In this insurance bad faith case, plaintiffs Betty and Jerry Douglas and defendant Fidelity National Insurance Company (Fidelity) appeal from the judgment after jury trial. Judgment was entered in favor of plaintiffs and against Fidelity in the amount of $807,058.10, plus interest and costs of suit. Plaintiffs appeal the trial court's decision to strike the jury's $1.9 million punitive damages award following the granting, in part, of Fidelity's motion for judgment notwithstanding the verdict (JNOV) (appeal no. A137645). Fidelity appeals from the same order arguing, among other things, that the court committed jury instructional error (appeal no. A137732). Fidelity also filed a notice of appeal from the court's ruling on the motion to tax costs (appeal no. A137897).
We agree with Fidelity that the trial court prejudicially erred in refusing to give certain jury instructions necessary to the jury's fair consideration of the case. Accordingly, the judgment is reversed and the matter is remanded for a new trial.
In December 2010, plaintiffs went to a business called Cost-U-Less Insurance (Cost-U-Less) where, over the telephone, an InsZone Insurance Services (InsZone) employee assisted them in obtaining a homeowners insurance policy with Fidelity.
On March 14, 2011, a fire damaged plaintiffs' home. Shortly thereafter, they made a claim with Fidelity to recover for their losses.
After an investigation, Fidelity rescinded the homeowners policy on the grounds that plaintiffs' insurance application contained material misrepresentations about various facts concerning plaintiffs' and their home. Fidelity stated it would not have issued the policy had it known the truth about the misrepresentations.
On August 24, 2011, plaintiffs filed a complaint against Fidelity and InsZone. The complaint alleges causes of action for breach of contract, declaratory relief, breach of the covenant of good faith and fair dealing, negligent misrepresentation, and breach of an oral contract to obtain insurance.
On September 26, 2011, Fidelity filed a motion to strike the claim for punitive damages. Fidelity asserted the complaint failed to allege sufficient facts to support the conclusion that it had acted with oppression, fraud, or malice.
On December 9, 2011, the trial court denied Fidelity's motion to strike.
On December 19, 2011, Fidelity filed a cross-complaint against plaintiffs for declaratory relief, restitution, and reimbursement. Fidelity asserted it was entitled to restitution of all benefits paid under the policy prior to the rescission.
On September 11, 2012, the trial court denied Fidelity's motion for summary judgment.
Jerry testified he had been married to Betty for 23 years. The couple has five children, some of whom are adopted. They purchased a home on Locust Street in Hayward in 1993 or 1994. Jerry was listed on the deed as the owner of the home but he considered the residence to be community property. The family moved to Stockton in 2005. They kept the Hayward house and used it to run a group home for minors on probation.
Around 2008 and 2009, the family experienced serious financial difficulties. Jerry lost his job and Betty was having health problems. They ceased operating the group home and moved back to the Locust Street property in March 2010. They also filed for bankruptcy and became late on their mortgage payments.
In December 2010, plaintiffs went to a Cost-U-Less store in Stockton to purchase an insurance policy for the Locust Street home. Previously, Betty had gone by herself to a Cost-U-Less store in Hayward and had obtained a Fidelity policy. However, the policy was cancelled shortly thereafter. Jerry understood the policy had been cancelled because the owner of record was required to sign the application.
When plaintiffs arrived at the Stockton store, an employee told them the paperwork he needed had not yet arrived. They left the store and did some shopping nearby. When they returned, the employee told them he had received the documents and only needed Jerry's signature. The insurance paperwork Jerry signed consisted of three pages. The first page was a blank form. The employee at Cost-U-Less did not ask him any questions about the property. Jerry signed the documents and gave the employee a check.
Jerry received a letter dated May 31, 2011, from an attorney named Jeffrey Charlston. The letter included a check from Fidelity in the amount of the insurance premium Jerry had paid. Charlston stated that in the course of investigating the fire loss, evidence had developed showing material misrepresentations had been made in connection with plaintiffs' insurance application.
On cross-examination, Jerry confirmed plaintiffs had filed for bankruptcy approximately three days before the fire. However, the signatures on the bankruptcy documents were not his. He did not recall if he had given his wife permission to sign his name. Plaintiffs had also filed bankruptcy petitions in October 2010 and March 2010. These filings also had signatures that were not his. Many of the statements regarding the family's assets in the supporting documentation for the October 2010 bankruptcy filing were false. One of the documents stated Jerry had worked as an "ARF counselor" with "On The Right Path" for 11 years.
