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[Editor's note: footnotes (if any) trail the opinion]

[1] Filed 7/26/96

[2] Insurance






[7] Plaintiff and Appellant,



[9] Defendant and Respondent.

[10] B093653

[11] (Super. Ct. No. SC034765)

[12] APPEAL from a judgment of the Superior Court of Los Angeles County.

[13] Alan B. Haber, Judge. Reversed.

[14] Harold E. Griffin for Plaintiff and Appellant.

[15] Cooper, Kardaras & Scharf, L.L.P., Gerald G. Knapton and Linda Chalison for Defendant and

[16] An insured sued his real property insurer and insurance agent for breach of contract and negligence,
claiming that the defendants failed and refused to provide him with the 100 percent replacement cost
coverage he had requested and which the agent assured him he was receiving. On demurrer, the trial court
concluded that the insured could not state a cause of action against his insurer because the policy limits
were less than the cost of replacing structures destroyed by an earthquake and fire. We conclude that the
reasonable expectations of the insured would be that he was completely covered for the replacement cost
of the structures, regardless of the policy limits. Accordingly, we reverse the court's order of dismissal in
favor of the insurer.


[18] Narendra Desai purchased real property in Santa Monica in 1991. To safeguard his investment, Desai
sought to purchase earthquake, fire and hazard insurance. Desai informed an insurance vendor, Carol
Sacramone Insurance Agency, that he wanted 100 percent coverage for the cost of repairing or replacing
improvements to the property, including any increases for inflation. Sacramone told Desai that Farmers
Insurance Group offered the type of insurance Desai wanted, and orally represented that the policy
provided "100% coverage for the costs of repairs and/or replacement of the improvements to the property
including any and all increases in costs of repair or rebuilding in the event of a loss." In reliance upon the
representations of Sacramone and based on the understanding that the policy provided 100 percent
replacement coverage in the event of a loss, Desai purchased a Farmers insurance policy through
Sacramone, effective November 4, 1991. Before the policy issued, Sacramone personally inspected the
property to determine the amount of coverage needed to meet and fulfill Desai's stated requirements. The
policy was renewed annually through February 22, 1994.

[19] On January 17, 1994, two of the structures on Desai's land were completely destroyed by an
earthquake. On February 22, 1994, a third structure damaged in the earthquake was destroyed by fire.
The total loss sustained by Desai was $546,757. Desai made a claim of loss on his policy with Farmers.
Farmers agreed to pay Desai $158,734 on the grounds that this sum was the limit of its liability for the loss.

[20] Desai instituted this lawsuit on January 17, 1995. In his first amended complaint, he asserts a cause of
action for negligence against Sacramone for advising him to purchase insurance from Farmers when the
coverage for which he paid was not what he told Sacramone he needed. As a consequence of this
negligence, Desai was unable to rebuild the structures which were destroyed. Desai also makes a
respondeat superior claim against Farmers for Sacramone's negligence. Finally, Desai alleges a cause of
action against Farmers for breach of contract.


[22] 1. Appealability

[23] Desai has appealed from the trial court's April 13, 1995, order sustaining Farmer's demurrers without
leave to amend. The order sustaining the demurrers is not an appealable order. (Lavine v. Jessup (1957)
48 Cal.2d 611, 614.)

[24] The record on appeal also contains an order of dismissal as to Farmers pursuant to Code of Civil
Procedure section 581, subdivision (f)(1). The dismissal operates as a final judgment with respect to
Farmers, and is separately appealable. (Seidner v. 1551 Greenfield Owners Assn. (1980) 108 Cal.App.3d
895, 901.) In the interests of justice and economy, we shall treat the notice of appeal as incorporating the
order of dismissal.

[25] 2. Standard of Review

[26] An appellate court reviews a ruling sustaining a demurrer without leave to amend de novo, exercising
independent judgment on whether a cause of action has been stated as a matter of law. (Hoffman v. State
Farm Fire & Casualty Co. (1993) 16 Cal.App.4th 184, 189.) All facts properly pleaded are deemed
admitted, and we are not concerned with a plaintiff's possible inability to prove the claims made in the
complaint at trial. (Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125; Gruenberg v.
Aetna Ins. Co. (1973) 9 Cal.3d 566, 572.)

[27] 3. Breach of Contract Claim

[28] In 1994, the year Desai sustained his insured loss, his annual statement from Farmers showed that the
"Amount of Insurance" was $150,000 for loss or damage to structures (from fire, for example) and
$150,000 for earthquake loss or damage to structures. Farmers relies on general policy conditions stating
that it is only responsible for (1) "the replacement cost of . . . the building," or (2) "the amount actually and
necessarily spent to repair or replace the damaged building," or (3) "the limit of liability" under the policy,
whichever is smaller. The smallest amount was the $150,000 policy limit, which is what Farmers paid.

