JUDAH v. STATE FARM FIRE AND CASUALTY COMPANY

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Court of Appeal, First District, Division 3, California.

Clarice JUDAH, Plaintiff and Appellant, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant and Appellant.

No. A040852.

Decided: February 08, 1990

Clarke B. Holland, Thorton, Taylor & Downs, San Francisco, for plaintiff and appellant. Jack T. Friedman, Donald T. Ramsey, Carroll, Burdick & McDonough, San Francisco, for defendant and appellant.

This is an appeal by defendant State Farm Fire and Casualty Company (State Farm) from a $953,270 judgment entered against it after an adverse jury verdict.   Plaintiff Clarice Judah (Judah) also cross-appeals contending that the trial court improperly refused to allow damages for the diminution in value of her property and restricted recovery of prejudgment interest.   Pursuant to Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 257 Cal.Rptr. 292, 770 P.2d 704, we reverse the judgment.

FACTS

In 1981, Judah purchased a single-family residence at 55 Underhill Road in Orinda, California.   At approximately the same time she purchased an all-risk policy from State Farm.

In January of 1982, a landslide occurred approximately 100 to 125 feet from Judah's property.   The slide itself did not directly touch Judah's property;  however, it blocked the storm drains on Underhill Road.   Later efforts to repair the slide damage deposited debris on Judah's property.   As a consequence, in subsequent rainstorms increased surface water ran over the street onto Judah's property causing significant erosion.

Judah was not initially concerned about the slide, the debris, or the increased surface water.   As time went by, however, she began to notice problems in her house.   Cracks appeared in the sheet rock, and various parts of the house began to grow out of level.   Sliding glass doors would not slide properly, doors began to stick, and the retaining wall between the garage and the stairway began to pull away from the garage.

On September 11, 1984, Judah wrote to her State Farm agent, making a claim for property damage for “needed repair to land and landscape, threatened/potential damage to house and its foundation” and “depreciated market value of the house and the property.”   Approximately one month later, State Farm telephoned Judah to set up an appointment to view the property.   After State Farm adjustor Bill Denton came and observed the damage, the company sent Judah a reservation of rights letter informing her that the loss might not be covered because the policy excluded losses due to earth movement and water damage.

Civil engineers were subsequently retained by State Farm to evaluate the damage to Judah's home.   In their first report, dated January 30, 1985, the engineers concluded that “there is considerable evidence of cracking and distress in the foundation of the residence and within the interior drywall of the residence around door and window openings.”   The report predicted that, “it is likely that additional foundation movement will occur in the future.”   In addition, the report noted that erosion had occurred on the Judah property as a result of water flowing from a catch basin located on the up slope shoulder of Underhill Road.   On February 21, 1985, a State Farm adjuster informed Judah that the company had decided to ask its engineers to proceed with additional studies to determine the cause of the structural distress.

The engineers issued their second report on June 13, 1985.   The report, which noted that additional cracking and deterioration had occurred since the time of the first report, opined that “the existing drilled pier foundations of the residence do not extend deeply enough nor are they constructed heavily enough to resist the loads imposed by the surface soil creep.”   The report further stated:  “[T]he only way to completely and effectively repair the residence and to mitigate similar foundation movement in the future would be to construct new, engineered underpinning foundations to support the existing structure.”

In July of 1985, Judah spoke with Marie Wimer of State Farm who informed her that design plans for the foundation of Judah's home had come in and that they would be sent out to bid.   A few days later Wimer told Judah that she needed to further discuss the matter with her supervisor, but that a coverage determination would be made by State Farm within a week.   However, on July 29, 1985, State Farm requested that engineers determine “whether or not the foundation was designed and constructed in accordance with industry standards for the time of construction.”

The engineers issued their third report on August 27, 1985.   They concluded that the general design of the foundation was “typical” for similar residences and similar site conditions at the time of construction.   Nevertheless, they recommended that the question be answered by a structural engineer who specialized in residential design.

On September 5, 1985, State Farm sent a letter to Judah which stated in part:  “In our opinion, this report does not support a conclusion that third party negligence was a concurrent cause of the subject stress.”   It was at this point that Judah retained an attorney.

Despite its representation to Judah that the contractor had not been negligent, State Farm had already filed a subrogation suit against the contractor, Wally Anderson, alleging that he negligently designed and constructed the foundation of Judah's house.1

On November 6, 1985, the structural engineers, Integrated Design Services, reported to State Farm that the contractor had failed to utilize existing technical information available at the time of construction.2

In December of 1985, the Court of Appeal filed its unpublished opinion in Garvey v. State Farm.3  In Garvey, the plaintiffs claimed that although their policy excluded coverage for damage caused by earth movement, it provided coverage for damage caused by negligence.   They further asserted that damage to their house was caused mainly by negligent construction and therefore the loss was covered.   The Court of Appeal reversed a trial court finding of coverage, despite the fact that negligent construction was a given.