Lon Anderson is an independent insurance adjuster. He was assigned to make contact with plaintiffs, inspect the damaged home, take photographs, and complete a preliminary report. During the investigation, he spoke with Fowler, Fidelity's representative. Anderson went to the property twice and
Anderson did not recall meeting with Jerry or discussing any missing tools, though he may have spoken with him on the telephone. Subsequent test results showed the house was contaminated with asbestos and lead. In his final report, he estimated the cost of repair for the damage to the structure to be $242,572.70.
Betty testified that she ran a daycare business out of the Hayward home for about 10 years. The family lived in the home until 2005 when she decided to stop the daycare business and instead use the house as a group home. The group home was called "Leading the Right Path." It housed minors who had been removed from their parents' care and who were on juvenile probation. Under state regulations the home could not also be used as a personal residence, so plaintiffs bought a house in Stockton and moved there. Betty operated Leading the Right Path until about 2008. About a year later, plaintiffs decided to move back to the Hayward home.
In 2007, Betty submitted an application to a licensing agency for another business called "On the Right Path," intending to provide housing for clients with developmental disabilities.
Although the corporation called On the Right Path went out of business, Betty testified that "On the Right Path, dba" did serve some mentally ill clients. The clients were sometimes referred to her by psychiatric hospitals and transitional living programs. She received between $600 and $961 per month from each such client. The clients paid with their SSI (Supplemental Security Income) checks. She usually rented out one bedroom for two clients to share. She also cooked meals for them. If she had more than two clients living in the home, she would rent out another bedroom. In December 2010,
In November or December of 2010, Betty went to a Cost-U-Less store in Hayward. Her policy had lapsed and she needed to secure new insurance to obtain a mortgage modification. At the store, she spoke to a man on the telephone who asked her three questions: (1) the year the house was built, (2) the home's square footage, and (3) whether the electric panel used fuses or circuit breakers. The man said he was from InsZone. She was not given any forms to fill out. She was not asked whether she had a business in the home or who lived there. The man said he would call her back. On her way home, he called and said she needed to pay $125. She made the payment. About a week later, the same man called her and asked her to return to the Cost-U-Less store and call him from there. When she called him, he told her he could not issue the insurance policy. He explained that because her husband's name was on the deed, Jerry would have to initiate the insurance. When she said he was in Stockton, the man said Jerry could go to a Cost-U-Less store in Stockton and say that he had been sent there.
Shortly thereafter, plaintiffs went to the Cost-U-Less store in Stockton. Consistent with Jerry's testimony, Betty testified that all of the paperwork shown to them was blank. The employee just pointed to the places on the papers where he wanted Jerry to sign. They were not asked about electrical panels, whether the structure was occupied by more than one family, if there were roommates or boarders in the home, or whether a business was conducted on the property.
After the fire, Betty went to the Red Cross and they helped her contact Fidelity to make a claim. She met with Anderson the following afternoon. Later, when she received letters from Fidelity indicating that it was going to rescind the policy, she contacted the state insurance commission and was advised to retain an insurance adjuster or an attorney. A contractor referred her to an insurance adjuster named Kevin Dawson. She retained him immediately. He handled all the communications with Fidelity after that.
On cross-examination, Betty admitted she filed a petition for bankruptcy in 2012 under the name Malika Masouda. The filing reflects that two men were seeking thousands of dollars from her claiming they had been employed by
Dawson is an insurance adjuster with Professional Insurance Evaluations. He is licensed by the Department of Insurance (DOI) to represent policyholders in disputes with insurers. He is compensated on a contingency basis. In the present case, he and plaintiffs agreed he would get 15 percent of any recovery. He asserted he was testifying both as a "non-retained expert" and as an advocate for plaintiffs.
Dawson was retained by plaintiffs after Betty came to him with a copy of Charlston's letter. Dawson was concerned because the letter did not include a copy of the application containing the alleged misrepresentations. He discussed the letter with Betty and came to believe that Charlston's assertions were untrue. Specifically, he understood the family resided in the home, and that the residence had never been used as a rehabilitation facility or as a halfway house for former prisoners. However, Betty did tell him "there were persons that would live at the house that were referred by an agency who contracted with Alameda County and she would provide short-term housing arrangements for these people who were in a transition, either between the hospital and the homelessness or some other housing program where they needed temporary accommodations and she would receive a stipend."
