Filed 7/22/13 Verniero v. Allstate Ins. Co. CA2/7
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication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.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
JOHN VERNIERO et al., B236212
Plaintiffs and Appellants, (Los Angeles County
Super. Ct. No. BC388553)
v.
ALLSTATE INSURANCE COMPANY,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los Angeles County, Alan S.
Rosenfeld, Judge. Affirmed in part; reversed in part with directions.
Shernoff Bidart Echeverria Bentley, Michael J. Bidart, Ricardo Echeverria, Steven
Schuetze, Steven Messner; The Ehrlich Law Firm and Jeffrey Isaac Ehrlich for Plaintiffs
and Appellants.
MacGregor & Berthel, Gregory Michael MacGregor, Deborah A. Berthel and R.
Timothy O‟Connor for Defendant and Respondent.
______________________
INTRODUCTION
In denying a claim for water damage to a residence caused by a burst pipe, the
insurer in this case relies on an exclusion in the insurance policy for wear and tear. In
arguing that the exclusion does not apply, the insured relies on an exception to the
exclusion. The insurer claims the language of the exception is unambiguous and does not
apply. The trial court agreed. We find plenty of ambiguity, and conclude that the trial
court improperly granted the insurer‟s motion for summary adjudication on the insured‟s
cause of action for breach of contract stemming from the denial of the insureds‟ claim for
water damage caused by the burst pipe. We conclude, however, that the trial court
properly granted the insurer‟s motion for summary adjudication on the insureds‟ claims
for breach of the implied covenant of good faith and fair dealing and for punitive
damages.
FACTUAL AND PROCEDURAL BACKGROUND
A. A Pipe Bursts
On July 1, 2007 John Verniero and his wife Maria Calabrese left their home in the
“early afternoon.” When they “returned at about 7:00 pm” they heard noises that led
them “to believe that water was leaking from somewhere.” They called a plumber, Pink
Plumbing, and the next day they “observed about a foot of water covering the crawl
space.”
The rupture in the pipe occurred about a foot below the surface of the ground, next
to the corner of the foundation on the outside of, but not quite under, the house. The
break in the pipe was in the inlet water main pipe that runs from a meter near the curb,
continues along the foundation, connects to the house inside the crawl space under the
home, and services the house. The pipe comes out of the ground right next to the
foundation and is “up against the brick and mortar surface” of the foundation of the
house. Water from the broken pipe entered the crawl space and accumulated into a small
2
“lake” in the crawl space area. The water penetrated the subsurface and caused a
“differential heave” in the soil under the home. A contractor retained by Verniero and
Calabrese stated, after “thoroughly inspect[ing] the home,” that the “water caused the
soils to expand, causing the foundation to rise, shift and subside as the moisture levels
changed, which in turn caused substantial damage to the structure,” including damage to
the floor insulation, framing and sheeting, floors, walls, and ceiling. Verniero and
Calabrese observed buckling in the hardwood floors and walls, kitchen cabinets and
doors out of adjustment, cracks in the ceiling, and walls separating from the ceiling.
B. The Policy’s Coverage, Exclusion, and Exception
Allstate issued Verniero and Calabrese a “Deluxe Plus Homeowners Policy.” The
policy covers “sudden and accidental direct physical loss to property” described as the
“dwelling including attached structures,” “[c]onstruction materials and supplies at the
residence premises for use in connection with [the] dwelling,” and “[w]all-to-wall
carpeting fastened to [the] dwelling.” The policy defines “dwelling” as “a one, two, three
or four family building structure . . . where you reside and which is principally used as a
private residence,” and defines “building structure” as “a structure with walls and a roof.”
The policy contains various exclusions and exceptions to the exclusions.
Exclusion 15 of the policy excludes from coverage nine categories of losses, listed as (a)
through (i):
“a) wear and tear, aging, marring, scratching, deterioration, inherent vice, or
latent defect;
“b) mechanical breakdown;
“c) growth of trees, shrubs, plants or lawns whether or not such growth is
above or below the surface of the ground;
“d) rust or other corrosion, mold, wet or dry rot;
“e) contamination, including, but not limited to the presence of toxic, noxious,
or hazardous gasses, chemicals, liquids, solids or other substances at the residence
premises or in the air, land or water serving the residence premises;
3
“f) smog, smoke from the manufacturing of any controlled substance,
agricultural smudging[1] and industrial operations;
“g) settling; cracking; shrinking; bulging or expansion of pavements, patios,
foundations, walls, floors, roofs or ceilings;
“h) insects, rodents, birds or domestic animals. We do cover the breakage of
glass or safety glazing materials caused by birds; or
“i) seizure by government authority.”
An exception to Exclusion 15 provides, however, that if any of the conditions
listed in “(a) through (h) cause the sudden and accidental escape of water or steam from a
plumbing, heating or air conditioning system, household appliance or fire protective
sprinkler system within your dwelling, we cover the direct physical damage caused by the
water or steam.” The exception further provides: “If loss to covered property is caused
by water or steam not otherwise excluded, we will cover the cost of tearing out and
replacing any part of your dwelling necessary to repair the system or appliance. This
does not include damage to the defective system or appliance from which the water
escaped.” This case involves the interpretation of the words “within your dwelling” and
a determination of what “within your dwelling” modifies in the first sentence of the
exception.2
On September 2, 2007 Allstate denied the claim by Verniero and Calabrese on the
ground Exclusion 15 applied and that the exception to Exclusion 15 did not. Allstate
stated that the loss “was caused by: failure of a plumbing system that was not within the
1 Agricultural smudging is a frost-preventative measure used in orchards that
involves the use of heavy smoke to prevent the radiation of frost. (Midwest Specialties,
Inc. v. Westfield Ins. Co. (Ohio App. 1994) 1994 WL 107192 at p. 11; see Milliken v. Neil
(Colo. 1917) 167 P. 770 [“heavy frost in the valley” ruined “the fruit crop for [the] year”
where “there had been no arrangements for the protection of [the] orchard by
smudging”].)