State Farm denied coverage under Judah's policy on March 31, 1986.   According to State Farm there was no coverage because the “claimed damages [were] dependent upon the excluded perils of earth movement and surface/subsurface water.   There is no independent concurrent proximate cause of loss.”

At trial below, State Farm requested that the court adopt a coverage theory consistent with Sabella v. Wisler (1963) 59 Cal.2d 21, 27 Cal.Rptr. 689, 377 P.2d 889.   Judah argued that the correct standard was set forth in Farmers Ins. Exchange v. Adams (1985) 170 Cal.App.3d 712, 216 Cal.Rptr. 287, which in turn was based upon State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94, 109 Cal.Rptr. 811, 514 P.2d 123.   The court agreed with Judah and instructed the jury:  “When there are two concurrent proximate causes of a loss, an insured is covered as long as one of those proximate causes is covered by the policy.   ¶ The law does not require that the covered peril independently caused the damage or that the covered peril be the prime moving or efficient cause of the damage.”

DISCUSSION

Garvey Issues

 In March of 1989, our Supreme Court filed Garvey, supra, wherein the majority rejected the application of Partridge to first party property insurance claims.   The high court held that Sabella “set forth a workable rule of coverage4 that provides a fair result within the reasonable expectations of both the insured and the insurer whenever there exists a causal or dependent relationship between covered and excluded perils.   In multiple cause cases, a proximate cause analysis, focusing on the efficient proximate cause, could be employed to determine whether or not the insured was covered for the loss under the property portion of the homeowner's insurance policy.”  (Garvey, supra, 48 Cal.3d at p. 404, 257 Cal.Rptr. 292, 770 P.2d 704.)

Clearly, the instruction given to the jury at trial was based on the Partridge analysis of concurrent liability and thus misstated the correct standard to determine coverage of a property insurance policy.   The resulting judgment must therefore be reversed.

 There is no merit to Judah's contention that Garvey should not be applied retroactively.   As was recently stated in La Bato v. State Farm Fire & Cas. Co. (1989) 215 Cal.App.3d 336, 343–344, 263 Cal.Rptr. 382:  “[T]he rule of Garvey is not a new rule of law, in three significant senses.   First, Garvey is a confirmation and explication of the rule of Sabella v. Wisler, supra, 59 Cal.3d 21, 27 Cal.Rptr. 689, 377 P.2d 889 which the Supreme Court of California decided over 20 years before the trial of this case.   Second, Garvey overrules no prior decision of the California Supreme Court.  [Citation.]   Third, both Garvey and Sabella give effect to a statutory rule codified in Insurance Code sections 530 and 532.   Contrary cases constitute a misconstruction of that statutory rule.   Under these circumstances, no exception to the usual rule of retroactivity can apply.   Garvey applies in all cases not yet final at the time of its decision, including the present case.  [Citation.]”

 Nor need we address Judah's contention that State Farm should be estopped from relying upon the Garvey decision because Judah was led to believe she was protected under the policy or because the company shifted grounds for denial of her claim.   It is long settled that an estoppel must be specially pleaded;  the eventual failure to so plead constitutes a waiver of an estoppel theory.  (Holzer v. Read (1932) 216 Cal. 119, 124, 13 P.2d 697;  Green v. Travelers Indemnity Co. (1986) 185 Cal.App.3d 544, 555, 230 Cal.Rptr. 13;  California Teachers' Assn. v. Governing Board (1983) 145 Cal.App.3d 735, 746, 193 Cal.Rptr. 650.)   Although Judah's complaint was filed before State Farm denied her claim, she never amended the complaint nor advanced an estoppel theory at trial.   Thus, we may not consider the equitable estoppel issue which was raised for the first time on appeal.  (California Teachers', supra, 145 Cal.App.3d at p. 746, 193 Cal.Rptr. 650.)

 Nevertheless, we disagree with State Farm's contention that judgment should be entered in its favor.   State Farm's contention is based on the theory that the insurer does not warranty the soundness of the insured's home, and negligence inherent in the construction of a house is not a covered peril in an all-risk policy.   State Farm relies on footnote 7 in Garvey 5 as authority for the proposition that courts should distinguish between passive, in-built defects and negligence that might be associated with the operation of an active physical force.

However, rejection of this contention is found in the Garvey opinion itself.   In Garvey, the plaintiffs noticed that a house addition had begun to pull away from the main structure and that there was damage to a deck and garden wall.   Similar to the policy in this case, the Garveys' State Farm policy specifically excluded earth movement as a covered risk.   The Garveys claimed the policy “implicitly provided coverage for losses caused by contractor negligence because negligence was not a specifically excluded peril under the policy.”  (Garvey, supra, 48 Cal.3d at p. 400, 257 Cal.Rptr. 292, 770 P.2d 704.)   The high court rejected State Farm's response that although third party negligence is not specifically excluded in an all-risk policy, it is not a covered peril because it is technically not a “risk of physical loss” within the policy terms, as not supported by authority and remanded the case for further proceedings.  (Id., at pp. 408, 413, 257 Cal.Rptr. 292, 770 P.2d 704.)

