. (See Winchester v. North British etc. Co. (1911) 160 Cal. 1, 4; Minich v. Allstate Ins. Co. (2011) 193 Cal.App.4th 477, 481; Hughes v. Potomac Ins. Co. (1962) 199 Cal.App.2d 239, 252-253.)
The theft of the catalytic converter was a covered loss under the Policy. The payment of loss provision does not define what is a covered risk or loss and instead sets forth the amount Sterling will pay for a covered loss. The payment of loss provision does not except certain events or conditions, nor does it completely eliminate coverage for certain kinds of loss. The Policy defines "exclusion" as an exception from coverage under the heading "What Is Not Covered—Exclusions Part IV."
The payment of loss provision in the Policy constitutes a deduction or adjustment of a claim for depreciation rather than an exclusion from coverage. While the depreciation provision refers to depreciation as a deduction, the provision effectively deducts depreciation value from the replacement cost by using the phrase "minus . . . depreciation." Sterling treated depreciation as a deduction from a covered loss, not as an exclusion, by deducting depreciation from the amount of Hodson's claim. Sterling did not deny the theft of the catalytic converter was a covered loss under the Policy.
D.
Although the Policy permitted Sterling to depreciate the value of the catalytic converter to reduce the amount of Hodson's claim, California regulations place restrictions on an automobile insurer's ability to depreciate or adjust the value of replacement parts. Those regulations are deemed part of the Policy. "'Generally, all applicable laws in existence when an agreement is made necessarily enter into the contract and form a part of it, without any stipulation to that effect, as fully as if they were expressly referred to and incorporated in its terms. [Citation.]' [Citation.]" (City of Shasta Lake v. County of Shasta (1999) 75 Cal.App.4th 1, 16.)
10 CCR section 2695.8(i) provides: "When the amount claimed is adjusted because of betterment or depreciation, all justification shall be contained in the claim file. Any adjustments shall be discernable, measurable, itemized, and specified as to dollar amount, and shall accurately reflect the value of the betterment or depreciation. This subsection shall not preclude deduction for prior and/or unrelated damage to the loss vehicle. The basis for any adjustment shall be fully explained to the claimant in writing and shall: [¶] (1) reflect a measurable difference in market value attributable to the condition and age of the vehicle, and [¶] (2) apply only to parts normally subject to repair and replacement during the useful life of the vehicle such as, but not limited to, tires, batteries, et cetera." (Italics added.)
Hodson alleged: "A catalytic converter is among the category of parts not 'normally subject to repair and replacement during the useful life of the vehicle.' . . . [¶] . . . [¶] . . . Because a catalytic converter normally lasts the useful life of a vehicle,
Sterling's adjustment violated 10 CCR [section] 2695.8(i)(2) because it was not 'appl[ied] only to parts normally subject to repair and replacement during the useful life of the vehicle such as, but not limited to, tires, batteries, et cetera.' A catalytic converter is not among the category of parts that a betterment or depreciation deduction might lawfully be applied based upon the prohibitions of 10 CCR §2695.8."
Under 10 CCR section 2695.8(i), Sterling could depreciate the value of the catalytic converter only if it were subject to repair and replacement during the useful life of Hodson's 1999 Toyota 4Runner; that is, the useful life of the catalytic converter was shorter than the useful life of the vehicle.
We can get some insight into the useful life of a catalytic converter from the warranty periods required by federal and state statutes. Title 42 United States Code section 7541(a)(1) requires manufacturers to cover catalytic converters for a warranty period of eight years or 80,000 miles. California law requires a general emissions warranty coverage for seven years or 70,000 miles and a slightly shorter warranty period for certain "'high-priced'" emissions control equipment. (Cal. Code Regs., tit. 13, § 2037, subds. (b), (c).)
The warranty on Hodson's catalytic converter complied with the federal standard. As Sterling's own communication to Hodson stated, "Toyota of North America advised [Sterling] that the catalytic converter is expected to last for 80,000 miles or 8 years . . . ." If a catalytic converter is "expected to last" for eight years or 80,000 miles, the inference could be drawn that a catalytic converter has a useful life of eight years or 80,000 miles.
To determine whether 10 CCR section 2695.8(i) permitted Sterling to depreciate the catalytic converter, we must also know the useful life of Hodson's Toyota 4Runner and whether it is greater or less than the useful life of the catalytic converter. We cannot make that determination as a matter of law. Sterling argues that "irrespective of the actual 'useful life' that a particular vehicle may have[,] . . . catalytic converters older than eight years or in use for more than 80,000 miles are reasonably subject to replacement" because they are outside the warranty period. Yet, the language of 10 CCR section 2695.8(i) does not determine whether a part is normally subject to repair or replacement "irrespective" of the vehicle's useful life, but rather determines whether a part is "normally subject to repair and replacement during the useful life of the vehicle." (10 CCR § 2695.8(i)(2).)