2 The policy also excludes losses caused by flood, sewage back up, sump pump
overflow, water below the ground, and seepage, but these exclusions are not at issue in
this appeal.
4
dwelling,” and advised its insureds that the policy did not cover the loss because “the
pipe was outside the perimeter of the house.” Allstate explained that “the location of the
pipe failure was out side [sic] the footing of the house,” and that “the wording of
exclusion #15, „within your dwelling‟ is in this case applicable to this occurrence and the
policy is therefore unable to assist with . . . any repairs to the house that may be required
as a result of the failure of this water line.”
C. Verniero and Calabrese File This Action
Verniero and Calabrese commenced this action on April 4, 2008. In their second
amended complaint filed on November 20, 2008, they alleged that on July 1, 2007 they
“heard water splashing underneath their house, up against the first floor and walls,” and
that a “sudden, unexpected and accidental burst of a plumbing pipe had caused a large
amount of water under their house,” which caused damage to property covered by the
policy. Verniero and Calabrese alleged that on September 3, 2007 Allstate improperly
denied their claim “on the basis that Allstate contended the failed plumbing system is
outside the footprint of the house,” and that Allstate “unreasonably relied on unclear and
ambiguously worded language in the Policy.” Verniero and Calabrese also alleged that
Allstate wrongfully denied a separate claim for loss in 2008 for “additional, substantial
damage to their home as a result of catastrophic rain and windstorms throughout
Southern California.”3 Verniero and Calabrese asserted causes of action against Allstate
for breach of contract and breach of the implied covenant of good faith and fair dealing,
as well as a claim for punitive damages.
3 The parties refer to the July 1, 2007 broken pipe loss as the 2007 water claim, and
the 2008 rain storm loss as the 2008 wind and rain claim. As explained below, this
appeal does not involve the 2008 claim.
5
D. Allstate Files a Motion for Summary Judgment or Adjudication
On August 13, 2009 Allstate filed a motion for summary judgment or in the
alternative for summary adjudication. Allstate moved for summary adjudication that it
had no duty to pay policy benefits for the 2007 water claim because the loss was not
covered and because the loss did not occur during the policy period. Allstate argued that
the language of the exception to Exclusion 15 was unambiguous and excluded coverage
for the 2007 water claim. Allstate also moved for summary adjudication on the second
cause of action for breach of the implied covenant of good faith and fair dealing and on
the claim for punitive damages. Allstate argued that it properly denied the 2007 water
claim because “the burst pipe was outside the footings of the dwelling and not inside or
under the dwelling.”4 Allstate also moved for summary adjudication that it had no duty
to pay policy benefits for the 2008 wind and rain claim.
The day before the October 1, 2009 hearing on Allstate‟s motion, Verniero and
Calabrese filed an ex parte application for leave to file supplemental papers in opposition
to the motion and to continue the hearing pursuant to Code of Civil Procedure
section 437c, subdivision (h), based on their recent discovery of this court‟s unpublished
decision in Korbatov v. Allstate Ins. Co. (July 5, 2000, B125702).5 Verniero and
4 Allstate also argued in the trial court that evidence of a contractor‟s negligent
installation of sump pumps and “shoddy, defective workmanship” in remodel work on
the house demonstrated that the 2007 water loss was preexisting, occurred outside the
policy period, and was excluded from coverage pursuant to several exclusions in the
policy. Allstate has not pursued these theories on appeal.
5 The unpublished opinion in Korbatov was (and still is) not available on Westlaw,
Lexis, or the Court of Appeal‟s website because “it was issued before Lexis and Westlaw
began posting unpublished opinions online.” Counsel for Verniero and Calabrese found
the case in September 2009 when they located in the archives of a website devoted to
complaints about Allstate a reference to an appellate brief filed in the Korbatov case.
Counsel tracked the Los Angeles Superior Court case number to the Court of Appeal
case, and on September 24, 2009 received from the clerk of the court a copy of this
court‟s opinion in Korbatov for $5. The docket on the Court of Appeal‟s website shows
that the file was retrieved from archives in November 2009 and returned in December
2009. The record on appeal in Korbatov was destroyed in 2011.
6
Calabrese argued in their ex parte application that in Korbatov this court held that the
identical language in the same exception to Exclusion 15 was ambiguous, that Allstate
was collaterally estopped from arguing otherwise, and that “Allstate‟s insistence on
adhering to its interpretation after the unpublished [Korbatov] opinion was issued against
Allstate is evidence that Allstate acted in bad faith in this case.” The trial court denied
the ex parte application, finding no good cause under Code of Civil Procedure section
437c, subdivision (h), because the “[u]npublished opinion [was] rendered in 2000.”