 It is our view that footnote 7 in Garvey is limited to the specific negligence to which it refers;  i.e., where construction is undertaken for the sole purpose of protecting against the operation of a specifically excluded risk.   Clearly, the normal construction of a residence is not undertaken for that purpose.6

Bad Faith and Punitive Damages

State Farm contends that the judgment for punitive damages must be reversed because the Garvey opinion made the coverage position State Farm adopted, if not ultimately correct, at least reasonable as a matter of law.   Judah, in turn, argues the punitive damage judgment should be separatelyaffirmed, since an insurer's improper claims handling practice may make it liable in tort for bad faith, regardless of whether the insurer owed a duty of coverage.

It is well established that liability for punitive damages is a question of fact.  (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 821, 169 Cal.Rptr. 691, 620 P.2d 141;  Slaughter v. Legal Process & Courier Service (1984) 162 Cal.App.3d 1236, 1252, 209 Cal.Rptr. 189.)   The difficulty in this case is there is no way to determine upon which facts the jury below based its verdict.   Pursuant to directions to return a verdict on special issues, the jury found inter alia that State Farm 1) breached its duty to deal fairly and in good faith in the manner in which it investigated, handled or denied Judah's claim;  2) violated the Insurance Code by engaging in unfair or deceptive claims handling practices;  and 3) acted with malice, fraud or oppression, or in conscious disregard of Judah's rights.   The jury awarded Judah $103,384 for damages to her house, $5,886 for damage to the land and $15,000 for emotional distress.   The jury found that State Farm acted with malice, fraud or oppression, or in conscious disregard of Judah's rights, and awarded $750,000 as punitive damages.

 We agree with State Farm that it is simply not possible to speculate that the jury would have reached the same conclusion regarding tort liability if it had not been persuaded, by erroneous instructions and argument, that State Farm unreasonably refused to pay a covered claim.   For instance, the following instruction was given to the jury:  “Mrs. Judah has brought a separate cause of action for a violation of California Insurance Code Section 790.03, the Unfair Practices Act.   To prevail on this cause of action, Mrs. Judah must provide by a preponderance of the evidence that:  ¶ One, State Farm knowingly violated one or more provision of Insurance Code Section 790.03 on one or more occasion;  ․ [¶] The Insurance Code of this state enumerates unfair methods of practice in the business of insurance such as:  ․ [¶] Five, not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.”   The court also instructed:  “An insurance company which fails to deal fairly and in good faith with the insured by unreasonably refusing to pay the insured on a valid claim covered by the policy is subject to liability for all damages proximately resulting from such conduct.”   Finally, the court instructed:  “Before you can consider the matter of good faith, or a violation of the Insurance Code, you must first find that the insurance policy covered the loss complained of.   Unless you first find a covered loss, there is no issue of bad faith or a violation of the Insurance Code.” 7  Given these instructions, it is possible that the jury found a violation of Insurance Code section 790.03 and/or breach of the covenant of good faith and fair dealing because they were erroneously instructed on the coverage issue and believed State Farm had refused to pay a valid claim.   On the other hand, the jury could have found State Farm guilty of improper claims handling practices which were independent of the coverage issue.   Where, as here, it appears possible that the jury's verdict may have been based on an erroneous instruction, prejudice appears and the appellate court should not speculate upon the basis of the verdict.  (Robinson v. Cable (1961) 55 Cal.2d 425, 428, 11 Cal.Rptr. 377, 359 P.2d 929.)   Consequently, the punitive damages award also must be reversed and retried.

Pursuant to Code of Civil Procedure section 43, we next address those issues which are likely to be raised on retrial.

Cause of Action for Statutory Violation

 The viability of a private cause of action under Insurance Code section 790.03 8 for a first party claim was unsettled after Moradi–Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58.9  As State Farm noted in its briefs, it was questionable whether the court's conclusion that no private cause of action existed under section 790.03 encompassed first party claims.   Directly at issue in Moradi–Shalal was a third party claim, and the language of the case was ambiguous as to whether the holding applied with equal force to first party claims.   Further, even if the holding in Moradi–Shalal applied to first parties, the question remained whether it applied prospectively to first and third parties, or only to third parties.

These issues, however, were squarely addressed in Zephyr Park v. Superior Court (1989) 213 Cal.App.3d 833, 262 Cal.Rptr. 106.   In Zephyr, an insured challenged the rulings of Moradi–Shalal and attempted to bring an action under section 790.03.   The Court of Appeal held that Moradi–Shalal determined that section 790.03, subdivision (h) cannot be used as the basis for a private action, whether brought by “first parties” or “third parties.”   (Id., at p. 834, 262 Cal.Rptr. 106.)   Nevertheless, the Zephyr court also found the Moradi–Shalal 's ruling of nonretroactivity for pending bad faith cases is applicable to “first party” as well as “third party” actions.   (Id., at pp. 834–835, 262 Cal.Rptr. 106.)

