CALIFORNIA FEDERATION OF FAMILY DAY CARE ASSOCIATIONS, INC., a California corporation, Mary Hammer, Martha L. Fry, Albertina Washington, Penny Teramoto, Sherri Myers and Evelyn Moore, individually and on Behalf of the class they represent, Plaintiffs and Appellants, v. MISSION INSURANCE COMPANY, et al., Defendants and Respondents.
This is an appeal by plaintiffs California Federation of Family Day Care Associations, Inc. (Federation), Mary Hammer, Martha L. Fry, Albertina Washington, Penny Teramoto, Sherri Myers, and Evelyn Moore, from the denial of a preliminary injunction. The individual plaintiffs represent a class, which has yet to be certified, of licensed family day care home providers (providers); the Federation is a non-profit corporation that gives information and assistance to providers. Plaintiffs claim that defendant Mission Insurance Company's mid-term cancellation of approximately 4,691 providers' liability insurance policies (policies), and non-renewal of an estimated 1,500 providers' policies without notice, constituted bad faith and violated both contract and statute. Plaintiffs allege that Mission's actions created a crisis whereby approximately half of the providers whose policies were cancelled do not have any liability insurance, and 20–40 percent of those whose policies were cancelled have closed their family day care homes. For the reasons set forth below, we shall reverse and remand with instructions.
STATEMENT OF FACTSA. Licensed Family Day Care Homes
A family day care home provides day care to twelve or fewer children in the provider's home. (Health & Saf. Code, § 1596.78.) Family day care homes must be licensed by the Department of Social Services, according to different health and safety guidelines for large (7–12 children) and small (6 and fewer children) family day care homes. (Health & Saf. Code, §§ 1596.78, 1596.79, 1596.80, 1597.53.) If more than 12 children are cared for, the facility must be licensed according to health and safety guidelines for day care centers. (Health & Saf. Code, § 1596.76.)
At the time this lawsuit was filed, family day care homes were statutorily required to either maintain liability insurance of at least $300,000 for each injury or death sustained on account of the negligence of the licensee or its employees, or to maintain a bond for $300,000, or to maintain a file of affidavits signed by each parent with a child enrolled in the home, stating “that the parent has been informed that the family day care home does not carry liability insurance or a bond according to standards established by the state.” (Health & Saf. Code, § 1597.531, subd. (a).) Failure to comply with these requirements is grounds for revocation of the provider's license. (Health & Saf. Code, § 1597.531, subd. (b).)
Plaintiff Hammer, president of the Federation, states that there are about 34,000 licensed family day care homes in California, approximately 5,000 of which are in Los Angeles County. The average rate for family day care is $55 per child per week, out of which must be paid the costs of food, toys, equipment, utilities, insurance, repairs to home, fire equipment, presents for birthdays and Christmas, field trips, and the salary of an assistant in large family day care homes. Hammer states that the typical family day care provider is a woman with her own young children who “began providing child care as a means of staying home with her own children, as well as providing a service to other parents who must work. Without family day care, very young children would either be left home alone or supervised by older siblings, who are themselves merely children.”
B. Mission's Insurance Policy
According to Leach, Mission's Assistant General Counsel, on January 1, 1983, Mission assumed another insurance company's liability insurance coverage for 7,278 policies issued to California insureds for day care centers serving more than 12 children, family day care homes for up to 12 children, and foster parents. Mission's family day care home liability policy (policy or policies), the only policy at issue herein, states that it applies to “bodily injury, property damage or personal injury arising out of the Insured's activities as a Day Care Provider,” subject to certain exclusions. The term “day care provider” is defined as “a person who is licensed, approved, certified or registered by a city, county or state by an adoption or child care organization licensed or recognized by a city, county or state.” The term “Insured” is defined as the “day care provider named in the declarations, and any relative of the Insured or the Insured's spouse who resides in the same household, and any other person less than 21 years old in the household, in the care of the Insured.” The policy covered additional insureds upon payment of additional premiums. The policy had limits of $300,000 to $1,000,000.
Each policy's period's one-year starting and ending dates were typed in on the first page of the policy. The premium basis of the insurance “is per Day Care Home and is fully earned when the policy is issued.” Premiums were pre-paid at the beginning of each policy period, rather than in installments. Mission's premium for a small family day care home liability policy with a $300,000 limit was $55 in 1983–1984, $95 in 1984–1985, and $145 in 1985–1986. Mission's premium for a large family day care liability policy with a $300,000 limit was $80 in 1983–1984, $161 in 1984–1985, and $235 in 1985–1986.
Paragraph 9, entitled “Cancellation” states: “This policy may be cancelled by the Named Insured by surrender thereof to the Company or any of its authorized agents or by mailing to the Company written notice stating when thereafter such cancellation shall be effective. This policy may be cancelled by the Company by mailing to the Named Insured, at the address shown in this policy, written notice stating when not less than 60 days thereafter such cancellation shall be effective. However, if the Company cancels this policy because the Named Insured has failed to pay a premium when due, this policy may be cancelled by the Company by mailing a written notice of cancellation to the Named Insured at the address shown in this policy stating when, not less than 10 days thereafter, such cancellation shall be effective. The mailing of notice as aforesaid shall be sufficient proof of notice. The time of surrender or the effective date and hour of cancellation stated in the notice shall become the end of the policy period. Delivery of such written notice either by the Named Insured or by the Company shall be equivalent to mailing. Coverage under this policy automatically terminates when the named insured ceases to be a day care provider as defined in the policy.”
C. Mission's Decision to Cease Providing These Policies
Mission decided to cease providing day care liability insurance at some time prior to May 1985, after part of its reinsurance expired and Mission was unable to obtain satisfactory replacement reinsurance. According to Leach, prior to March 31, 1985, Mission had retained an exposure of only $100,000 per policy. On April 1, 1985, Mission found itself exposed to unacceptable limits of liability on these policies when it was unable to obtain acceptable amounts of reinsurance coverage. According to a chart prepared by Mission, Mission's exposure is summarized as follows:
1. Correspondence from Mission Concerning Cancellation and Renewal of policies
In April 1985, Mission's broker (BMF) sent an undated letter advising providers that Mission had reversed its earlier decision to cancel their policies, but warning that Mission would be lowering liability limits to $300,000, and raising premiums.