On cross-examination, Dawson responded affirmatively when asked if he would "present unbiased, unprejudiced testimony." He was asked if the rescission was based on whether plaintiffs lived on the property. Dawson responded: "No. It relies on a claim by Fidelity that on the application of insurance there were misrepresentations and those four questions weren't on the application. So, it's false in its foundation this rescission. These were not questions on the application. These are questions that somebody made up and said that Jerry answered wrong." (Italics added.) Dawson conceded plaintiffs' property was licensed to provide clients with transitional housing. He also acknowledged that homeowners insurance is not available for residential care
Richard Gasparini, Jr., is a licensing program analyst with the State Department of Social Services' Community Care Licensing Division. His work involves regulating residential care facilities in the community by conducting annual inspections and investigating complaints. Residential care facilities usually have a six-bed capacity and look like a normal houses in the community.
Gasparini had visited On the Right Path several times. During one such visit, he was setting up his laptop computer when people came through the front door yelling that they had a search warrant. He was handcuffed and taken out to the street. In connection with that visit he created a report dated December 30, 2009. He also visited plaintiffs' home on February 10, 2011. Later, Betty came to his office and told him about the fire. She said several times that she wanted to relocate the facility to another house.
James LaRosa is a deputy sheriff with the Alameda County Sheriff's Office. On several occasions he was called to investigate missing persons who had been clients of On the Right Path. On December 26, 2010, he was dispatched to the property on a report of a missing patient at risk. On another occasion, he arrested one of plaintiffs' sons for a domestic violence incident. He also participated in the execution of a no-knock warrant. During the search of the premises, he contacted at least two patients who said that they lived in the residence. A county caseworker was also present.
Robert Lockefeer was employed as a producer for InsZone when plaintiffs purchased the Fidelity policy. He testified that a producer is someone who quotes, secures, and issues insurance policies on behalf of a customer. InsZone primarily works with its customers over the phone. Lockefeer is licensed by the state to sell property casualty insurance, including homeowner policies.
For homeowner policies, Lockefeer would inquire as to the property's address, the square footage of the home, the year the home was built, whether the property already had insurance, whether the customer had any pets, the size of the garage, and whether there was a swimming pool. He would always ask about home businesses because customers who ran businesses out of their homes would not be eligible for a homeowners policy with any of InsZone's carriers. He would also ask if the home had circuit breakers or fuses. If the home had fuses, it would probably also not be eligible for coverage. He worked off his own questionnaire, filling it out as he spoke with the customer. The questionnaire was basically a data collection sheet that allowed him to have all the information he needed on a single page. He would then input the information using a computer program that would generate quotes from all of InsZone's carriers.
If a customer wanted to purchase coverage from Fidelity, Lockefeer would fill out an online application using Fidelity's Web site. He had a username and password for the site. The online form required answers to 43 questions. Among the questions was whether the electrical panel utilizes circuit breakers or fuses, and whether there were any roommates or boarders in the home. It was his practice to ask the customer each of the questions appearing on Fidelity's Web site. All 43 questions had to be answered in order for the application to be transmitted successfully.
After the application was transmitted, a printout would be generated to show how Fidelity's questions had been answered. The printout was made on an ACORD (Association for Cooperative Operations Research and Development) form. An ACORD form is a generic homeowner insurance application. The boxes on the ACORD form itself would not be filled out because Fidelity's questionnaire was printed out at the same time with the questions populated with the applicant's answers. Lockefeer understood the ACORD boxes were left blank because filling out that form would have been "awfully
Lockefeer stated he would not have been able to generate an accurate quote by asking a customer only three questions. Specifically, he would need more information than just the square footage of the house, the year it was built, and whether it used fuses or circuit breakers. He also testified that he would never have submitted answers to the online application that were not authorized by the client. It would not be in his interest to do so because if the policy were to be rescinded or cancelled, he would lose his commission. He stated he had never falsified an application.