Thus, the state of the law at this time is that both first and third parties are denied a private cause of action arising from section 790.03 violations, but that any cases that were pending prior to the Moradi–Shalal decision, including both first and third party claims, are not barred by the Moradi–Shalal decision.   Since Judah filed her lawsuit against State Farm onJanuary 14, 1986, prior to the Moradi–Shalal decision of August 18, 1988, her claim is viable.

 A separate question is whether a cause of action exists for violation of section 790.03, subdivision (h) in the absence of coverage under the policy.   The answer depends upon which subsection of subdivision (h) the cause of action is based.

This court previously considered the issue of whether a statutory bad faith action could lie in the absence of coverage in Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 231 Cal.Rptr. 791.   The facts in Lesher are concededly different than those in the present case in that Travelers had voluntarily undertaken a defense for its insured, and the insured sued under section 790.03 for Travelers' mishandling of the defense.

State Farm argues that Lesher merely stands for the proposition that once Travelers had assumed its insured's defense, it had a duty to act in conformity with the Insurance Code.   However, the holding in Lesher extends beyond State Farm's reading.   Expressly rejecting Travelers' contention that section 790.03 could only be violated when coverage ultimately exists for the claim, we stated:  “Travelers does not advance a persuasive basis for holding that an insured need process in a prompt and competent manner only those claims for which there is coverage.   Logic compels the conclusion that under section 790.03, the insurer must process all claims submitted to it promptly and competently, even in those instances where no coverage will ultimately be provided.”  (Lesher, supra, 187 Cal.App.3d at p. 190, 231 Cal.Rptr. 791.)

In Bodenhamer v. Superior Court (1987) 192 Cal.App.3d 1472, 238 Cal.Rptr. 177, the court held that although there is a requirement that a third party must obtain a final determination of liability against the insured prior to asserting a statutory bad faith action against the insurer, there is no corresponding requirement for the insured when filing against its insurer.   (Id., at p. 1480, 238 Cal.Rptr. 177.)   Further, the Bodenhamer court noted that an insurance company has obligations pursuant to section 790.03, subdivision (h) prior to and independently of a final determination of the insured's liability.  (Ibid.)

Finally, in Carter v. Superior Court (1987) 194 Cal.App.3d 424, 239 Cal.Rptr. 723, an insured's property was damaged as a result of a “landslide/land subsidence” on neighboring property.   Although the insured reported the loss to her carrier, she also filed an action against her neighbor in order to protect her rights and those of the carrier against the negligent third party.   The insured then filed suit against the carrier, alleging among other things a violation of section 790.03.   The insurance company's demurrer to the insured's complaint was based in part on the theory that the insured's cause of action for the statutory violation was premature.   Relying on Bodenhamer, the Court of Appeal held the duty to comply with statutory requirements of section 790.03, subdivision (h) can arise prior to and independently of the insured's action with the third party.  (Id., at pp. 427–428, 239 Cal.Rptr. 723.)   In response to the carrier's suggestion that in order to establish any liability for bad faith the insured had to establish that the moving or efficient cause of her landslide was the negligence of third parties, the court stated:  “Establishing the fault of third parties is not a prerequisite to trial or disposition of the suit against her insurer.   Petitioner's argument that in the resolution of the coverage issue her insurer acted in bad faith is not necessarily dependent—either in law or in fact—upon the entry of judgment in petitioner's action for or against the third parties.”  (Id., at p. 428, 239 Cal.Rptr. 723.)

Following the logic of Lesher, Bodenhamer and Carter, we have no trouble concluding that an insurer may become liable for its mismanagement of claims prior to and independently of a determination of coverage.   Judah's complaint specifically alleges that State Farm violated section 790.03, subdivision (h), subsections (1), (2), (3), (4), (5) and (13).10  While certain subsections of subdivision (h), such as subsection (5), may be predicated on a finding of coverage, other subsections, such as subsection (13), clearly are not.   Accordingly, we find that Judah may have a cause of action for statutory violations independent of a finding of coverage.

Breach of the Implied Covenant of Good Faith and Fair Dealing

 The covenant of good faith and fair dealing is implied in every insurance contract.  (Gruenberg v. Aetna Ins. Co (1973) 9 Cal.3d 566, 573, 108 Cal.Rptr. 480, 510 P.2d 1032;  Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429, 58 Cal.Rptr. 13, 426 P.2d 173;  Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658, 328 P.2d 198.)   The question on remand is whether Judah can pursue her cause of action for tortious breach of the implied covenant, if it is determined that her policy does not provide coverage for the underlying loss.   The answer is yes.