No case law interprets 10 CCR section 2695.8(i), and no legal authority addresses the useful life of Hodson's Toyota 4Runner. The parties direct us to federal law, which requires emissions control equipment, including catalytic converters, to be "designed, built, and equipped so as to conform at the time of sale with applicable regulations" and to be "free from defects in materials and workmanship which cause such vehicle or engine to fail to conform with applicable regulations for its useful life (as determined under section 7521(d) of this title)." (42 U.S.C. § 7541(a)(1), (3) & (i)(2).) Title 42 United States Code section 7521(d)(1) defines "useful life" of "light duty vehicles . . . and light-duty trucks" as "a period of use of five years or fifty thousand miles (or the equivalent), whichever first occurs . . . ." But whatever the standard for useful life of a vehicle adopted for purposes of emissions control regulations, nothing permits us to conclude that standard is also applicable to insurance regulations.
The five-year/50,000-mile standard would apply rather than the alternate 10-year/100,000-mile standard in 42 United States Code section 7521(d)(1) (limited to regulations effective post-1990) because the catalytic converter regulation, 42 United States Code section 7541, became effective in 1970.
Sterling has brought to our attention no statute, rule, regulation, or matter, of which we may take judicial notice indicating what the useful life of a 1999 Toyota 4Runner might be. Whether the catalytic converter is a part normally subject to repair or replacement during the useful life of Hodson's Toyota 4Runner and, consequently, whether the regulations permitted Sterling to depreciate the catalytic converter, could not be resolved on the face of the pleadings by demurrer.
II.
Did Hodson Adequately Allege Causes of Action for Breach
of the Implied Covenant of Good Faith and Fair Dealing,
False Promise Fraud, Unfair Competition,
and Declaratory Relief?
A.
Second Cause of Action: Breach of the Implied Covenant of
Good Faith and Fair Dealing
Hodson's second cause of action alleged Sterling breached the Policy's implied covenant of good faith and fair dealing by failing to evaluate the claim objectively, failing to give as much consideration to Hodson's interests as to its own interests, and adopting an unreasonable interpretation of the Policy. "[T]o establish an implied covenant tortious breach, an insured must show first, that benefits were due under the policy, and second, that the benefits were withheld without proper cause." (Benavides v. State Farm General Ins. Co. (2006) 136 Cal.App.4th 1241, 1250.)
Sterling argues Hodson cannot recover for breach of the implied covenant of good faith and fair dealing because she cannot plead a cause of action for breach of contract. A breach of contract is a prerequisite to recovery for breach of the implied covenant of good faith and fair dealing. (Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at p. 36.) "[A]n insured cannot maintain a claim for tortious breach of the implied covenant of good faith and fair dealing absent a covered loss." (Benavides v. State Farm General Ins. Co., supra, 136 Cal.App.4th at p. 1250.) We have concluded, however, the Complaint states a cause of action for breach of the Policy based on 10 CCR section 2695.8(i).
B.
Third Cause of Action: False Promise Fraud
Hodson's cause of action for false promise fraud alleged that by issuing the Policy, Sterling promised to pay for any covered loss or damage to Hodson's vehicle subject only to a $1,000 deductible. The Complaint alleged: "Sterling has applied the betterment or depreciation reduction to parts to which 10 CCR [section] 2695.8(i) prohibits application of a betterment or depreciation reduction, including but not limited to catalytic converters. [¶] . . . Sterling has improperly, deceptively, and fraudulently applied such betterment or depreciation deductions on claims made by plaintiff and other policy holders with knowledge that the terms of its policy and 10 CCR [section] 2695.8(i) prohibited it from applying such a betterment or depreciation to such claims."
Citing Stansfield v. Starkey (1990) 220 Cal.App.3d 59, 73, Sterling argues the third cause of action does not state a claim because Hodson did not allege fraud with the required specificity. Hodson's fraud cause of action fails, not for lack of specificity, but because she did not allege the necessary elements of false promise fraud. Those elements are (1) a promise by the defendant (2) made without an intent to perform and (3) made with the intent to induce reliance by the plaintiff, followed by (4) reasonable reliance by the plaintiff that results in (5) injury to the plaintiff. (Civ. Code, §§ 1572, 1710; Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.)
