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July 2012

Axis Surplus Insurance Company v. Reinoso - No Insurance Coverage For Habitability Claims Against Insured Co-Owner With Actual Knowledge Of Substandard Housing Conditions

An Apartment Co-Owner with Actual Knowledge of Substandard Housing Conditions is Not an Innocent Co-Insured and is Jointly and Severally Liable to Reimburse Insurer for Settlement of Uncovered Claims

(June 26, 2012) ___Cal.App.4th ___; 12 C.D.O.S. 7242

The Second Appellate District of the California Court of Appeal affirmed a judgment after a bench trial awarding over $2.1 million to an insurer for recovery of its contribution to a settlement of uncovered habitability claims made by tenants in an apartment complex co-owned by the insureds.  The Court of Appeal held there was substantial evidence to support the finding that the settlement was not covered by liability insurance because the insured knew of the substandard conditions at the complex.  The Court also held substantial evidence supported the trial court's implied allocation to the insured of joint and several liability to reimburse the insurer for the settlement because the insured benefited from the settlement.

Linda Reinoso owned and managed several apartment complexes in Southern California with her husband, Edgar Reinoso.  Mr. Reinoso had a criminal record relating to fire hazard and housing code violations.  In 2003, the Reinosos purchased an apartment complex in Lancaster, California, known as the J-3 Apartments, which they owned as community property.  Within months, the city issued a notice to correct code violations, including dilapidation, insects, and vermin. In 2005, tenants in the J-3 Apartments sued the Reinosos, their management company, and the former property owners for habitability deficiencies and sought damages in excess of $10,000,000.00, plus punitive damages, and attorneys fees.

The Reinosos tendered the defense of the habitability action to Axis Surplus Insurance Company (“Axis”), who accepted the tender under a reservation of rights and ultimately contributed over $2.1 million to a settlement of the action.

Axis filed an action against the Reinosos to recover defense costs related to uncovered claims and the settlement.  Axis argued that the habitability claims arose from the Reinosos’ willful acts and were not covered under the Axis policy. After a bench trial, the trial court agreed and entered a $2.1 million judgment for Axis jointly and severally against all defendants.

Linda Reinoso appealed, arguing the trial court erred in finding that she was not an “innocent insured” because it applied an objective standard to determine her knowledge of the substandard conditions at the J-3 Apartments.  Reinoso also argued that substantial evidence did not support the trial court’s finding that she expected or intended the tenants’ injuries.  In addition, she asserted that the trial court failed to allocate liability for the $2.1 million judgment among the insureds and instead erroneously imposed joint and several liability.

The Court of Appeal found that the trial court did not err and apply an objective standard to determine whether Reinoso was an “innocent insured.”  Rather, the trial court relied on circumstantial evidence that Reinoso had sufficient knowledge of the conditions at the complex such that it was implausible that she did not expect the tenants’ injuries.  The Court also found that substantial evidence supported the trial court’s finding regarding the extent of Reinoso’s actual knowledge of the substandard conditions.  This evidence included Reinoso's involvement in the management of the apartment complex and the notice of housing code violations imposed by the city.  In addition, Reinoso’s knowledge of Mr. Reinoso’s criminal record supported the trial court’s finding.

The Court also affirmed the imposition of joint and several liability for the entire settlement amount.  As a preliminary matter, the Court concluded allocation of liability for reimbursement of the settlement proceeds was required.  But the Court of Appeal also held that while the trial court did not expressly state that it had made an allocation, it could be implied from the evidence that it had done so and allocated the full judgment amount against each of the defendants jointly and severally.  Reinoso’s failure to bring to the trial court’s attention any ambiguity or omission as to allocation in the Statement of Decision allowed the Court of Appeal to make that inference.

In addition, the Court held that substantial evidence supported the trial court’s implied allocation of full liability for the judgment to Reinoso joint and severally with the other defendants.  Reinoso held the J-3 Apartments as community property with Mr. Reinoso and conceded that she would be jointly and severally liable for torts committed by Mr. Reinoso related to the property.  As a consequence, she benefited from the settlement of the habitability action.  Not allocating liability to Reinoso for the full settlement amount would amount to unjust enrichment.  Accordingly, the Court of Appeal held the trial court did not err in its allocation and affirmed the judgment.

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This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority in California state courts.

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