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Stephens & Stephens XII, LLC v. Fireman's Fund Insurance Co.

California Court of Appeals, First District, First Division

November 24, 2014

STEPHENS & STEPHENS XII, LLC, Plaintiff and Appellant,
FIREMAN'S FUND INSURANCE CO., et al., Defendants and Respondents.

[As Modification on December 17, 2014]


San Francisco County Superior Court No. CGC-10-502891 Honorable Curtis E.A. Karnow, Trial Judge.

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[Copyrighted Material Omitted]

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Daniel Upham Smith; Valerie T. McGinty; and Nina Grigoryevna Shapirsteyn for Plaintiff and Appellant.

Sharon Joellen Arkin for United Policyholder as Amicus Curiae on behalf of Plaintiff and Appellant.

Rex S. Heinke; Reginald D. Steer; Ashley Brooke Vinson; Teresa W. Ghali; and Danielle Crockett for Defendants and Respondents.

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Humes, P. J.

Fireman’s Fund Insurance Co. issued an insurance policy covering loss from property damage, including rent, on a building owned by plaintiff Stephens & Stephens XII, LLC (Stephens XII). Three days after the policy became effective, Stephens XII discovered the property had sustained serious damage from burglars who stripped it of all electrical and other conductive materials. Stephens XII sought reimbursement for the damage from Fireman’s Fund, but Fireman’s Fund delayed resolving the claim. Stephens XII then brought this suit.

The policy provided two different measures for reimbursing covered damages. Stephens XII could recover either the full cost of repairing the damages, so long as the repairs were actually made, or the depreciated value of the damaged property. As of the date of trial, Stephens XII had not repaired the damage. The jury nevertheless awarded Stephens XII the full cost of repairing it. In addition, the jury awarded Stephens XII lost business income on a theory not authorized by the policy, but it declined to award lost rent, which was authorized by the policy. The trial court granted Fireman’s Fund judgment notwithstanding the verdict (JNOV), finding that neither of the awards was permitted under the policy.

We reverse. Although we agree with the trial court that Stephens XII is not entitled to an immediate award for the costs of repairing the damage, we conclude that it is entitled to a conditional judgment awarding these costs if the repairs are actually made. We also uphold the award for lost business income because it is properly construed as an award for compensable lost rent. Finally, we conclude that there are insufficient grounds to proceed with a new trial.


Stephens XII filed this suit against Fireman’s Fund, American Insurance Company, and Factory Mutual Insurance Company, [1] alleging causes of action for breach of contract and breach of the covenant of good faith and fair dealing. The operative complaint alleged that Stephens XII purchased a liability insurance policy from Fireman’s Fund for a commercial property in January 2007. Property-damage coverage was later added and became effective on June 28. On July 1, Stephens XII discovered that burglars had

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caused more than $2 million in damage to the property. Stephens XII notified Fireman’s Fund of the property damage, but the insurance company failed to pay for it.

A. Fireman’s Fund’s Liability.

Fireman’s Fund was found liable to Stephens XII on both causes of action after a jury trial. The factual findings underlying its liability are not challenged in this appeal, but we review them briefly to provide context for the appellate claims.

Stephens XII is a limited liability company formed for the purpose of buying and operating the property, a very large industrial warehouse located in Richmond, California. Stephens XII, in turn, is managed by D.R. Stephens & Company, a “property management company” that manages some 40 real properties.[2] When Stephens XII purchased the property in 2005, it was being used as a distribution center by a tenant, Navistar International Transportation Corporation (Navistar).

In January 2007, Stephens & Company, Stephens XII, and more than 30 other, presumably related, entities became insured under a Fireman’s Fund commercial insurance policy. Stephens XII, however, did not arrange for property-damage coverage on the property because Navistar already carried it. After Navistar vacated the property on May 31, 2007, Stephens XII realized it needed property-damage coverage and, through its insurance broker, contacted Fireman’s Fund to secure it. The coverage was added, and it became effective on June 28.

The property was burglarized sometime after June 8, when the property was inspected and found sound. Burglary hardly begins to describe the nature of the crime. Virtually all conductive material was stripped from the building and taken away. An electrician who examined the damage said “[t]he copper theft was the most complete job I’ve ever seen.” There was water damage throughout; walls were damaged; fire-protection equipment was rendered inoperable; and virtually all electrical components had been taken away. The estimated cost of repair exceeded $1 million. The theft appears to have stopped on or about July 1, after a police officer on routine patrol spotted a door ajar, investigated, and detained two men who said they were collecting metal inside the building.

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Within days of discovering the damage, Stephens notified Fireman’s Fund. Although Fireman’s Fund eventually paid Stephens XII for emergency repairs, it neither accepted nor denied coverage for the loss. From virtually the beginning of its investigation, Fireman’s Fund was concerned that the damage was too extensive to have occurred in the brief period of the policy’s coverage. Fireman’s Fund ultimately denied coverage, but not until February 2012—nearly five years after the incident and barely a month before trial—on grounds that Stephens XII had concealed and misrepresented material information during the insurance investigation.

Trial began the next month. In a special verdict, the jury concluded all of the damage occurred while the policy was in effect, rejected Fireman’s Fund’s defenses of concealment and misrepresentation, and found for Stephens XII on its claims for breach of contract and breach of the covenant of good faith and fair dealing.

B. The Damages.

The issues raised on appeal all relate to the jury’s award of damages. Under the breach of contract claim, the jury awarded $2, 100, 293 for the “Replacement Cost” of the damage to the property and $2, 135, 936 in lost “Business Income.” Under the claim for breach of the covenant of good faith and fair dealing, the jury denied damages for costs of repair and lost profits, but it awarded $436, 896 in what was characterized as “lost rents.” As we will describe further below, the trial court concluded that the terms of the policy did not support the jury’s awards, and it entered JNOV for Fireman’s Fund.

1. Replacement or Repair Cost.

Under the heading “Valuation, ” the policy provides two alternative means for determining the amount Fireman’s Fund is required to pay for property damage. Fireman’s Fund must initially value the damages according to their “Replacement Cost, ” meaning the expenditure required to replace the damaged property with “new property of comparable material and quality.” Significantly, however, Fireman’s Fund is not required to pay replacement cost “until the lost or damaged property is actually repaired or replaced and unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.” We shall refer to this provision requiring the repairs to be made before full replacement cost is to be paid as the policy’s

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repair requirement. When Fireman’s Fund’s obligation to pay full replacement cost is triggered, Fireman’s Fund is only required to pay “[t]he amount [the insured] actually spend[s] that is necessary to repair or replace the lost or damaged property.” [3]

As an alternative to seeking replacement cost, the insured may claim “Actual Cash Value, ” which is defined as the actual, depreciated value of the damaged property.[4] As the policy acknowledges, the actual cash value might be “significantly less” than the replacement value. If an insured makes a claim for actual cash value, it may still repair the damage and claim the additional amount necessary to equal the replacement cost, so long as the insured notifies ...

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