Lead Opinion
Opinion
I.
Introduction and Contentions
American Empire Insurance Company (American) appeals from a judgment entered against it in an action on a general liability policy. Plaintiffs Wilfred and Marie Collin (Collins) sued American to collect a $200,000 default judgment against American’s insured, a contractor known as Southwest Design. The judgment was for conversion and damage to real property caused by Southwest Design while remodeling the Collins’ home.
After a trial on stipulated facts, the Honorable David P. Yaffe of the Los Angeles Superior Court entered judgment against American for $100,000, half the amount requested by the Collins. The trial court held that the damage to the Collins’ house was not covered by the American policy because Southwest Design’s remodeling of the Collins’ house was not an “accident” as required by the policy. The court held that Southwest Design’s conversion of the Collins’ personal property, however, was an “accident” covered by the policy.
American raises the following contentions on appeal:
1. The judgment was predicated upon “willful” misconduct and not an accident thereby constituting an event not covered by the policy;
*796 2. No evidence was adduced as to how Southwest Design “converted” the Collins’ property thereby failing in the necessity to present a prima facie case;
3. The trial court erred when it construed the term “accident” by reference to the insured’s intent to harm rather than its intent to perform the act creating liability;
4. The trial court erred in finding that conversion of property constituted “property damage” under the policy definition; and
5. The Collins gave late notice of their claim to American which should have relieved American of any obligation under the judgment.
On their cross-appeal, the Collins make the following contentions:
1. The case presents no evidence of intentional misconduct by Southwest Design pertaining to loss, damage or destroyed personal property of the Collins, therefore American should provide indemnity for the judgment relating to those items; and
2. The trial court erred in determining that their judgment against Southwest Design, based upon consequential damages to their home and fixtures, was not covered by the American policy.
II.
Statement of Facts
Procedural Background
The Collins commenced this action against American on October 9, 1991. The sole cause of action was to satisfy a $200,000 judgment against American’s insured, pursuant to Insurance Code section 11580, subdivision (b)(2).
The Collins and American thereafter agreed to try the case on stipulated facts. The trial was held October 9, 1992.
By minute order filed October 13, 1992, the court held that American’s policy did not cover the Collins’ “real property” damages, but did cover their
Because this action is an action to satisfy a judgment in a previous lawsuit, it is necessary to review the original dispute and the previous action arising therefrom, as well as the judgment in this case which is the basis of this appeal.
The Remodeling of the Collins’ Home
This action began as a dispute among the plaintiffs, their renter and the renter’s remodeling contractor.
The Collins owned a house on Oriole Way in Los Angeles. Beginning on March 3, 1985, they leased their house to Richard Gordon, with an option to purchase. Gordon thereafter hired a company called “Southwest Design” to do some remodeling work on the Collins’ house, presumably because he intended to exercise the purchase option.
The remodeling work which Gordon commissioned included the installation of an air conditioner, the removal of a glass wall and a bar, painting over of certain interior surfaces and miscellaneous structural modifications. Notes which appear to belong to Southwest Design mention removal of the bar, painting and etching of the front door, painting of the walls, ceiling and floors, and replacement of light fixtures with newer fixtures. Southwest Design performed this work at Gordon’s direction.
The Collins’ Dispute With Gordon
The Collins were unaware of Gordon’s remodeling efforts, or at least unaware of their extent. This came to light in the fall of 1985, when the Collins discovered that Gordon had renovated their house without their permission and had taken several personal items from the house.
The Collins’ attorney wrote Gordon on September 24, 1985, stating, “you have made major structural changes, including the removal of a ten-foot, beveled glass wall, and the removal of the built-in bar.” The Collins’ letter also referred to the removal of a chandelier, the painting over of walls and floors, and other tasks which Gordon hired Southwest Design to perform. In his September 24, 1985, letter, the Collins’ attorney also pointed out that Gordon had removed numerous personal items belonging to the Collins. The
Gordon did not return the items, purchase insurance for them, or restore the premises to their previous condition. Instead, his business faltered and he was unable to meet his financial obligations. Gordon not only stopped paying rent on the Collins’ home, but he stopped paying Southwest Design as well. As a result of Gordon’s failure to pay rent, the Collins commenced an unlawful detainer action against him.
With Gordon’s permission, the Collins went in November of 1985 to the warehouse where Gordon had stored their personal property under his own name. When they arrived, however, the property stored there had either been removed or destroyed.
