Opinion
C085749
09-29-2020
AUBURN WOODS I HOMEOWNERS ASSOCIATION et al., Plaintiffs and Appellants, v. STATE FARM GENERAL INSURANCE COMPANY et al., Defendants and Respondents.
Hirsch Closson, Clifford E. Hirsch and Barrett B. Braun, for Plaintiffs and Appellants. Pacific Law Partners, Sandra E. Stone, Emeryville, and Andrew P. Collier, for Defendants and Respondents.
Certified for Partial Publication.
Pursuant to California Rules of Court, rules 8.1105 and 8.1110, this opinion is certified for publication with the exception of parts I through V of the Discussion.
Hirsch Closson, Clifford E. Hirsch and Barrett B. Braun, for Plaintiffs and Appellants.
Pacific Law Partners, Sandra E. Stone, Emeryville, and Andrew P. Collier, for Defendants and Respondents.
MAURO, Acting P. J. Auburn Woods I Homeowners Association (HOA) and its property manager Frei Real Estate Services (FRES) tendered the defense of two lawsuits filed against them by a member of HOA under HOA's condominium/association policy. HOA's insurer, State Farm Insurance Company (State Farm), denied the tender for the first lawsuit. It accepted the defense of the second lawsuit as to HOA only. HOA and Al Frei, individually and doing business as FRES, sued State Farm and its agent Frank Lewis for, among other things, breach of contract and breach of the implied covenant of good faith and fair dealing. (We will refer to Al Frei and FRES collectively as Frei and to Al Frei as Mr. Frei.) The trial court entered judgment in favor of State Farm and Lewis and against HOA and Frei following a bench trial.
HOA and Frei now contend (1) the trial court erred in concluding that State Farm did not owe a duty to defend HOA and FRES against the first lawsuit; (2) HOA had a reasonable expectation that FRES would be covered under the directors and officers liability provision of its policy; (3) State Farm failed to reimburse HOA for post-tender expenses related to the second lawsuit; (4) Lewis breached his contract with HOA by failing to include FRES as an additional insured and failing to alert HOA and Frei that it was not possible to include FRES under the directors and officers liability provision; (5) State Farm breached the covenant of good faith and fair dealing implied in HOA's policy; and (6) the trial court erred in denying HOA and Frei's motion to tax the expert witness fees State Farm and Lewis sought to recover under Code of Civil Procedure section 998 ( section 998 ).
We conclude (1) State Farm did not have a duty to defend HOA and FRES against the first lawsuit; (2) HOA and Frei fail to establish that FRES should be deemed an insured under the directors and officers liability provision; (3) substantial evidence supports the trial court's finding that HOA did not present State Farm with a clear statement of the amount of attorney's fees and costs HOA incurred in defending against the second lawsuit; (4) HOA and Frei do not establish the alleged contract between Lewis and HOA; (5) HOA and Frei fail to demonstrate error with regard to their breach of implied covenant cause of action; and (6) State Farm and Lewis's pretrial offer to compromise was effective to trigger cost shifting under section 998.
We will affirm the judgment and the second amended judgment.
BACKGROUND
HOA is a nonprofit mutual benefit corporation organized to perform specified functions for a condominium development located in Auburn, California. FRES was the property manager for HOA from 2009 through 2014. FRES took over handling the day-to-day affairs of HOA in January 2009. Ashley Budelli and Vanessa Machen, employees of FRES, managed HOA. Al Frei owned FRES.
The association management agreement between HOA and FRES required HOA to defend and indemnify FRES against any claim, liability, judgment, cost or expense suffered as a result of FRES's performance under the agreement, except for willful misconduct or gross negligence. The agreement required FRES to solicit proposals for all of HOA's insurance needs and HOA to name FRES as an additional insured on HOA's liability and directors and officers insurance policies.
From at least January 11, 2007 through 2015, HOA insured its condominium development under a condominium/association policy with State Farm, through State Farm agent Frank Lewis. Al Frei did not discuss any insurance issue with the previous property manager when management of HOA was transferred to FRES. Although he was unfamiliar with State Farm's condominium/association policy, Mr. Frei did not speak with anyone at HOA about whether the State Farm policy met HOA's insurance requirements. There was conflicting testimony about whether in 2009 Mr. Frei sent Lewis letters inquiring about whether HOA's property manager was an additional insured under HOA's policy. But Mr. Frei testified he did not call Lewis when he did not receive a response to his 2009 letters.
