The California Court of Appeal for the Second Appellate District issued a decision reversing the trial court's summary judgment ruling in favor of the insurer and holding that when an automobile insurance policy provides the insurer with the option to pay for damages to or repair an insured vehicle, the insurer satisfies its contractual obligation by electing to repair damages even though the insured refused to authorize repairs. However, the Court of Appeal also held that the insurer can be liable in bad faith if it pays for repairs not authorized by the insured and then recovers from the tortfeasor in subrogation because the subrogation action may be prejudicial to the insured's direct action against the tortfeasor.
Harry and Jessica Hibbs' van was insured by Allstate Insurance Company. On April 13, 2004, the van was struck by Jerome Brooks and the front was substantially damaged. The van was taken to a repair shop where Jessica Hibbs signed an authorization to repair the van. The repair shop later estimated the cost to repair the van was $6,500. Jessica Hibbs contacted Allstate and advised that she believed the van was a total loss and refused to authorize the repairs.
On April 22, 2004, Allstate was advised by the repair shop that Jessica Hibbs had authorized the repairs, and that the repairs were substantially complete. On May 3, 2004, after the van had been repaired it was driven into another car by a repair man and again suffered front end damage. The Hibbs refused to authorize repairs and refused to pick up the van. Allstate paid the repair shop the cost to repair the van less the Hibbs' deductible. Allstate eventually recovered the cost to repair plus the Hibbs' deductible from Brooks' insurer in a subrogation action and sent the deductible to Hibbs, which they never cashed.
The Hibbs filed a complaint against Allstate alleging, among other things, breach of contract and breach of the implied covenant of good faith and fair dealing. The trial court granted Allstate's motion for summary adjudication as to the breach of contract and breach of the covenant of good faith and fair dealing claims and denied Allstate's motion for costs. Both sides timely appealed.
The Court of Appeals first affirmed the trial court's determination that a triable issue of fact existed as to whether or not the Hibbs authorized the repair of their van. The Court of Appeals cited to Business & Professions Code section 9984.9 which requires, among other things, that an automotive repair dealer give the customer a "written estimated price for labor and parts necessary for a specific job . . . before authorization to proceed is obtained from the customer." The Court of Appeal found that the authorization to repair the van signed by Jessica Hibbs was void under section 9984.9 because the repair shop failed to provide Jessica Hibbs with a written estimate prior to obtaining her written or verbal approval for the repairs.
The Court of Appeal next addressed an issue of first impression in California – whether an insurer that has elected to repair a vehicle under an automobile insurance policy that provides it with an option to repair or pay the costs of repair, is relieved of its obligation under the policy by its insured's refusal to authorize repairs. After considering decisions from other jurisdictions, the Court of Appeal held that where the policy clearly and unequivocally provides the insurer with the option to repair and the insurer chooses that option, the insured's prevention of the insurer's performance by refusing to authorize the repair, excuses the insurer's obligation under the policy. The Court of Appeal also rejected the Hibbs' contention that Allstate's adjuster chose to settle the claim, finding no authority for the claim absent a showing of estoppel.
Finally, the Court of Appeal addressed the Hibbs' contention that Allstate breached the implied covenant of good faith and fair dealing. The Court of Appeal held that Allstate did not act in bad faith when it authorized the repairs to the van finding that there was no authority indicating such authorization constituted bad faith and that any repair authorized by Allstate would still be subject to further authorization by Hibbs' under section 9884.9.
The Court of Appeal also found that Allstate did not breach the implied covenant of good faith and fair dealing by ignoring the Hibbs' request for a mechanical and safety inspection to ensure the van was safe or for failing to respond to the Hibbs' settlement demand for full market value, because Allstate was not obligated under the policy to provide such expert inspections or to pay full market value for the vehicle.
However, the Court of Appeal found that a triable issue of fact existed as to whether Allstate breached the covenant of good faith and fair dealing by prosecuting its subrogation claim against Brooks. The Court of Appeal found that because Hibbs did not consent to the repairs, the repair shop was not due any compensation. As a result, Allstate had no right to subrogation against Brooks. In addition, the Hibbs were prejudiced by Allstate's subrogation action since Brooks would have a right to an offset against any cause of action the Hibbs might be able to successfully assert against him.
As a result, the Court of Appeal reversed and remanded for trial on the issue of bad faith and awarded costs on appeal to Hibbs.
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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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