Upon retaking possession of their home, the Collins hired the Greenspan Company, an independent insurance adjuster, to estimate the value of the personal property which Gordon had taken from the house, as well as the cost of restoring the premises to their previous condition. The adjuster’s report divides the loss between missing property and structural repairs. The magnitude of the loss in these two categories was $55,763.30 and $21,322, respectively, in 1979-1980 values, or a total of $77,085.30. The report also lists values in 1986 dollars: $92,543 in missing personal property and $32,833 in structural loss, for a total of $125,376. The record is silent as to how the property was converted, because, as stipulated, the Collins “do not know what happened to their property.”
The Previous Litigation
After Gordon stopped paying Southwest Design for the work on the Collins’ house, Southwest Design filed an action against Gordon and the Collins to recover the value of the work it had performed. Southwest Design alleged in that action that it had performed $40,000 worth of services on the Collins’ home and sought payment in that amount.
The third count alleged that Southwest Design’s construction work “was commenced without the knowledge, consent, or agreement of cross-complainants,” that Southwest Design “damaged the subject property as set out more fully in paragraph 12(c) of the herein cross-complaint,” and that “[sjaid construction work was not performed in a proper, workmanlike manner, further damaging said property, and has thereby reduced the value of cross-complainants’ property.”
Paragraph 12(c), mentioned in the third count, sought damages for “major structural changes, including the removal of a ten-foot bevel glass wall; the removal of a built-in bar; the removal of hanging fixtures, including but not limited to chandeliers; the removal of several works of art; the painting over of custom wallpaper, cabinets and wooden floors; the removal of windows and wall coverings; the removal of all outdoor furniture; the removal of furniture and personal possessions belonging to cross-complainants and the changing of all locks on the subject premises.” The Collins alleged that Southwest Design knew the work was unauthorized and, despite this knowledge, damaged the house willfully and maliciously.
The fourth cause of action alleged that the Collins “were, and still are, . . . entitled to possession of certain personal property, including, but not limited to, furniture, artwork and fixtures, which were located at 9100 Oriole Way,” and that “[djuring or about the month of July 1985, cross-defendants herein took and/or destroyed the above-mentioned property, thus depriving cross-complainants of possession thereto and, thereby, converted the same to their own use.” Like the third count, the fourth alleged that Southwest Design’s conversion of personal property was willful. In short, as the Collins described it elsewhere, “the house suffered from extensive damage due to unfinished remodeling and . . . numerous items of the household furnishings had been removed.”
The Judgment in the Previous Action
Instead of tendering the Collins’ cross-complaint to American, Southwest Design chose to defend itself in the litigation.
Initially, the Collins won a summary judgment on Southwest Design’s complaint, leaving only their own cross-complaint at issue. After this development, Southwest Design’s attorney withdrew, leaving Southwest Design to defend itself in propria persona.
The following day, the Collins—not Southwest Design—tendered Southwest Design’s defense to American. American received the Collins’ notification letter on November 10, 1988, over two years after the cross-complaint was filed and over a week after Southwest Design’s default.
On November 18, 1988, American retained Murchison & Gumming to defend Southwest Design. This defense was provided under a reservation of rights. After attempting without success to locate the insured, a motion to set aside the default was filed. The court denied the motion, finding that there “has been a failure to show excusable neglect by the moving party.”
The court then conducted a prove-up hearing on May 8, 1990, to establish the amount of the Collins’ damages. The only witness at the hearing was Mr. Collin. Mr. Collin did not identify the damage to his house or the converted property. Nor did he place a value on a single item of damaged property. Instead, his attorney simply asked him whether he had been damaged “in excess of $230,000,” to which he responded “yes.” Based upon this “evidence,” the court entered judgment in the amount of $100,000 on each of the Collins’ two causes of action. There is nothing in the record explaining how this allocation was reached.
This Action and the Ruling Below
After their judgment against Southwest Design was final, the Collins commenced this action against American to satisfy the judgment. Their sole cause of action was under Insurance Code section 11580, subdivision (b)(2), which provides that “. . . an action may be brought against the insurer on the policy and subject to its terms and limitations, by [a] judgment creditor to recover on the judgment.”