Budelli spoke to Marianne Bruns at Lewis's office in about January 2009, but at trial, Budelli could not recall what they spoke about. Budelli did not recall whether she asked Bruns to include FRES as an additional insured on HOA's policy. Bruns testified that Budelli did not ask Bruns to add FRES as an additional insured on HOA's policy. FRES community association manager Machen was not aware of any request to add FRES to HOA's insurance policy before 2014.
On July 15, 2013, Marva Beadle filed a complaint against HOA, FRES and Allied Trustee Services for declaratory relief, injunctive relief and an accounting. Beadle owned a condominium unit within HOA. Her complaint alleged that Allied Trustee Services recorded a notice of default and election to sell her property based on unpaid HOA fees. Beadle alleged the amount purportedly owed was unreasonable and incorrect. There were "deliberately manufactured" discrepancies in Beadle's "HOA account." According to Beadle, the actual amount of money Beadle owed to FRES and Allied Trustee Services was in dispute and could not be determined without an accounting, and Allied Trustee Services did not comply with Civil Code section 2924, subdivision (f) in recording a notice of trustee's sale.
Beadle's complaint further alleged that Allied Trustee Services would sell Beadle's property on July 17, 2013, unless restrained. Sale of the property would cause Beadle great and irreparable injury, Beadle had no other plain, speedy or adequate remedy, and injunctive relief was necessary to prevent the loss of Beadle's property, which loss would result in a $50,000 profit for "opposing parties" as the actual HOA fees owed were less than $2,000. Beadle requested (1) a declaration that Allied Trustee Services had no right to conduct a trustee's sale and Beadle did not breach the covenants, conditions and restrictions (CC&Rs) for HOA; (2) an injunction preventing the sale of Beadle's property; (3) an accounting to determine the amount Beadle actually owed defendants; (4) attorney's fees and costs; and (5) such other and further relief as the court may deem just and proper.
HOA and FRES tendered the defense of the Beadle action to State Farm under HOA's condominium/association policy. The policy included a comprehensive business liability (Coverage L) provision and an optional directors and officers liability (Option DO) provision. Under Coverage L, State Farm agreed to "pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury, property damage, personal injury or advertising injury to which" the policy applied. Coverage L obligated State Farm "to defend any claim or suit seeking damages payable under [the] policy even though the allegations of the suit may be groundless, false, or fraudulent." Under Option DO, State Farm agreed to "pay those sums that the insured becomes legally obligated to pay as damages because of ‘wrongful acts’ committed by an insured solely in the conduct of their management responsibilities for the Condominium/Association."
Mark Hattersley, a State Farm duty to defend claim representative, reviewed HOA and FRES's claim. He reviewed the Beadle complaint and spoke with Machen and Natalie Vance, counsel for HOA, FRES and Allied Trustee Services. Vance informed Hattersley that Beadle's property had been sold, but the trial court could set the sale aside. Hattersley shared his opinion that it was likely State Farm would deny the tender of defense by HOA and FRES, but he invited Vance to let him know of any new information. Hattersley prepared a coverage memo, summarizing Beadle's allegations and concluding that there was no potential coverage under Coverage L and Option DO.
Hattersley was not aware of a dispute about whether FRES was an additional insured under HOA's policy. State Farm did not offer a policy that included a property manager under Option DO of a condominium policy. Nevertheless, Hattersley testified it would not have made a difference in the first Beadle lawsuit if FRES was an insured under Option DO because there was no claim for damages that was covered under that provision.
State Farm denied HOA and FRES's tender of defense. Its denial letter asked HOA and FRES to provide State Farm with any additional information regarding the lawsuit, but Hattersley did not receive any further information from HOA or FRES. The Beadle lawsuit concluded after the trial court sustained demurrers to the complaint without leave to amend.