E. The Trial Court Rules; the Case Goes to Trial; Verniero and Calabrese
Appeal
The trial court “determine[d], as a matter of law, that no ambiguity exists in the
language of Exclusion 15 of the Allstate Insurance Homeowner‟s Policy at issue here,
including the „exception‟ language, stating: „If any of [exclusions] (a) through (h) cause
the sudden and accidental escape of water or steam from a plumbing, heating or air
conditioning system, household appliance or fire protective sprinkler system within your
dwelling, we cover the direct physical damage caused by the water or steam.‟” The court
also “rejected Plaintiff‟s contention that if one were to project upward from the point of
the break, one would touch an overhang or an eve of the roof such that the break was
located „within‟ the dwelling . . . .” The court found that “the Policy is not susceptible to
that interpretation because the scenario Plaintiffs proffer would mean that at any time, the
addition of an overhang or a projection or a prolongation of the roof line would move the
line that was sought to be drawn by the contract terms of the policy as „within [your]
dwelling.‟” The court found that it was undisputed the “pipe was not within the four
walls of the dwelling.” The trial court therefore granted Allstate‟s motion for summary
adjudication of the 2007 water claim. The trial court, however, denied Allstate‟s motion
for summary adjudication that it had no duty to indemnify the 2008 wind and rain claim.
The court filed a written order on November 3, 2009.
On November 13, 2009 Verniero and Calabrese filed a motion for reconsideration,
arguing that the Korbatov decision was new matter under Code of Civil Procedure
7
section 1008, subdivision (a), and that it collaterally estopped Allstate on the issue of
whether the exception to Exclusion 15 is ambiguous. They also argued that there were
triable issues of fact on their bad faith claim because “Allstate knew that its interpretation
of Allstate‟s exact same policy language was adjudicated as ambiguous in Korbatov,” yet
“steadfastly maintained [the] same interpretation of the policy language that had
previously been adjudicated to be ambiguous at best.” The trial court denied the motion
for reconsideration on the grounds that the Korbatov opinion did not constitute “new or
different facts, circumstances, or law,” and that Verniero and Calabrese had “not shown
on the merits that collateral estoppel applies to the interpretation of Exclusion 15 in the
policy at issue in this lawsuit.”
The parties proceeded to trial on the causes of action based on the 2008 wind and
rain claim. On July 7, 2011 the jury returned a verdict in favor of Allstate. On July 25,
2011 the trial court entered judgment in favor of Allstate. On September 22, 2011
Verniero and Calabrese filed a notice of appeal from the judgment.
DISCUSSION
A. Standard of Review
We apply a de novo standard of review to an order granting summary judgment or
adjudication based on the interpretation of an insurance policy. (Mt. Hawley Ins. Co. v.
Lopez (2013) 215 Cal.App.4th 1385, 1394, petn. for review filed June 11, 2013,
S211292; Federal Ins. Co. v. Steadfast Ins. Co. (2012) 209 Cal.App.4th 668, 679.) “The
interpretation of an insurance policy, like other contracts, is a legal question to which the
court applies its own independent judgment.” (Carolina Casualty Ins. Co. v. L.M. Ross
Law Group, LLP (2010) 184 Cal.App.4th 196, 204.) “As a question of law, the
interpretation of an insurance policy is reviewed de novo under well-settled rules of
contract interpretation. [Citation.] „The fundamental rules of contract interpretation are
based on the premise that the interpretation of a contract must give effect to the “mutual
intention” of the parties. “Under statutory rules of contract interpretation, the mutual
8
intention of the parties at the time the contract is formed governs interpretation.
[Citation.] Such intent is to be inferred, if possible, solely from the written provisions of
the contract. [Citation.] The „clear and explicit‟ meaning of these provisions, interpreted
in their „ordinary and popular sense,‟ unless „used by the parties in a technical sense or a
special meaning is given to them by usage‟ [citation], controls judicial interpretation.
[Citation.]”‟ [Citation.]” (E.M.M.I. Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th
465, 470; Health Net, Inc. v. RLI Ins. Co. (2012) 206 Cal.App.4th 232, 251; see County
of San Diego v. Ace Property & Casualty Ins. Co. (2005) 37 Cal.4th 406, 414 [“„In
reviewing de novo a superior court‟s summary adjudication order in a dispute over the
interpretation of the provisions of a policy of insurance, the reviewing court applies
settled rules governing the interpretation of insurance contracts.‟”].)
“Furthermore, policy exclusions are strictly construed [citations], while exceptions
to exclusions are broadly construed in favor of the insured [citations]. „“[A]n insurer
cannot escape its basic duty to insure by means of an exclusionary clause that is unclear.
As we have declared time and again „any exception to the performance of the basic
underlying obligation must be so stated as clearly to apprise the insured of its effect.‟
[Citation.] Thus, „the burden rests upon the insurer to phrase exceptions and exclusions
in clear and unmistakable language.‟ [Citation.] The exclusionary clause „must be
conspicuous, plain and clear.‟” [Citation.] This rule applies with particular force when
the coverage portion of the insurance policy would lead an insured to reasonably expect
coverage for the claim purportedly excluded.‟ [Citation.]” E.M.M.I. Inc. v. Zurich
American Ins. Co., supra, 32 Cal.4th at p. 470; Health Net, Inc. v. RLI Ins. Co., supra,