Although the Complaint identified and quoted verbatim the portions of the Policy alleged to constitute false promises, it did not allege Sterling made those promises without intent to perform them. Instead, the Complaint alleged, "Sterling intends to deny claims for damages above the stated deductible through the use of a 'betterment/ depreciation' contention." (Italics added.) That allegation did not aver Sterling formed its intent by the time it issued the Policy to Hodson. This defect might be nothing more than a matter of verb tense; however, in alleging false promise fraud, the correct verb tense is critical to satisfying the element of making a promise without intent to perform. Unless Sterling intended at the time it issued the Policy to Hodson to deny claims based on depreciation, Sterling engaged in, at most, breach of contract, not false promise fraud.
Hodson also did not allege reasonable reliance on, and damages caused by, the alleged false promise. To allege false promise fraud, the plaintiff typically alleges he or she entered into a contract in reliance on the promise to perform the contract terms. Hodson did not allege she bought the Policy from Sterling in reliance on a promise to abide by its terms; she alleged she relied on Sterling's conduct after she made her claim. The Complaint alleged: "Sterling has induced reasonable reliance by plaintiff and its other policy holders by asserting contractual language from the policy in an attempt to mislead, deceive, or defraud policy holders from obtaining the full value of claims made for replacement parts that are not subject to betterment or depreciation deductions because the parts, such as but not limited to catalytic converters, generally last the life of the vehicle." Actual damages for false promise fraud typically would be the amounts the plaintiff spent performing the contract; here, in contrast, Hodson alleged she was damaged "by the denial of claims for payment exceeding the policy deductible."
In her opening brief, Hodson argues she relied on Sterling's false promises by paying premiums to maintain the Policy "with an expectation of coverage in the event of loss." Hodson did not make this allegation in the Complaint.
Hodson also alleged fraud based on Sterling's communications regarding her claim. She alleged, "Sterling has unlawfully, deceptively, and fraudulently asserted reliance upon policy provisions it purports allows it to reduce claims for replacement parts by way of depreciation or betterment." Construing Hodson's third cause of action as one for fraudulent misrepresentation rather than false promise fraud does not save it because Hodson did not allege she did anything to her detriment in reliance on Sterling's communications to her. To the contrary, she rejected Sterling's representations, contested the denial of her claim, and brought this lawsuit.
Although we affirm the judgment on the false promise fraud cause of action, we do so without prejudice to Hodson bringing a motion for leave to amend that cause of action.
C.
Fourth Cause of Action: Unfair Competition
Hodson's cause of action for unfair competition under Business and Professions Code section 17200 alleged Sterling engaged in an unlawful, unfair, or fraudulent business practice of "deduct[ing] and offset[ting] from its insureds' damages under their policies of insurance for depreciation above the stated deductible based on the 'betterment' provision of its insured's policies." Hodson alleged Sterling's practice was contrary to the terms of the Policy and violated 10 CCR section 2695.8(i).
Business and Professions Code section 17200 prohibits "any unlawful, unfair or fraudulent business act or practice." The scope of section 17200 is broad. (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180.) "The statutory language referring to 'any unlawful, unfair or fraudulent' practice (italics added) makes clear that a practice may be deemed unfair even if not specifically proscribed by some other law. 'Because Business and Professions Code section 17200 is written in the disjunctive, it establishes three varieties of unfair competition—acts or practices which are unlawful, or unfair, or fraudulent. "In other words, a practice is prohibited as 'unfair' or 'deceptive' even if not 'unlawful' and vice versa."' [Citation.]" (Ibid.)
Under Business and Professions Code section 17200, "unfair competition," means any unlawful, unfair, or fraudulent business act or practice. (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., supra, 20 Cal.4th at p. 180 [section 17200 "governs 'anti-competitive business practices'"].) "A business practice is unlawful 'if it is forbidden by any law'" (Olszewski v. Scripps Health (2003) 30 Cal.4th 798, 827), and "'[v]irtually any law—federal, state or local—can serve as a predicate for a section 17200 action. [Citation.]'" (Smith v. Wells Fargo Bank, N.A. (2005) 135 Cal.App.4th 1463, 1480). "Section 17200 'borrows' violations from other laws by making them independently actionable as unfair competitive practices." (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1143.)
Sterling argues its practice of deducting depreciation from claims for damaged or stolen catalytic converters was lawful and permitted by the Policy. Hodson's allegation that Sterling's practice of adjusting claims for depreciation violated 10 CCR section 2695.8(i) satisfies the requirement of pleading an unlawful act or practice. Accepting the allegations of the Complaint as true, Sterling's practice of adjusting claims for damaged or stolen catalytic converters by deducting for depreciation violated 10 CCR section 2695.8(i) and, therefore, might constitute an unlawful, unfair, or fraudulent business practice under Business and Professions Code section 17200.
