Unpublished Disposition, 886 F.2d 1321 (9th Cir. 1985)

No. 88-6063.

United States Court of Appeals, Ninth Circuit.

Before WALLACE and FLETCHER, Circuit Judges, and MUECKE,^*  Senior District Judge.

MEMORANDUM^** 

This case involves a dispute between an insurance company, Vanguard Insurance Company, and the owners of an insured structure that was severely damaged in an arson fire. The appellants, Makis and Haralambos Havadjia ("the Havadjias"), challenge the directed verdict on their breach of contract and bad faith counterclaims, various evidentiary rulings, and the jury instructions. We affirm in part, reverse in part, and remand.

* The insured structure at issue (the "structure" or the "house") was a three bedroom house in Anaheim, California. The Havadjias purchased the lot including the house for $260,000 and insured the house for $230,000. About a month after escrow closed, the house was severely damaged in (what all parties concede was) an arson fire. The insurance policy provided that, except for minimal claims, the insurer "will pay no more than the actual cash value of the damage until actual repair or replacement is completed."

On November 13, 1984, Vanguard rejected the Havadjias' proof of loss for the cost of repairs. At some point, the dispute's focus changed from the cost of repairs to the actual cash value at the time of the fire. On April 12, 1985, Vanguard sent a letter to the Havadjias stating that Vanguard planned to litigate the issues of whether the structure had any actual cash value prior to the fire and whether the Havadjias had an insurable interest in the structure. Vanguard's claim that the structure had no actual cash value was based on an appraisal. Its claim that the Havadjias had no insurable interest was based on its belief that the Havadjias considered the structure to be valueless when they purchased the lot and that they always intended to demolish the structure and build a restaurant in its place. The structure has in fact been demolished.

Along with this letter, Vanguard sent $27,813.96 to the Havadjias under a reservation of rights. $25,013.96 was for the structure, $2800 for lost rent.

Vanguard filed a declaratory judgment suit on April 22, 1985, seeking a declaration that the structure had no actual cash value at the time of the loss and that the Havadjias had no insurable interest in the structure. Vanguard also sought recoupment of the money it paid the Havadjias. The Havadjias brought breach of contract and bad faith counterclaims. The district court directed verdicts against the Havadjias on the counterclaims. The jury found that the Havadjias had an insurable interest in the structure. The jury answered $10,620 to the question "What was the actual cash value?" We have jurisdiction pursuant to 28 U.S.C. § 1291.

II

"In determining the propriety of a directed verdict, this court has the same role as the district court. A directed verdict is proper if the evidence permits only one reasonable conclusion. The panel must examine all the evidence in the light most favorable to the nonmoving party to decide whether there is substantial evidence that could support a finding in favor of that party." Othman v. Globe Indemnity, Co., 759 F.2d 1458, 1463 (9th Cir. 1985) (citations omitted), cert. denied, 475 U.S. 1122 (1986). Accord Peterson v. Kennedy, 771 F.2d 1244, 1256 (9th Cir. 1985).

If Vanguard's insurance contract with the Havadjias required it to pay more than the $25,013.96 paid under a reservation of rights for damage to the house and lost rent, then Vanguard clearly breached its contract. Vanguard argues that it had no contractual obligation to pay anything to the Havadjias because they had no insurable interest in the property and the house had an actual cash value of zero. We conclude that the directed verdict on the contract claim was improper because a reasonable jury could have concluded that Vanguard was obligated to pay more than $25,013.96 under its contract with the Havadjias.

The Havadjias' appraiser estimated that the structure had an actual cash value of $49,000.00 before the fire. Vanguard argues that this appraisal was improper for three reasons. First, it argues that the appraiser equated actual cash value with replacement cost less depreciation, which is impermissible under Jefferson Insurance Co. v. Superior Court, 3 Cal. 3d 357, 90 Cal. Rptr. 608, 475 P.2d 880 (1970). Second, Vanguard argues that the appraiser failed to consider comparable sales in estimating the structure's value. Third, Vanguard argues that the appraiser incorrectly assumed that the condition of the structure prior to the fire was "average."