206 Cal.App.4th at p. 251.)
B. Breach of Contract
1. The Parties‟ Contentions
Allstate argues that the one and only reasonable interpretation of the language of
Exclusion 15 and its exception is that the exception applies only if the point at which the
pipe burst is within the insured‟s dwelling. Allstate did not argue in the trial court and
9
does not argue on appeal that the exception applies when the “escape of water or steam”
occurs within the insured‟s dwelling. Allstate did not argue in the trial court and does not
argue on appeal that the exception applies when the “plumbing system” is within the
insured‟s dwelling. Allstate‟s argument is that the exception applies only when the
location of the pipe break or “burst” is within the insured‟s dwelling. As counsel for
Allstate argued to the trial court, “[w]e would argue that it‟s pretty clear that what we‟re
talking about here is where the break is happening as opposed to where the water is
happening.” As Verniero and Calabrese point out, however, there is usually little
difference between arguing that the “burst pipe” must be within the dwelling and arguing
that the escape of water must be within the dwelling.6
Verniero and Calabrese argue that the exception to Exclusion 15 is ambiguous and
should be construed in their favor, that even if Allstate‟s interpretation were reasonable it
is not the only reasonable one, and that water escaping from a plumbing system within
their dwelling causing damage to their home is covered. They also argue that Allstate is
collaterally estopped from arguing otherwise because in Korbatov, this court found that
the same exact exception to Exclusion 15 was ambiguous.
2. Exclusion 15 of the Policy Is Ambiguous
“An insurance policy provision is ambiguous when it is capable of two or more
constructions, both of which are reasonable. [Citation.] The uncertainty may relate to
the extent or existence of coverage, the peril insured against, the amount of liability or the
6 We distinguish between where the “pipe bursts” and where the “water escapes”
because the parties do. We note that it is possible that damage could occur at a location
in the plumbing or other system not within the dwelling that causes the escape of water or
steam at a different location in the system that is within the dwelling. For example, a
valve in the plumbing system outside of the dwelling may malfunction or even “burst”
such that the increased flow of water causes water to escape within the dwelling. (See,
e.g., Cardio Diagnostic Imaging, Inc. v. Farmers Ins. Exchange (2012) 212 Cal.App.4th
69, 71, 72 [a blockage in the sewer line caused water to back up and overflow from a
toilet within the premises and 20 to 40 feet away from the blockage].)
10
party or parties protected.” (Jordan v. Allstate Ins. Co. (2004) 116 Cal.App.4th 1206,
1214.) Thus, the proper question is whether the particular phrase is ambiguous in “„the
context of this policy and the circumstances of this case. [Citation.] “The provision will
shift between clarity and ambiguity with changes in the event at hand.” [Citation.]‟
[Citation.] This question must be answered through the eyes of a reasonable person in
the position of the insured.” (Ibid.; see State of California v. Continental Ins. Co. (2012)
55 Cal.4th 186, 195 [“„A policy provision will be considered ambiguous when it is
capable of two or more constructions, both of which are reasonable.‟”]; Powerine Oil
Co., Inc. v. Superior Court (2005) 37 Cal.4th 377, 390 [same].) “„Even language that
may be plain and clear may be found to be ambiguous when read in the context of the
policy and the circumstances of the case and, in order to give effect to the insured‟s
objectively reasonable expectations, construed in the insured‟s favor.‟” (Clarendon
America Ins. Co. v. North American Capacity Ins. Co. (2010) 186 Cal.App.4th 556, 567.)
“„Language in an insurance policy is “interpreted as a whole and in the
circumstances of the case, and cannot be found to be ambiguous in the abstract.”‟
[Citation.] When the relevant provisions of an insurance policy are ambiguous, extrinsic
evidence may be admitted to determine the proper interpretation. [Citations.] If there is
no relevant extrinsic evidence or the extrinsic evidence does not resolve the ambiguity,
the court must interpret „“„“the ambiguous provisions in the sense the [insurer] believed
the [insured] understood them at the time of formation. [Citation.] If application of this
rule does not eliminate the ambiguity, ambiguous language is construed against the party
who caused the uncertainty to exist. [Citation.]”‟”‟” (Palacin v. Allstate Ins. Co. (2004)
119 Cal.App.4th 855, 862; see Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th
315, 321 [“„[o]nly if these rules do not resolve a claimed ambiguity do we resort to the
rule that ambiguities are to be resolved against the insurer‟”]; Powerine Oil Co., Inc. v.
Superior Court, supra, 37 Cal.4th at p. 391 [“„“If an asserted ambiguity is not eliminated
by the language and context of the policy, courts then invoke the principle that
ambiguities are generally construed against the party who caused the uncertainty to exist
(i.e., the insurer) in order to protect the insured‟s reasonable expectation of coverage.”‟”];
11
E.M.M.I. Inc. v. Zurich American Ins. Co., supra, 32 Cal.4th at p. 471 [“„“Any
ambiguous terms are resolved in the insured[‟s] favor, consistent with the insured[‟s]
reasonable expectations.”‟”].) “The „tie-breaker‟ rule of construction against the insurer
stems from the recognition that the insurer generally drafted the policy and received
premiums to provide the agreed protection.” (Minkler, supra, at p. 321.)
“To further ensure that coverage conforms fully to the objectively reasonable
expectations of the insured, the corollary rule of interpretation has developed that, in
cases of ambiguity, basic coverage provisions are construed broadly in favor of affording
protection, but clauses setting forth specific exclusions from coverage are interpreted
narrowly against the insurer. The insured has the burden of establishing that a claim,
unless specifically excluded, is within basic coverage, while the insurer has the burden of
establishing that a specific exclusion applies.” (Minkler v. Safeco Ins. Co. of America,
supra, 49 Cal.4th at p. 322.) “Policy exclusions are strictly construed” while
“[e]xceptions to exclusions on the other hand, are broadly construed in favor of the
insured.” (Jordan v. Allstate Ins. Co., supra, 116 Cal.App.4th at p. 1214.) The insurer
has the burden of phrasing “„“„exceptions and exclusions in clear and unmistakable
language.‟”‟” (E.M.M.I. Inc. v. Zurich American Ins. Co., supra, 32 Cal.4th at p. 471.)