Bruce LeBlanc evaluates policies to ensure they meet Fidelity's underwriting guidelines. He confirmed that insurance brokers use Fidelity's Web site to complete online applications. The application program is called Fidelity Rating and Internet Service Technology (F.I.R.S.T.). It automatically quotes and underwrites policies in real time. Some of the questions on the application are underwriting questions and others are rating questions. The rating questions pertain to the quote for the premium on a specific policy. The underwriting questions are intended to qualify the risk for acceptance. The broker obtains the relevant information from the applicant and inputs it into the F.I.R.S.T. system. Once the application is submitted, the broker can print the signature page off the Internet and have the applicant sign it. The system will not approve applications that have unacceptable underwriting responses.
LeBlanc testified the records did not show that more than one Fidelity policy had ever been issued to plaintiffs. A subsequent investigation indicated that four of the questions on plaintiffs' submission had been answered incorrectly. Had the correct answers been given, the policy would not have been issued.
Edward MacCubbin is an investigator with Fidelity's special investigations unit. He was assigned to investigate plaintiffs' claim. In reviewing an online news article about the fire, he noted there might have been a business at the property because it appeared a resident employee and some unrelated clients also lived at the property. He was told to investigate plaintiffs' insurance application because it appeared there were inconsistencies that needed to be evaluated.
MacCubbin discovered plaintiffs had filed a bankruptcy petition three days prior to the fire. The petition indicated that Betty was employed with On the Right Path, which was identified as having the same address as the subject property. He passed the information on to LeBlanc and asked him to evaluate whether the inconsistencies he had found would have had any bearing on Fidelity's acceptance of the policy. MacCubbin concluded a business was being operated on the property, the property contained fuses, and more than one family resided there. He presented the results of his investigation to management and to legal counsel.
Roy Pollock testified as an expert witness with respect to insurance industry practices. He stated the use of automated online underwriting systems, like the one used in this case, is becoming more prevalent in the industry. ACORD applications are typically used in conjunction with an individual insurance company's separate and more detailed application.
InsZone brought a motion for directed verdict as to plaintiffs' claim for negligence, asserting no evidence had been presented to suggest that it fell below the standard of care in its application process. It noted even plaintiffs' own expert (Dawson) had agreed on cross-examination that InsZone did not do anything wrong or act negligently with respect to the application process. Fidelity's expert, Pollock, had also stated that there was no evidence to suggest InsZone had misrepresented anything in the application. The motion for directed verdict was granted.
Fidelity also brought a motion for directed verdict, asserting that plaintiffs' claim for damages failed because they never submitted sworn proofs of loss and inventory. The motion was denied.
On October 31, 2012, the jury, using a special verdict form, concluded plaintiffs' application for insurance did not contain any misrepresentations of fact. The jury found Fidelity liable to plaintiffs for $298,924.28 for the loss of real property, $110,000 for the loss of personal property, and $15,600 for loss of use. It also determined Fidelity's failure to pay the covered losses under the policy was unreasonable or without proper cause. The jury allocated $3,600 in damages for additional loss of use and $300,000 for emotional distress. Attorney fees were awarded in the amount of $101,885.83.
As to punitive damages, the jury found Fidelity had acted with fraud, malice, or oppression by withholding or delaying the payment of policy benefits, and that these acts were authorized by one or more of Fidelity's officers, directors, or managing agents.
On November 5, 2012, the jury awarded plaintiffs $1.9 million in punitive damages.
Judgment was entered on the jury verdict on November 29, 2012.
Fidelity moved for JNOV and new trial on several grounds, including that the jury had been given erroneous jury instructions and verdict forms. It further argued Dawson's testimony should have been disregarded because his contingency agreement created an inherent conflict of interest. It also claimed the issue of punitive damages should not have been submitted to the jury as there was no evidence that the acts of any of Fidelity's employees had been ratified at the corporate management level.
On January 16, 2013, the trial court issued its order granting the motion for JNOV in part and denying the motion for new trial. The court granted the JNOV as to the $1.9 million award for punitive damages, the awards of $15,600 and $3,600 for loss of use, and imposed a corresponding reduction in the amount awarded for attorney fees. The court modified the judgment accordingly.
On January 25, 2013, the trial court filed a corrected and amended judgent in the amount of $823,881.52. These consolidated appeals followed.
Because we find it dispositive, we address Fidelity's appeal of the order denying its motion for new trial.