The parties stipulated to 38 facts and to the authenticity of 30 exhibits. Each party filed an opening trial brief, a responsive brief and a reply brief. American argued that it had no duty to pay the Collins’ judgment because
After oral argument on October 9, 1992, the trial court issued a minute order on October 13, 1992. In that order, the court reached different conclusions as to the two types of damages which the Collins suffered. Concerning the claim for “damages to property damage,” the court ruled that there was no coverage under the American policy because the judgment was based upon deliberate conduct, not an “accident.” The court ruled as follows:
“The gravamen of the underlying complaint against the insured is that alterations were made in the house and property was removed from the house without the consent of the owner. The threshold issue, therefore, is whether the insured knew that the person with whom it contracted was not the owner of the house and that the owner had not consented to the work or removal of the property. The only information that the Court has with respect to the issue is the underlying cross-complaint by Collin against the insured, in paragraph 24 of which Collin alleges that: ‘. . . SW Design knew that said construction work was commenced and would be conducted without the knowledge, consent or agreement of the owners . . . and commenced said work, despite said knowledge . . . .’
“This allegation, the substance of which is repeated in Paragraph 5 of the complaint in this action, is fatal to Collin’s claim against AESL for the work performed on the house without his consent. The default by the insured in the underlying action constituted an admission of the material allegations of the complaint for the purposes of that action, and the insured therefore is deemed to have admitted that it deliberately, intentionally and knowingly performed the work without the owner’s consent. Such conduct was not insured against in the subject policy and could not have been insured against in any policy.”
With respect to the “conversion” portion of the judgment, however, the court held that the judgment was based upon an “accident” and represented a claim for “property damage.” The court reasoned as follows: “The claim for the value of property removed from the premises and eventually lost presents different issues. AESL contends that conversion is by its nature an intentional act and therefore liability for it was not and could not be insured against. The stipulated facts however are that Gordon merely stored the furniture in a warehouse; there is no indication that Gordon, let alone the
“AESL further argues that even if the loss was not intentionally caused it was not within the coverage of the policy because the policy covers only physical injury to, or destruction of, the property, not its loss by theft or disappearance. The policy, however, also covers the loss of use of tangible property which has not been injured or destroyed if such loss of use is caused by an ‘occurrence.’ As the loss was accidental and not intentional, it was caused by an ‘occurrence’ as the term is defined in the policy. AESL further argues that the Toss of use’ as that term is used in the policy, means Temporary loss of use only. AESL admits however that the phrase Toss of use’ is not defined in the policy and that when used in the policy it is not modified by the adjective ‘temporary.’ There is nothing in the policy that indicates that coverage is to be restricted to temporary, as opposed to permanent loss of use.”
The court’s ruling did not cite any legal authority governing the interpretation of insurance policies or construing the standard provisions of the comprehensive general liability policy. The ruling also did not mention any of the exclusions raised by American, and failed to address American’s argument that it was prejudiced by the insured’s delay in reporting the claim. Based upon this minute order, the court entered judgment in favor of the Collins in the amount of $100,000, the amount of their judgment against Southwest Design for “conversion” damages.
III.
Discussion
The sole question presented by this case is whether the judgment against Southwest Design is covered by American’s policy. The interpretation of an insurance policy as applied to undisputed facts is a question of law for the court, and this court is not bound by the trial court’s construction. (Whittaker Corp. v. Allianz Underwriters, Inc. (1992)
A. General Principles Governing the Interpretation of Insurance Policies Under California Law
An insurance policy is written in two parts: the insuring agreement defines the type of risks which are covered, while the exclusions remove
Second, although exclusions are construed narrowly and must be proven by the insurer, the burden is on the insured to bring the claim within the basic scope of coverage, and (unlike exclusions) courts will not indulge in a forced construction of the policy’s insuring clause to bring a claim within the policy’s coverage. (Whittaker Corp. v. Allianz Underwriters, Inc., supra,
Finally, while an insurer has a duty to defend suits which potentially seek covered damages, it has a duty to indemnify only where a judgment has been entered on a theory which is actually (not potentially) covered by the policy. (City of Laguna Beach v. Mead Reinsurance Corp. (1990)
B. The Trial Court Erred in Finding That the Collins’ Judgment for “Conversion” Was Based Upon an “Accident”
The most critical (but not only) issue before the trial court was whether the Collins’ “conversion” damages resulted from an “accident.” The court ultimately held that they did.
The court’s ruling was erroneous in three respects. First, the Collins’ cross-complaint pleaded only intentional conduct, and its allegations must be
Second, there was no factual basis—in the cross-complaint or elsewhere— for the court’s finding of an “accident.” To make out a prima facie case of coverage, the Collins were required to establish that an “accident” took place. They failed to establish how a single one of their possessions was converted and, indeed, stipulated that they did not know what happened to their property. Given this total failure of proof, the court’s inference that an “accident” had occurred was clearly improper.
Finally, the court’s ruling was based upon a misunderstanding of the term “accident.” Under California law, the term refers to the nature of the insured’s conduct, not his state of mind. The court improperly held that Southwest Design’s deliberate taking of the Collins’ property was an “accident” because there was no proof that it “intended to permanently deprive Collin of the property.”