Allstate argues repeatedly that the language of Exclusion 15 and its exception is
“plain,” “clear,” “unambiguous,” “explicit,” and “unequivocal,” and that any other
interpretation would be “strained,” “distorted,” and “tortured.” We disagree. Allstate‟s
interpretation is a reasonable one, but it is not the only reasonable interpretation. (See
MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 655 [even if insurer‟s
“interpretation is considered reasonable, it would still not prevail, for in order to do so it
would have to establish that its interpretation is the only reasonable one”].)
The language of Exclusion 15 and its exception, considered as a whole and in the
context of the policy, is ambiguous because it is capable of at least four reasonable
constructions. First, although not argued by either side here, “within your dwelling” can
modify “escape of water,” so that the exception to the exclusion applies where water
escapes into the insured‟s dwelling. Second, as Allstate argues on appeal, “within your
12
dwelling” can mean the location where the damage to the system or appliance is (i.e.,
where the “pipe bursts”), so that the exception to the exclusion applies when the “pipe
bursts” within the insured‟s dwelling. Third, as Verniero and Calabrese argue, “within
your dwelling” can modify only the immediately preceding antecedent “fire protective
sprinkler system,” so that the exception to the exclusion applies “to traditional, indoor,
ceiling-mounted sprinklers — which are distinct from external fire sprinkler systems.”7
Fourth, and also not argued by either side, “within your dwelling” can modify the entire
list of antecedents, so that the exception to the exclusion applies to water escaping from
(a) a plumbing system within the dwelling, (b) a heating or air conditioning system
within the dwelling, (c) an appliance within the dwelling, and (d) a fire protective
sprinkler system within the dwelling.
These are all reasonable interpretations of Exclusion 15 and its exception
(although the specific interpretation urged by Verniero and Calabrese based on the last
antecedent rule is the least convincing). Therefore, the language of the policy is
ambiguous. (See Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18 [“A policy
provision will be considered ambiguous when it is capable of two or more constructions,
both of which are reasonable.”]; Carolina Casualty Ins. Co. v. L.M. Ross Law Group,
LLP, supra, 184 Cal.App.4th at p. 206 [same]; Hudson v. Allstate Ins. Co. (N.Y. App.
Div. 2006) 25 A.D.3d 654, 656 [809 N.Y.S.2d 124, 126] [“an ambiguity was created by
the conflict between the provision of coverage for accidental escape of water from a
plumbing system and” Exclusion 15 “[b]ecause the pipe that burst supplied water to the
plaintiff‟s home” and therefore “was part of her plumbing system”]; Flynn v. Allstate
Indem. Co. (N.Y. City Ct. 2009) 22 Misc. 3d 1138(A) [2009 WL 782520 at p. 13]
7 “The last antecedent rule provides that „“„qualifying words, phrases and clauses
are to be applied to the words or phrases immediately preceding and are not to be
construed as extending to or including others more remote.‟”‟” (Mt. Hawley Ins. Co. v.
Lopez, supra, 215 Cal.App.4th at pp. 1412-1413.) “The last antecedent rule . . . „is “„not
immutable,‟”‟” should not be applied rigidly, “and has several exceptions.” (Id. at
p. 1413.)
13
[finding “a per se ambiguity . . . between what is excluded by paragraph 15(a) to (h) and
the provision in that same paragraph for coverage if the cause is a leak in the plumbing
system”].)
3. Application of the Rules for Interpretation of Insurance Policies
Results in Coverage
Because the language of Exclusion 15 and its exception is ambiguous, we proceed
to the next step in the interpretive analysis. “When the language of the policy is
ambiguous, we must consider the language in the context of the policy as a whole and the
circumstances of the case.” (National Casualty Co. v. Sovereign General Ins. Services,
Inc. (2006) 137 Cal.App.4th 812, 822.) “Ambiguity „“„is resolved by interpreting the
ambiguous provisions in the sense the [insurer] believed the [insured] understood them at
the time of formation. [Citation.] If application of this rule does not eliminate the
ambiguity, ambiguous language is construed against the party who caused the uncertainty
to exist. [Citation.]‟ „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.”‟”‟” (E.M.M.I. Inc. v. Zurich American Ins. Co.,
supra, 32 Cal.4th at p. 470.) The burden is on the insurer to show that the insured could
not have had an objectively reasonable expectation of coverage. (Id. at p. 473;
Clarendon America Ins. Co. v. North American Capacity Ins. Co., supra, 186
Cal.App.4th at p. 573.)
Allstate did not meet its burden on summary judgment. Neither side introduced
any extrinsic evidence to interpret the policy, other than Verniero and Calabrese‟s
attempt to submit the Korbatov opinion. Allstate did not present any evidence or
argument in the trial court on the issue of what it believed Verniero and Calabrese
understood about Exclusion 15 and its exception at the time the parties entered into the
insurance contract. Nor does Allstate make any argument on appeal regarding what it
believed its insureds understood about Exclusion 15 and its exception. Allstate argues, as
it did in the trial court, that the exception to Exclusion 15 is unambiguous and that
14
therefore it is unnecessary to determine what the parties understood at the time of
contract formation. Allstate does argue that Verniero and Calabrese did not have an
objectively reasonable expectation of coverage because the pipe burst was not within
their dwelling, but this argument is based on Allstate‟s theory of its insureds‟
understanding at the time of the loss, not at the time of contracting.
