APPENDIX 9 FULL TEXT OF GARVEY V. STATE FARM

• Jurisdiction: United States

Garvey v. State Farm Fire and Casualty Co.
48 Cal. 3d 395, 770 P.2d 704, 257 Cal. Rptr. 292 (Cal. 03/30/1989)

We granted review to consider the Court of Appeal's reversal of a directed verdict of coverage in favor of Jack and Rita Garvey (hereafter plaintiffs). We sought to resolve some of the confusion that has arisen regarding insurance coverage under the "all risk" section of a homeowner's insurance policy when loss to an insured's property can be attributed to two causes, one of which is a non-excluded peril, and the other an excluded peril.

In recent years, some courts have misinterpreted and misapplied our decisions in Sabella v. Wisler (1963) 59 Cal. 2d 21 [27 Cal. Rptr. 689, 377 P.2d 889], and State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal. 3d 94 [109 Cal. Rptr. 811, 514 P.2d 123]. In so doing, they have allowed coverage in first party property damage cases under our holding in Partridge by inappropriately using the Partridge concurrent causation approach as an alternative to Sabella's efficient proximate cause analysis.^*fn1 (See fn.1.) This extension of the analysis in Partridge, a third party liability case, allows coverage under a first party property insurance policy whenever a covered peril is a concurrent proximate cause of the loss, without regard to the application of specific policy exclusion clauses.^*fn2 Such reasoning ignores the criteria set forth in Insurance Code sections 530 and 532,^*fn3 the relevant analysis in Sabella and the important distinction between property loss coverage under a first party property policy and tort liability coverage under a third party liability insurance policy. Indeed, because a covered peril usually can be asserted to exist somewhere in the chain of causation in cases involving multiple causes, applying the Partridge approach to coverage in first party cases effectively nullifies policy exclusions in "all risk" homeowner's property loss policies, thereby essentially abrogating the limiting terms of insurance contracts in such cases. We cannot believe Partridge intended such a sweeping result in first party property loss cases. To the contrary, as we explain below, we must put Partridge in its proper perspective, i.e., that decision should be utilized only in liability cases in which true concurrent causes, each originating from an independent act of negligence, simultaneously join together to produce injury. Therefore, as will appear, we conclude this case should be remanded to the Court of Appeal with directions to remand to the trial court for a jury determination of causation pursuant to Sabella, supra, 59 Cal. 2d 21. I.

Facts

Plaintiffs bought their house in the mid-1970's. In 1977, plaintiffs purchased from State Farm Fire and Casualty Company (hereafter defendant) an "all risk" homeowner's policy of insurance which was in effect at all times relevant. Section I of the policy in question provided coverage for "all risks of physical loss to the property covered" except as otherwise excluded or limited. Losses excluded by this portion of the policy included those "caused by, resulting from, contributed to or aggravated by any earth movement, including but not limited to earthquake, volcanic eruption, landslide, mudflow, earth sinking, rising or shifting," and losses caused "by . . . settling, cracking, shrinkage, bulging or expansion of pavements, patios, foundations, walls, floors, roofs or ceilings. . . ."

In August 1978, plaintiffs noticed that a house addition, built in the early 1960's, had begun to pull away from the main structure. They also discovered damage to a deck and garden wall. There ensued numerous phone calls, letters, meetings and investigations as plaintiffs tried to determine from defendant whether the damage was covered by their homeowner's property insurance policy.

In October 1979, after receiving from its counsel an opinion that the loss was not covered, defendant notified plaintiffs by letter that the "policy excludes coverage for the loss herein. Normally, such a denial of coverage would leave you to your remedies. [ para. ] However, because the company wishes to resolve the coverage issue in an atmosphere free from extraneous matters such as bad-faith and class action issues, the company is prepared to advance you the claimed sum of $11,550 subject to a reservation of rights as authorized by Johansen v. CSAA, 15 Cal. 3d 9. . . ." Under the agreement proposed, defendant would make the advance and file a declaratory relief action on the issue of coverage; plaintiffs would pay back the advance if the court ruled in defendant's favor, would waive "any claim of consequential or punitive damages arising out of any allegation of bad-faith, mental distress, oppression, fraud or insurance-related tort," and would not "institute any class-action against defendant on account of the facts and issues involved in this loss and claim."