The covenant of good faith and fair dealing imposes obligations on the contracting parties separate and apart from those consensually agreed to.   (Gruenberg, supra, 9 Cal.3d at pp. 573–574, 108 Cal.Rptr. 480, 510 P.2d 1032.)  “ ‘The duty violated—that of dealing fairly and in good faith with the other party to a contract of insurance—is a duty imposed by law, not one arising from the terms of the contract itself.   In other words, this duty of dealing fairly and in good faith is nonconsensual in origin rather than consensual.   Breach of this duty is a tort.’ ”  (Id., at p. 574, 108 Cal.Rptr. 480, 510 P.2d 1032, quoting Richardson v. Employers Liab. Assur. Corp. (1972) 25 Cal.App.3d 232, 239, 102 Cal.Rptr. 547.)   As was summarized in Koehrer v. Superior Court (1986) 181 Cal.App.3d 1155, 1169, 226 Cal.Rptr. 820 (disapproved on other grounds in Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 688, 254 Cal.Rptr. 211, 765 P.2d 373):  “[T]he obligations imposed by the implied covenant of good faith and fair dealing are not those set out in the terms of the contract itself, but rather are obligations imposed by law governing the manner in which the contractual obligations must be discharged—fairly and in good faith.  [Citation.]   While the specific nature of the obligations imposed by the implied covenant of good faith and fair dealing are dependent upon the nature and purpose of the underlying contract and the legitimate expectations of the parties arising from the contract [citations], those obligations are not the obligations that were consensually undertaken in the contractual provisions, and care must be taken in each case to determine whether the alleged breach is of an obligation imposed by law and thus a tort [citation] or breach of an obligation consensually created by the parties in the terms of the contract and thus simply a breach of contract [citation].”

Thus, in Lesher, Bodenhamer and Carter, the insureds were not only able to state a cause of action for violations of the Insurance Code but for tortious breach of the covenant of good faith and fair dealing as well.   In Lesher, we noted that the plaintiff's theory of liability was not dependent on a determination that the insurer had a duty to defend or indemnify under the terms of the policy.   Rather, the plaintiff's theory was as follows:  “Despite the coverage dispute, once Travelers undertook Lesher's defense, it was obligated to conduct that defense with the same duty of care as if there were no coverage dispute.   If Travelers breached that duty of care, it was liable for all damage to Lesher proximately caused by its acts or omissions, even though there was no actual coverage under the policy.”   (Lesher, supra, 187 Cal.App.3d at p. 187, 231 Cal.Rptr. 791.)

In Bodenhamer, the insured's jewelry store was burglarized resulting in a substantial loss to the insured's stock in trade and to pieces of their customers' jewelry.   The insured filed suit against their insurer, alleging bad faith in handling claims arising from the burglary.11  The trial court granted the insurer's motion for summary adjudication of issues, which disposed of the insured's claim for breach of the implied covenant of good faith and fair dealing, on the grounds that no cause of action arises until third party claims against the insured had resulted in final determination against the insured.   The Court of Appeal disagreed.   It noted:  “An express term of the liability contract is to pay claims of third parties where the insured is liable.   An implied promise is to process the claims in a manner which will not injure the insured, which in this case includes injury to the business.”  (Bodenhamer, supra, 192 Cal.App.3d at pp. 1478–1479, 238 Cal.Rptr. 177.)   The court then held that the insureds were entitled to a trial on the issue of whether the insurer's actions in processing the customers' claims constituted a breach of the implied covenant.  (Id., at p. 1479, 238 Cal.Rptr. 177.)

Similarly, in Carter, the plaintiff's cause of action for breach of the implied covenant appears to be based on the allegation that the carrier was deceitful in indicating it was willing to adjust and settle the claim and withheld an engineering report establishing the third party's negligence.   As previously discussed, the appellate court found that establishing the fault of the third party was not a prerequisite to the suit against the insurance carrier.

Lesher, Bodenhamer and Carter strongly undermine State Farm's assertion that there can be no liability for bad faith in the absence of coverage.   While the covenant breach alleged in Comunale, Crisci and Gruenberg, i.e., wrongful denial of coverage, is dependent on a finding of coverage, wrongful denial of coverage is not the only basis for the breach of implied covenant of good faith and fair dealing.   Clearly, Lesher, Bodenhamer and Carter present other, but not the only, fact situations which potentially give rise to a breach of the implied covenant.   Accordingly, a breach of the implied covenant may be found without the existence of coverage.

Jury Instructions

 In making this determination, it is obvious that the trial court's instruction that the jury had to find coverage before it could determine bad faith or a violation of the Insurance Code was erroneous.   On remand such an instruction should be omitted.   On the other hand, the jury should be instructed that in the absence of a finding of coverage, tort and punitivedamages must be limited to those injuries directly resulting from breach of the implied covenant and/or statutory violations.

