Sometimes it’s right there before your eyes. Then, poof, it’s gone. This was the experience of one insured, who brought a bad faith insurance denial claim against his insurer thinking that the facts were in his favor, only to discover they were not.
The 501 E .51st Street Case
The Water Main Break and AGI’s Report
The owner of a 10-unit apartment building built in 1963, 501 East 51st Street, Long Beach-10 LLC (just rolls off the tongue doesn’t it?), filed a bad faith action against its insurer Kookmin Best Insurance Co., Ltd., after it denied 501 East’s insurance tender following a water main break that caused the building’s foundation to subside.
The water main break occurred sometimes between December 31, 2015 and January 2, 2016 next to the southwest side of the building. 501 East tendered its insurance claim to Kookmin on March 8, 2016, and in April 2016, presented a report prepared by American Geotechnical, Inc. (“AGI”) concerning damage to the building. According to the report prepared by AGI, AGI conducted a “limited geotechnical investigation” to “evaluate site conditions relating to the reported building distress following a waterline breach near the south end of the building.” The scope of AGI’s investigation was limited to “observation, photo documentation of the site conditions, [and[ floor-level survey of the interior of the first level units.” AGI’s investigation did not involve any subsurface investigation or soil testing.
The report prepared by AGI noted cracks in the interior walls and the concrete slab floor of units 1 and 4. As to the exterior of the building, the report noted “significant cracks on the foundation stem wall in the south side of the building near the reported water leak.” The report also noted “[n]umerous stucco cracks,” “significant floor defamation,” “toward tilting to the rear as well as to the right and left sides of the building” and that “[t]he steepest floor tilt . . . occurs at the left side of Unit 1, close to the reported water leak.”
In conclusion, AGI opined that “existing building distress was substantially contributed to by the water main break. The water introduced to the soil medium appears to have triggered differential movement causing the stress features to develop. Some of the distress may have pre-existed and be due to long-term soil influences as well as inadequate original design and/or construction. Further investigation including soil sampling and testing can be performed to determine the site soil conditions. AGI’s preliminary cost of repair was estimated to be $259,900.77.
After receiving AGI’s report, Kookmin hired J.S. Held LLC, a construction consulting firm, to help investigate the claim. At J.S. Held’s recommendation, Kookmin also hired Wiss, Janney, Elstner Associates (“WJE”) to assist with the investigation.
On June 4, 2016, J.S. Held, WJE, and representative of 501 East conducted a site survey. No soil tests were conducted during the site survey. On June 29, 2016, WJE issued a report. WJE’s report noted numerous previous repairs to the stucco on the building, at the west and south facades, and near the water leak. The report also noted that “[a]t some locations, particularly at the sound end of the main building, some of the [previously repaired] cracks have opened up. . . .” and that the window in Unit 1, the unit closest to the water main break, had been replaced with acrylic after replacement glass windows had broken three times since the pipe break.
In conclusion, WJE opined that “at least some settlement and movement of the building occurred prior to the water supply line break event and subsequent running water from the broken line. However, the reopening of previously repaired cracks, presence of open cracks, observed discontinuity with vertical offsets in Unit 1, and the multiple occurrences of glass breakage in the window in Unit 1 as reported by residents, indicate that there has been some movement or settlement of the building since the early 2016 water supply line break event. WJE concluded its report by recommending that “floor finishes in Unit 1 be removed to investigate further the noted floor slab discontinuity and vertical offset.
Kookmin’s Retention of Coverage Counsel
On June 30, 2016, Kookmin retained insurance coverage counsel to render an opinion regarding coverage for the damage under the policy.
On July 27 2016, overage counsel issued an opinion letter. According to the coverage counsel, while damage to the building caused by earth movement and settlement are excluded, water damage resulting from an “accidental discharge” of water was covered. The letter noted that both AGI and WJE had agreed that there was “pre-existing, ongoing general settlement” of the building, and that while “there are a number of candidates for the ‘efficient proximate cause’ of loss,” that “both experts concur that the water leak set in motion forces that seriously exacerbated the preexisting condition of the property and likely caused new damage.”
In conclusion, coverage counsel opined that “damage to the insured apartment building attributable to the recent water line break is covered. There was undoubtedly pre-existing settlement and cracking at the insured location. To the extent the experts can reasonably segregate the repair cost between the two types of damage, then coverage would exist only for damage applicable to the pipe break.” Coverage counsel also suggested that obtaining water usage records “to verify that this leak was a sudden occurrence in the December-January time frame as opposed to a chronic condition at the property.”
Kookmin Seeks Further Expert Opinions
On October 5, 2016, Kookmin retained geotechnical engineer Ninyo & Moore.
On October 11, 2016, Ninyo & Moore visited the site and conducted subsurface exploration consisting of the “excavation, logging, and sampling pf two hand excavated test pits and four hand-angered exploratory borings around the subject buildings.” On December 6, 2016, Ninyo Moore issued a report. Ninyo & Moore’s report noted previously patched cracks in the stucco that experienced “minor re-opening.” The report also noted large cracks in the concrete slab under Unit 1, but noted that the “slab bracket were generally noted to have aged characteristics including rounded and worn edges” and they were filled with debris. The report also noted that a “topping slab/replacement slab” had been applied to the southwest bedroom floor in attempt to level the sloping floor.