On June 4, 1985, BMF sent providers a “Care Provider Liability Insurance Programs Bulletin,” stating in pertinent part: “We will continue to make liability insurance coverage available for providers up to June 28, 1985. [¶] We are sending a letter with new policies that explains the probability of cancellation and that premiums for the unused portion of the liability premium will be credited to the insured. [¶] However, a final decision by the Mission Insurance Company to send non-renewal notices to policy holders whose policy expires in July and August 1985 has not been made as of this date. [¶] To make sure policy holders are notified, we are sending a non-renewal letter to providers whose policies expire in July 1985. [¶] They have also informed us they intend to send 60-day notices of cancellation in July to be effective around September 1, 1985 on all policies. [¶] WE ARE CONTINUING OUR EFFORTS TO FIND A NEW MARKET THAT WILL PROVIDE PROPER COVERAGES AT AFFORDABLE RATES. [¶] If we are successful in arranging new coverage with one of the companies we are negotiating with, prior to the cancellation of the Mission policies, we will automatically replace the coverage and apply the Mission return premium to the new policy. If an additional premium is due, we will notify each policy holder.” (Italics in original.)
Enclosed with the June 4, 1985 Bulletin was a renewal application and a notice stating: “Enclosed is an application for anyone who wishes to apply for insurance in the month of June with the understanding that coverage may be cancelled short term. [¶] If cancelled, each policy holder is entitled to 60 days written notice from Mission Insurance Company and return of unused premium. [¶] All applications must be received in our office prior to June 28, 1985 to be eligible for coverage.” (Italics in original.)
A second letter dated June 4, 1985, entitled “Family Day Care Liability Insurance Notice of Non-Renewal,” was sent by BMF to those insureds whose terms expired in July 1985. This letter stated in pertinent part: “Mission Insurance Company has informed us that they will not renew your Day Care Liability insurance policy which expires on the date shown on the address label below. [¶] We are not sure if they will send you a notice; therefore, this may be the only notice you will receive. [¶] We are continuing our efforts to find a new insurance company that will provide the proper insurance at affordable rates and will notify you as soon as we are successful.”
Then on June 19, 1985, BMF sent letters to those who applied for renewal, stating that renewal was contingent on their return of a signed release form cancelling their expiring policy prior to its expiration date, effective June 28, 1985. The release form stated: “The above referenced policy is lost, destroyed or being retained. No claims of any type will be made against the Insurance Company under this policy for losses which occur after the date of cancellation shown above [June 28, 1985]. Any premium adjustment will be made in accordance with the terms and conditions of the policy.” The June 19 letter further stated: “․ Mission Insurance Company has advised us that they will be sending a 60-day notice of cancellation on all policies, including those issued in June 1985.”
2. Notices of Cancellation
On or about July 1, 1985, BMF mailed 60 day notices of cancellation, effective on or after September 1, 1985, to 4,691 providers, including plaintiffs Hammer, Moore, Fry, and Myers, who had applied for and received renewed policies for 1985–1986 terms. The 60-day notice of cancellation explains the reason for cancellation as “program discontinued.”
Mission provided refunds to those providers whose policies were cancelled mid-term, despite the contract provision that the premium basis is fully earned when the policy is issued. The parties agree that “fully earned when policy is issued” is a term of art used and understood in the property-casualty insurance industry to mean that no refund is due when the policy is cancelled by either party prior to the expiration of the term.
3. Notices of Non-Renewal
BMF also mailed notices of non-renewal to those providers, including plaintiff Teramoto who, between June and September 1985, applied for, but were denied, renewal of their policies, despite their tender of payment and execution of the required release. No reason for non-renewal was given on the notice sent to Teramoto.
D. The Crisis Created by Mission's Cancellations and Non-Renewals
1. Reaction of the Legislature: Recognition of a Crisis
During the pendency of this appeal, the Legislature, in recognition of a child care insurance “crisis,” passed the Child Care Insurance Act (“Act”; Stats.1985, ch. 1362; Assem.Bill No. 929, § 3), urgency effective October 1, 1985, codified at chapter 10, to Part 2 of Division 1 of the Insurance Code, commencing with section 1862. The legislative purpose of the Act is to assure “the availability, stability, and affordability of liability insurance for operators of day care in this state, and to provide the residents of this state an adequate, safe, affordable, and plentiful market of day care services.” (Ins.Code, § 1862.) This urgency statute was necessitated by a “crisis” situation facing child care providers due to the “midterm policy cancellations, substantial rate increases during the term of existing coverage, non-renewals upon policy expiration dates, and substantial price increases and coverage limitations upon the renewal or purchase of new policies.” (AB 929, § 5.) The statute states that “[m]idterm cancellations and premium increases are frequently taking place regardless of a child care provider's risk quality, claims history, or loss experience.” (Ibid.) The statute further notes that “[t]his crisis has forced child care providers to discontinue operations, pass the increased costs on to parents who cannot afford these increases, or illegally operate ‘underground’ without a license.” (Ibid.)
Section 4 of AB 929 directs the Insurance Commissioner to ensure the availability of liability insurance to child care centers and family day care providers. Specifically, the Act adds section 1864 to the Insurance Code, which directs insurance companies to file annual reports with the Insurance Commissioner, disclosing statistical information regarding family day care home liability policies, premiums, claims, cancellations, non-renewals, and net underwriting gains or losses, to be reviewed by a task force. Section 1864 also declares it to be in the public interest for insurers to allow for installment payments on premiums for child care liability insurance.1
2. Availability of Replacement Insurance
On the same day this complaint was filed, Mission agreed, in cooperation with the California Department of Insurance, to offer temporary liability insurance to those “parties” whose Mission day care policies were cancelled by Mission, effective on or after September 1, 1985. The record does not reflect whether Mission offered this temporary insurance to all eligible insureds or to just the “parties” in this action. The temporary policy has a $300,000 limit, and is effective through October 15, 1985.