Cost for Restoration

Assuming that contractual indemnity is owed, State Farm contends that its obligation is limited to the cost of repairing the actual physical damage to Judah's home, and not for the costs of an improved foundation which may lessen the chance of future damage.   The jury below was instructed:  “If you find that it is necessary to design and install new foundation members in order to provide Mrs. Judah's house with adequately lateral and vertical support and to prevent further damage to the house resulting in whole or in part from covered causes, then State Farm is responsible for the cost of such a redesigned and improved foundation.”   Citing Davis v. Phoenix Ins. Co. (1896) 111 Cal. 409, 415, 43 P. 1115 and Breshears v. Indiana Lumbermens Mut. Ins. Co. (1967) 256 Cal.App.2d 245, 248, 63 Cal.Rptr. 879, State Farm maintains that the insurer should not be a source of profit;  nor is it obligated to place the insured in a better position than he was in at the time of damage.   Decisions in landslide cases hold otherwise.

In Pfeiffer v. General Insurance Corporation (N.D.Cal.1960) 185 F.Supp. 605, an insured home was damaged in a landslide.   After the slide, the land underneath the home remained unstable, rendering the structure unsafe.   Damage to the house amounted to $8,000;  however, an additional expenditure of $23,000 was necessary in order to stabilize the land beneath the house.   The plaintiffs sued to have the insurance carrier pay for stabilizing the underlying soil.   The court found “that no amount of repairs to the present structure alone will cure the damage or replace the dwelling until the earth movement under the structure is stabilized.”  (Id., at p. 608.)   The court concluded that “to require plaintiffs to repair the house and garage on a mass of shifting earth is to render abortive their rights and to place a construction [on the policy] that results in an absurdity.”  (Ibid.)

The rationale underlying Pfeiffer was extended in Hughes v. Potomac Ins. Co. (1962) 199 Cal.App.2d 239, 18 Cal.Rptr. 650.   In Hughes, a home located near a creek bank was insured by an all risk policy.   A major slide on the property destroyed a block of earth 30 feet wide and 100 feet long.   This left the home standing on the edge of a newly formed 30–foot cliff and deprived the home of essential subjacent and lateral support.   Although the slide caused only $50 damage to the home itself, the cost of a retaining wall and fill necessary to support the dwelling and stabilize the soil was estimated at $19,000.   When the insurer took the position that only the “dwelling building” was insured, the court observed:  “[A]ppellant would deny that any loss or damage had occurred unless some tangible injury to the physical structure itself could be detected.   Common sense requires that a policy should not be so interpreted in the absence of a provision specifically limiting coverage in this manner.”  (Id., at pp. 248–249, 18 Cal.Rptr. 650.)

In Snapp v. State Farm Fire & Cas. Co. (1962) 206 Cal.App.2d 827, 24 Cal.Rptr. 44, the case most pertinent to the instant action, a home insured under an all risk policy was built on poorly made fill.   Because of the unstable fill and heavy rainfall, the land beneath the home moved laterally, causing damage to the structure and its foundation.   The trial court found “[t]hat the original foundation was not designed to protect the insured premises from lateral earth movement and was not constructed to adequately protect the insured premises from vertical or lateral earth movement and therefore restoration of the foundation to its original condition will not prevent further damage to the insured premises.”  (Id., at p. 832, 24 Cal.Rptr. 44.)   Nevertheless, the Court of Appeal determined that it was the insurer's responsibility to pay for a redesigned foundation which would prevent the recurrence of damage to the extent of policy coverage.  (Id., at pp. 833–834, 24 Cal.Rptr. 44.)

Finally, the court in Strickland v. Federal Insurance Co. (1988) 200 Cal.App.3d 792, 246 Cal.Rptr. 345 applied the principles enunciated in Pfeiffer, Hughes and Snapp, and held that where a landslide left a home structurally intact in itself, but exposed to danger from future slides, the insurer could not fulfill its policy obligations merely by making cosmetic repairs to the home.   Instead, the insurer was required to pay up to its full policy limits to stabilize the soil beneath the house.  (Id., at p. 801, 246 Cal.Rptr. 345.)

 From these cases we distill the following rule:  When a policy insures a dwelling against a nonexcluded peril, and such peril damages or threatens the structure, the insurer has an obligation to pay, up to the policy limits, for measures necessary to stabilize the dwelling in a manner adequate to the changed condition of the land.

Although the issue was not addressed by either party, we find additional support for our position in the policy itself.   Section 2 under Additional Coverages states:  “Reasonable Repairs.   We will pay the reasonable cost incurred by you of repairing damage to covered property necessary to protect the property from further damage or loss, provided coverage is afforded for the peril causing the loss.   This coverage does not increase the limit of liability applying to the property being repaired.”   Clearly, this language contemplates expenses necessary to stabilize the dwelling.

Damage to Land Alone

Judah's claim was based in part for “needed repair to land and landscape.”   State Farm contends that the subject policy did not coverdamage to land alone.   It maintains the trial court erred in finding an ambiguity in the policy language.   The error was further compounded when the court instructed the jury:  “Should you find that the language used within the insurance policy in question contains any ambiguities or uncertainties, you are to interpret these ambiguities against the insurer, State Farm, and in favor of the policyholder Mrs. Judah.   Any reasonable doubt contained within the language on the policy concerning ambiguous terms will be resolved against the insurer.”   We agree.