While this court generally reviews orders concerning new trials for abuse of discretion (Howard v. Thrifty Drug & Discount Stores (1995) 10 Cal.4th 424, 443 [41 Cal.Rptr.2d 362, 895 P.2d 469]; People v. Davis (1995) 10 Cal.4th 463, 524 [41 Cal.Rptr.2d 826, 896 P.2d 119]), any determination underlying the order is scrutinized under the test appropriate for that determination. (City of San Diego v. D.R. Horton San Diego Holding Co., Inc. (2005) 126 Cal.App.4th 668, 678 [24 Cal.Rptr.3d 338].) Here, the underlying issues on appeal — whether the jury instructions misstated the law and whether the trial court erred in refusing to allow the jury to consider whether InsZone's conduct could be imputed to plaintiffs — are analyzed de novo. (See ibid.; People v. Posey (2004) 32 Cal.4th 193, 218 [8 Cal.Rptr.3d 551, 82 P.3d 755].)
Using a special verdict form, the jury answered the following question in the negative: "Did the application for insurance with [Fidelity] by Jerry and Betty Douglas contain a misrepresentation of fact?" It would appear that either the jury found the allegedly false statements were true, or it concluded the application Jerry signed did not contain any misrepresentations. The first possibility is questionable. Even construed in the light most favorable to plaintiffs, it is undisputed that during the pendency of the policy Betty used the home to provide room and board to mentally ill clients pursuant to a license she obtained from a social services agency.
The evidence presented at trial would support a finding that plaintiffs were licensed to operate a residential care facility out of their home and that they received money in exchange for providing room and board to mentally ill clients.
We also note plaintiffs' counsel essentially stipulated, outside the presence of the jury, that Betty was running a business out of her home. Towards the end of the trial, the following dialogue occurred: The court: "Let me ask counsel for plaintiff, notwithstanding any argument about what [Betty] said, are you going to be arguing to the jury that she wasn't running a business?" Plaintiffs' counsel responded: "No, your honor, it's admitted." In sum, the evidenced offered at trial supports the conclusion that three of the four answers provided to Fidelity during the application process were false, namely, that no boarders lived in the home, that the home was not occupied by more than one family, and that the home was not being used to run a business.
Persons or entities who solicit, sell, or negotiate insurance contracts are known generically as "producers." Producers fall into two broad classifications: insurance agents and insurance brokers. (See Krumme v. Mercury Ins. Co. (2004) 123 Cal.App.4th 924, 932, fn. 4 [20 Cal.Rptr.3d 485] (Krumme).)
Plaintiffs assert the evidence unequivocally shows that InsZone was not a broker. They cite to the independent producer agreement between InsZone and Fidelity. The agreement states, in part: "Producer shall never be deemed an agent for the Company or Insurance Company unless required by law. Producer has no authority to bind Company or Insurance Company on any insurance policy except as otherwise stated in the underwriting guidelines for the territories and lines of business set forth on Compensation Schedule." (Italics added.) The compensation schedule provides that InsZone was authorized "to bind policies for the lines of business listed below and the Company shall pay Producer a commission based on the following table...." The table includes homeowners policies in California. Relying on Marsh, plaintiffs assert that this power to bind "means the producer is [an] agent." Plaintiffs claim, "had the jury decided the agent/broker issue, it would have found InsZone was a producing agent for Fidelity, thus gutting the proposed affirmative defense." In our view, the issue is not as clear cut as plaintiffs suggest.
Fidelity proposed the following instruction, which is based on CACI No. 2307: "Insurance Agency Relationship Disputed": "Jerry and Betty Douglas claim that [InsZone] was [Fidelity's] agent and that [Fidelity] is therefore responsible for [InsZone's] representations. [¶] If Jerry and Betty Douglas prove that [Fidelity] gave [InsZone] the authority to act on behalf of [Fidelity], then [InsZone] was [Fidelity's] agent. This authority may be shown by words or may be implied by the parties' conduct. This authority cannot be shown by the words of Jerry and Betty Douglas alone. [¶] [Fidelity] and [InsZone] both agree that [InsZone] is a producer or a broker and that [InsZone] did not have authority to act on behalf of [Fidelity]."