During the pendency of this appeal, the California Insurance Commissioner, in conjunction with the insurance industry, developed a new program called “CAL–CARE” that is designed to aid family day care homes to obtain affordable liability insurance. According to the program's “General Guidelines,” this voluntary market assistance program is “designed to resolve the current child-care provider liability insurance crisis.” Prior to submitting an application, a provider must have “been declined for coverage by at least two insurers.” Completed applications are sent to three of twenty-eight participating companies for a quote. If a quote is not issued, the application is sent to another three companies. If a quote is still not issued, the application is reviewed by the “placement subcommittee,” who “shall attempt to place the applicant with a single carrier or advise the applicant on what corrective steps it should take to make it acceptable to that carrier.” This is not an assigned risk plan or joint underwriting authority.
A July 17, 1985 letter from the Executive Manager of the Association of California Insurance Companies, George W. Tye (of which Mission is a Member), to State Senator John Seymour, indicates the recent availability of family day care liability insurance from a certain insurer. According to Tye, “ ‘The basic policy is an occurrence form with $300,000 limits and it offers a payment plan over the first three months to help with affordability. The price for a home with one to six children is $450 and for a home with seven to twelve children, the price is $780.’ ” Including additional premiums to cover liability for accidents, personal property damage, excess automobile liability passenger coverage, and an additional named insured, the total premium under this plan for a small day care home is $645.
3. Reaction of the Providers
A Senate Office of Research survey of a random sample of 113 day care operators, comprised of 80 family day care homes and 33 day care centers, produced the following results. Among large family day care homes, 45 percent were cancelled or not renewed; 36 percent experienced major rate increases at an average of 523 percent. Of those 81 percent who reported these problems, 35 percent said they would operate without insurance, and 11 percent said there was a substantial probability they would close down. Among small family day care homes, 21 percent had no insurance to start with. Of those who had insurance, 30 percent were cancelled or not renewed and 23 percent experienced major rate increases at an average of 451 percent. Of those 53 percent who reported these problems, 36 percent said they were seriously considering closing, or that they were unable to open.
According to Hammer, Mission insured about one-third of the licensed family day care providers in California during 1984–1985. Figures obtained by Hammer show that of 544 providers whose policies were either cancelled mid-term or not renewed in 1985, 54 percent planned to buy new policies at higher rates; 12 percent planned to obtain parents' affidavits; 19 percent planned to close down; and 15 percent were undecided or planned to go “underground,” or operate without licenses and without insurance. Hammer also states that a significant number of large family day care homes are reducing in size to become small family day care homes to save premium costs.
Figures obtained by Frazier-Parker, president of San Diego County Family Day Care Association, show that of 53 licensed providers in her area, 43 will raise rates to cover higher premiums (13 of those 43 will decrease in size to become small day care homes in order to obtain lower premium rates), and 16 will turn in their licenses. Twenty prospective operators told Frazier-Parker they will operate without a license.
Plaintiffs Moore, Myers, Teramoto, and Washington, who provide family day care to children from low income families through a program subsidized by the City of Gardena, are required by the City to maintain liability insurance. Of the four, two (Moore and Myers) were cancelled, one (Teramoto) completed the renewal application but was turned down, and one (Washington) did not sign the release required for renewal. Due to prohibitive costs of replacement insurance, Moore has closed her family day care home, and Myers states she may have to close hers. Myers states it would cost $605 to replace the $215 policy that Mission cancelled; 50 to 70 percent of her income ($200 a week during the summer and $100 a week during the school year) goes to expenses.
The remaining four individual plaintiffs have not closed their family day care homes. Teramoto and Washington purchased replacement insurance costing $525 and $986 respectively, contrasted with the respective costs of $195 and $339, had their policies been renewed by Mission. Hammer states that she may have to cease providing care if she cannot afford to pay $655 to replace the $270 policy that Mission cancelled mid-term. Fry states that she cannot afford to pay $520 to replace the $115 policy that Mission cancelled (her income is $300 per week); Fry will instead maintain a file of parents' affidavits.
PROCEDURAL BACKGROUNDA. Proceedings Below Prior to this Appeal
Plaintiffs filed this class-action lawsuit on August 29, 1985, alleging causes of action for bad faith, fraud, breach of contract, violation of Insurance Code, sections 484, 790.03 and 675–678, and unfair business practices (Bus. & Prof. Code, § 17200, et seq.). The complaint seeks injunctive and declaratory relief, specific performance, general and punitive damages, attorney's fees, and costs.
After briefing by both parties and oral argument, plaintiffs' ex parte application for a temporary restraining order was denied on August 29, 1985. After further briefing and oral argument, plaintiffs' motion for a preliminary injunction was also denied on September 19, 1985, the trial court having decided that plaintiffs failed to show a “reasonable probability of their success at trial ․ or that under all the facts of the case, the court should exercise its equitable jurisdiction to require [Mission] to continue to carry risks that it no longer desires to carry.” The trial court refused to stay the action pending this appeal.
B. Proceedings After the Filing of This Appeal
1. The Appellate Injunction Issued by this Court
Simultaneous with the filing of this appeal on September 20, 1985, plaintiffs petitioned this court for a writ of supersedeas, which we deemed to be a petition for an appellate injunction. After an informal hearing with the parties' attorneys, we entered an order on October 4, 1985, finding that the public welfare required the speedy determination of this appeal, with oral argument to be heard on November 4, 1985. We further ordered Mission, pending disposition of this appeal, to continue to offer the temporary liability insurance, described supra, to all insureds whose policies were cancelled on or after September 1, 1985, and to notify all eligible insureds by certified mail of the availability of such insurance, and to send them a copy of our October 4, 1985 order.
2. The Superior Court's “Order Appointing Conservator and Restraining Order”
On Thursday, October 31, 1985, two court days prior to the November 4, 1985 oral argument on this appeal, Bunner, Insurance Commissioner of the State of California (Commissioner), represented by the Attorney General, successfully applied for an order appointing the Commissioner as Conservator of Mission in an action captioned Insurance Commissioner of the State of California v. Mission Insurance Company, etc., Los Angeles Superior Court No. C 572724. (Ins.Code, § 1011.) According to the Commissioner's “Application for Order Appointing Conservator,” Mission is “insolvent within the meaning of Article 13, Chapter 1, Part 2, Division 1 of the Insurance Code,” due to a $124,502,317 deficit, in violation of the $1 million dollar minimum paid in capital requirements for an insurer such as Mission under Insurance Code section 700.01.
