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Nationwide Mut. Ins. Co. v. Ryan

United States District Court, N.D. California

April 8, 2014

DONALD V. RYAN, et al., Defendants

Page 931

For Nationwide Mutual Insurance Company, Plaintiff, Counter-defendant: John T. Burnite, Wilson Elser Moskowitz Edelman & Dicker LLP, San Francisco, CA; Stephen James Liberatore, Julian J. Pardini, Lewis Brisbois Bisgaard & Smith LLP, San Francisco, CA.

For Donald V. Ryan, Defendant, Counter-claimant: John Charles McCaslin, LEAD ATTORNEY, Law Office of John C. McCaslin, Sacramento, CA; Marcus Daniel Merchasin, LEAD ATTORNEY, Attorney & Counselor at Law, San Francisco, CA.

For Michael Ryan, Barbara Ryan, Defendants: Marcus Daniel Merchasin, LEAD ATTORNEY, Attorney & Counselor at Law, San Francisco, CA.

For Barbara Ryan, Cross-claimant, Counter-claimant: Marcus Daniel Merchasin, Attorney & Counselor at Law, San Francisco, CA.

Page 932


JON S. TIGAR, United States District Judge.

In this action for claims arising out of an insurance coverage dispute, Plaintiff Nationwide moves for summary judgment on Defendants' counterclaims for breach of contract and breach of the implied covenant of good faith and fair dealing, as well as Defendants' prayer for punitive damages. As the motion is suitable for determination without oral argument, the hearing scheduled for April 10, 2014, is VACATED. For the reasons set forth below, the motion is DENIED.


A. The Parties and Claims

Nationwide Mutual Insurance (" Nationwide" ) issued an insurance policy of commercial property insurance to Defendants Donald V. Ryan, Barbara Ryan, and Michael Ryan, which was effective from April 24, 2011, to April 24, 2012, and that provided first-party property coverage for a commercial building located at 7031 Watt Avenue in North Highlands, California (" the property" ). Am. Compl., ECF Nos. 5, 33. In June 2011, Defendants submitted a claim to Nationwide with respect to damage caused to the property by vandalism. ECF No. 5 ¶ 9. Nationwide paid part of the claim ($99,277.52) before voiding the policy and denying the remainder of the claim ($541,264.89) on March 27, 2012, on the ground that Defendants committed insurance fraud. Id. ¶ 18.

Nationwide brings this action against Defendants to obtain a declaratory judgment that Nationwide's voidance of the policy and denial of benefits was proper.

Defendants filed counterclaims against Nationwide for breach of contract and breach of the implied covenant of fair dealing based on Nationwide's failure to pay the totality of their claimed damages. ECF No. 19. Defendants seek, among other things, punitive damages in connection with their claim for breach of the implied covenant.

B. Facts

1. Defendants' Claim and Nationwide's Investigation

Defendants owned a large commercial building in North Highlands, California.

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Liberatore Decl. ¶ 18 & Ex. 40, Donald Ryan Dep. at 17:4-7. Prior to the vandalism damage, a Nationwide agent inspected the property for underwriting purposes and increased the policy's premiums based on the results of this inspection. Trapani Dep. at 8.

In June 2011, Defendants submitted a claim to Nationwide with respect to a vandalism loss to that building. Johnson Decl. ¶ 2. Nationwide's claims representative, Norm Johnson, contacted Defendants and learned that they were represented by public adjuster Michael Connaughton of Paladin Consulting, who in turn retained George John of Wolf & Associates to help him prepare an estimate for Defendants. Johnson Decl. ¶ 4; Connaughton Decl. ¶ ¶ 8-9. Johnson contacted Connaughton and made arrangements to visit the property on June 24, 2011, at which time Johnson inspected the site, took photographs, and began an investigation of the loss and necessary repairs. Johnson Decl. ¶ ¶ 5-6. Johnson wrote an " activity log entry" describing is inspection, which does not state that he took pictures. See id., Ex. 2.

At Johnson's request, representatives of a contracting firm named Regional Builders, Inc. (" RBI" ) inspected the property sometime between June 24, 2011, and July 1, 2011, and took photographs. Boling Decl. ¶ 5. Johnson met with RBI representatives at the property on July 7, 2011, where they prepared an estimate of necessary repairs. Johnson Decl. ¶ 7. Johnson prepared another activity log entry to document this inspection. Id., Ex 3.

By letter dated July 14, 2011, Johnson wrote to Connaughton to request that Defendants submit a sworn statement of Proof of Loss. Johnson Decl. ¶ 8 & Ex. 4, 5. Johnson provided a blank form for Defendants to use; among other things, the form requested information regarding the replacement cost value (" RCV" ) of the property damaged as a result of the vandalism, the applicable depreciation of that property, and the actual cash value (" ACV" ) of that property, which is determined by subtracting the depreciation amount from the RCV. Id.