After refusing to sign the foregoing agreement, plaintiffs sued, claiming that although their policy excluded coverage for losses caused or aggravated by earth movement, it implicitly provided coverage for losses caused by contractor negligence because negligence was not a specifically excluded peril under the policy. Plaintiffs also argued that defendant denied their claim before adequately investigating the damage to the structure, and that subsequent investigations were undertaken merely to confirm the original denial. In addition, plaintiffs asserted, defendant's denial of coverage constituted a breach of the implied covenant of good faith and fair dealing and violated various provisions of the Insurance Code. Plaintiffs sought as relief (i) policy benefits, (ii) general damages for economic detriment and emotional distress, and (iii) punitive damages.

Defendant rested on the 12th day of trial, and the court granted a directed verdict for plaintiffs on the coverage issue. The court informed the parties it was following the decisions in Partridge, supra, 10 Cal. 3d 94, and Sabella, supra, 59 Cal. 2d 21, and that plaintiffs were covered under the policy because negligent construction, a covered risk, was a concurrent proximate cause of the damage. Specifically, the trial court stated: "[The Supreme Court] told me in Sabella that negligent construction can be a proximate cause. They told me in Partridge there may be coverage whenever an insured risk constitutes simply a concurrent proximate cause of the injuries. [ para. ] Now, to me that is crystal clear, putting those two causes together, that if negligent construction is a concurrent proximate cause of the loss, there is coverage." The court continued, "The key witness for the defense, Mr. Nelson, conceded in his testimony, as I heard it and understood it, that the negligent construction was a cause of the room falling away. He did not use the word ‘proximate.' He said a causative factor at one time. I don't recall the exact language when he answered a question. In substance, that it was a cause on another occasion. As a matter of law, based upon the evidence, it was a proximate cause."

The jury subsequently found defendant liable for $47,000 in policy benefits and general damages, and $1 million in punitive damages. The court denied defendant's motions for judgment notwithstanding the verdict and for a new trial, and declined to issue a remittitur with respect to the punitive damages award. The court entered judgment in accordance with the verdict. Defendant appealed, and the Court of Appeal reversed the judgment in a divided opinion. Before reviewing the Court of Appeal holding, and in order to provide sufficient background information that will aid in the understanding of this case, we first discuss the development of multiple and concurrent causation insurance analyses, and the important distinction between property and liability policies.

II.

Discussion

A. Development of Multiple Causation Insurance Coverage Analyses

1. The efficient proximate cause standard

Our courts have long struggled to enunciate principles that determine whether coverage exists when excluded and covered perils interact to cause a loss. Initially, the courts attempted to reconcile section 530 (which provides for coverage when a peril insured against was the "proximate cause" of loss) with section 532 (which provides, that "If a peril is specifically excepted in a contract of insurance, and there is a loss which would not have occurred but for such peril, such loss is thereby excepted [from coverage] even though the immediate cause of the loss was a peril which was not excepted").

In our 1963 Sabella decision, supra, 59 Cal. 2d 21, we faced a difficult property loss coverage question arising after a building contractor constructed a house on uncompacted fill and negligently installed a sewer line; negligent installation was a covered peril. Eventually, the sewer line ruptured causing water to saturate the ground surrounding the insureds' house, resulting in subsidence, an excluded peril. The insureds brought a first party action against their insurer, seeking recovery for property loss under their homeowner's property policy. (Id., at p. 26.)^*fn4 The trial court found the loss was not covered because subsidence was a specifically excluded peril under the policy. The insureds appealed this ruling and we reversed.

On its face, section 532 would have precluded coverage because the loss would not have occurred "but for" the excluded peril of subsidence. We recognized, however, that such a result would be absurd because it would deny coverage even though an insured peril "proximately" caused the loss simply because a subsequent, excepted peril was also part of the chain of causation. We reasoned that sections 530 and 532 were not intended to deny coverage for losses whenever "an excepted peril operated to any extent in the chain of causation so that the resulting harm would not have occurred ‘but for' the excepted peril's operation . . . ." (Sabella, supra, 59 Cal. 2d at p...