The superior court entered an order on October 31, 1985 (conservatorship order), that authorized the Commissioner, inter alia, to conduct Mission's business, to pay or defer payment of all “proper claims and of obligations” accruing prior or subsequent to the order, and to take possession of all of Mission's assets. In particular, and of significance to this appeal, the superior court's order enjoined all persons “from instituting or maintaining any action at law or suit in equity including but not limited to matters in arbitration, against [Mission] or against [Mission's Conservator] ․ except after an order from this court obtained after reasonable notice to the Conservator.”
This court received unofficial notice of the conservatorship order on Friday, November 1, 1985, when the Attorney General lodged uncertified copies of the Commissioner's application and the conservatorship order. Plaintiffs' attorneys received oral notice of the Commissioner's application and the conservatorship order at 4:30 p.m., Thursday, October 31, 1985. The Commissioner, through the Attorney General, delivered a letter to this court on November 1, 1985, advising us that this appeal is stayed by the superior court's restraining order.
Plaintiffs, rather than seeking an order from the superior court to lift the stay over this action, made a request directly to this court, due to our greater familiarity with the case, that oral argument proceed as scheduled on Monday, November 4, 1985. It should be noted that the superior court judge who issued the conservatorship order was not even informed at the conservatorship hearing of the pendency of this appeal, despite the presence of Mission's attorney, Oakes, who is also counsel for Mission in this case. At the November 4, 1985 oral argument before this court on this appeal, Oakes stated he had been retained to represent Mission at the conservatorship hearing solely to inform the superior court that Mission would not object to the conservatorship proceeding. Oakes stated that although he knew of no other actions against Mission, he failed to inform the superior court judge of this case. Moreover, Jue, the Deputy Attorney General who appeared at the superior court conservatorship hearing, was not informed by Oakes of this appeal until after the conservatorship order was signed by the superior court judge.
At the November 4, 1985 hearing on this appeal, the Commissioner, in his capacity as Conservator of Mission, appeared in this action through Deputy Attorney General Jue and Mission's attorney, Oakes, who claims he was hired by the Commissioner, in his capacity as Conservator of Mission, to represent the Commissioner as cocounsel in this case.2 At the November 4, 1985 hearing, the Commissioner conceded that this court is empowered to override the superior court stay of this action, and to proceed with this appeal.
STANDARD AND SCOPE OF REVIEW
“A temporary restraining order or a preliminary injunction, or both, may be granted in a class action, in which one or more of the parties sues or defends for the benefit of numerous parties upon the same grounds as in other actions, whether or not the class has been certified.” (Code Civ.Proc., § 527, subd. (a).) An order denying an injunction, including a preliminary injunction is an appealable order. (Code Civ.Proc., § 904.1, subd. (f); Kagan v. Kearney (1978) 85 Cal.App.3d 1010, 1014, 149 Cal.Rptr. 867.)
In deciding whether to issue a preliminary injunction, the trial court must balance the respective equities of the parties by considering the following interrelated questions: “(1) are the plaintiffs likely to suffer greater injury from a denial of the injunction than the defendants are likely to suffer from its grant; and (2) is there a reasonable probability that the plaintiffs will prevail on the merits.” (Robbins v. Superior Court (1985) 38 Cal.3d 199, 206, 211 Cal.Rptr. 398, 695 P.2d 695.)
Generally, the grant or refusal of a preliminary injunction is within the discretion of the trial court and its order may be reversed on appeal only if abuse of discretion is shown. (Heckmann v. Ahmanson (1985) 168 Cal.App.3d 119, 125, 214 Cal.Rptr. 177.) Discretion is abused in the legal sense “ ‘whenever it may be fairly said that in its exercise the court ․ exceeded the bounds of reason or contravened the uncontradicted evidence.’ [Citations.]” (Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 527, 67 Cal.Rptr. 761, 439 P.2d 889.) The substantial evidence rule requires the reviewing court to interpret the facts most favorably to the prevailing party. (City of Signal Hill v. Owens (1984) 154 Cal.App.3d 118, 121, 200 Cal.Rptr. 925.) However, the appellate court need not affirm “if the injury resulting from the alleged wrong is sufficient to establish a ‘ “manifest miscarriage of justice.” ’ ” (E & H Wholesale, Inc. v. Glaser Bros. (1984) 158 Cal.App.3d 728, 733, 204 Cal.Rptr. 838.)
Appellate court deference, and hence trial court discretion, is preferable where a disputed factual determination is based on live witness testimony or review of physical evidence. (Hurtado v. Statewide Home Loan Co. (1985) 167 Cal.App.3d 1019, 1022, 213 Cal.Rptr. 712.) The facts on which this motion was based are largely undisputed. A preliminary injunction motion is required by statute to be supported either by a verified complaint or by affidavits (Code Civ.Proc., § 527, subd. (a).) This motion was supported and opposed by declarations and exhibits; there was no live testimony. While Mission argues that plaintiffs' declarations contain only inadmissible hearsay evidence of irreparable injury to plaintiffs, Mission failed to object below to their admission. (See infra.) It is well settled that where the facts are largely undisputed, the trial judge is in no better position than the appellate court to decide the case. (Hurtado v. Statewide Home Loan Co., supra, 167 Cal.App.3d at p. 1026, 213 Cal.Rptr. 712.) We therefore conclude that the trial court's denial of the preliminary injunction should be reviewed largely as a question of law.
Plaintiffs urge us to reach the merits of the case on the basis that no material factual questions exist and the appeal is solely a question of law. While it is true that some appellate courts have granted permanent injunctions in reviewing denials of preliminary injunctions in cases where no material facts are in dispute, and the appellate court is in as good a position to resolve the case on its merits as the trial court would be after determination of the appeal (see North Coast Coalition v. Woods (1980) 110 Cal.App.3d 800, 805, 168 Cal.Rptr. 95), this is not such a case. In this class action lawsuit, the class of plaintiffs has not even been certified. We decline to resolve the case on its merits because we know of no authority, nor have plaintiffs cited us to any, that allows the appellate court to issue a permanent injunction prior to the certification of the class in a class action lawsuit. We adhere to the general rule that the “ ‘granting or denial of a preliminary injunction does not amount to an adjudication of the ultimate rights in controversy.’ ” (Continental Baking Co. v. Katz, supra, 68 Cal.2d at p. 528, 67 Cal.Rptr. 761, 439 P.2d 889.)