1. Under a Comprehensive General Liability Policy Containing the Standard “Occurrence” Definition, the Controlling Question Is Whether the Insured’s Conduct Can Be Characterized as an “Accident”
The basic grant of coverage in the American policy provides as follows:
“The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of
“A. bodily injury or
“B. property damage
“to which this Insurance applies, caused by an occurrence, . . .”
“Occurrence” is defined as “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” This is standard language throughout the insurance industry. (See, e.g., Dyer v. Northbrook Property & Casualty Ins. Co., supra,
In construing this definition, the California courts have agreed that the controlling issue is whether the claimant was injured as the result of an
2. Because the Collins’ Judgment for “Conversion” Was Based Upon a Cross-complaint Alleging Intentional Misconduct, the Court Erred in Finding That Their Damages Resulted From an “Accident”
In determining the nature of the conduct upon which a judgment is based, one naturally must look to the allegations in the pleadings. The trial court correctly observed below that a judgment based upon allegations of intentional wrongdoing is not—and cannot be—insured under a liability policy. The court applied the doctrine inconsistently, however. The court properly ruled that the Collins’ third cause of action (for “damages to real property”) pleaded nonaccidental conduct and therefore was not covered by American’s policy. The court’s error was in failing to analyze the fourth cause of action (for “conversion”) in the same manner, since it contained the same allegations.
Where a party defaults, the allegations against it are deemed true. (Morehouse v. Wanzo (1968)
Inexplicably, the court failed to apply the same analysis in analyzing coverage for the fourth count. The fourth count alleged that Southwest Design “took and/or destroyed” the Collins’ property “and, thereby, converted the same to their own use,” and further alleged that these acts “were
It is fundamental that allegations of intentional wrongdoing do not allege an “accident.” (See Chatton v. National Union Fire Ins. Co., supra,
C. The Collins Did Not Meet Their Burden of Establishing an “Accidental” Conversion, and the Trial Court Improperly Assumed Nonexistent Facts and Put the Burden on American to Disprove Them
Apart from the purely intentional nature of the Collins’ “conversion” allegations, the trial court’s finding of an “accident” was erroneous for a second reason: there was not a scintilla of evidence in the record supporting the finding. Indeed, the Collins stipulated that they do not know what happened to their property. The trial court responded by assuming hypothetical facts and placing the burden on American to disprove them.
As discussed previously, the party seeking coverage has the burden of proving a loss within the insuring agreement. Because the “occurrence” or “accident” requirement is in the insuring clause, the party seeking coverage must establish an “occurrence” or “accident.” (Chamberlain v. Allstate Ins. Co. (9th Cir. 1991)
In this case, the Collins failed to establish that the “conversion” of their personal property was the result of an “accident.” Indeed, the parties stipulated that “The Collins do not know what happened to their property.” Given this stipulation, they could not possibly establish—and the trial court could not reasonably find—that their property was “accidentally” converted.
By coincidence, Division Five of this court recently addressed a remarkably similar situation, reversing a decision of the Los Angeles Superior Court where the party seeking coverage had stipulated that it lacked information necessary to establish a loss within the basic insuring clause. (Whittaker Corporation v. Allianz Underwriters, Inc., supra,
The court reversed, finding that the insured had failed to prove—indeed, could not prove—a loss within the policy period. (
Here, as in Whittaker, the parties seeking coverage have stipulated that they cannot establish a critical element of the insuring clause: that the conversion of the contents of their house was an “accident.” Accordingly, their claim necessarily must fail for lack of proof.
The trial court evidently inferred that the conversion of the Collins’ property was “accidental.” In the absence of evidence showing how the property was converted, however, the trial court could not properly draw such an inference.
As noted, the Collins do not know what happened to their property. To the extent there was any evidence as to what happened to the property, it suggested that Richard Gordon removed the property and stored it in a warehouse. The Collins discovered this in September of 1985 and had their attorney write Gordon to demand return of the property. The Collins did not, however, recover the property. The 38 stipulated facts and 30 exhibits are devoid of any information regarding who actually removed the property, or why, or what they did with it, or why the Collins were unable to recover it.
From these bare facts, the trial court reached the following conclusion: “The stipulated facts however are that Gordon merely stored the furniture in a warehouse; there is no indication that Gordon, let alone the insured, intended to permanently deprive Collin of the property. Its loss appears to have been accidental and therefore properly the subject of insurance.”
