California Court of Appeals, First District, First Division
Alameda County Super. Ct. No. RG11591967 Hon. Delbert C. Gee
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
Hereford Kerley, J. Edward Kerley Law Office of Dylan Schaffer, and Dylan Schaffer for Plaintiffs and Appellants and for Plaintiffs and Respondents.
Shoecraft Burton, and Michelle L. Burton for Defendant and Appellant.
In this insurance bad faith case, plaintiffs Betty and Jerry Douglas and defendant Fidelity National Insurance Company (Fidelity) appeal from the judgment after jury trial. Judgment was entered in favor of plaintiffs and against Fidelity in the amount of $807, 058.10, plus interest and costs of suit. Plaintiffs appeal the trial court’s decision to strike the jury’s $1.9 million punitive damages award following the granting, in part, of Fidelity’s motion for judgment notwithstanding the verdict (JNOV) (appeal no. A137645). Fidelity appeals from the same order arguing, among other things, that the court committed jury instructional error (appeal no. A137732). Fidelity also filed a notice of appeal from the court’s ruling on the motion to tax costs (appeal no. A137897).
We agree with Fidelity that the trial court prejudicially erred in refusing to give certain jury instructions necessary to the jury’s fair consideration of the case. Accordingly, the judgment is reversed and the matter is remanded for a new trial.
In December 2010, plaintiffs went to a business called Cost-U-Less Insurance (Cost-U-Less) where, over the telephone, an InsZone Insurance Services (InsZone) employee assisted them in obtaining a homeowner’s insurance policy with Fidelity.
On March 14, 2011, a fire damaged plaintiffs’ home. Shortly thereafter, they made a claim with Fidelity to recover for their losses.
On May 6, 2011, a Fidelity property claims representative named Richard Fowler sent Jerry a letter advising him that Fidelity was investigating coverage for the fire incident. Fowler indicated Fidelity had obtained information suggesting Jerry did not live in the home. Additionally, Fowler stated the company’s belief that the property had been used and operated as a residential care facility.
After an investigation, Fidelity rescinded the homeowner’s policy on the grounds that plaintiffs’ insurance application contained material misrepresentations about various facts concerning plaintiffs’ and their home. Fidelity stated it would not have issued the policy had it known the truth about the misrepresentations.
I. Litigation Commences
On August 24, 2011, plaintiffs filed a complaint against Fidelity and InsZone. The complaint alleges causes of action for breach of contract, declaratory relief, breach of the covenant of good faith and fair dealing, negligent misrepresentation, and breach of an oral contract to obtain insurance. The gravamen of the complaint is that Fidelity wrongfully failed to pay benefits due under plaintiffs’ homeowner’s insurance policy after the home was damaged in a fire. Plaintiffs sought punitive and exemplary damages in connection with their claim for breach of the covenant of good faith and fair dealing.
On September 26, 2011, Fidelity filed a motion to strike the claim for punitive damages. Fidelity asserted the complaint failed to allege sufficient facts to support the conclusion that it had acted with oppression, fraud, or malice.
On December 9, 2011, the trial court denied Fidelity’s motion to strike.
On December 19, 2011, Fidelity filed a cross-complaint against plaintiffs for declaratory relief, restitution, and reimbursement. Fidelity asserted it was entitled to restitution of all benefits paid under the policy prior to the rescission.
On June 21, 2012, Fidelity filed a motion for summary judgment.
On September 11, 2012, the trial court denied Fidelity’s motion for summary judgment.
II. Proceedings at Trial
A. Plaintiffs’ Case
1. Jerry Douglas
Jerry testified he had been married to Betty for 23 years. The couple has five children, some of whom are adopted. They purchased a home on Locust Street in Hayward in 1993 or 1994. Jerry was listed on the deed as the owner of the home but he considered the residence to be community property. The family moved to Stockton in 2005. They kept the Hayward house and used it to run a group home for minors on probation.
Around 2008 and 2009, the family experienced serious financial difficulties. Jerry lost his job and Betty was having health problems. They ceased operating the group home and moved back to the Locust Street property in March 2010. They also filed for bankruptcy and became late on their mortgage payments.