The October 4, 1985 order of this court issued in connection with the petition for appellate injunction does not alter this standard of review. That order was designed to maintain the status quo during the pendency of the appeal, i.e., to maintain in effect the voluntarily provided temporary liability insurance offered to those “parties” whose policies had been cancelled on or after September 1, 1985. Our authority to issue this order, similar in effect to a writ of supersedeas, is recognized by statute and decisional law. (Code Civ.Proc., § 923; see People ex rel. S.F. Bay etc. Com. v. Town of Emeryville (1968) 69 Cal.2d 533, 72 Cal.Rptr. 790, 446 P.2d 790; Voorhies v. Greene (1983) 139 Cal.App.3d 989, 995–996, 189 Cal.Rptr. 132; 6 Witkin, Cal. Procedure (3d ed. 1985) § 325, p. 275.)
The issue before this court is whether the trial court abused its discretion in denying plaintiffs' motion for preliminary injunction. “Although the trial court has broad discretionary powers to grant or deny a request for a preliminary injunction, it has ‘no discretion to act capriciously.’ [Citation.] It must exercise its discretion ‘in favor of the party most likely to be injured.’ [Citations.] If the denial of an injunction would result in great harm to the plaintiff, and the defendants would suffer little harm if it were granted, then it is an abuse of discretion to fail to grant the preliminary injunction. [Citations.]” (Robbins v. Superior Court (1985) 38 Cal.3d 199, 205–206, 211 Cal.Rptr. 398, 695 P.2d 695.)
A. Balancing the Hardships to the Parties
Mission claims that the enforcement of coverage on the cancelled and non-renewed policies pending trial “is unfair and potentially devastating financially” due to the increased exposure now retained by Mission on the policies. Mission states that forcing it “to remain on the risk materially changes the nature of the relationship with its insureds, as cancellation is prohibited, and reinsurance has become unavailable.” Mission contends that “financial collapse” could occur if only four policy payments of $300,000 were made, because the total premium intake, at an average of $235 per policy (the rate for large day care homes) for 4,691 policies would be $1,102,385, which is less than the $1.2 million it would have to pay out.
We do not intend to infer that Mission may not ever cease its coverage of child care liability, nor do we doubt that Mission, if forced to continue its coverage of those policies that were cancelled or non-renewed, faces potential payments on those policies. But this is the nature of the insurer's duty based on contracts freely entered into.
Contrasted with the potential monetary harms Mission alleges, is the harm to health and safety that will be suffered by children and parents whose family day care providers cannot afford replacement insurance. Absent injunctive relief, providers will be left with the painful choices to operate without insurance, or to raise their rates or take fewer children in order to afford replacement insurance, or to cease operating as a licensed provider. Any of these alternatives will cause either grave harm to the providers or to the thousands of families in this state who must rely on family day care homes for affordable and safe day care. This is especially serious in view of the Legislature's recent implementation of the workfare program, which affects certain families who receive AFDC money.
While Mission points out that the statutory licensing scheme allows providers to maintain affidavits in lieu of insurance, this does not minimize the serious blow that would be struck to the family day care home system if the preliminary injunction does not issue. The Legislature, for obvious reasons, clearly expressed a policy preference for the maintaining of liability insurance. As stated in AB 929, the child care insurance crisis harms children of parents who cannot afford the higher rates imposed to cover increased insurance costs, and endangers children who are cared for by those who will forego licensing. This crisis threatens the legislative objective of meeting the “vital need for families ‘to have available an adequate, safe, and affordable market of family day care services․' ” (AB 929, § 5.)
We reject Mission's untimely objection that plaintiffs' declarations contain inadmissible hearsay statements that are incompetent to show evidence of irreparable harm. Mission waived its right to object to the admission of the declarations of Hammer and Frazier-Parker by its failure to assert that right below. “Even conceding that many of the averments of the affidavit are conclusions or hearsay, they become competent evidence for the reason that they were admitted without objection.” (Falk v. Falk (1941) 48 Cal.App.2d 780, 789, 120 P.2d 724.) We do not decide the question of whether the figures in the declarations are admissible as expert opinion testimony as plaintiffs contend, but rather leave that for the trial court, should Mission raise the hearsay objection at trial. We find the declarations were properly admitted, based on the record as it stands on this appeal.
We also reject Mission's argument that the harm to plaintiffs is strictly financial. Mission argues that whatever the exact increased cost of replacement insurance (the parties present figures ranging from 29 cents to 50 cents to 69 cents per child per day in a small family day care homes with three children) the harm to plaintiffs is solely a minimal increase in cost. We disagree, especially in view of the inadequacy of monetary damages due to the Commissioner's allegation that Mission is “insolvent” (see West Coast Constr. Co. v. Oceano Sanitary Dist. (1971) 17 Cal.App.3d 693, 700, 95 Cal.Rptr. 169). Additionally, the declarations of plaintiffs Moore and Myers show that the increased cost per child, while “minimal” to a large insurer such as Mission, is prohibitive to low income families and providers who participate in the subsidized programs such as the one subsidized by the City of Gardena. The record unequivocably shows that providers are closing down in response to the increased rates for liability insurance; that these providers refuse to operate without liability insurance is certainly understandable in view of their potential personal liability. The maintenance of adequate insurance not only benefits the providers but also the children and families whom they serve and society as a whole.
We therefore conclude that plaintiffs have demonstrated that denial of an injunction would result in harm greater to plaintiffs than the harm to defendants if it were granted.
B. Plaintiffs Have Demonstrated a Probability of Success on the Merits of their Right to Specific Performance of Contract
Mission contends that paragraph 9 of the policy, which states that Mission may cancel the policy “by mailing to the Named Insured, at the address shown in this policy, written notice stating when not less than 60 days thereafter such cancellation shall be effective,” allows it to cancel policies mid-term.