Beadle filed a complaint against HOA, FRES, Allied Trustee Services and Sutter Capital Group, LP on May 5, 2014, to set aside a foreclosure sale, cancel the trustee's deed and quiet title, and for an accounting and injunctive relief against an unlawful detainer action filed by Sutter Capital Group, LP against Beadle. The complaint alleged that Allied Trustee Services caused Beadle's property to be sold at auction and that Sutter Capital Group, LP purchased the property and obtained a trustee's deed upon sale. Beadle claimed the assessments against her were improper and the trustee's deed upon sale was wrongfully executed. She sought an order restoring possession of her property and damages. HOA and FRES tendered the defense of the second Beadle lawsuit to State Farm under HOA's policy. Hattersley reviewed that claim. He spoke with HOA's attorney Rod Baydaline regarding the matter. Hattersley told Baydaline it appeared the Beadle complaint did not seek bodily injury, property damage, personal injury or advertising injury damages under Coverage L, but there may be coverage under Option DO triggering a duty to defend. He also said it was unlikely FRES would qualify as an insured under Option DO. Hattersley prepared a detailed summary of the complaint and a coverage memoranda with his recommendations.
State Farm agreed to defend HOA against the second Beadle lawsuit, but denied the tender for FRES. The denial letter invited FRES to provide State Farm with any new or additional information affecting the coverage decision. Baydaline did not provide additional information regarding the claim.
On August 18, 2014, Beadle amended her complaint to add a cause of action for elder abuse. FRES's business attorney Sharon Futerman notified State Farm of the amendment. Hattersley reviewed the amended pleading and prepared a coverage memo. He determined the new cause of action did not give rise to a potential for coverage under Coverage L and State Farm did not have a duty to defend FRES. Accordingly, State Farm denied FRES's tender of defense for the first amended complaint. State Farm's denial letter to FRES again solicited additional information relating to FRES's claim.
State Farm continued to defend HOA against the second Beadle lawsuit. That lawsuit was eventually dismissed following successful demurrers.
On August 12, 2015, HOA and Frei filed an amended complaint against State Farm and Lewis for breach of contract, breach of the covenant of good faith and fair dealing, violation of Business and Professions Code section 17200, and declaratory relief, based on the tenders of defense for the first and second Beadle lawsuits.
The parties waived a jury trial. At the court trial they called witnesses including Frei, Lewis, Bruns, Budelli, Machen, Hattersley, Vance, and Baydaline, and presented expert testimony regarding insurance coverage and claims handling and the standard of care for an insurance agent. The trial court issued a statement of decision and entered judgment in favor of State Farm and Lewis and against HOA and Frei. HOA and Frei appeal from the judgment.
The trial court entered a second amended judgment following its ruling on State Farm and Lewis's memorandum of costs and HOA and Frei's motion to tax costs. (A first amended judgment mistakenly indicated that HOA and Frei were entitled to recover interest.) HOA appeals from the second amended judgment. DISCUSSION
See footnote *, ante .
VI
In addition, HOA and Frei contend the trial court erred in denying their motion to tax the expert witness fees State Farm and Lewis sought to recover under section 998.
To encourage the settlement of lawsuits prior to trial, section 998 authorizes a party to serve a written offer to compromise on another party and to allow judgment to be taken in accordance with the terms and conditions stated in the offer. ( § 998, subds. (a) - (c) ; Prince v. Invensure Ins. Brokers, Inc. (2018) 23 Cal.App.5th 614, 621-622, 232 Cal.Rptr.3d 887 ( Prince ).) The statute provides disincentives for rejecting a reasonable pretrial offer of settlement. The trial court may require a plaintiff, who does not accept a valid section 998 offer and then fails to obtain a more favorable judgment, to pay a defendant's reasonable postoffer expert witness costs. ( § 998, subd. (c)(1).)
Prior to the trial, State Farm and Lewis made a written settlement offer under section 998 to HOA. The offer explained how HOA may accept State Farm and Lewis's offer: "If you accept this offer, please: [¶] a) Date and sign the Agreement attached hereto as Exhibit A; [¶] b) Have your legal counsel execute a Request for Dismissal in a form identical to that attached hereto as Exhibit B; [¶] c) Send the signed Agreement and signed Request for Dismissal to counsel for defendants, who will then file the Request for Dismissal with the Court; and [¶] d) Execute, by and through your counsel, the statement of acceptance of this offer that appears below and return the same to attorneys for defendants indicating that the Offer to Compromise is accepted pursuant to the terms and conditions outlined above." The offer included a document which read, "STATEMENT OF ACCEPTANCE OF OFFER TO COMPROMISE [¶] In accordance with Code of Civil Procedure section 998, subdivision (b), plaintiff Auburn Woods I HOA hereby accepts Defendants’ Offer to Compromise pursuant to the terms and conditions set forth in that offer." The statement concluded with a signature block for counsel for HOA.