The Havadjias' appraiser, Michael Locke, testified that he did not base his estimate of the structure's value on its replacement costs less depreciation. Locke further testified that he based his estimate of the value of the structure on its "actual cash value" and that he defined actual cash value as "being the highest reasonable price that a given property would bring in the open market allowing a reasonable time to consummate the sale with both the buyer and the seller being prudent, informed people operating without duress or undue stimulus." Locke's definition of actual cash value is entirely consistent with that articulated by the California Supreme Court in Jefferson. See Jefferson, 90 Cal.Rptr. at. 610 (" 'Actual cash value' ... is synonymous with 'fair market value.' "). The jury should have been allowed to decide the credibility of Locke's testimony. See United States v. Binder, 769 F.2d 595, 602 (9th Cir. 1985) (credibility questions should be resolved by the jury).

Locke also testified that he did not consider comparable sales in assessing the actual cash value of the structure. He explained that "comparable sales" were not helpful because the sales in the area all involved the sale of land or the sale of land and a structure, while his task was to appraise the value of the structure apart from the land. Locke suggested that he estimated the actual cash value of the structure at the time of the fire by evaluating the rental income the structure could have generated and the value of the structure to a developer who could have converted it to commercial use; in his view, "the best use of the improvements [would have been] a continuing use for residential purposes for a relatively short interim period of, say, five years...." We have found no California cases stating that an appraisal for the purpose of determining an insurer's liability must always be based on comparable sales. Indeed, the California courts have held that the comparable sales method, although preferred, is only one of several permissible methods in assessing the fair market value of a property for property tax purposes. See Pacific Mutual Life Ins. Co. v. County of Orange, 187 Cal. App. 3d 1141, 232 Cal. Rptr. 233, 235-36 (1985). A reasonable jury could have concluded that comparable sales data was not available to Locke and that his appraisal was as fair an estimate of actual cash value as could have been made under the circumstances.

Vanguard also argues that Locke's appraisal was improper because Locke assumed that the condition of the structure was "average" prior to the fire. Vanguard presented evidence suggesting that the structure was in a state of extreme disrepair at the time of the fire. However, the Havadjias also presented evidence suggesting that the problems with the structure were modest and that any necessary repair costs would have been modest. For example, Albert Toussau, the former owner of the structure, testified (by means of a deposition read to the jury) that the structure was in "a very livable condition" at the time of the fire and that he spent "about $6500 to $7000" for repairs in 1982; he also testified that the main problem with the structure was its sewer system and that this problem could have been solved with an additional leach line for as little as $800. The jury could have reasonably accepted the Havadjias' "version" of the condition of the structure at the time of the fire and concluded that Locke's appraisal was therefore not utterly without value simply because it was premised on the belief that the structure was in average condition at the time of the fire.

Vanguard argues that it had no contractual obligation to pay the Havadjias because the Havadjias lacked an insurable interest in the structure. This argument is meritless. As the Havadjias point out, there simply is no authority for the proposition that an insured's mere intent to demolish a structure deprives the insured of an insurable interest in the structure. Although somewhat obscure, the only opinion construing California law seems to support the general view that the insured retains an interest in a structure as long as he retains the option of using it. In explaining its holding that the Sisters of Presentation lacked an insurable interest in a building, the court noted:

At the time of the fire in this case, the Sisters had abandoned the old building and moved into the new. Under their agreement with the Bishop, they had already obligated themselves to surrender the building for demolition.... What is most important is that since all of the Bishop's contractual obligations had been performed, the Sisters could not legally escape their obligation to allow destruction of the old convent.