“In interpreting an insurance policy we apply the general principle that doubts as to the meaning must be resolved against the insurer and that any exception to the performance of the basic underlying obligation must be so stated as clearly to apprise the insured of its effect. [Fn. omitted.]” (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 269, 54 Cal.Rptr. 104, 419 P.2d 168.) “If semantically possible, the contract will be given such construction as will fairly achieve its object of securing indemnity to the insured for the losses to which the insurance relates. [Citation.] If the insurer uses language which is uncertain any reasonable doubt will be resolved against it; if the doubt relates to extent or fact of coverage, whether as to peril insured against [citations], the amount of liability [citations], or the person or persons protected [citations], the language will be understood in its most inclusive sense, for the benefit of the insured.” (Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 437–438, 296 P.2d 801.)
“These principles of interpretation of insurance contracts have found new and vivid restatement in the doctrine of the adhesion contract․ [¶] Although courts have long followed the basic precept that they would look to the words of the contract to find the meaning which the parties expected from them, they have also applied the doctrine of the adhesion contract to insurance policies, holding that in view of the disparate bargaining status of the parties we must ascertain that meaning of the contract which the insured would reasonably expect. [Fns. omitted.]” (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at pp. 269–270, 54 Cal.Rptr. 104, 419 P.2d 168.) “The policy should be read as a layman would read it and not as it might be analyzed by an attorney or an insurance expert. [Citation.]” (Crane v. State Farm Fire & Cas. Co. (1971) 5 Cal.3d 112, 115, 95 Cal.Rptr. 513, 485 P.2d 1129.)
Plaintiffs argue that paragraph 9, when read in the context of the entire policy, is ambiguous, and should be interpreted to mean that the right to cancellation arises only at the end of a policy period, i.e., that Mission may deny renewals with 60 days' notice. Plaintiffs argue that construing paragraph 9 to allow midterm cancellations would be unconscionable because paragraph 10, which the average insured could not understand, deprives the insured from receiving a refund of the unused portion of the premium upon cancellation. (As discussed above, the parties agree that paragraph 10 of the contract is a term of art that is understood in the insurance industry to mean that no refunds are due upon mid-term cancellation of the policy by either the insurer or the insured.) Plaintiffs argue that if paragraph 9 is interpreted to allow the mutual right to mid-term cancellations, that right is an empty one as far as the insured is concerned, because the insured is not entitled to a refund under paragraph 10.
The uncontradicted declarations of plaintiffs' sociolinguistics expert, Finagan, states that the “meaning of the cancellation language of the contract is not at all clear and is subject to different understandings. One understanding that could reasonably be drawn from this language, and that a significant portion of readers could be expected to draw, would be that the insurance coverage is seen as continuous but running for year-long periods, and that the reference to cancellation refers to cancelling the continuation of the running agreement.”
We conclude, based on the facts presented in the record, that plaintiffs have successfully established a reasonable probability of success on the merits of its claim that the contract's cancellation language is ambiguous, and that it would be unconscionable to permit mid-term cancellations where the average insured would not understand that paragraph 10 deprives the insured of a refund in the event of cancellation. Because insurance contracts are interpreted to protect the insured wherever semantically possible, we find that there is a probability that plaintiffs will succeed at trial on this cause of action.
Moreover, there “is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. [Citation.] This principle is applicable to policies of insurance.” (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658, 328 P.2d 198.) “Cancellation provisions of a contract are subject to the covenant of good faith and fair dealing just as are other provisions of a contract.” (Spindle v. Travelers Ins. Companies (1977) 66 Cal.App.3d 951, 958, 136 Cal.Rptr. 404.)
Even assuming the cancellations were in accordance with the cancellation provisions of the policy, the cancellations could be found to have been made in bad faith. The record shows that Mission's reinsurance was cancelled as of April 1, 1985. However, Mission continued to offer renewals for a one-year term, requiring full payment in advance, knowing that its reinsurance had expired and that refunds were not due under paragraph 10. Without deciding the issue, we note that the facts are disturbing and could potentially result in a judgment for plaintiffs on their bad faith claim. As our Supreme Court stated: “ ‘The insurers' obligations are ․ rooted in their status as purveyors of a vital service labeled quasi-public in nature. Suppliers of services affected with a public interest must take the public's interest seriously, where necessary placing it before their interest in maximizing gains and limiting disbursements ․ [A]s a supplier of a public service rather than a manufactured product, the obligations of insurers go beyond meeting reasonable expectations of coverage. The obligations of good faith and fair dealing encompass qualities of decency and humanity inherent in the responsibilities of a fiduciary․’ [Citation.]” (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 820, 169 Cal.Rptr. 691, 620 P.2d 141.)
C. Plaintiffs Demonstrated a Reasonable Probability of Success on the Merits that Section 675 of the Insurance Code Applies
1. Section 675
Chapter 11 of the Insurance Code (Stats.1970, c. 313, p. 709, § 1, commencing with Sections 675 et seq.), entitled “Cancellation and Failure to Renew Certain Property Insurance,” limits the rights of insurance companies to cancel and non-renew certain policies described in Insurance Code section 675. Section 675 states in pertinent part:
“Except as provided in Section 679.6, this chapter shall apply to policies of insurance, other than automobile insurance and workmen's compensation insurance, on risks located or resident in this state which are issued and take effect or which are renewed after the effective date of this chapter and insuring any of the following contingencies:
“(a) Loss of or damage to real property which is used predominantly for residential purposes and which consists of not more than four dwelling units.
“(b) Loss of or damage to personal property in which natural persons resident in specifically described real property of the kind described in subdivision (a) have an insurable interest, except personal property used in the conduct of a commercial or industrial enterprise.
“(c) Legal liability of a natural person or persons for loss of, damage to, or injury to, persons or property, but not including policies primarily insuring risks arising from the conduct of a commercial or industrial enterprise.”