Therefore, because the ambiguity in the exception to Exclusion 15 is not resolved
by any extrinsic evidence or by considering how Allstate believed its insureds understood
the language, we proceed to the last step of the analysis and construe the language against
Allstate. (Palacin v. Allstate Ins. Co., supra, 119 Cal.App.4th at p. 862; AIU Ins. Co. v.
Superior Court (1990) 51 Cal.3d 807, 822; see Cardio Diagnostic Imaging, Inc. v.
Farmers Ins. Exchange, supra, 212 Cal.App.4th at p. 74 [“„If application of this rule does
not eliminate the ambiguity, ambiguous language is construed against the party who
caused the uncertainty to exist.‟”]; Jordan v. Allstate Ins. Co., supra, 116 Cal.App.4th at
p. 1213 [same].) In addition, as noted above, we strictly construe the exclusion against
Allstate and broadly interpret the exception in favor of Verniero and Calabrese. (See
E.M.M.I. Inc. v. Zurich American Ins. Co., supra, 32 Cal.4th at p. 471; Aydin Corp. v.
First State Ins. Co. (1998) 18 Cal.4th 1183, 1192; Health Net, Inc. v. RLI Ins. Co., supra,
206 Cal.App.4th at p. 251.) Employing these “tie-breaker” rules (Minkler v. Safeco Ins.
Co. of America, supra, 49 Cal.4th at p. 321), we conclude the policy covers Verniero and
Calabrese‟s claim.
Interpreting Exclusion 15 and its exception in favor of the insureds in this case
protects their reasonable expectation that the water damage in their dwelling would be
covered by their policy. Allstate does not argue that by entering the crawl space the
water did not enter the dwelling, nor does Allstate dispute that water in the dwelling
caused damage within the dwelling.8 The reasonable expectations of the insureds focus
8 Although Allstate mentions in the factual summary section of its brief that “neither
the water nor the pipe break were „within [the] dwelling,‟” Allstate‟s legal argument is
“that the burst pipe was not „within‟ [the] dwelling” and that “the burst pipe must be
„within [your] dwelling‟ for coverage under the Policy to exist.”
15
on insuring against water damage to the inside of their home, whether the water comes
from a plumbing system, HVAC system, fire sprinkler system, or household appliance
inside, outside, or (as in this case) immediately adjacent to and touching the side of the
house. The rooms in which Verniero and Calabrese spend their quiet weekday evenings
after work and their lazy Sunday mornings reading the newspaper are equally damaged
by the water in their dwelling, whether the water escaped from a household appliance in
their kitchen, the plumbing system that brings water into their residence, or the heating
and air conditioning system that exchanges air between the inside of their home and the
outside world. Verniero and Calabrese reasonably expected that their insurance policy
would cover their 2007 water claim.
Allstate also argues that “the reasonable insured could not expect coverage under
Appellants‟ interpretation when one considers that such an interpretation would mean
that the Policy would cover the neighbor‟s plumbing if there was a burst pipe and the
water rolled down the hill into Appellants‟ house.” This inapt analogy does not support
Allstate‟s position. No one disputes there would be no coverage in Allstate‟s
hypothetical because in that case neither the escape of water, the burst pipe, nor any of
the systems or appliances identified in the exception to Exclusion 15 would be “within
the dwelling.” (See Waldsmith v. State Farm Fire & Casualty Co. (1991) 232
Cal.App.3d 693, 697, 698 [exception to exclusion for sudden and accidental leakage or
seepage of water or steam from “(1) heating or airconditioning system; . . . (2) household
appliance; or . . . (3) plumbing system” did not apply to a break in city water main
because “accidental leakage from a „plumbing system‟ [does not] relate[] to any system
other than one directly connected to and a part of the covered residence.”].) Allstate‟s
hypothetical does not make its insureds‟ expectation of coverage unreasonable.
Allstate correctly argues that the language of the exception to Exclusion 15 must
be interpreted in the context of the entire policy. Allstate then points to the next two
sentences of the exception to Exclusion 15, which provide: “If loss to covered property is
caused by water or steam not otherwise excluded, we will cover the cost of tearing out
and replacing any part of your dwelling necessary to repair the system or appliance. This
16
does not include damage to the defective system or appliance from which the water
escaped.” Allstate argues that “[i]t is crystal clear from this language that any systems
and appliances which could have caused a covered loss addressed by this exception must
have been „within your dwelling‟ given that the sentence addresses tearing out and
replacing any part of the dwelling necessary to repair the defective system or appliance.”
Allstate‟s argument is both inconsistent and incorrect. It is inconsistent with
Allstate‟s argument on appeal that the exception to Exclusion 15 applies when the
location of the damage to the plumbing system (i.e., the location of the break in the pipe)
is within the dwelling, not when the system or appliance is within the dwelling. As
Verniero and Calabrese point out, Allstate‟s inconsistency proves their point: If “within
your dwelling” modifies “plumbing system,” then there is coverage because the pipe that
burst was a part of a plumbing system that, at least in part, was within the dwelling. (See
Hudson v. Allstate Ins. Co., supra, 25 A.D.3d at p. 656 [809 N.Y.S.2d at p. 126].)
Allstate‟s argument is also wrong: It may be necessary to tear out and replace part of the
dwelling to repair a part of a system (or even an appliance)9 that is within the dwelling
but has been damaged at a point that is not within the dwelling.