Royal Ins. Co. v. Sisters of Presentation, 430 F.2d 759, 761 (9th Cir. 1970). See also Garcy Corporation v. Home Insurance Corporation, 496 F.2d 479, 481 (7th Cir. 1974) ("the critical factual question almost always is whether the insured had abandoned the building pursuant to an irrevocable commitment to demolish it"). Vanguard presented no evidence suggesting that the Havadjias had any commitment to demolish the structure at the time of the fire.

In sum, since a reasonable jury could have concluded that the structure had an actual cash value greater than $27,813.96 at the time of the fire and since Vanguard failed to present any evidence that the Havadjias had a commitment to demolish the structure at the time of the fire, we conclude that the district court erred in directing the verdict on the contract claim.

In California, " [a] covenant of good faith and fair dealing is a part of every insurance contract.... The insurer is obligated to give the interests of the insured at least as much consideration as it gives its own interests ..." Othman, 759 F.2d at 1464 (citations omitted). A bad faith action may be based on either the insurer's failure to investigate a claim with reasonable speed and/or the insurer's unreasonable denial of payments. The denial of a claim is unreasonable unless the insurer has first "thoroughly investigat [ed] the foundation for its denial." Eagan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 620 P.2d 141, 146, 169 Cal. Rptr. 691, 696 (1979), cert. denied, 445 U.S. 912 (1980). See also McCormick v. Sentinel Life Ins. Co., 153 Cal. App. 3d 1030, 510 P.2d 1032, 200 Cal. Rptr. 732 (1984) (reviewing the development of bad faith tort in California).

In essence, the Havadjias make three "bad faith" claims. First, they argue that Vanguard acted unreasonably in engaging in scare or intimidation tactics designed to force the Havadjias to abandon their claim. Second, they argue that Vanguard's investigation of the Havadjias' claim was not sufficiently prompt. Third, they argue that Vanguard had no reasonable basis for rejecting the Havadjias' claims for the "actual cash value" of the structure. We conclude that the district court did not err in directing the verdict on the Havadjias' bad faith claim.

We know of no cases where a bad faith claim was based solely on the fact that the insurer tried to scare the insured into foregoing his claim by unjustly accusing the insured of arson or by threatening deportation. However, it seems clear that such conduct is at a minimum "unreasonable" and thus constitutes a breach of the implied covenant of good faith and fair dealing. See McCormick, 200 Cal. Rptr. at 742 (in bad faith cases, basic standard is one of reasonableness). See also Gruenberg v. Aetna Ins. Co., 108 Cal. Rptr. 480, 486 (1973) (where an insurer unjustly accuses the insured of arson as part of a plan to avoid the payment of benefits by ensuring that criminal charges would be brought and that the insured would therefore be unwilling or unable to appear for an examination, the insured may bring a bad faith action against the insurer).

The trial record simply does not support the Havadjias' allegation that Vanguard accused them of arson or concealing knowledge about arson. Vanguard's letters to the Havadjias do not discuss the issue of arson.

The Havadjias base their claim that Vanguard implicitly threatened deportation solely on Vanguard's November 13, 1984 letter to the Havadjias. This letter asks the Havadjias for passport and customs information. However, it appears clear from the wording of the request that Vanguard simply wanted this information to help it to investigate any claims the Havadjias had for personal property lost in the fire:

With respect to each and every item of personal property for the loss of which claim is made and which was purchased or otherwise acquired by you outside the United States of America [provide]

A. The passport or passports under which you traveled to or from each country in which any such purchase was made.

B. Any and all documents tending to show the fact of a customs declaration or the amount of valuation so declared by you with respect to each of said items to the United States Custom Service upon your entry or reentry into the United States after having made each such purchase.

The fire occurred on June 29, 1984. The Havadjias filed a proof of loss on September 24, 1984. Although Vanguard informed the Havadjias of its concerns about their claim on several occasions between September 24, 1984 and April 12, 1984, Vanguard did not clearly state its assessment of the Havadjias' rights under the insurance contract until April 12, 1984. The Havadjias' claim involved complicated factual questions, such as whether the Havadjias were responsible for the arson fire, what the condition of the structure was at the time of the fire, and what the Havadjias commitments were with respect to the demolition of the structure at the time of the fire. Moreover, there is no evidence that the Havadjias ever expressed concern about the delay to Vanguard. Although the question is close, we conclude that a reasonable jury could not have concluded that Vanguard's six and one-half months investigation of the Havadjias claim was unreasonably long.