 In construing a contract, the question of whether an ambiguity exists is one of law, not fact.  (Evid.Code, § 310;  Brant v. California Dairies, Inc. (1935) 4 Cal.2d 128, 133, 48 P.2d 13;  Madison v. Superior Court (1988) 203 Cal.App.3d 589, 598, 250 Cal.Rptr. 299.)   Thus, the lower court's finding of ambiguity is not binding on this court.

 A review of the table of contents on page 1 of the subject policy shows that it is divided into Section I, having to do with property coverage, and Section II, having to do with liability coverage.   Prefacing both sections is the section on definitions which pertains to the policy as a whole.   The pertinent provisions in Judah's insurance policy are contained in the sections dealing with definitions, coverages and additional coverages.

Paragraph 4 of the definitions section provides in relevant part:  “ ‘insured location’ means:  a. the residence premises;  b. the part of any other premises, other structures, and grounds, used by you as a residence or which is acquired by you during the period this policy is in effect for your use as a residence.”

Coverage A in the coverage section provides in relevant part:  “We cover:  1. the dwelling on the residence premises shown in the Declarations used principally as a private residence, including structures attached to the dwelling.”

Finally, paragraph 3 in the additional coverages section states:  “Trees, Shrubs and Other Plants.   We cover trees, shrubs, plants or lawns, on the residence premises, for loss caused by the following Perils Insured Against:  Fire or lightning, Explosion, Riot or civil commotion, Aircraft, Vehicles not owned or operated by a resident of the residence premises, Vandalism or malicious mischief or Theft.   The limit of liability for this coverage shall not exceed 5% of the limit of liability that applies to the dwelling for all trees, shrubs, plants and lawns nor more than $500 for any one tree, shrub or plant.   This coverage may increase the limit of liability otherwise applicable.”

When read as a whole, these sections clearly state that while the insured location includes the grounds, property coverage is extended only to buildings and structures which are on the premises.   If coverage extended to land, the coverage section would merely have provided for coverage for the insured location.   Moreover, if coverage was provided for land alone, the additional coverage section for loss of trees, shrubs and other plants because of specialized perils would have been superfluous.   We consequently find that property coverage under the policy is clearly limited to damage to the dwelling, unless land and landscaping is damaged by one of the enumerated perils.

Damages for Diminution in Value

 Citing Civil Code section 3333 and Ferraro v. Southern Cal. Gas Co. (1980) 102 Cal.App.3d 33, 49, 162 Cal.Rptr. 238, Judah contends the trial court erred in refusing to allow damages for the diminution in value of her property.   The contention is without merit.   Rules applicable to recovery in tort do not apply to an action on a contract of property insurance.  (Ray v. Farmers Insurance Exchange (1988) 200 Cal.App.3d 1411, 1417, 246 Cal.Rptr. 593.)

Prejudgment Interest

 Judah contends the trial court improperly restricted recovery of prejudgment interest under Civil Code section 3291,12 when it ruled that only $15,000 of the total compensatory award of $203,270 constituted an award for “personal injury.”   She also claims the court misinterpreted the holding in Morin v. ABA Recovery Service, Inc. (1987) 195 Cal.App.3d 200, 240 Cal.Rptr. 509, and held that the total recovery to which section 3291 prejudgment interest could apply was the $15,000 compensatory award, plus that amount of the punitive damage award arrived at by application of the proportion that the “personal injury” award bore to the entire compensation award, i.e., 15,000/203,270 or 7 percent of the $750,000 punitive award.   Judah maintains she is entitled to prejudgment interest on the entire punitive award.   The contention is without merit.

Civil Code section 3291 unambiguously authorizes an award of prejudgment interest only for personal injury damages.  (Morin, supra, 195 Cal.App.3d at p. 208.)   Judah's cited authority does not hold otherwise.  Greenfield v. Spectrum Investment Corp. (1985) 174 Cal.App.3d 111, 219 Cal.Rptr. 805 was a pure personal injury action.   In Moradi–Shalal, the court stated:  “[A]part from administrative remedies, the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as fraud, infliction of emotional distress, and (as to the insured) either breach of contract or breach of the implied covenant of good faith and fair dealing.   Punitive damages may be available in actions not arising from contract, where fraud, oppression or malice is proved.  (See Civ.Code, § 3294.)   In addition, prejudgment interest may be awarded where an insurer has attempted to avoid a prompt, fair settlement.  (See id., § 3291.)”  (Moradi–Shalal, supra, 46 Cal.3d at pp. 304–305, 250 Cal.Rptr. 116, 758 P.2d 58, emphasis added.)   The court's use of the permissive word “may” indicates its awareness that prejudgment interest is not mandatory in bad faith cases;  rather, Civil Code section 3291 only applies where the bad faith results in personal injury.13

The judgment is reversed.   The case is remanded to the trial court for further proceedings consistent with the views expressed herein.

Both parties to bear their own costs on appeal.