Judge Yaffe had no factual basis to infer that the loss was “accidental.” Evidence Code section 600, subdivision (b) defines an “inference” as “a deduction of fact that may logically and reasonably be drawn from another fact or group of facts found or otherwise established in the action.” It is fundamental that one cannot make an inference from thin air: “Where there is no evidence or not even slight evidence of an essential fact to be proved by the plaintiff, a conclusion of a trial court or jury based thereon becomes a mere conjecture and does not rise to the dignity of an inference.” (Juchert v. California Water Service Co. (1940)
3. To the Extent the Court Placed the Burden on American to Prove That the Conversion Was Nonaccidental, the Court Committed Error
One way to explain the trial court’s finding of an “accident” is that it assumed American had the burden of establishing that the loss resulted from nonaccidental conduct. If so, the court was clearly wrong.
The court’s ruling appears to assume that American had the burden of disproving the existence of an “accident.” In its minute order, the court noted that “there is no indication that Gordon, let alone the insured, intended to permanently deprive Collin of the property. Its loss appears to have been accidental.” The court’s questions and statements at oral argument appear to confirm this conclusion:
“The Court: Well, how do I know whether [the painting] was deliberate?
“Mr. Barnes: I would respond to that in two ways. One, if you don’t know, then, the plaintiffs have failed to prove entitlement in accordance—
“The Court: The plaintiff says it’s your burden because it’s an exclusion.
“Mr. Barnes: It’s not an exclusion. It’s part of the insuring clause. . . .
“The Court: Well, the question is, at what point does the burden shift?”
Thus, it appears from the trial court’s questions and ruling that it believed American had the burden of establishing that the insured’s conduct was nonaccidental. Until the Collins made out a prima facie showing of an “accident,” however, American had no burden whatsoever. The court’s apparent understanding to the contrary was erroneous.
The trial court’s third error in applying the “occurrence” definition is that it misconstrued the term “accident” to refer to an unintended' injury rather than an unintended act. The overwhelming weight of California authority holds that the term “accident” refers to the nature of the act giving rise to liability, not to the insured’s intent to cause harm; for this reason, conversion (absent bizarre circumstances) can never be an “accident” because the insured’s liability is based upon the deliberate taking of property. By focusing upon the absence of any evidence that the insured “intended to permanently deprive Collin of the property,” the court applied the incorrect legal standard.
a. Under California law, the term “accident” in an insurance policy refers to an act which the insured does not intend to perform, not to an injury which the insured does not intend to inflict
California courts interpreting “occurrence” have focused exclusively on the insured’s intent to perform the act which gives rise to liability, not on the insured’s state of mind. If the claimant’s injuries did not result from an “accident,” it does not matter whether the insured expected or intended his conduct to cause any harm.
The California Supreme Court has defined the term “accident” as “ ‘ “an unexpected, unforeseen, or undesigned happening or consequence from either a known or unknown cause.” ’ ” (Hogan v. Midland National Ins. Co. (1970)
Because the term “accident” refers to the insured’s intent to commit the act giving rise to liability, as opposed to his or her intent to cause the consequences of that act, the courts have recognized—virtually without exception—that deliberate conduct is not an “accident” or “occurrence” irrespective of the insured’s state of mind. The most comprehensive discussion of the term appeared in Merced Mutual Ins. Co. v. Mendez (1989)
As stated in American Guar. & Liability Ins. Co. v. Vista Medical Supply (N.D.Cal. 1988)
Likewise, in Commercial Union Ins. Co. v. Superior Court, supra,
b. Because the essence of “conversion” is the exercise of dominion over the property of another, virtually every court to consider the question has agreed that “conversion” cannot occur “accidentally”
The tort of conversion is an “act of dominion wrongfully exerted over another’s personal property in denial of or inconsistent with his rights therein.” (Oakes v. Suelynn Corp. (1972)
Our research has located no California case addressing whether “conversion” is an “accident” or “occurrence.”