After the parties rested, the trial court expressed the view that InsZone could be held liable for failing to ask plaintiffs all of the necessary questions as part of the insurance application. The court noted: "The jury could conclude this whole thing is because they had an agent that didn't do his job, which is not the fault of Fidelity. [¶] I know there's some talk about whether InsZone was the agent for the defendant, but [the jurors] might conclude that it's not. That's why I think the verdict forms need to be redone to reflect that possibility because right now it doesn't." (Italics added.) Subsequently, the court indicated it would not give the final paragraph of the proposed instruction, which is not included in the model instruction. It opined that the proposed language was an improper attempt "to get the court to rule on a matter of law that they didn't have authority to act on behalf of the agents [sic] and I think that's an issue for the jury." (Italics added.) The court also stated that the instruction would be moot if the court granted InsZone's motion for directed verdict, which it later did.
We reach a different conclusion with respect to the instruction given by the trial court on rescission. CACI No. 2308 was given to the jury as follows: "[Fidelity] claims that no insurance contract was created because Jerry and Betty Douglas made a false representation in their application for insurance. To establish this claim, [Fidelity] must prove all of the following: [¶] One, that Jerry and Betty Douglas submitted [an] application for insurance with [Fidelity]. [¶] Two, that in the application for insurance, Jerry and Betty Douglas represented that: (A) there is no unit in the structure occupied by more than one family; (B) the electrical panel utilizes circuit breakers and not fuses; (C) there are no roommates or boarders in the house and/or the house is not used as a rooming or boarding house; (D) there is no business conducted on the property. [¶] Three, the application asks for that information. [¶] Four, that Jerry and Betty Douglas knew that one or more of these representations were not true. [¶] Five, [Fidelity] would not have issued the insurance policy if Jerry and Betty Douglas had stated the true facts in the application. [¶] Six, that [Fidelity] gave Jerry and Betty Douglas notice that it was rescinding the insurance policy. [¶] And, seven, that [Fidelity] offered to return the insurance premium paid by Jerry and Betty Douglas."
Before the instruction was read to the jury, Fidelity's attorney told the trial court that the first element "should say Jerry and Betty Douglas, but I think it should also say InsZone Insurance Services since that's the broker who ultimately submits the application online to Fidelity." She also stated that the word "application" should be changed to "applications." Plaintiffs' counsel countered stating, "[w]e think the way the Court's drafted it is appropriate. Jerry Douglas is the one who submitted a signed application." Fidelity's
Fidelity had proposed its own version of 2308. The instruction proposed by Fidelity states: "[Fidelity] claims that it is entitled to rescind the homeowners' policy it issued to Jerry Douglas because of concealment (whether intentional or unintentional) by [plaintiffs] and/or [InsZone], when [plaintiffs] applied for the policy of homeowners' insurance. The court will determine whether [Fidelity] is entitled to rescission based upon your findings. You must determine whether [Fidelity] has established each of the following by a preponderance of the evidence: [¶] 1. Whether [plaintiffs] and/or [InsZone] concealed material facts (whether intentionally or unintentionally) or failed to advise [Fidelity] of material facts when [plaintiffs] applied for the homeowners' insurance policy; and [¶] 2. If you find that the facts were concealed (intentionally or unintentionally) whether such facts were material; and [¶] 3. If [Fidelity] had known any material facts concealed or not disclosed, it would probably and reasonably not have issued the homeowners' insurance policy."
Fidelity also requested special verdict forms regarding InsZone's disputed agency that would have allowed the jury to find in favor of Fidelity even if the misrepresentations were deemed unintentional. The trial court refused to give the proposed special verdict form and did not allow the jury to otherwise consider the import of any unintentional misrepresentations. The court also believed it did not need to include InsZone along with Jerry and Betty as a party who provided the allegedly false information to Fidelity in the application. Based on the state of the law discussed above, we agree with Fidelity that the instruction given by the court below erroneously omitted these two key points.
Plaintiffs argue that the jury's verdict moots any error regarding the affirmative defense because the jury concluded the application contained no misrepresentations.
Next plaintiffs assert Fidelity never pursued the proposed affirmative defense at trial and affirmatively waived the right to present expert testimony in support of the defense. Yet the entire trial was centered on the allegedly erroneous information Fidelity received, either from plaintiffs or InsZone, and whether its rescission was justified based on the faulty information. As to whether expert testimony was required, it appears to us that the issue for the jury, under properly given instructions, is relatively straightforward: were the challenged statements untrue and, if so, were the misrepresentations material? Contrary to plaintiffs assertions, there was no need to delve into whether InsZone's conduct fell below the standard of care. If InsZone was plaintiffs' broker, and if it supplied untrue information to Fidelity that was material to the underwriting process, then Fidelity would have had the right to rescind the policy regardless of whether InsZone acted negligently or not.