HOA and Frei claim State Farm and Lewis's section 998 offer to HOA was defective because it did not identify the accepting party in the signature line. We independently review whether a section 998 offer is valid. ( Prince, supra, 23 Cal.App.5th at p. 622, 232 Cal.Rptr.3d 887 ; Rouland v. Pacific Specialty Ins. Co . (2013) 220 Cal.App.4th 280, 285, 162 Cal.Rptr.3d 887 ( Rouland ).) We apply general contract principles in interpreting a section 998 offer when doing so does not conflict with the statute's purpose of encouraging the pretrial settlement of lawsuits. ( Rouland, at p. 285, 162 Cal.Rptr.3d 887.) We interpret any ambiguity in the offer against the offeror and strictly construe the offer in favor of the party against whom section 998 is sought to be enforced. ( Sanford v. Rasnick (2016) 246 Cal.App.4th 1121, 1129-1130, 201 Cal.Rptr.3d 614 ( Sanford ).)
A section 998 offer must include a provision that allows the recipient to indicate acceptance of the offer by signing a statement that the offer is accepted. ( § 998, subd. (b).) Acceptance must be in writing and signed by counsel for the accepting party or, if not represented by counsel, by the accepting party. ( § 998, subd. (b).) State Farm and Lewis's section 998 offer satisfies the statute's requirement that an offer specify the manner in which it is to be accepted and provide for a written acceptance to be signed by the offeree or its counsel. ( Rouland, supra, 220 Cal.App.4th at p. 288, 162 Cal.Rptr.3d 887 [ section 998 does not require an offer to include a line for the party to sign]; Whatley-Miller v. Cooper (2013) 212 Cal.App.4th 1103, 1107, 1111, 151 Cal.Rptr.3d 517 [approving acceptance that included a place for the attorney's signature].) Even if section 998 requires an offer to identify the accepting party in the signature line, the signature block in the Statement of Acceptance identified HOA.
HOA and Frei next contend the section 998 offer was defective because it included an overbroad and ambiguous settlement agreement and release. A section 998 offer must be sufficiently specific and certain to allow the offeree to evaluate the value of the offer and make a reasoned decision whether to accept it, and allow the trial court to determine whether a judgment is more favorable than the offer. ( Fassberg Construction Co. v. Housing Authority of City of Los Angeles (2007) 152 Cal.App.4th 720, 764-765, 60 Cal.Rptr.3d 375 ( Fassberg ); Barella v. Exchange Bank (2000) 84 Cal.App.4th 793, 801-802, 101 Cal.Rptr.2d 167.) However, the inclusion of a release of claims does not necessarily render it ineffective under section 998. ( Ignacio v. Caracciolo (2016) 2 Cal.App.5th 81, 88-90, 206 Cal.Rptr.3d 76 ; McKenzie v. Ford Motor Co. (2015) 238 Cal.App.4th 695, 698-699, 706-707, 189 Cal.Rptr.3d 560 ; Valentino v. Elliott Sav-On Gas, Inc. (1988) 201 Cal.App.3d 692, 694-695, 697-701, 247 Cal.Rptr. 483 ; see Chen v. Interinsurance Exchange of the Automobile Club (2008) 164 Cal.App.4th 117, 120, 122, 78 Cal.Rptr.3d 755.) An offer that requires the offeree to release all claims between the parties in the current action is effective under section 998. ( Linthicum v. Butterfield (2009) 175 Cal.App.4th 259, 270-273, 95 Cal.Rptr.3d 538 ( Linthicum ); Goodstein v. Bank of San Pedro (1994) 27 Cal.App.4th 899, 905, 907-908, 32 Cal.Rptr.2d 740 ( Goodstein ).)