A policy falling under Insurance Code section 675 can only be cancelled pursuant to the provisions of Insurance Code sections 676 and 677. Section 676 provides that a cancellation of a policy which has been in effect for 60 days, or has been renewed, shall not be effective unless it is based on the occurrence, after the effective date of the policy, of non-payment of premium, conviction of the insured of certain crimes, fraud or material misrepresentation by the insured, discovery of grossly negligent acts or omissions by the insured substantially increasing any of the hazards insured against, and physical changes in the insured property which result in the property becoming uninsurable. Section 677 requires that all notices of cancellation be in writing, mailed to the insured at the address shown in the policy, stating which of the grounds in section 676 is relied upon, and stating that the insurer shall furnish the facts on which the cancellation is based upon written request.
Insurance Code section 678 requires the insurer to provide 45 days' written notice to the insured of its intention not to renew the policy or to condition its renewal upon reduction of limits or elimination of coverages. If such notice is not given, the insurer shall not fail to renew upon payment of the premium due on the effective date of the renewal. Any policy written for a term of less than one year shall be considered as if written for a term of one year; any policy written for a term longer than one year, or with no fixed expiration date, shall be considered as if written for successive policy periods or terms of one year.
The issue before us is whether plaintiffs have demonstrated a reasonable probability of success that they will prevail in proving that family day care home liability policies fall under Insurance Code section 675, subdivisions (b) and (c). More specifically, we must determine whether the policies “primarily” insure “risks arising from the conduct of a commercial ․ enterprise.” (Ins.Code, § 675, subd. (c).) If the policies fall under section 675, then Mission's right to cancel or non-renew the policies is subject to Insurance Code sections 676–678. Because Mission concedes the cancellations were not made for the reasons stated in section 676, and because it appears that 45 day notices were not given to certain providers who were denied renewal, plaintiffs' probability of success on the issue of commercial enterprise is determinative of plaintiffs' probability of success on its statutory cause of action.
3. The Legislative Scheme Supports the Conclusion that Family Day Care Homes Are Not Businesses
The stated legislative purpose of family day care homes is to provide children with “normal residential surroundings so as to give children the home environment which is conducive to healthy and safe development. It is the public policy of this state to provide children in a family day care home the same home environment as provided in a traditional home setting.” (Health & Saf.Code, § 1597.40, subd. (a).)
The Legislature expressly made the following findings and declarations concerning the desirability and need for more licensed family day care homes:
“The Legislature finds and declares:
“(a) It has a responsibility to ensure the health and safety of children in family homes that provide day care.
“(b) That there are insufficient numbers of regulated family day care homes in California.
“(c) There will be a growing need for child day care facilities due to the increase in working parents.
“(d) Many parents prefer child day care located in their neighborhoods in family homes.
“(e) There should be a variety of child care settings, including regulated family day care homes, as suitable alternatives for parents.
“(f) That the program to be operated by the state should be cost effective, streamlined, and simple to administer in order to ensure adequate care for children placed in family day care homes, while not placing undue burdens on the providers.
“(g) That the state should maintain an efficient program of regulating family day care homes that ensures the provision of adequate protection, supervision, and guidance to children in their homes.” (Health & Saf.Code, § 1597.30.)
In order to ensure that day care homes would be located in single family residences, the Legislature enacted a provision preempting “municipal zoning, building and fire codes and regulations governing the use or occupancy of family day care homes for children,” and prohibiting any restrictions relating to the use of single-family residences for family day care homes for children except as provided by the chapter of the Health & Safety Code governing family day care homes. (Health & Safety Code, § 1597.40, subd. (a).) Section 1597.45 states that the use of single-family residences for small family day care homes is a residential use of property for the purposes of all local ordinances, and prohibits the imposition of any business license, fee, or tax for the privilege of operating a small family day care home. Large family day care homes are subject to additional standards for health and safety, such as fire standards adopted by the State Fire Marshal (Health & Saf.Code § 1597.46, subd. (d)), but are also deemed “a permitted use of residential property for zoning purposes.” (Health & Saf.Code, § 1597.46, subd. (a)(1).)
We find that this legislative scheme, particularly the determination that family day care homes are residential uses of property (cf. McCaffrey v. Preston (1984) 154 Cal.App.3d 422, 201 Cal.Rptr. 252), is persuasive authority for plaintiffs' position that the policies fall under section 675. Mission's reliance on the Ninth Circuit Court of Appeals' decision in Rush v. Obledo (9th Cir.1985) 756 F.2d 713, is misplaced. In that case, the court was determining the constitutionality of warrantless searches of family day care homes under Health and Safety Code, sections 1597.55 and 1596.852. In upholding the constitutionality of section 1597.55 as limited by 22 Cal.Admin.Code, section 88030, against plaintiffs' Fourth Amendment violation charge, the court determined that the warrant exception for pervasively regulated businesses applied. The court stated that family day care homes are “businesses” while children cared for from other families for compensation are present, but that at all other times the homes are private residences. The court further stated that even when children cared for are present, the provider retains expectations of privacy in those areas to which the day care children are denied access.
We distinguish Rush because that court's determination that these homes are partly “businesses” was based solely on Fourth Amendment grounds, and is explicitly contradicted by the Legislature's statutory mandate that family day care homes are residential for purposes of zoning and other local regulations.
Moreover, contrary to Rush, our Supreme Court has indicated that the provision of family day care in the provider's home by a provider who is simultaneously caring for his or her own children, is not a commercial activity. (Crane v. State Farm Fire & Cas. Co., supra, 5 Cal.3d 112, 95 Cal.Rptr. 513, 485 P.2d 1129.) In Crane, one of the children being cared for with remuneration by Mrs. Chamberlain (provider), was injured while under the provider's care in the provider's home. Plaintiff, the mother of the injured child, brought a declaratory relief action against defendant insurer to establish liability for medical expenses under the provider's homeowner's policy. The policy excluded “ ‘any business pursuits of an Insured, other than activities therein which are ordinarily incident to non-business pursuits․' ” (Id., at p. 115, 95 Cal.Rptr. 513, 485 P.2d 1129.) The trial court concluded that the exclusion applied because the injuries arose out of the provider's business pursuits, and that the exception to the exclusion did not apply because the injuries did not originate in activities ordinarily incident to non-business pursuits. (Ibid.) The Supreme Court declined to review the trial court's finding that the provider was engaged in a business pursuit at the time of the injury, because it found the exception to the exclusion to be applicable. The court stated that “as a matter of law,” the provider “was engaged in activities which are ordinarily incident to non-business pursuits at the time of the accident.” (Ibid.) The court stated: “Andrea was being cared for in the home while Mrs. Chamberlain simultaneously cared for her own children. She testified that even if Andrea had not been left in her charge, she would have been caring for her own children at the time of the accident, that she provided lunch for her own children as well as for Andrea, and that she prepared no special diet for Andrea. Assuming that the care of the child constituted a business pursuit, such duties under the circumstances presented here were clearly incident to Mrs. Chamberlain's non-business regimen of maintaining a household and supervising her own children. Indeed, it is difficult to conceive of an activity more ordinarily incident to a non-commercial pursuit than home care of children.” (Crane v. State Farm Fire & Cas. Co., supra, 5 Cal.3d at pp. 116–117, 95 Cal.Rptr. 513, 485 P.2d 1129.)