3. No Reasonable Basis for Rejecting the Claim

Although we conclude that the district court erred in directing the verdict on the contract claim, we hold that a reasonable jury could not have concluded that Vanguard lacked a reasonable basis for concluding that the structure had no actual cash value. Vanguard's appraiser examined the structure and data on comparable sales in the surrounding area; he then concluded that the structure had no actual cash value because the surrounding area was a commercial/industrial area in which a vacant lot commands a higher price than a lot with a residential structure on it.

III

The Havadjias challenge five of the district court's evidentiary rulings. "A trial court has broad discretion to admit or exclude evidence, and [this] court review [s] its decision only for an abuse of discretion. Even if there is error, reversal is appropriate only if we can say that the error affected the substantial rights of the parties." In re Aircrash in Bali, 684 F.2d 1301, 1313 (9th Cir. 1982) (citation omitted). We conclude that the district court did not abuse its discretion in making the five challenged evidentiary rulings.

The Havadjias argue that the district court abused its discretion in admitting the Anaheim fire marshal's testimony that, based on his experience and logic, he was "thoroughly convinced" that the Havadjias were responsible for the fire, that the only way the Havadjias could convince him otherwise would be to take a polygraph test, and that Mike Havadjia refused to take a polygraph test. The Havadjias objected to the testimony on the ground that its prejudicial impact outweighed its probative value.

Chief Doty's testimony is certainly prejudicial, but it is also arguably relevant to the bad faith counterclaim. Although Doty did not testify that he ever communicated his concerns to Vanguard, his assessment of the circumstances surrounding the fire tends to support Vanguard's contention that these circumstances justified investigation into the Havadjias' possible responsibility for the fire and the additional delay caused by this investigation.

Doty's testimony was heard during the declaratory judgment phase of the case rather than the bad faith counterclaim phase. However, the district court did not abuse its discretion in concluding that when the Havadjias' lawyer alluded to Vanguard's accusations of arson during the declaratory judgment phase, he "opened the door" to Doty's testimony.

The Havadjias also argue that "Vanguard compounded the prejudice" by bringing out the fact that the Havadjias had sustained two prior fire losses. In fact, the district court sustained the Havadjias' objection to a question about prior fire losses.

The Havadjias also argue that they should have been allowed to introduce evidence that Vanguard did not report the suspected arson to the appropriate state authorities. The court excluded this evidence as "tangential" and thus irrelevant. The district court did not abuse its discretion in ruling that Vanguard's failure to report the suspected arson was irrelevant since California's insurance code does not require an insurer to submit a report simply because an "initial investigation indicated a potentially fraudulent claim." California Insurance Code Sec. 12992(b) (1).

The Havadjias argue that the district court abused its discretion in ruling that a California Department of Insurance Report was irrelevant. This report compiles statistics on the total number of claim and non-claim complaints against a number of insurers. Nothing in the report discusses the nature of the claim complaints against the insurers.

The Havadjias argue that under Sec. 790.03(h) of the California Insurance Code an insured may establish an insurer's breach of duties by showing that the insurer engaged in the unfair settlement practice at issue with a frequency that indicates a general business practice. The Department of Insurance Report simply does not discuss specific unfair settlement practices; the district court therefore did not abuse its discretion in ruling that the report is irrelevant to a claim that Vanguard frequently engaged in the same unfair practices as it (allegedly) did in this case.

