Opinion
INTRODUCTION
We hold there is substantial evidence to support the finding that appellant was not covered by liability insurance in connection with claims brought against her by tenants of an apartment building that she co-owned. We also hold that in connection with the insurer’s action against appellant and others to recover the costs of settling those claims, there is substantial evidence to support the trial court’s implied allocation to appellant of joint and several liability to the insurer for the amount of the settlement costs paid by the insurer. The benefit to appellant of the settlement justified such an allocation. We therefore affirm the judgment.
Defendant and appellant Linda Reinoso and her husband Edgar Reinoso, owned and managed about 15 rental properties in the City of Palmdale.
In 2001, Edgar pleaded no contest in People v. Reinoso (Super. Ct. L.A. County No. 1AT03779) to the charge of permitting a fire hazard at a real estate project, a misdemeanor, and was placed on probation. In 2002, the People filed a 33-count misdemeanor complaint in People v. Reinoso (Super. Ct. L.A. County No. 2AT06169) alleging violations of the Palmdale Housing Code at four properties Edgar owned. The counts included pest harborage, inadequate heating facilities, and general dilapidation. Edgar pleaded no contest to eight counts in the complaint, including counts for general dilapidation and pest harborage, and was placed on probation. As part of his plea agreement, Edgar agreed to abate those violations. In 2004, Edgar admitted to violating the terms of his probation by failing to abate certain of the violations.
In May, 2003, the Reinosos acquired a 48-unit apartment complex on West Avenue J-3 in Lancaster (the J-3 Apartments) in their names as “husband and wife, as community property.” They testified that they worked together in connection with the management of the property. In late September or early October 2003, the City of Lancaster issued a “Notice of Code Enforcement Corrections” with respect to certain units at the J-3 Apartments. Among the issues raised in the notice were general dilapidation; infestation of insects, vermin, and rodents; inadequate garbage storage; lack of proper water and heat; and dampness of residences.
In January, 2005, the tenants of the J-3 Apartments brought an action against the Reinosos; Proud American; and the J-3 Apartments’ former owner, Mark Kaufman, concerning the J-3 Apartments’ alleged habitability deficiencies (the Tenant Action). As amended, the Tenant Action alleged causes of action against Edgar and Proud American for breach of written contract (first cause of action) and breach of the implied warranty of habitability (second cause of action); causes of action against Kaufman for
The Reinosos tendered the defense of the Tenant Action to their insurer, plaintiff and respondent Axis Surplus Insurance Company (Axis). The Reinosos and Proud American had become insured under two policies providing commercial general liability insurance issued by Axis with respect to the J-3 Apartments. Axis agreed to represent the Reinosos and Proud American in the Tenant Action under a reservation of rights. The action settled for just over $3 million, with Axis contributing $2,162,500.
At the trial of the action brought by Axis to recover its defense costs and settlement contribution, Michael King, an attorney, testified that Axis retained him to represent Edgar, Linda, and Proud American in the Tenant Action. King referred to a report he prepared for Axis concerning the Tenant Action. The trial court found that the report provided substantial factual support for the “serious” habitability claims in the Tenant Action and the reasonableness of the ultimate settlement of that action. King testified that he did not believe that Edgar, Linda, and Proud American could prevail in the Tenant Action.
In a report King prepared concerning efforts to settle the Tenant Action, he stated that the Reinosos entered a five-year agreement with Steve Donell of
King believed that Edgar would not be an effective trial witness before a jury and that a jury would not approve of Edgar’s approach to property management given the numerous condition problems with the J-3 Apartments. King’s contact with Linda was limited. Linda assisted in locating documents about the J-3 Apartments and their management. King did not believe that Linda had “deep involvement” in managing the J-3 Apartments- or “input into decisions in that field.” Very little additional time was spent on the representation of Linda. King did not mention Linda in the reports he prepared about the Tenant Action. The foundation for the settlement was the condition of the J-3 Apartments and the “serious concerns” about Edgar as a trial witness.
David Hart, a senior vice-president of claims for Axis, testified that Linda was not a factor in his settlement considerations. Hart testified that he “absolutely did not consider Linda Reinoso’s culpability” in reaching the decision to settle the Tenant Action and did not allocate any part of the settlement proceeds toward settling the case against her. Hart’s testimony reflected that at this point in Axis’s action to recover its costs, Axis minimized Linda’s involvement, apparently in the event it was determined that Linda was covered by the insurance. Linda and Edgar argued against Axis’s position, suggesting that any liability to Axis should be joint and several—also probably because of the possibility that Linda was covered by the insurance.