In December 2010, plaintiffs went to a Cost-U-Less store in Stockton to purchase an insurance policy for the Locust Street home. Previously, Betty had gone by herself to a Cost-U-Less store in Hayward and had obtained a Fidelity policy. However, the policy was cancelled shortly thereafter. Jerry understood the policy had been cancelled because the owner of record was required to sign the application.
When plaintiffs arrived at the Stockton store, an employee told them the paperwork he needed had not yet arrived. They left the store and did some shopping nearby. When they returned, the employee told them he had received the documents and only needed Jerry’s signature. The insurance paperwork Jerry signed consisted of three pages. The first page was a blank form. The employee at Cost-U-Less did not ask him any questions about the property. Jerry signed the documents and gave the employee a check.
After the fire occurred, plaintiffs met with an inspector named Lon Anderson who looked over the home and made an inventory of the damage. Someone had broken into storage sheds on the property and stolen Jerry’s tools. Jerry estimated the value of the tools to be about $25, 000 to $30, 000. Anderson told him he could make a separate claim for the stolen items.
Jerry received a letter dated May 31, 2011 from an attorney named Jeffrey Charlston. The letter included a check from Fidelity in the amount of the insurance premium Jerry had paid. Charlston stated that in the course of investigating the fire loss, evidence had developed showing material misrepresentations had been made in connection with plaintiffs’ insurance application. The alleged misrepresentations pertained to: (1) whether any unit in the structure was occupied by more than one family, (2) whether the electrical panel utilized circuit breakers or fuses,  (3) whether there were roommates or boarders in the home and/or if the home was used as a rooming or boarding house, and (4) whether a business was conducted on the property. Charlston also stated it did not appear Jerry had ever personally lived in the home, asserting the property was being used either as a halfway house for parolees or as a rehab facility. Jerry testified that these claims were untrue. Finally, Charlston advised that plaintiffs owed Fidelity in excess of $24, 000 for benefits already paid.
On cross-examination, Jerry confirmed plaintiffs had filed for bankruptcy approximately three days before the fire. However, the signatures on the bankruptcy documents were not his. He did not recall if he had given his wife permission to sign his name. Plaintiffs had also filed bankruptcy petitions in October 2010 and March 2010. These filings also had signatures that were not his. Many of the statements regarding the family’s assets in the supporting documentation for the October 2010 bankruptcy filing were false. One of the documents stated Jerry had worked as an “ARF counselor” with “On The Right Path” for 11 years.
2. Lon Anderson
Lon Anderson is an independent insurance adjustor. He was assigned to make contact with plaintiffs, inspect the damaged home, take photographs, and complete a preliminary report. During the investigation, he spoke with Fowler, Fidelity’s representative. Anderson went to the property twice and
took photographs. He also obtained a non-waiver agreement from plaintiffs, as well as authorization forms.
Anderson did not recall meeting with Jerry or discussing any missing tools, though he may have spoke with him on the telephone. Subsequent test results showed the house was contaminated with asbestos and lead. In his final report, he estimated the cost of repair for the damage to the structure to be $242, 572.70.  He estimated the actual cash value at $225, 468.18.
3. Betty Douglas
a. The Locust Street Property
Betty testified that she ran a daycare business out of the Hayward home for about 10 years. The family lived in the home until 2005 when she decided to stop the daycare business and instead use the house as a group home. The group home was called “Leading the Right Path.” It housed minors who had been removed from their parents’ care and who were on juvenile probation. Under state regulations the home could not also be used as a personal residence, so plaintiffs bought a house in Stockton and moved there. Betty operated Leading the Right Path until about 2008. About a year later, plaintiffs decided to move back to the Hayward home.
In 2007, Betty submitted an application to a licensing agency for another business called “On the Right Path, ” intending to provide housing for clients with developmental disabilities. She successfully obtained the license but never served a developmentally disabled client. She kept the license active, however, so her home remained a licensed adult facility. The license allowed her to house up to six clients at a time.
Although the corporation called On the Right Path went out of business, Betty testified that “On the Right Path, dba” did serve some mentally ill clients. The clients were sometimes referred to her by psychiatric hospitals and transitional living programs. She received between $600 and $961 per month from each such client. The clients paid with their SSI (Supplemental Security Income) checks. She usually rented out one bedroom for two clients to share. She also cooked ...