Although the precise nature of the Havadjias' objection to the district court's treatment of their expert witness Eugene Evans is unclear, the gist of the objection seems to be that the Havadjias wanted Evans' testimony about the standards of practice in the insurance industry, and the court would not allow that testimony. In fact, the district court permitted Evans to testify about the typical concerns of insurance investigators and simply sustained objections to questions which were vague or which seemed to deal with issues beyond Evans' expertise as an investigator. In any event, the Havadjias do not present any reasons for us to conclude that the limitations on Evans' testimony were prejudicial to their bad faith claim.

The Havadjias argue that the district court abused its discretion in excluding evidence of the settlement offers Vanguard made after the litigation had commenced. In fact, Fed.R.Evid. 408 prohibits the introduction of evidence of settlement offers to prove liability for a claim. The Havadjias never argued that they wanted to introduce the settlement offers for any purpose other than proving their bad faith claim. Compare Urico v. Parnell Oil Co., 708 F.2d 852, 854-55 (1st Cir. 1983) (evidence of post-litigation settlement offers is not admissible to prove liability in a bad faith suit, but is admissible to prove that the plaintiffs made reasonable efforts to mitigate damage).

IV

The Havadjias argue that the district court's jury instructions and verdict form misled the jury. This court "reviews the jury instructions and the verdict form together to determine whether the jury was misled." Boggs v. Lewis, 863 F.2d 662, 666 (9th Cir. 1988). See also United States v. Pazsint, 703 F.2d 420, 424 (9th Cir. 1983) ("court must consider whether the instructions as a whole were misleading or inadequate to guide the jury's determination").

The jury answered $10,620 to the special verdict form's question, "What was the actual cash value?" The district court then subtracted this sum from the sum Vanguard paid under reservation of rights for the structure and ordered the Havadjias to return the difference plus prejudgment interest and costs. Although the special verdict question is unambiguous on its face, the Havadjias argue that the district court may have confused the jury as to their task in answering the question. The district court instructed the jury that the amount of any verdict in favor of Vanguard should include compensation to Vanguard to reimburse it for sums paid under reservation of rights. The Havadjias contend that this instruction may have led the jury to interpret the question "What was the actual cash value?" as "To what extent, if any, did the cash value exceed the sum paid under reservation of rights?" We agree that the jury instructions coupled with the verdict form may have misled the jury and accordingly reverse and remand for a new trial of Vanguard's declaratory judgment claim that the actual cash value of the structure at the time of the fire was zero.¹ 

CONCLUSION

We affirm the directed verdict on the Havadjias' bad faith counterclaim. We reverse the directed verdict of the Havadjias' breach of contract counterclaim and remand for a new trial. We reverse the judgment of $19,670.90 and costs in favor of Vanguard and remand for a new trial as to Vanguard's declaratory judgment claim that the actual cash value of the structure at the time of the fire was zero.

AFFIRMED in part, REVERSED in part and REMANDED.

WALLACE, Circuit Judge, concurring in part and dissenting in part.

I concur fully in parts I through III of the majority disposition. Because I conclude that the jury instructions and special verdict form do not require reversal, I dissent from part IV.

We review the district court's jury instructions for abuse of discretion. Kanekoa v. City and County of Honolulu, 879 F.2d 607, 613 (9th Cir. 1989). Even if there was an abuse in instructing the jury, we should not reverse if the error was more probable than not harmless. Coursen v. A.H. Robins Co., 764 F.2d 1329, 1337 (9th Cir. 1985).

The special verdict form is clear on its face. It unambiguously asks "What was the actual cash value?" The term "actual cash value" was well known to the jury, as the appropriate method of calculating "actual cash value" was the central issue in this trial. The parties spent considerable time offering evidence, including expert testimony, to support their respective methods. At no time did either party suggest that "actual cash value" meant "actual cash value in excess of that already paid to the Havadjias." I find it difficult to imagine that the jurors would have confused the term's plain meaning--the meaning used throughout the entire trial--with a strained meaning which neither party had proposed.

I would therefore hold that the district court did not abuse its discretion in instructing the jury.