State Farm and Lewis's section 998 offer to HOA read, "[I]n full settlement of all claims ... asserted by [HOA] in this action against [State Farm] or Frank Lewis or both ..., defendants jointly offer to pay [HOA] the sum of Thirty-Five Thousand Dollars ($35,000) in exchange for the following: [¶] 1. Entry of a Request for Dismissal with Prejudice of [HOA's] entire action; and [¶] 2. Signing of the attached Settlement Agreement and Release ("Agreement") by [HOA's] authorized representative, which will forever end this case and the underlying disputes between [HOA] and each defendant." The settlement agreement attached to the section 998 offer includes a release which read, "[HOA] releases and forever discharges State Farm and Lewis ... from any and all claims ... arising out of the subject of the ACTION." "ACTION" was defined as HOA and Frei's lawsuit against State Farm and Lewis in Placer County Superior Court case No. SCV0036315, which is the subject of this appeal. The Civil Code section 1542 waiver in the proposed settlement agreement read, HOA "expressly waives and assumes the risk of any and all claims for damages related to the subject of the ACTION, which exists as of this date, but of which it is unaware, ... and which, if known, would materially affect its decision to enter into this settlement, and further assumes the risk that it may suffer damages in the future which it does not now anticipate or suspect may occur as a result of any matter referred to herein, and therefore waives all rights under California Civil Code section 1542 ...."
The release language in this case is similar to that approved in Fassberg, supra , 152 Cal.App.4th 720, 60 Cal.Rptr.3d 375. The plaintiff in Fassberg agreed to "fully release" the defendant "from all claims, disputes and liabilities arising from, relating or in any way pertaining to the subject matter of the Action including ... any actual or potential claim and all disputes arising from or relating to ... the Action." ( Id. at p. 765, 60 Cal.Rptr.3d 375.) The appellate court in that case held the proposed release was not overbroad. ( Id. at p. 766, 60 Cal.Rptr.3d 375.) It noted that the release identified only two parties to the proposed settlement and was limited to that action. ( Id. at p. 767, 60 Cal.Rptr.3d 375.) Like in Fassberg , here the proposed release provided that HOA "releases and forever discharges State Farm and Lewis ... from any and all claims ... arising out of the subject of the ACTION."
Read in context and as a whole, State Farm and Lewis's section 998 offer and proposed settlement agreement were clearly limited to claims in the underlying lawsuit. The "Disclaimer of Liability" section of the proposed settlement agreement confirm this conclusion, stating that HOA "accepts payment of the sums specified in ¶ 2 of this Agreement as a full and complete compromise of matters involving disputed facts and issues related to the ACTION filed by [HOA] against Defendants ...." Because it was limited to the present action, the proposed release did not invalidate State Farm and Lewis's offer for purposes of section 998. ( Linthicum, supra, 175 Cal.App.4th at pp. 270-273, 95 Cal.Rptr.3d 538 ; Goodstein, supra, 27 Cal.App.4th at pp. 907-908, 32 Cal.Rptr.2d 740 ; Fassberg, supra , 152 Cal.App.4th at pp. 766-767, 60 Cal.Rptr.3d 375.)
HOA and Frei assert the section 998 offer was also invalid because it referred to an extraneous agreement that was not part of the offer. The contention is meritless. State Farm and Lewis offered to pay HOA $35,000 in exchange for, among other things, HOA's acceptance of the settlement agreement that was actually attached to the offer to compromise. Unlike in the Sanford case, here the proposed settlement agreement was attached to State Farm and Lewis's section 998 offer, and thus HOA was not required to guess about the terms and conditions. ( Sanford, supra , 246 Cal.App.4th at pp. 1125, 1130, 201 Cal.Rptr.3d 614.)
HOA and Frei further argue that even if the section 998 offer was valid, the trial court should have apportioned the expert witness fees between HOA and FRES. We agree with State Farm and Lewis that the claim is forfeited because HOA and FRES did not raise the argument in the trial court. ( Mepco Services, Inc. v. Saddleback Valley Unified School Dist. (2010) 189 Cal.App.4th 1027, 1049, fn. 29, 117 Cal.Rptr.3d 494 ; Staples v. Hoefke (1987) 189 Cal.App.3d 1397, 1409, 235 Cal.Rptr. 165.)
DISPOSITION
The judgment is affirmed. State Farm and Lewis shall recover their costs on appeal. ( Cal. Rules of Court, rule 8.278(a)(1), (2).)
We concur:
DUARTE, J.
RENNER, J.