The trial court concluded that “the only reasonable interpretation” of the exception
to the exclusion is that it applies only to “things that happened inside the house that
caused the damage.” The trial court reasoned that the exclusions listed in Exclusion 15
involved “things that are coming in, in many cases, from the outside and are things that
are affecting the dwelling itself” or “are starting to intrude . . . in the dwelling,” like
“growth of trees, shrubs, plants, or lawn above or below the ground.” The trial court
found that, in contrast, the exception to the exclusion for “water or steam from a
plumbing, heating, or air-conditioning system, household appliance” involved “things
inherently inside the dwelling.”
9 For example, if a portion of an HVAC system, drainage from a washing machine,
or vent from a dryer extends from the side of the home.
17
The problem with the trial court‟s analysis is that the language of the policy does
not say that Exclusion 15 applies to water or steam from external sources and that the
exception applies to water or steam from internal sources. The language refers to water
or steam escaping from systems and appliances within the dwelling. Moreover, of the
nine exclusions listed in Exclusion 15, three appear to refer to occurrences that are
primarily internal (a, b, and d),10 three appear to refer to occurrences that are primarily
external (c, h, and i),11 and three refer to occurrences that could be internal or external (e,
f, and g).12 In fact, exclusion (e) is inconsistent with the trial court‟s internal/external
distinction by distinguishing between contamination from substances “at the residence”
and substances “in the air, land or water serving the residence.” Similarly, exclusion (g)
includes both external (patios, foundations) and internal (walls, floors, ceilings) settling
and cracking.
For these reasons, we conclude that the water damage to the home of Verniero and
Calabrese is covered by the policy pursuant to the exception to Exclusion 15. The trial
court erred by granting Allstate summary adjudication on the first cause of action for
breach of contract relating to the 2007 water claim.13
10 Wear and tear, aging, marring, scratching, deterioration, inherent vice, latent
defect (a); mechanical breakdown (b); and rust, corrosion, mold, and wet or dry rot (d).
11 Growth of trees, shrubs, plants or lawns (c); insects, rodents, birds, or domestic
animals (h) (although some domestic animals may live only in the dwelling); and seizure
by government authority (i).
12 Contamination from toxic, noxious, or hazardous gasses, chemicals, liquids,
solids, or other substances at the residence premises (e); smog or smoke from the
manufacture of controlled substances, agricultural smudging or industrial operation (f);
settling, cracking, shrinking, bulging, or expansion of pavements, patios, foundations,
walls, floors, roofs or ceilings (g).
13 We do not reach the alternative argument by Verniero and Calabrese that the
location of the break in the pipe was within the dwelling because, even though it was
outside of the wall, it was “inside the boundary formed by the outermost edges of the roof
of the house as well as the footing of its foundation.”
18
C. Breach of the Implied Covenant of Good Faith and Fair Dealing
“The linchpin of a bad faith claim is that the denial of coverage was
unreasonable.” (McCoy v. Progressive West Ins. Co. (2009) 171 Cal.App.4th 785, 793;
see Hibbs v. Allstate Ins. Co. (2011) 193 Cal.App.4th 809, 820 [“An insurer breaches the
implied covenant of good faith and fair dealing when it unreasonably withholds policy
benefits.”].) The test for reasonableness of an insurer‟s denial of benefits is an objective
one. (See Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 724; Bosetti v. United
States Life Ins. Co. in City of New York (2009) 175 Cal.App.4th 1208, 1236-1237.)
Nevertheless, “while an insurer‟s subjective bad intentions are not a sufficient basis on
which to establish a bad faith cause of action, an insurer‟s subjective mental state may
nonetheless be a circumstance to be considered in the evaluation of the objective
reasonableness of the insurer‟s actions.” (Bosetti, supra, at p. 1239.) “The
reasonableness of an insurer‟s conduct is ordinarily a question of fact, except in the
„exceptional instance when “only one reasonable inference can be drawn from the
evidence.”‟” (Mt. Hawley Ins. Co. v. Lopez, supra, 215 Cal.App.4th at p. 1424, quoting
Lee v. Fidelity National Title Ins. Co. (2010) 188 Cal.App.4th 583, 599; see Dalrymple v.
United Services Auto. Assn. (1995) 40 Cal.App.4th 497, 511 [“In general, where bad faith
is alleged, a jury is empowered to resolve conflicting evidence regarding an insurer‟s
conduct and motives.”].)
Verniero and Calabrese argue that whether Allstate‟s conduct amounted to bad
faith is a factual issue for the jury. We can see how a trier of fact could find Allstate‟s
denial of Verniero and Calabrese‟s claim unreasonable. In Korbatov, a case involving
the exact same policy language and the same attorneys for Allstate, this court rejected
Allstate‟s position that the language of Exclusion 15 and its exception is unambiguous.
Thus, Allstate (and its attorneys) took a position in this case that they knew this court had
rejected. Moreover, “if there is an ambiguity in an insurance policy provision, the
insurance company must interpret the ambiguity in favor of the policyholder.” (Griffin
Dewatering Corp. v. Northern Ins. Co. of New York (2009) 176 Cal.App.4th 172, 208.)
