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March 2010

Abdelhamid v. Fire Ins. Exchange - Denial of Coverage Proper Where Insured Failed to Perform Condition Precedent for Coverage Under Insurance Contract

Summary Judgment in Favor of Insurer on Insured's Breach of Contract Claim Upheld Because the Insured Failed to Produce Requested Documents, Answer Material Questions, or Cooperate in the Insurer's Investigation of Claim

(February 22, 2010) ___ Cal.App.4th ___; 10 C.D.O.S. 3007

The California Court of Appeal, Third Appellate District, affirmed summary judgment in favor of the insurer in a coverage action because the insured failed to perform conditions precedent for coverage under the subject insurance policy and failed to cooperate with the insurer.

Fire Insurance Exchange issued an insurance policy to Zary Abdelhamid covering residential property in Sacramento, California.  Abdelhamid retained contractors to remodel several rooms in the house for a total of $140,000.  Abdelhamid paid the contractors $87,000 at the outset.  During renovations, the contractors discovered the ceilings in the house contained asbestos.  The City of Sacramento stopped work on the house because the contractors had not obtained the necessary permits.  Abdelhamid was unable to get her money back from the contractors or compel them to obtain the necessary permits and complete the work.

A few weeks later, Abdelhamid's house burned down.  She reported the fire to her insurer.  Fire conducted an initial investigation and learned, among other things, (a) that the remodel had been stopped by the City; (b) that Abdelhamid paid more for the house than it was worth; (c) that she paid 80% of the contract price of her remodel but less than half of the work was completed; and (d) that the fire department concluded the fire was the result of arson.  Fire also retained a company to investigate the cause and origin of the fire.  In its report, the company also concluded the fire was deliberately set.

Fire retained coverage counsel to further investigate.  Coverage counsel learned that Abdelhamid contacted the Fire agent who issued the policy two days before the fire to ask that certain mortgagee provisions be changed.  Abdelhamid followed up the day before the fire to confirm the change had been made.  The next day, she reported the fire.

Coverage counsel wrote Abdelhamid, advising her that Fire did not have sufficient information to accept her fire loss claim.  Counsel asked Abdelhamid to submit a completed proof of loss, produce 11 categories of documentation, and to appear for an examination under oath (EUO). 

Abdelhamid did not produce all of the requested documents.  At her EUO, Abdelhamid also repeatedly refused to answer questions about her business or personal finances, purportedly relying on legal advice that such questions were irrelevant to her claim. 

Fire formally denied Abdelhamid's claim in writing on the ground that she failed to comply with conditions precedent under the policy and because she failed to cooperate with Fire.  In its denial letter, Fire advised Abdelhamid that it would consider any additional information or documentation she might provide.

Abdelhamid filed suit against Fire, alleging breach of contract, bad faith, bad faith denial of claim, and unfair business practices.  The trial court granted summary judgment in favor of Fire. 

Abdelhamid appealed only as to the trial court's grant of summary adjudication as to her breach of contract claim.  Specifically, Abdelhamid argued the trial court erred because she had "substantially" performed the conditions precedent, thereby triggering Fire's duties under the insurance contract.

The Court of Appeal disagreed, finding the deficiencies to be a "far cry from minor defects."  Among other things, Abdelhamid's proof of loss only contained an estimated value of loss for the house.  She did not specify repair estimates, provide an inventory of personal property, nor did she provide documentation to support her claim for living expenses.  The Court of Appeal further found that Abdelhamid breached the insurance policy by failing to answer questions regarding her financial condition, which the Court concluded were material since arson was suspected. 

The Court of Appeal rejected Abdelhamid's contention that she relied on advice of counsel in refusing to answer Fire's questions.  First, Abdelhamid was not represented by counsel at her EUO.  More importantly, the California legislature never intended for an insured to circumvent her contractual obligations simply by asserting a privilege.  In other words, while the California legislature has recognized an insured's right to withhold information on the basis of privilege, it has also acknowledged that the insured's rights under the insurance policy contract may be adversely affected as a result.  (See Cal. Ins. Code, §§  2070, 2071.) 

The Court of Appeal also rejected Abdelhamid's argument that Fire's offer to consider additional information in its denial letter "reopened the door to its obligations and duties" under the policy.  The Court found that Fire did not suggest that denial of coverage was preliminary or that it was continuing to evaluate her claim.  Rather, Fire simply advised that it would consider any additional documentation.  Under these circumstances, Fire did not "reopen" the door to its obligations.

Lastly, Abdelhamid argued that an insurer must demonstrate "substantial" prejudice resulting from the insured's breach of conditions before it may properly deny coverage.  The Court of Appeal did not decide this issue because it found that Fire was prejudiced in its investigation of Abdelhamid's claim because of her breach.  The information and documents Fire sought, which Abdelhamid declined to produce, were essential to determining the extent of her claim. 

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This opinion is not final. Though it has been certified for publication, it may be modified on rehearing, or granted review by the Supreme Court of the State of California. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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Christopher R. Wagner