On or about July 21, 2011, Johnson completed Nationwide's estimated scope and cost of repairs of the vandalism damage. By that estimate, Nationwide estimated that the replacement cost value of necessary repairs was $127,881.73, with recoverable depreciation in the amount of $27,604.21. Johnson Decl. ¶ 9 & Ex. 6; Boling Decl. ¶ 7. This estimate bears the heading " AMCO insurance Company" instead of " Nationwide" because of Johnson's " oversight." Johnson Decl. ¶ 9.

On or about August 4, 2011, Nationwide sent to Connaughton a check in the amount of $99,277.52, representing the ACV, less the applicable deductible under the policy, which was $1,000. Johnson Decl. ¶ 11 & Ex. 9. Also on August 4, Johnson sent to Connaughton a copy of Nationwide's 48-page estimated scope and costs of repair. The cover letter that accompanied the estimate invited Defendants to hire a contractor to perform the repair work and requested that Defendants contact Nationwide if they discovered hidden or additional damage. Johnson Decl. ¶ 12 & Ex. 10. Connaughton forwarded Nationwide's check to Defendants, stating that the $99,277.52 . . . is the initial insurance company payment on the above-referenced property [and] that cashing this check will not prejudice our ability to continue processing our claim in order to be compensated for the full insurance related damages." Liberatore ¶ 17 & Ex. 11.

On September 6, 2011, Connaughton wrote to Johnson to advise that Defendants disagreed with the " settlement amounts" Nationwide had paid on the claim and demanded that Nationwide submit

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the claim to appraisal, as provided in the policy. Johnson Decl. ¶ 13 & Ex. 12.

The next day, Connaughton wrote to Johnson again to renew his request for an appraisal and to provide him with Defendants' Proof of Loss, which was signed by Donald Ryan under penalty of perjury and claimed that the vandalism had resulted in damages that would cost $559,641.19 to repair (" the first estimate" ). Johnson Decl. ¶ ¶ 14-15 & Ex. 13, 14. Connaughton considered this estimate to be a " preliminary statement designed to advise the insurer of its potential liability on a claim." Connaughton Decl. ¶ 24. Connaughton testified that he used the Wolf & Associates estimate in putting together the first estimate but he did not submit the Wolf & Associates estimate as an attachment because it was not completed at the time. Id. ¶ 61. The form of the Proof of Loss was different from the form Johnson had supplied, was printed on " Paladin Consulting" letterhead, and did not provide the information that Nationwide had requested in its form regarding the applicable depreciation or ACV of the property damaged by vandalism. Id; Johnson Decl. ¶ 15 & Ex. 14. Defendants did not submit any photographs to support the figures in the estimate. Johnson Decl. ¶ ¶ 14-15 & Ex. 13, 14.

On September 11, 2011, Johnson wrote to Defendants, stating that they could obtain additional estimates and asking them to contact Nationwide if their contractor's estimate was higher than Nationwide's. Johnson Decl. ¶ 17 & Ex. 16. Also on September 11, 2011, Johnson wrote a second letter to Defendants to explain how to receive the depreciation that had been withheld from Nationwide's payment of the undisputed amount, and the conditions placed on his receipt thereof. Johnson ¶ 18 & Ex. 17.

On September 13, 2011, Johnson wrote to Connaughton and acknowledged receipt of the demand for appraisal; Johnson also advised Connaughton of Nationwide's designated party-appraiser. Johnson Decl. ¶ 19 & Ex. 18. He wrote again on October 18, 2011, to explain that receipts for repair work should be submitted to Nationwide for recovery of the withheld depreciation. Johnson Decl. ¶ 20 Ex. 19.

On November 17, 2011, Johnson wrote to Connaughton again and explained:

To date we have not received any information indicating that anymore should be paid on this claim. The amount claimed in Mr. Connaughton's correspondence dated September 7, 2011 provides no substantive information that would allow [Nationwide] to determine that those figures were based on like, kind and quality repairs for damages suffered in the above referenced incident. In order to determine that your estimate matches our estimate in scope of repairs we will need an estimate from you with the scope detailed line by line such as that which we provided. Until such information is provided, [Nationwide] has only the estimate it developed by which to determine the cost of repairs, and thus no additional policy benefits can be forthcoming.

Johnson Decl. ¶ 21 & Ex. 20.

Having received no response to that letter, on December 19, 2011, Johnson wrote again and stated exactly what he had written in his November 17 letter. Johnson Decl. ¶ 22 & Ex. 21. Johnson wrote similar letters twice more, on January 31, 2012, and on February 27, 2012. Johnson Decl. ¶ ¶ 24-25 & Ex. 22, 23.

2. Preparation for Appraisal Hearing

The parties agreed to the appointment of the Honorable Harry W. Low to act as neutral umpire in the appraisal. Liberatore Decl. ...

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