Here, rather than interpreting the ambiguity in favor of its insureds, Allstate (1) denied
19
the existence of the ambiguity even though a court had already determined the same
policy language was ambiguous, (2) argued that the language unambiguously meant
something different than Allstate had argued the language unambiguously meant in
Korbatov,14 and (3) interpreted the ambiguous policy language against its insured to deny
coverage. Discovery on these issues might have further developed evidence of Allstate‟s
knowledge and response to the Korbatov decision, steps taken by Allstate to apply or
revise the language of Exclusion 15 and its exception in light of Korbatov, and whether
the Korbatov decision had any role in Allstate‟s denial of Verniero and Calabrese‟s
claim. In these somewhat unusual circumstances, a jury could find that Allstate‟s
“decisions and actions . . . evaluated as of the time that they were made” were
unreasonable. (Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1073; see
Wilson v. 21st Century Ins. Co., supra, 42 Cal.4th at pp. 723-724 [“„an insurer is not
entitled to judgment as a matter of law where, viewing the facts in the light most
favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably‟”].)15
The problem is that the Korbatov decision was not properly before the trial court
on Allstate‟s motion for summary judgment or adjudication. The trial court denied
Verniero and Calabrese‟s ex parte application for a continuance under Code of Civil
Procedure section 437c, subdivision (h), and their motion for reconsideration. Verniero
and Calabrese do not argue on appeal that the trial court abused its discretion in making
either of these rulings. (See Cheviot Vista Homeowners Assn. v. State Farm Fire &
14 In Korbatov Allstate argued that the exception to Exclusion 15 was unambiguous
and meant that the plumbing system must be within the dwelling. In this case Allstate is
arguing that the exception to Exclusion 15 is unambiguous and means that the location of
the damaged pipe must be within the dwelling.
15 It is true that if an insurer‟s denial of coverage is reasonable, the insurer cannot be
liable for bad faith just because a court rejects its interpretation or position after the
insurer denied coverage. (Griffin Dewatering Corp. v. Northern Ins. Co. of New York,
supra, 176 Cal.App.4th at p. 179; see Morris v. Paul Revere Life Ins. Co. (2003) 109
Cal.App.4th 966.) Here, however, a court rejected Allstate‟s interpretation before
Allstate denied coverage on the rejected ground.
20
Casualty Co. (2006) 143 Cal.App.4th 1486, 1500-1501 [ruling on request to continue
hearing on summary judgment motion reviewed for abuse of discretion]; Lucas v. Santa
Maria Public Airport Dist. (1995) 39 Cal.App.4th 1017, 1027 [denial of motion for
reconsideration reviewed for abuse of discretion].) Therefore, Verniero and Calabrese
have waived these issues. (See Behr v. Redmond (2011) 193 Cal.App.4th 517, 538
[failure to brief issue “constitutes a waiver or abandonment of the issue on appeal”];
Kelly v. CB&I Constructors, Inc. (2009) 179 Cal.App.4th 442, 452 [“point not raised in
opening brief will not be considered”]; Gombiner v. Swartz (2008) 167 Cal.App.4th
1365, 1375 [contention waived where appellant did “not analyze the court‟s ruling in
light of the applicable abuse of discretion standard of review”].)16 Because Verniero and
Calabrese did not present evidence of the Korbatov decision in their opposition to
Allstate‟s motion, nor challenge on appeal the trial court‟s refusal to consider Korbatov,
we cannot find that the trial court erred in granting Allstate‟s motion for summary
adjudication on the second cause of action for breach of the implied covenant of good
faith and fair dealing. (See Environmental Protection Information Center v. Department
of Forestry & Fire Protection (1996) 43 Cal.App.4th 1011, 1015, 1016 [“in summary
judgment cases” we “limit our review to the record as compiled in [the trial] court”].)
16 Citing Tuchscher Development Enterprises, Inc. v. San Diego Unified Port Dist.
(2003) 106 Cal.App.4th 1219, Verniero and Calabrese contend that the arguments the
trial court “entertains on reconsideration become subject to appellate review.” This is not
a fair characterization of Tuchscher. The court in Tuchscher determined that it could
review the contentions at issue because the contentions were challenging the trial court‟s
order reaffirming a prior order granting a special motion to strike under Code of Civil
Procedure section 425.16; the contentions were not challenging “the trial court‟s granting
reconsideration.” (Tuchscher, supra, at p. 1245.) The court also noted that an “„“order
denying a motion for reconsideration is interpreted as a determination that the application
does not meet the requirements of [Code of Civil Procedure] section 1008.”‟” (Ibid.)
Here, the trial court found that Verniero and Calabrese‟s motion did not meet the
requirements of Code of Civil Procedure section 1008.
21
D. Punitive Damages
Because Allstate was entitled to summary adjudication on Verniero and
Calabrese‟s cause of action for breach of the implied covenant of good faith and fair
dealing, Allstate was entitled to summary adjudication in their claim for punitive
damages. (See Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 61;
Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal.App.4th 1004, 1054.)
DISPOSITION
The portion of the judgment in favor of Allstate on Verniero and Calabrese‟s
cause of action for breach of contract relating to the 2007 water claim is reversed. The
matter is remanded to the trial court with directions to vacate its order granting summary
adjudication and to enter a new order granting summary adjudication only on Verniero
and Calabrese‟s claims for breach of the implied covenant of good faith and fair dealing
and for punitive damages, and for trial on Verniero and Calabrese‟s cause of action for
breach of contract relating to the 2007 water claim. The judgment is otherwise affirmed.
Verniero and Calabrese are to recover their costs on appeal.
SEGAL, J.
We concur:
PERLUSS, P. J. ZELON, J.
Judge of the Los Angeles Superior Court assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.
22
Verniero v. Allstate Ins. Co. CA2/7
Combined Opinion