Here, as in Crane, many of the providers are mothers with small children of their own, who simultaneously care for other children in order to supplement their income so that they can afford to stay home rather than having to work outside the home and to pay someone else for child care. There is a reasonable probability that plaintiffs will successfully show that the activities of family day care homes are primarily non-commercial, despite the fact that fees are charged for their services. Moreover, plaintiffs may also be able to prove that the use of the words “commercial enterprise” in section 675 is vague and uncertain. Insurance statutes which “contain ambiguities or uncertainties must be construed in favor of the insured and against the insurer.” (Weatherford v. Northwestern etc. Ins. Co. (1966) 239 Cal.App.2d 567, 570, 49 Cal.Rptr. 22.) “Statutes regulating insurance are remedial and should be liberally construed so as to protect the insuring public. [Fn. omitted.]” (19 Appleman, Insurance Law and Practice (1982), § 10324, p. 45; see 2A Couch on Insurance (2d ed. 1984), § 21.3, p. 228.)
We are not persuaded by Mission's reliance on recently enacted language in Insurance Code section 676.1, subdivision (a). That subdivision states: “The arbitrary cancellation of a policy of homeowner's insurance solely on the basis that the policyholder is engaged in a licensed family day care business at the insured location shall subject the insurer to administrative sanctions․” Mission contends that this section would not have been necessary if, as plaintiffs contend, Insurance Code section 675 applies to family day care home liability policies. We disagree for the simple reason that the purpose of section 676.1, necessitated by widespread cancellations and non-renewals of homeowner's policies of family day care home providers, is to impose administrative sanctions. Section 675 does not deal with administrative sanctions, and there is no merit in Mission's argument that section 676.1 was necessary only because section 675 did not cover family day care homes.
Mission also argues that the use of the words “family day care business” in section 676.1 shows that family day care homes are businesses. We are not persuaded by this argument in view of the supreme court's decision in Crane, and in view of the legislative scheme providing that family care homes are residential uses of property for zoning purposes.
The order denying the motion for a preliminary injunction is reversed, and costs on appeal are awarded to plaintiffs. Our appellate injunction of October 4, 1985, shall remain in full force and effect until the filing of the remittitur. We further order that the case is remanded to the trial court with the following directions:
A. The superior court is ordered to enter an order substituting the Insurance Commissioner of the State of California, in his capacity as Conservator of Mission, in place of defendant, Mission Insurance Company. (Code Civ.Proc., § 923.)
B. The superior court is further ordered to vacate its order denying the preliminary injunction and to enter an order granting the following preliminary injunctive relief:
1. All currently uninsured plaintiffs who fall into the following categories are deemed to be policyholders of Mission family day care home liability insurance, as follows:
(a) The cancellations of plaintiffs' policies, effective on or after September 1, 1985, are deemed ineffective,3 and plaintiffs' cancelled policies' period terms are deemed effective and retroactive, as if the cancellations had not occurred;
(b) The notices of non-renewal sent to those plaintiffs less than 60 days before they were denied renewal are deemed ineffective, and those plaintiffs' non-renewed policies are automatically deemed retroactively renewed; plaintiffs must tender to Mission, within 30 days of the date Mission files proof of service of this order, payment in full for premiums at rates in effect at the time of their non-renewals.
2. The superior court is also ordered to enter an order requiring Mission to notify all plaintiffs forthwith, by certified mail, of the preliminary injunction. Mission shall also be required to file an affidavit in the superior court showing compliance with such notification.
3. The superior court is ordered to set the undertaking in this case in an amount not to exceed $1,000, to be filed in the superior court. (Code Civ.Proc., § 529, subd. (a).)
4. The superior court is further ordered to enter an order enjoining the Insurance Commissioner of the State of California from taking any steps in the case captioned Insurance Commissioner of the State of California v. Mission Insurance Company, Los Angeles County Superior Court No. C572724, preventing this action from proceeding to trial, including, but not limited to, preventing plaintiffs from using any lists of policyholders or information contained therein.
D. The superior court is ordered, for the purpose of minimizing any potential harm to Mission, to accelerate the preferential trial treatment normally accorded to litigants seeking injunctive relief. (Code Civ.Proc., § 527, subd. (a).)
1. There are two other provisions of AB 929. Section 1 amends Health & Safety Code, section 1597.531, subdivision (a), by replacing the $300,000 liability insurance requirement with a minimum liability coverage limit of $100,000 for all licensed child day care homes, per occurrence, not to exceed $300,000 in the aggregate during an annual policy period.Section 2 adds section 676.1 to the Insurance Code, which authorizes the imposition of administrative sanctions for the arbitrary cancellation and non-renewal of homeowners' insurance policies solely on the basis that the policy holders were licensed family home day providers, absent a material misrepresentation of fact, a substantial change in risk since the policy was issued, a non-payment of premium, or the insurer no longer writing homeowners' policies. (Ins.Code, § 676.1, subds. (a), (b).)
2. We are unaware of the source of the Commissioner's authority to “hire” Oakes as cocounsel. Insurance Code section 1036 states that the Attorney General is empowered to hire attorneys and authorizes pay forms in these instances.
3. The effect, if any, of the refunds made by Mission may be determined at the time of trial.
THOMPSON, Associate Justice.
LILLIE, P.J., and JOHNSON, J., concur.