Linda testified that she and Edgar had worked together “full-time with the property management and purchasing properties” since 1990. Linda and Edgar married in 1991. Linda testified that she played a somewhat limited role in the management and oversight of the J-3 Apartments and that she paid bills and maintained some records for the J-3 Apartments. The trial court found Linda’s testimony about her limited role at the J-3 Apartments to be credible. The trial court found less credible Linda’s testimony that she was not aware of the criminal proceedings involving Edgar that arose out of the ownership of rental properties. Edgar testified that Linda played a very limited role in the management of the J-3 Apartments and that her primary
Edgar testified that he had been involved in real estate ownership and the management of rental properties for about 30 years. He claimed to have little insight into the type of maintenance that rental properties needed and little knowledge or understanding of mold, pest control, or needed repairs. He asserted that he hired a site manager for each of his projects and had that person make management decisions without his input. He said that the site managers reported to a general manager in his organization, implying that he played a limited role in maintenance and improvement decisions. The trial court found Edgar to be an unbelievable witness and rejected his effort to persuade it that he was an uninformed and innocent absentee owner. Instead, the trial court found that the evidence established that Edgar was an involved and informed owner who insisted on managing his property in a manner that led to poor living conditions for his tenants.
Donell testified that he worked with Edgar and Linda for three months at the beginning of 2006. He believed that the J-3 Apartments were in a terrible, unsafe, and unsanitary condition at that time. He also believed that Edgar was not a good owner and that Edgar’s decisions were guided only by costs and not by proper management principles. Donell considered Edgar’s approach to property management to be inappropriate. According to Donell, Edgar wanted “things” done cheaply even if that meant substandard living conditions. Edgar told Donell that he wanted Donell to use the Reinosos’ business model. Donell said that Edgar told him that Edgar’s “business model was to get new, illegal immigrants from Central America as tenants because they were not aware of their rights and' could be threatened with deportation if they complained about conditions.”
Donell testified that he spoke with Linda about management issues between 25 and 50 times. Those conversation concerned daily management issues such as maintenance, repairs, and rent rolls. Linda assisted in the creation of a rent roll. Donell found Linda to be informed and engaged. Linda told Donell that the Reinosos had limited funds to spend on repairs. After the Tenant Action settled, Donell left his position with the Reinosos because Edgar would not permit him to perform needed maintenance and make needed repairs.
At trial, Edgar and Linda argued that Axis had failed to allocate “defense and settlement expenses between covered/non-covered claims and as between each insured defendant.” There is no evidence that the insurer had made any such allocation. The trial court, in its statement of decision, did not refer explicitly to any such allocation.
The Reinosos and Proud American appealed from the judgment. The appeals by Edgar and Proud American have been dismissed. In her appeal, Linda contends that the trial court erred when it found that she was not an “innocent” insured entitled to benefits under the insurance policies. Linda also contends that the trial court erred when, for purposes of reimbursement, it failed to apportion the settlement Axis paid among its three insureds— Linda, Edgar, and Proud American—based on the actual settlement costs for each insured and instead, in effect, ordered the insureds to pay the entire sum jointly and severally.
I. Substantial Evidence Supports the Trial Court’s Finding That Linda Was Not Insured for Her Acts
Linda contends that the trial court erred in finding that she was not an innocent insured entitled to benefits under the insurance policies because the trial court wrongly applied an objective rather than a subjective standard in determining that she knew of the conditions at the J-3 Apartments, and because substantial evidence does not support the trial court’s determination that Linda intended or expected the tenants’ injuries. The trial court did not err.
