Agent’s Statement Binds Insurer

It is not Bad Faith Only to Deny a Claim

Barry Zalma

Feb 13, 2024

Transcript

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FACTUAL BACKGROUND

Plaintiff purchased from defendant AAA Life Insurance Company (AAA) a life insurance policy for himself, along with a child term rider (rider) providing up to $10,000 in coverage per insured child.

According to the First Amended Complaint (FAC) plaintiff understood from his prepurchase conversations with Webb that the rider would cover all of the children in plaintiff’s household, even those without a biological or legally defined relationship (i.e., as an adopted child, foster child, or stepchild) to him. However, when one of the children in plaintiff’s household-17-year-old Mahki Bowen-was murdered while the rider was in effect, AAA rejected plaintiff’s claim for coverage because Bowen was not plaintiff’s biological or legally recognized child (i.e., adopted child, foster child, or stepchild).

When plaintiff first contacted Webb within their household were four children under the age of 19: three with plaintiff’s surname, plus Bowen, who was the biological child of plaintiff’s fiancee and another man. Bowen’s biological father had died in 2007, when Bowen was four years old, and Bowen had lived in plaintiff’s household, as part of plaintiff’s family, since he was about six years old. Although the FAC alleges that Bowen “was [plaintiff’s child since he was approximately six years old,” all agree that Bowen was not plaintiff’s biological, step, adopted, or foster child.

Webb, as the agent for the insurer, stated, “‘the rider covers all your children for $7.00.”

The three-page rider contained the following relevant provisions. The rider “provides term life insurance coverage for each Insured Child.” An Eligible Child must be dependent upon the Insured for support and living within the Insured’s household or attending an educational institution as a full-time or part-time student.

In November 2020, about seven months after plaintiff’s policy became effective, tragically, Bowen was fatally shot. On the date of his death, Bowen was 17 years old, unmarried, financially dependent on plaintiff, and living in plaintiff’s household. Plaintiff contacted Webb to inform him of the death, and Webb “again represented to [plaintiff] that the Child Term Rider would provide coverage” and told plaintiff how he could initiate his claim. AAA formally denied plaintiff’s claim under the rider, stating in its final rejection letter that Bowen was “not a ‘qualifying child.’ ”

DISCUSSION

Breach of Contract (Express Contract Theory)

The trial court sustained the demurrer for failure to plead a breach of the rider by AAA.

Here, the definition of “Eligible Child” as it appears in the rider’s first paragraph is, on its face, ambiguous, in that it is susceptible to more than one reasonable interpretation as to whom the term covers . The Court of Appeals noted that definition of this term as denoted in the first paragraph, can reasonably be read as the trial court read it, to limit coverage as of the policy’s effective date, to children who meet all of the undisputed criteria and are the insured’s biological, adopted, step, or foster children (that is, children who are encompassed in the categories specified in the second paragraph of the definition). The definition can also reasonably be read to provide coverage, as of the policy’s effective date, for children who meet all of the undisputed criteria and are openly held out by the insured to be his children, consistent with California parentage law. As discussed below, “California parentage law creates a presumption that a person who openly holds out a child as his own is the child’s natural parent.” (emphasis added)

To the extent the rider can reasonably be interpreted to provide coverage for a child with a relationship to the insured akin to Bowen’s relationship with plaintiff, the FAC properly pleads the element of breach-the only element the trial court found missing.

Defendants’ contention that the phrase “all of the Insured’s. children” an interpretation of the rider to the effect it covers children who were adopted by the insured or became his stepchildren or court-appointed foster children after it took effect, but not the insured’s existing adopted children, stepchildren, and court-appointed foster children as of its effective date, would be unreasonable.

The Court of Appeals concluded that “Eligible Child” in the first paragraph of the rider is ambiguous, in that it is reasonably susceptible to two interpretations.The FAC, liberally construed, indicates that plaintiff held Bowen out as his child; the FAC also alleges that Bowen lived in plaintiff’s household and was dependent on plaintiff for support. Accordingly, in light of its ambiguity, the definition of “Eligible Child” in the first paragraph must be construed to protect that expectation.

In addition, in Shade Foods, Inc. v. Innovative Products Sales &Marketing, Inc. (2000) 78 Cal.App.4th 847 (Shade Foods) the Court of Appeals held that an insurance carrier is “bound by its agent’s interpretation of coverage under the policy,” and an agent’s authority to bind the principal “unquestionably extends to giving ambiguous contract provisions an interpretation that the insurer itself might reasonably adopt.” As a result, the court concluded, the insurer was “bound by its agent’s interpretation of the contract.”

Breach of the Covenant of Good Faith and Fair Dealing

The mere fact that an insurer withholds coverage based on an erroneous interpretation of the policy does not necessarily mean there was a breach of the covenant; to be liable in tort, the insurer must have acted unreasonably. Although the reasonableness of an insurer’s denial of benefits” ‘is ordinarily a question of fact,'” a court can conclude as a matter of law that an insurer’s denial of a claim is not unreasonable, as long as there existed a genuine issue as to the insurer’s liability.

The trial court’s dismissal of the FAC’s cause of action for breach of contract on an express contract theory, defendants argue in the alternative that plaintiff cannot plead this tort claim (i.e., breach of the covenant) because AAA’s interpretation of the rider was reasonable and therefore shielded by the genuine dispute doctrine. The Court of Appeals agreed with AAA and it affirmed the trial court’s dismissal of plaintiff’s breach of covenant claim.

Negligence

An insurance agent has an obligation to use reasonable care, diligence, and judgment in procuring insurance requested by an insured. The law is well established in California that an agent’s failure to deliver the agreed-upon coverage may constitute actionable negligence and the proximate cause of an injury. Accordingly, it concluded the FAC alleges adequate facts to show a special duty of care, breach of that duty, causation, and damages.

The judgment of dismissal was, therefore, reversed. The matter is remanded with instructions to the trial court to vacate the order sustaining the demurrer without leave to amend and to enter a new order (1) overruling the demurrer to the breach of contract (express contract theory) cause of action and (2) sustaining the demurrer to the breach of the covenant of good faith and fair dealing cause of action with leave for plaintiff to further amend his complaint to allege, if he is able, causes of action against AAA for breach of contract by estoppel, against AAA and Webb for violation of Business and Professions Code section 17200 et seq., against AAA and Webb for negligent misrepresentation, against AAA and Webb for negligence, and for reformation based on mutual mistake. The parties shall bear their own costs on appeal.

ZALMA OPINION

This case, over a $10,000 dispute, went through a claim denial, a demurrer dismissing the entire action, an appeal, a reversal of the breach of contract claim, and a return to the trial court to allow amendment of a statutory breach claim, if possible, and trial on the breach of contract case. No bad faith because it took the court to find a statute making a person “held out as a son” to be a son even if there is no physical, natural relationship nor a relationship by adoption. This is a case where the concept of “millions for defense and not a dime for tribute” requires reconsideration, mediation and settlement.