Court of Appeals of California finds no breach of contract or bad faith where actual cost of repairing fire-damaged home was higher than insurer’s initial estimate and holds that an insurer does not assume unlimited liability by exercising oversight over repair efforts.
Robert and Patricia Meuser’s (the “Meusers”) Newark, California home was damaged in an accidental fire. Allstate Insurance Company (“Allstate”) insured the home and con- tents for fire damage under a homeowner’s policy. The policy included coverage for repair or replacement of the building structure, replacement of damaged or destroyed personal property, and reimbursement for temporary living expenses in the event of a fire. Following the fire, Allstate estimated the actual cash value (“ACV”) of the structural loss for the Meusers’ home at $125,000, and put the full replacement cost at $127,688.99.
The Meusers hired a general contractor from Allstate’s recom- mended vendor program to repair the fire damage. The con- tractor agreed to repair the home in six months’ time for approximately the amount of Allstate’s repair estimate. Allstate issued payment to the Meusers totaling $125,000 and agreed to repay the depreciation when repairs were complete. During the repairs, issues arose between the Meusers and the contractor, who ultimately refused to continue work. Allstate wrote to the Meusers to inform them that the contractor was withdrawing from the job. The contractor agreed to refund $28,643.68 in payments it received for incomplete work, and to pay $10,340 to the Meusers for additional temporary living expenses occurred as a result of construction delays. After the contractor withdrew, Allstate made further payments (above the $125,000 of its initial estimate) and also reim- bursed the Meusers for the amounts promised by the contrac- tor, who had failed to reimburse them as promised.
Because of the construction delays, the Meusers filed suit against Allstate in Alameda County Superior Court. The Meusers’ alleged causes of action included counts for breach of contract, bad faith, fraud, and violations for California’s Insurance Code. Pursuant to California Insurance Code Section 2071, Allstate moved to compel appraisal of the Meusers’ loss. While the appraisal was pending, Allstate made a supplemental payment to the Meusers for additional landscaping repair and damage to appurtenant structures, bringing Allstate’s total payments under its structural coverage to $196,978.22. The appraisal panel assessed the repair cost of the structure at $209,189.54. Allstate subsequently paid the balance.
When the Meusers filed a supplemental complaint alleging additional wrongs by Allstate committed after the suit was filed, Allstate moved to strike the supplemental complaint and moved for summary judgment. The trial court granted both of Allstate’s motions and reasoned that there was no issue of material fact because Allstate had paid the Meusers all amounts due to them under the structure coverage of the poli- cy and had fulfilled its obligation to provide coverage for per- sonal property losses and temporary housing expenses.
On appeal, the Court of Appeal affirmed the trial court’s deci- sion. The Meusers argued that Allstate breached the contract and acted in bad faith by “constructively” invoking its option to undertake its own repair of the property and then failing to complete it, underpaying contents losses, and underestimating the cost of the structural repair. The appellate court rejected the Meusers’ argument that Allstate elected to self-repair the property. First, the court noted that the Meusers failed to cite any legal authority recognizing a “constructive” election by an insurer to self-repair. The court reasoned that Allstate’s actions in seeking an appraisal hearing and advancing the Meusers nearly $200,000 for structural repairs were inconsis- tent with any election to self-repair. While Allstate did monitor the repair efforts and paid some engineering consultant fees directly to avoid contractor overhead, the court held that an insurer that agrees to pay for repairs does not assume unlimit- ed liability for their completion merely by exercising some over- sight over how the money is being spent. The appellate court also held that as a matter of law, the mere fact that there was a discrepancy between Allstate’s initial replacement estimates and the amount found after appraisal was insufficient to show that Allstate engaged in bad faith or fraud in handling the claim.
The appellate court also rejected the Meusers’ contentions regarding personal property replacement. The Meusers claimed that Allstate failed to include shipping costs when it determined the ACV of contents covered by its personal prop- erty protection. The court explained that Allstate’s refusal to pay shipping charges in advance of the purchase of replace- ment property was not a breach of its obligations or an act of bad faith. An insurer has no obligation to pay shipping costs unless they are actually incurred as a result of the actual replacement of destroyed property. The court reasoned that the trial court correctly found no triable issues of material fact arising from the Meusers’ breach of contract and bad faith alle- gations and affirmed the judgment entered in Allstate’s favor.