Having concluded the trial court erred in instructing the jury, we turn to whether the errors were prejudicial. "When deciding whether an instructional error was prejudicial, `we must examine the evidence, the arguments, and other factors to determine whether it is reasonably probable that instructions allowing application of an erroneous theory actually misled the jury.' [Citation.] A `reasonable probability' in this context `does not mean more likely than not, but merely a reasonable chance, more than an abstract possibility.' [Citation.]" (Kinsman v. Unocal Corp. (2005) 37 Cal.4th 659, 682 [36 Cal.Rptr.3d 495, 123 P.3d 931], italics omitted.) We review the evidence in the light most favorable to appellant and assume that, had it been properly
As to the state of the evidence, we have already summarized the testimony and documentary evidence offered to support Fidelity's view that misrepresentations were made during the application process, either by plaintiffs or by InsZone. These misrepresentations relate to plaintiffs' use of the home to operate a licensed adult residential care facility by offering and providing room and board to mentally ill clients in exchange for money. Additionally, there was evidence, albeit conflicting, that InsZone and Lockefeer acted as plaintiffs' insurance brokers, and not as agents of Fidelity. Our review of the record indicates a reasonable probability that a properly instructed jury could have rendered a different verdict.
The instructional errors noted above were exacerbated by plaintiffs' counsel's closing arguments. He repeatedly asserted the "application" was the blank form Jerry had signed, emphasizing that this form did not include the disputed underwriting questions: "I want to show you the actual jury instruction, which is what Judge Gee will be giving you in this case so that we are absolutely clear what it is that you have to decide. Look at number [one], that Jerry and Betty Douglas submitted an application for insurance with Fidelity. Well, now they want to say it's not really the application, it's the underwriting in question, maybe InsZone's responsible for it. The law says it has to be an application submitted by Jerry and Betty Douglas. The only application in evidence is the two-page application. It doesn't have any misrepresentations at all on it. They were instructed just to sign it blank. [¶] Fidelity creates an application and gives it to InsZone to be signed. This is what they wanted. It provides a nice pretext if you want to rescind someone's policy to say, wow, you signed a blank application, it doesn't have any answers on it. That's Fidelity setting it up. That's what I meant when you go back and deliberate in the courtroom this afternoon [sic], you have to follow the law, not the arguments of counsel. But you have to look at the application and see if it actually has in there misrepresentations about anything that we've talked about today because it doesn't." (Italics added.) In discussing punitive damages, he also argued the questions Fidelity had relied on to rescind the policy were not on the application but "dragged out of Fidelity's underwriting system."
We also note it appears the jury may have been misled by the use of the term "application" in the instruction because the jurors asked for a definition of that word during deliberations. We note Fidelity's proposed instruction did not include the word "application." The online process utilized here generated documents evidencing the answers to the underwriting questions that Fidelity relied on in issuing the policy. Limiting the jury's consideration to the representations made by plaintiffs in Jerry's application alone was misleading and prejudicial.
There is no dispute that Jerry's signature appears on the second page of a blank preprinted ACORD application, that is, an ACORD form containing unchecked boxes. His signature also appears on the third page of a printout of the questionnaire underneath language authorizing the insurer to inspect the home. The 43 underwriting questions and answers appear on the first two pages only. None of the questions or accompanying answers are printed on the page he signed. Thus, Jerry's testimony that he never saw the Fidelity underwriting questionnaire generated by InsZone is not implausible, and, under the instruction given, the jurors could have concluded there were no misrepresentations in Jerry's "application" because there were no representations at all on the blank pages that he signed. Importantly, the jury was not asked to consider whether the F.I.R.S.T. application submitted by InsZone on plaintiffs' behalf via Fidelity's Web site contained any material misrepresentations. Additionally, the instructions and jury form required Fidelity to prove that the misrepresentations were made deliberately. Thus, Fidelity's affirmative defense was not properly presented to the jury and we conclude Fidelity was prejudiced thereby, necessitating a new trial.
Reversal of the judgment obviates the need to address plaintiffs' appeal of the trial court's decision to strike the punitive damages award. We also need not address Fidelity's appeal from the motion to tax costs.
The judgment is reversed and the cause is remanded to the trial court for proceedings not inconsistent with this opinion.
Margulies, Acting P. J., and Becton, J.,