A. Standard of Review
“ ‘In general, in reviewing a judgment based upon a statement of decision following a bench trial, “any conflict in the evidence or reasonable inferences to be drawn from the facts will be resolved in support of the determination of the trial court decision. [Citations.]” [Citation.] In a substantial evidence challenge to a judgment, the appellate court will “consider all of the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference, and resolving conflicts in support of the [findings]. [Citations.]” [Citation.] We may not reweigh the evidence and are bound by the trial court’s credibility determinations. [Citations.] Moreover, findings of fact are liberally construed to support the judgment. [Citation.]’ ” (Cuiellette v. City of Los Angeles (2011)
B. Application of Relevant Principles
1. The trial court correctly applied the subjective standard to find that Linda knew of the conditions at the J-3 Apartments
Intended, deliberate, and anticipated consequences of acts are not included within the policy coverage for the consequences of accidents. (Ins. Code, § 533 [excludes coverage for willful acts]; Delgado v. Interinsurance Exchange of Automobile Club of Southern California (2009)
The trial court rejected Linda’s claim that she was unaware of the condition of the J-3 Apartments and the manner in which they were being managed and therefore an innocent insured entitled to coverage under the policies. The trial court determined that the insurance policies excluded from coverage injuries that were “ ‘expected or intended from the standpoint of the insured.’ ” Citing Watts v. Farmers Ins. Exchange (2002)
Linda contends that the “should be charged with knowledge” language “strongly suggests” that the trial court applied an objective rather than a subjective standard—i.e., that Linda should have known, rather than Linda actually knew. The challenged language, however, does not reflect that the trial court used an objective standard. The trial court concluded that based on circumstantial evidence, Linda had sufficient knowledge of the conditions at the J-3 Apartments to expect the injuries alleged in the Tenant Action. The trial court said that Linda “did learn”—i.e., had actual knowledge of—the “management style and apartment conditions.” The trial court added that “common sense dictates that [Linda] was not unaware of how these properties were being managed.” Moreover, we presume that the trial court applied the correct standard. (See Denham v. Superior Court (1970)
2. There was substantial evidence that Linda knew of the conditions at the J-3 Apartments and how the apartments were being managed and thus expected the tenants to suffer injuries
There is substantial evidence to support the trial court’s rejection of Linda’s claim that she was ignorant of the conditions at the J-3 Apartments and the manner in which the apartments were being maintained. Linda and Edgar had worked together full time in purchasing and managing real estate since 1990. Linda owned, with Edgar, the J-3 Apartments. Linda and Edgar owned and managed numerous other properties. Although her role was limited, Linda was involved in managing the J-3 Apartments. By her own testimony, Linda paid the bills for the J-3 Apartments, including the bills for the utilities, pool service, trash collection, and pest control. In the two years prior to the Reinosos’ purchase of the J-3 Apartments, Edgar had twice been prosecuted for and pleaded no contest to charges concerning deficiencies in other properties, including charges of general dilapidation and pest harborage. The trial court found Linda’s claim that she knew nothing of those prosecutions not credible. Some five months after Linda and Edgar purchased the J-3 Apartments, the City of Lancaster issued a Notice of Code Enforcement Corrections concerning the substandard condition of certain units at the J-3 Apartments. Such evidence is substantial evidence supporting the trial court’s finding that Linda knew of the conditions at the J-3 Apartments and how the apartments were being managed and its conclusion that she therefore was not entitled to coverage under the insurance policies.
II. Allocation of the Settlement Expenses Among Axis’s Insureds
Linda contends that in connection with Axis’s claim for reimbursement of the settlement amount paid, the trial court erred by failing to allocate that amount among its three insureds—Linda, Edgar, and Proud American—based on the amount paid for and attributable to each insured and instead ordered the insureds to pay the entire sum jointly and severally.