FOOTNOTES

1.   After Judah filed suit, State Farm dismissed the claim against Anderson, apparently in return for his agreement to testify on its behalf.

2.   The report stated in pertinent part:  “The above mentioned observations tend to indicate that the building was designed without sufficient resistance to lateral loads induced by the on-site earth pressure forces․   ¶ It can be demonstrated that information concerning earth pressure creep forces of the type addressed in this report was available and furthermore, the knowledge and methods to mitigate the effects of down-slope earth pressures were available in the technical literature at the time of construction of the subject residence.”

3.   The Court of Appeal subsequently granted rehearing and filed a published opinion in May 1986.   Our Supreme Court granted review and filed its decision in March 1989.

4.   The Sabella rule states:  “ ‘[I]n determining whether a loss is within an exception in a policy, where there is a concurrence of different causes, the efficient cause—the one that sets others in motion—is the cause to which the loss is to be attributed, though the other causes may follow it, and operate more immediately in producing the disaster.’ ”   (Sabella, supra, 59 Cal.2d at pp. 31–32, 27 Cal.Rptr. 689, 377 P.2d 889.)   The Garvey court adopted the term “efficient proximate cause” (meaning predominating cause) when referring to the Sabella analysis, believing the phrase “moving cause” can be misconstrued to deny coverage erroneously, particularly when it is understood literally to mean the “triggering” cause.  (Garvey, supra, 48 Cal.3d at p. 403, 257 Cal.Rptr. 292, 770 P.2d 704.)

5.   Footnote 7 reads as follows:  “A related issue involves whether courts should distinguish between types of negligence when determining whether a loss caused by negligence is covered under a similar policy.   For example, if construction is undertaken on the insured premises for the sole purpose of protecting against the operation of a specifically excluded risk under the homeowner's policy, and that improvement subsequently fails to serve its purpose because it was negligently designed or constructed, the damage to the structure should arguably not be covered.   On the other hand, ordinary negligence that contributes to property loss, but does not involve acts undertaken to protect against an excluded risk, may give rise to coverage under an all-risk policy.   In other words, at some point, courts may want to distinguish between types of negligence when analyzing coverage in a first party property insurance context.   The issue, however, was not raised in the present case, and we do not address it here.”   (Garvey, supra, 48 Cal.3d at pp. 408–409, 257 Cal.Rptr. 292, 770 P.2d 704.)

6.   State Farm also notes that the court refused to instruct the jury on policy exclusions for latent defect and inherent vice.   Although State Farm included policy provisions which mentioned these exclusions in its denial letter to Judah, it never specifically relied on these particular items in refusing coverage.   Consequently, it was precluded from relying on these grounds at trial.  (Intel Corp. v. Hartford Acc. and Indem. Co. (N.D.Cal.1988) 692 F.Supp. 1171, 1178;  McLaughlin v. Connecticut General Life Ins. Co. (N.D.Cal.1983) 565 F.Supp. 434, 452.)

7.   The propriety of this instruction will be discussed infra.

8.   All further statutory references are to the Insurance Code unless otherwise indicated.

9.   Moradi–Shalal expressly overruled Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329, wherein the Supreme Court ruled there was a private cause of action against insurers pursuant to section 790.03.

10.   These statutory provisions state:  “The following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance․  [¶] (h) Knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices:  [¶] (1) Misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverages at issue.  [¶] (2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.  [¶] (3) Failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies.  [¶] (4) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured.  [¶] (5) Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear․  [¶] (13) Failing to provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the offer of a compromise settlement.”

11.   The insured claimed that the insurer had not set up a claim file for customer claims until 4 months after the burglary, customers had filed suit against the insured, the first customer had not been paid until 15 months after the burglary and, at the time of trial, 2 claims had not yet been paid.

12.   Civil Code section 3291 provides in pertinent part:  “In any action brought to recover damages for personal injury sustained by any person resulting from or occasioned by the tort of any other person, corporation, association, or partnership, whether by negligence or by willful intent of the other person, corporation, association, or partnership, and whether the injury was fatal or otherwise, it is lawful for the plaintiff in the complaint to claim interest on the damages alleged as provided in this section.   ¶ If the plaintiff makes an offer pursuant to Section 998 of the Code of Civil Procedure which the defendant does not accept prior to trial or within 30 days, whichever occurs first, and the plaintiff obtains a more favorable judgment, the judgment shall bear interest at the legal rate of 10 percent per annum calculated from the date of the plaintiff's first offer pursuant to Section 998 of the Code of Civil Procedure which is exceeded by the judgment, and interest shall accrue until the satisfaction of judgment.”

13.   In reaching our conclusion that prejudgment interest under Civil Code section 3291 is unavailable in an insurance bad faith action, we note that we have read, but disagree with, the reasoning in Gourley v. State Farm Mutual Automobile Insurance Company (1990) 227Cal.App.3d 1099, 265 Cal.Rptr. 634.

WHITE, Presiding Justice.

MERRILL and STRANKMAN, JJ., concur.