In conclusion, Ninyo & Moore concluded “that the reported December 31, 2015, pipe leak did not contribute to the tilt of the building floor or the cracks in the building. The tenants of the building reportedly observed water from the leaking pipe flowing into the drainage channel property to the north of the subject site. Based on our . . . surveying around the southwest part of the site, surface drainage in the vicinity of the reported pipe leak location would tend to flow away from the building toward the south and west into the drainage channel property adjacent to the subject site. . . . This suggests that water from the leaking pipe escaped to the ground surface and flowed away from the building and that a significant amount of water did not infiltrate the subsurface soils at the location of the leak. Additionally, the tilt of the slab-ongrade is relatively consistent from the south end of the building to the north end and cracks in the building walls were observed to be widespread across the structure. . . . We did not observe indications that the distress was isolated at the location of the reported pipe leak at the southwest corner of the building. . . .”
On December 5, 2016, WJE issued a supplemental report. Using ground penetrating radar (GPR), WJE’s supplemental report noted that “GPR surveys performed in several locations throughout the exposed slab revealed that the slab is largely unreinforced, and as a result, does not have the tensile strength to resist differential movement, which results in cracking. Some areas of the slab exhibit evidence of previous repairs.” WJE’s supplemental report further noted that “there has been ongoing, general settlement of the building, towards the south and west, resulting in the observed cracking in the slab and walls of Unit 1, which will likely continue without remediation of
the conditions that are causing the settlement, and which is not a result of the December 2015 water supply line break and subsequent discharge of water.”
Based on Ninyo & Moore’s report and the supplemental report of WJE, Kookmin denied coverage to 501 East. Claim notes, however, indicated that:
On July 26, 2017, Kookmin decided to extend coverage, but only to Unit 1, subject to reviewing previous water bills for the building.
J.S. Held’s estimator, who reviewed water bills in the months of December 2015 and January 2016 which revealed that in December and January water usage had increased 9,500 gallons more than in previous months, opined that 9,500 gallons more “is representative of enough water to cause the settling and deformation described.”
WJE opined that the water bills did not change its earlier report that pre-existing settlement of the building “was likely exacerbated as a result of the water supply line break.”
J.S. Held’s estimator provided an estimate to repair Unit 1 at an estimated cost of $227,752.90, to which a colleague at J.S. Held, stated that the estimate was “more than . . . expected and quite a bit more than the Insured’s estimate, so I want to be sure before we send.”
J.S. Held’s estimator explained that, because WJE had not recommended a scope of work or how to repair the damage to the building, that developing an estimate was difficult due to “unknowns.”
In the trial court, Kookmin filed a motion for summary adjudication on 501 East’s breach of covenant of good faith and fair dealing cause of action, arguing that “genuine dispute doctrine” provided a complete defense to a finding of bad faith, since its denial of 501 East’s insurance tender was based on expert opinions that the damage to the building was caused by long-term settlement and movement which was not a covered loss under the policy. The trial court agreed and 501 East appealed.
On appeal, 2nd District Court of Appeal explained that if a loss is “caused by more than one occurrence, including covered and not-covered events, then the insurer is liable only if the ‘efficient proximate cause’ or the ‘predominate” cause was a covered risk.” Moreover, explained the Court, where an insurer denies an insured’s tender, and “there is a genuine issue as to the insurer’s liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute.”
This, explained the Court of Appeals, is the “genuine dispute” doctrine, which applies where an insurer denies a claim based on the opinions of experts. However, explained the Court, the “genuine dispute” doctrine “will not automatically insulate an insurer from a bad faith claim based on a biased investigation” and “summary judgment on a bad faith claim must be denied where the evidence shows ‘the insurer dishonestly selected its experts[,] the insurer’ experts were unreasonable[,] [or] the insurer failed to conduct a thorough investigation.”
Here, however, held the Court of Appeals, although Kookmin’s experts had originally opined that the water main break was likely the “predominate” cause of the building’s subsidence, each of those initial opinions suggested that further investigation might be necessary, and as a result of subsequent investigation the opinions of Kookmin’s experts had changed from the water main break being the “predominate” cause of the building’s subsidence to long-term settlement as the “predominate” cause. “As the trial court aptly stated,” held the Court, “[I]nitial opinions are often superseded by further investigation.”
This was a hard pill to swallow for the insured. Particularly, since the claim file included documents that could suggest that the insurer was conducting further investigations in the hope of finding information that would offset earlier expert opinions that coverage was appropriate. However, as the Court of Appeal explained, under the “genuine dispute” doctrine, a carrier’s denial based on expert opinion will be upheld unless there is evidence that the insurer dishonestly selected its experts, its experts took unreasonable positions, or the insurer failed to conduct a thorough investigation, none of which were met in this circumstance.