This issue was addressed in Simmons Refining Co. v. Royal-Globe Ins. Co. (7th Cir. 1976)
Simmons was followed in another Seventh Circuit decision, Red Ball Leasing v. Hartford Acc. & Indem. Co. (7th Cir. 1990)
Numerous other courts have agreed that “conversion” cannot be an “occurrence.” In Federated Mut. Ins. Co. v. Madden Oil Co., Inc. (Mo.Ct.App. 1987)
This issue was articulated most clearly by the Texas Supreme Court in Argonaut Southwest Insurance Company v. Maupin (Tex. 1973)
Finally, a recent case considering the question at hand agreed that conversion by its nature does not result from “accidental” conduct. In Travelers Ins. Companies v. P.C. Quote, Inc. (1991)
Thus, those courts to consider the question have overwhelmingly agreed that “conversion” is not “accidental” conduct because it is based on inherently deliberate conduct. Judge Yaffe’s opinion did not distinguish or cite any of the aforementioned authorities. Nonetheless, it is clear that the vast majority of cases throughout the country hold that conversion is not an “occurrence” or “accident.” The California Supreme Court has indicated several times in recent years that it is appropriate to look to the decisional law of other states where insurance matters are concerned. (See, e.g., J. C. Penney Casualty Ins. Co. v. M. K. (1991)
c. The insured’s hypothetical intent to return the property (of which there is no evidence) would not render its conversion of the property “accidental”; it would only negate a subjective intent to injure the Collins
As noted above, the trial court ruled in its minute order that the loss of the Collins’ property “appears to have been accidental” because “there is no indication that Gordon, let alone the insured, intended to permanently deprive Collin of the property.” It is clear from the oral argument that the court was under the impression—which had no basis in the record—that the insured intended to return the Collins’ property after the remodeling was completed:
“The Court: Well, conversion is an intentional tort in that it requires the intentional act of taking possession of the goods of somebody else, but it does not require, as I understand it, the intention to permanently deprive the other person of the goods. It does not require the intention not to return the goods. It does not require the intention to appropriate or permanently deprive the owner of the goods.
“If we have a situation in which the insured took—intentionally took the items out of the house and put them into storage, intending fully to have them returned at a later time, and then they got lost or disappeared; do we have some—do we have conduct that is not covered by the policy?
“. . . Let’s take the insured’s version of the facts for a moment, [fl] The insured here intended to take this property out of the house and put it in storage. That’s all he intended to do. He did not intend to lose it, steal it, have it disappear. All of that was not intended by the insured.
“In which of those [out-of-state conversion] cases did the insured intend to take possession of the property but also intend to return it, and then have it for unintended reasons not be available to return?”
The insured’s intent, however, is irrelevant in determining whether its deliberate conduct was an “accident.” As stated in Merced Mutual Ins. Co. v. Mendez, supra,
D. The Trial Court Erred in Holding That Conversion of Property Is “Property Damage”
The American policy only covers “property damage,” as that term is defined therein. Virtually every court to consider the question has agreed that “conversion” of property is not “property damage.” Notwithstanding these rulings, the trial court ruled that “conversion” fell within the definition of “property damage” because the definition includes “loss of use” of property. “Loss of use” of property is not the same as “loss” of property.
The American policy defines “property damage” as “(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.” This definition does not include conversion.
Although no California court has specifically addressed whether “conversion” is property damage, virtually every other court to consider the question has held that it is not. (See Nortex Oil & Gas. Corp. v. Harbor Insurance Co. (Tex.Civ.App. 1970)
2. The Trial Court Improperly Held That “Loss Of Use” of Property Is the Same as “Loss” of Property
Despite the overwhelming weight of cases from other states holding that “conversion” is not “property damage,” the trial court found that “conversion” constitutes “loss of use” of property, and thus falls within the second prong of the “property damage” definition.
The Collins did not brief the “loss of use” argument and only mentioned it in passing in oral argument. The trial court cited no legal authority supporting its conclusion that the “loss of use” language was meant to cover “conversion.”
Contrary to the trial court’s impression, American never argued that the policy only covered temporary loss of use as opposed to permanent loss of use. American argued instead that (1) “loss of use” refers to the rental or income value of property which has been damaged or rendered unusable; and (2) the Collins did not seek damages for “loss of use” of their property but for the value of the property itself.
“Loss of use” of property is different from “loss” of property. To take a simple example, assume that an automobile is stolen from its owner. The value of the “loss of use” of the car is the rental value of a substitute vehicle; the value of the “loss” of the car is its replacement cost. The nature of “loss of use” damages is described in California Jurisprudence Third as; “The measure of damages for the loss of use of personal property may be determined with reference to the rental value of similar property which the plaintiff can hire for use during the period when he is deprived of the use of his own property.” (23 Cal.Jur.3d, Damages, § 69, pp. 129-130, italics added.)