An “insurer only has a duty to indemnify the insured for covered claims, and no duty to pay for noncovered claims because the insured did not pay premiums for such coverage. (See Buss, supra,
Linda does not contend that Axis failed to satisfy the prerequisites for seeking reimbursement of its costs in settling the noncovered claims in the Tenant Action. Instead, relying on LA Sound, supra,
In LA Sound, supra,
St. Paul negotiated a $1 million settlement on behalf of LA Sound and on behalf of Hsu and Ji in their capacities as LA Sound officers and directors. (LA Sound, supra,
After a trial, the trial court found in favor of St. Paul on its misrepresentation cause of action. (LA Sound, supra,
On appeal, the Court of Appeal affirmed the trial court’s order of rescission, but reversed the ruling that LA Sound, Hus, and Ji were “jointly” liable for the defense and settlement costs. (LA Sound, supra, 156 Cal.App.4th at pp. 1266, 1271.) The Court of Appeal held that although St. Paul was entitled to recover from Hsu and Ji the policy benefits it conferred upon them, the trial court wrongly held Hsu and Ji jointly liable with LA Sound for the entire amount of reimbursement. (Id. at p. 1271.) The Court of Appeal reasoned that joint and unallocated liability for Hsu, Ji, and LA Sound would be inconsistent with the principles of allocation of defense costs set out in Buss, supra,
In Buss, supra, 16 Cal.4th at pages 47 through 48, the California Supreme Court held that an insurer has a duty to its insured to defend in its entirety a “mixed action”—i.e., an action “in which some of the claims are at least potentially covered and the others are not.” In a mixed action, an insurer may not seek reimbursement of defense costs for claims that are potentially covered. (Id. at p. 49.) Instead, the insurer may seek reimbursement only of those defense costs that can be allocated solely to claims that are “not even potentially covered.” (Id. at pp. 50, 53, 57.) When an insurer seeks reimbursement of defense costs in a mixed action, it must prove by a preponderance of the evidence that the defense costs are solely allocable to claims that are “not even potentially covered.” (Id. at pp. 53, 57.)
The Court of Appeal in LA Sound, supra, 156 Cal.App.4th at pages 1272 through 1273, held that in a rescission action, “insurers seeking reimbursement must bear the analogous burden of showing which costs can be allocated to the defense or indemnity of each particular insured.” The Court of Appeal reasoned that “[i]t would be inequitable to require a party insured under a rescinded policy to reimburse the insurer the policy benefits it received and also all policy benefits that every other insured party received.” (Id. at p. 1273.)
The Court of Appeal stated, “Insurers that pay defense and indemnity costs are in the best position to monitor the underlying litigation, track expenses, and allocate policy benefits among insureds. The alternatives would be to require every insured under a rescinded policy to reimburse all costs spent defending or indemnifying all other insureds, or to impose upon an insured
Axis argues that LA Sound, supra,
Linda argues there is no meaningful distinction between the action for rescission in LA Sound, supra,
Axis also argues that LA Sound, supra,
The insurer seeking recovery against the insured for expenditures in settling a case when the claims were not covered should allocate those expenditures among the insureds. As the court in LA Sound, supra,
As noted, the trial court did not expressly state in its statement of decision that it made an allocation. Rather, it concluded that Linda and Edgar were liable for the $2,143,000 paid by the insurers to settle the Tenant Action. We may infer that the trial court made an implied finding of an allocation, which in this case was Linda’s joint and several obligation to reimburse the insurers for the full amount of the settlement payment. Although the trial court issued a statement of decision, Linda’s failure to bring to the trial court’s attention an omission or ambiguity in that decision permits us to make that inference. (Fladeboe v. American Isuzu Motors Inc. (2007)
There is substantial evidence to support that implied finding. That evidence shows that Linda had a sufficient benefit from the settlement such that not to allocate to her joint and several liability to the insurer of the full amount paid by the insurer to settle the Tenant Action would amount to unjust enrichment.
Linda conceded at trial she was jointly and severally liable for any tort committed by Edgar. There is no evidence that she would not be. She was a co-owner of the property in question with Edgar, and the property was held as community property. She participated in the management of the property. Under these circumstances, she should be jointly and severally liable under the causes of action against her in the Tenant Action. (See Myrickv. Mastagni (2010)
DISPOSITION
The judgment is affirmed. No costs are awarded.
Turner, P. J., and Armstrong, J., concurred.
Notes
As neither party challenges the trial court’s findings of fact in its statement of decision, our recitation of facts relies primarily on the statement of decision and the trial exhibits cited in that decision.
For clarity, we will at times refer to the Reinosos by their first names.
Other insurers contributed $325,000, Kaufman or his insurers contributed $275,000, and the Reinosos contributed $250,000.
Axis and Linda have changed their positions for this appeal.
Linda states in her reply brief, “the trial court found the defendants jointly and severally liable for the millions of dollars Axis paid to settle the Tenants’ lawsuit. . . .”
The court in LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co. (2007)
The coverage for “Personal and Advertising Injury” is not an issue on appeal.
Parenthetically, Linda and Edgar sold the property for a profit of $3.8 million—an amount that exceeded the settlement payment.