In addition, Hodson alleged Sterling's handling of her claim and practice of deducting depreciation for damaged or stolen catalytic converters constituted an unfair claims settlement practice in violation of Insurance Code section 790.03, subdivision (h). She alleged Sterling engaged in these unfair claims settlement practices: "(1) [m]isrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverages at issue"; "(3) [f]ailing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies"; "(5) [n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear"; "(6) [c]ompelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by the insureds, when the insureds have made claims for amounts reasonably similar to the amounts ultimately recovered"; and "(7) [a]ttempting to settle a claim by an insured for less than the amount to which a reasonable person would have believed he or she was entitled by reference to written or printed advertising material accompanying or made part of an application." (Ins. Code, § 790.03, subd. (h)(1), (3), (5), (6), (7).)
D.
Fifth Cause of Action: Declaratory Relief
Hodson's cause of action for declaratory relief alleged, "[p]laintiff contends that Sterling's setoff for betterment/depreciation is not permitted under the policies of insurance issued by Sterling" and "[a] judicial declaration is necessary and appropriate at this time under the circumstances of this [case] in order that plaintiff may ascertain her rights under the policy of insurance issued by Sterling as well as the rights of the general public and all other similarly situated."
Sterling argues the trial court was correct to sustain its demurrer to the declaratory relief cause of action because Hodson sought only retrospective relief, that is, "she would have to have sued Sterling for declaratory relief before Sterling denied her claim." Hodson's only remedy now, Sterling argues, would be money damages.
In Osseous Technologies of America, Inc. v. DiscoveryOrtho Partners LLC (2010) 191 Cal.App.4th 357, 365, a panel of this court created a conceptual framework classifying declaratory relief into three types for the purpose of determining whether the trial court erred by dismissing a declaratory relief cause of action. In a "'Type 1'" declaratory relief cause of action, the complaint alleges only a past breach of contract, a breach of contract remedy is available, and declaratory relief is unnecessary to guide future conduct. (Id. at pp. 365, 366-368.) A "'Type 2'" declaratory relief cause of action alleges an actual and ongoing controversy, such as a continuing contractual relationship, and future consequences that depend on the court's interpretation of the contract. (Id. at pp. 369-371.) A trial court must not dismiss a Type 2 declaratory relief cause of action. (Id. at p. 365.) A "'Type 3'" declaratory relief cause of action alleges a current controversy over a past breach of contract and the potential a declaration of the parties' rights under a contract might be necessary to guide the parties' future conduct in a continuing contractual relationship. (Id. at pp. 374-376.) A trial court has discretion to dismiss a Type 3 declaratory relief cause of action. (Id. at p. 365.)
Hodson alleged a Type 3 declaratory relief cause of action: a past breach of contract for which a breach of contract remedy is available and a continuing contractual relationship. She sought a declaration of Sterling's right to depreciate catalytic converters and other replacement parts that might, but not necessarily would, guide the parties' future conduct in that relationship. Although it is possible Hodson will in the future make another claim on the Policy for a stolen or damaged catalytic converter or other part, it is by no means certain she will do so. Practically speaking, our conclusion the Policy language permits Sterling to adjust claims for depreciation eliminates the need, potential at best, of a declaration of the parties' rights. The trial court therefore did err by sustaining the demurrer to the declaratory relief cause of action.
III.
Did the Trial Court Err by Granting the Motion to Strike?
In addition to the demurrer, Sterling moved to strike (1) the punitive damages allegations, (2) the class action allegations, and (3) references to legal authorities and conclusions. The trial court ruled on the demurrer and motion to strike separately. First, the trial court sustained the demurrer without leave to amend and, in the minute order sustaining the demurrer, concluded the motion to strike was moot. Several weeks later, the trial court issued a minute order granting the motion to strike.
The trial court granted the motion to strike the punitive damages allegations on the ground the Complaint failed to state a cause of action for fraud or other cause of action for which punitive damages are available. The court granted the motion to strike the class action allegations on the ground the Complaint failed to allege that depreciation of the catalytic converter violated the Policy or 10 CCR section 2695.8(i). The court granted the motion to strike references to legal authorities on the ground a complaint may not allege legal conclusions or argument.
Hodson argues the trial court erred by ruling on the motion to strike because the motion became moot once the court sustained Sterling's demurrer without leave to amend. We agree and reverse the order on the motion to strike. On remand, Sterling may renew its motion to strike.
DISPOSITION
The judgment is reversed as to the causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair competition. The order granting the motion to strike is reversed as moot. In all other respects, the judgment is affirmed without prejudice to Hodson moving for leave to amend the third cause of action. In the interest of justice, no party may recover costs on appeal.
FYBEL, J.
WE CONCUR:
ARONSON, ACTING P. J.
IKOLA, J.