In AIU Ins. Co. v. Superior Court, supra,
The court’s error is understandable: the Collins did “lose the use” of their property. What the court failed to appreciate is that the damages they
E. The Trial Court Erred in Failing to Conclude That American Suffered Actual Prejudice as a Result of Southwest Design’s Failure to Give Notice of the Collin Claim
Like virtually all liability policies, the American policy required Southwest Design to give notice of any covered occurrence “as soon as practicable” and required that if a “suit is brought against the insured, the insured shall immediately forward to the Company every demand, notice, summons or other process received by him or his representative.” Under California law, an insured’s breach of these conditions will relieve the insurer of liability if it is actually prejudiced by the late notice. (Northwestern Title Security Co. v. Flack (1970)
There is no question that Southwest Design failed to give prompt notice of the suit to American. Indeed, Southwest Design never gave notice of the suit. The Collins’ cross-complaint was filed July 23, 1986, and American first received notice of the action on November 10, 1988—over two years later and eight days after the insured’s default was taken.
Two years does not readily fall within one’s concept of “prompt.” The question is whether American was “actually prejudiced” by this delay.
The first way in which American was actually prejudiced by the late notice is that the judgment entered against its insured was substantially higher than the Collins’ actual damages. The only information in the record regarding the actual value of the property converted from the Collins is the Greenspan report, which accounted for $55,763.30 in “missing” property in 1979 prices. Yet, a judgment was entered on the conversion count for $100,000. Had American been able to propound discovery in the case, it is reasonable to assume that American could have established that the Collins’ conversion damages were only $55,763.30 as reflected in the Greenspan report. Because the insured was in default when the case was tendered, however, the counsel appointed by American could do nothing at the “prove up” hearing except object to the lack of foundation for the $100,000 damage claim.
More fundamentally, however, American was prejudiced because a $100,000 judgment was entered for “conversion” and the Collins now
This point is illustrated vividly by the transcript of the “prove up” hearing, in which the defense counsel retained by American tried to establish that Southwest Design had not taken the Collins, property. The Collins’ counsel deliberately thwarted this attempt to demonstrate the absence of liability on the insured’s part:
“Q. By Mr. Smilay: Now, the items that you contend were converted, you have no personal knowledge of any source as to who did the converting; correct?
“Mr. Hoffman: Objection. It’s beyond the scope.
“The Court: Sustained.
“Mr. Hoffman: Also default prove-up.
“The Court: Sustained.
“Q. By Mr. Smilay: And as to those items which are—which you contend have been converted, specifically what items do you contend were converted?
“Mr. Hoffman: Objection; beyond the scope, . . .
“The Court: I’ll sustain the objection.”
This exchange in the record demonstrates that Mr. Smilay attempted to establish Southwest Design’s innocence but that the Collins’ counsel successfully thwarted his efforts because a default had been entered. It shows, in other words, that the insured’s default prevented American from putting on any defense.
Despite the default and the ensuing judgment, however, the Collins have now conceded that they “do not know what happened to their property.” If anything can be inferred from stipulated facts, it is that Richard Gordon removed the Collins’ property and placed it in storage in a warehouse under his name. Indeed, the Collins accused Gordon in September of 1985 of removing all of their possessions to a warehouse, demanding that he return
IV.
Disposition
That part of the judgment in favor of the Collins against American for $100,000 is reversed. The matter is remanded to the trial court to enter a new and different judgment in favor of American consistent with the views expressed herein. The cross-appeal is dismissed. Costs of appeal are awarded to appellant, American.
Lillie, P. J., concurred.
Notes
Insurance Code section 11580, subdivision (b)(2) states: “A provision that whenever judgment is secured against the insured or the executor or administrator of a deceased insured in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment.”
The only reported California case to address coverage for conversion appears to be Karpe v. Great American Indem. Co. (1961)
The court recognized that Southwest Design was deemed to have taken the property, since there was a judgment to that effect:
“The Court: Well, if I’m going to accept the underlying judgment against Southwest, don’t I have to infer that Southwest did the converting?
“Mr. Barnes: Sure, that’s what the judgment is for. That’s straight out of City of Laguna Beach versus Mead [(1990)226 Cal.App.3d 822 (276 Cal.Rptr. 438 )].
“The Court: So I can’t accept conversion of the facts to the effect that Gordon took everything and Southwest didn’t have anything to do with it because that would not explain the judgment against Southwest, would it?”
The trial court’s analysis was rejected in an analogous fact situation in City of Beverly Hills v. Chicago Ins. Co., supra,
The second clause of the definition includes “loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.”
Concurrence Opinion
I concur with the judgment, but not necessarily the full rationale, of the majority’s affirmance of the trial court on the cross-appeal. I respectfully dissent, however, as to the majority’s reversal of the trial court’s judgment in favor of the Collins on the “conversion” cause of action.
This will be a brief dissent because the majority and I agree on much of the law. I do not read the majority opinion to hold a “conversion” cause of action can never be an “accident” for purposes of insurance coverage. Rather, I understand the majority decision to be based on a fact-specific determination—that the Collins are bound by the terms of the default judgment they obtained and this judgment specifically included the element this particular conversion involved an intent to damage, destroy and deprive the Collins of their property.
True, there is some language in the majority opinion which some might read to suggest a “conversion” is never an “accident” and, therefore, never covered under a typical accident insurance policy. However, I have too high a regard for my colleagues to believe they could accept such an absurd
“ ‘The foundation for the action of conversion rests neither in the knowledge nor the intent of the defendant. It rests upon the unwarranted interference by defendant with the dominion over the property of the plaintiff from which the injury to the latter results. Therefore, neither good nor bad faith, neither care nor negligence, neither knowledge nor ignorance, are the gist of the action.’ [Citations.] [fl] It follows that mistake, good faith, and due care are ordinarily immaterial, and cannot be set up as defenses in an action for conversion. [Citations.]” (5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 624, p. 718, italics in original.)
At and near the latter end of the spectrum, there are many “conversions” which qualify as “accidents” within any reasonable reading of any insurance coverage clause. (See, e.g., Poggi v. Scott (1914)
My differences with my colleagues are over their treatment of the trial court’s findings. This case was submitted on stipulated facts. The stipulated facts present a rather complete picture of what happened here. American Empire’s insured, employed by the Collins’ lessee, removed most of the Collins’ furniture and some other possessions to a storage locker without the Collins’ knowledge or consent. It did so without any intent to retain, damage or destroy that furniture or those possessions, but solely to facilitate the renovations it had been hired to perform. For whatever reason, that furniture and those possessions were damaged, destroyed, lost or stolen before American Empire’s insured could return them to the Collins’ possession. The Collins do not know, and as far as this case is concerned, no one, including American Empire, knows who damaged, destroyed, lost or stole the furniture and other possessions which American Empire’s insured had taken and placed in storage.
Those facts constitute an unintentional conversion, and accidental conversion if you will, from the perspective of American Empire’s insured. Not just
American Empire attempts to obfuscate the facts to which it stipulated by attempting to limit the facts the court can properly consider to the allegations of the Collins’ complaint. If the trial court indeed were to be limited to the allegations of the Collins’ complaint, American Empire should not have stipulated to the true facts of this conversion. One could be sure American Empire would have been happy to accept any deviation between the allegations of the complaint and the stipulated facts which favored its position. (Indeed, American Empire several times repeats and relies on the stipulated fact the Collins don’t know what happened to their possessions after they were put in storage, a stipulated fact found nowhere in the Collins’ complaint.)
American Empire cannot stipulate the facts of this conversion then deny those stipulated facts are true or can be used by the trial court to determine whether the conversion in this case was an accident for purposes of insurance coverage.
Even accepting the allegations of the complaint as somehow determinative of the nature of this “conversion” cause of action, those allegations are not nearly as unambiguous as to its insured’s intent as American Empire would have us believe. Those allegations, as repeated in the majority opinion, do not accuse American Empire insured’s of “intentional” conduct, but merely of “taking,” etc. (In this conduct the allegation of “taking” is no more an intentional, nonaccidental act than is “speeding” an intentional, nonaccidental act in a personal injury negligence case.)
The allegations the majority opinion quotes evidencing American Empire insured’s mental state are the “punitive damages” allegations of “malicious, oppressive, etc.” conduct. While insurance companies are not liable for punitive damages, this does not relieve the insurer of its responsibility to indemnify its insured for the compensatory damages it must pay in that same action. In other words, the punitive damage allegations about an insured’s
In my opinion, the trial court was correct in concluding this conversion was an “accident” within the meaning of the “occurrence” clause of this insurance policy. This is not even a close case if one accepts the stipulated facts and what they tell us about the nature of this conversion. But even accepting American Empire’s cramped version which limits the “facts” to the allegations of the Collins’ complaint, this particular conversion remains an “accident” qualifying for coverage under this policy. Accordingly, I would affirm.
American Empire cites a number of out-of-state cases for the proposition “conversion” causes of action are not “accidents” and thus are not covered by the typical insurance policy. Most, if not all, of those cases involve factual circumstances which bear no resemblance to the instant case, but situations where the conversion was obviously intentional. Even if they had precedential value these cases would be distinguishable. As out-of-state cases, they are only persuasive at best. And, in this instance, they fail to provide a persuasive reason for California to adopt an erroneous, unnecessarily broad rule.