[29] Desai contends that the policy is not nearly so clear-cut as Farmers suggests. In support of his
contention, Desai points to a policy provision guaranteeing payment of replacement costs. The policy
contains a "Value Protection Clause" which provides: "We [Farmers] may increase the limits of insurance to
reflect changes in costs of construction and personal property values. Any such increase will be made on
the renewal date of this policy or on the anniversary date of 3-year policies paid annually. If a Replacement
Cost provision forms a part of this policy, we guarantee that the limits of insurance meet the replacement
cost requirements." Elsewhere within the policy or accompanying literature, Farmers announces the
following to its policyholders: "Your policy contains a very important feature called Value Protection. Value
Protection provides automatic protection against inflation so that the coverage amounts are increased as the
costs of replacing your home or Personal Property increase. Value Protection guarantees to meet all
minimum insurance-to-replacement cost requirements if any are present in your policy. Subject to the
amount of your policy limits and all policy provisions, depreciation will not be applied to most building
losses . . . . The enclosed premium notice includes the increased amounts of insurance and premium, based
on the applicable indexes for your property and your area. If there has been no increase in amounts of
insurance this is because the applicable indexes did not show an upward adjustment for this period." (Italics

[30] For the reassuring guarantees and "extended coverage" of the Value Protection plan, Desai alleges that
he paid an extra $108 annually in premiums.

[31] "We begin with established principles applicable to the interpretation of insurance policies. Words
used in an insurance policy are to be interpreted according to the plain meaning which a layman would
ordinarily attach to them. Courts will not adopt a strained or absurd interpretation in order to create an
ambiguity where none exists. [Citations.] [Para(s)] On the other hand, `any ambiguity or uncertainty in an
insurance policy is to be resolved against the insurer and . . . if semantically permissible, the contract will be
given such construction as will fairly achieve its object of providing indemnity for the loss to which the
insurance relates.' [Citations.] The purpose of this canon of construction is to protect the insured's
reasonable expectation of coverage in a situation in which the insurer-draftsman controls the language of the
policy." (Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 807-808.) The insurer-draftsman will
not be rescued from the consequences of the imprecise terminology used in the insurance contract,
especially where it would defeat the reasonable expectations of the insured. (Id. at p. 811.)

[32] Farmers would like for the policy limits language of the contract to be read in isolation, without
reference to other provisions. This is not the correct way to construe insurance policies, however. "The
principles governing interpretation of insurance contracts are familiar and well settled. . . . Each clause of
the contract must be considered with reference to every other relevant clause and the clauses construed
together in order to ascertain the intent of the parties. Similarly, in construing the meaning of a specific
policy provision we do not view the provision in isolation but in the context of other relevant policy
provisions. If the policy language is clear and explicit, it governs. If, on the other hand, the provision is
susceptible to two or more reasonable constructions, it must be construed in accordance with the
objectively reasonable expectations of the insured. Finally, if applying the foregoing rules does not eliminate
or resolve any alleged ambiguity, the ambiguity is resolved against the insurer in favor of liability under the
policy." (A.B.S. Clothing Collection, Inc. v. Home Ins. Co. (1995) 34 Cal.App.4th 1470, 1478-1479.)

[33] The "Value Protection Clause" in Desai's policy seriously undermines the purported liability cap stated
elsewhere in the policy. Farmers guarantees to meet replacement cost requirements, and promises
automatic protection by increasing coverage levels as the cost of replacing the insured property increases.
*fn1 A reasonable policyholder could readily construe that to mean that he or she need not demand
increased coverage each year because Farmers would "automatically" take increased costs into account in
fixing the coverage and premium. Increased coverage is hardly "automatic" if the insured has to research the
matter himself, then demand changes in the policy. Moreover, the "guarantee" to meet replacement cost
requirements makes it appear that Farmers is willing to gamble that it correctly fixed the cost of replacing
the property when it drew up the contract and set the premium amount. Desai alleges that he paid over
$100 per year for this guarantee. The guarantee is worthless, however, if it turns out that the estimated cost
of replacement stated in the policy is dead wrong, either because the insurance agent who inspected the
property miscalculated what it would cost to rebuild, or because the insurer neglected to increase
automatically the policy limits each year to keep up with inflation. We doubt that the reasonable expectation
of the insured was to pay over $100 per year extra for a worthless guarantee. Rather, the insured would
expect to pay one premium for a policy that merely had a $150,000 policy limit, and a higher premium for a
policy that guaranteed the policy limit would cover the insured's replacement cost.

[34] In short, the $150,000 coverage amount is completely incompatible with other policy language
guaranteeing replacement cost and providing automatic protection with increased coverage. If Farmers
wished to pay only $150,000, it should not have promised automatic inflation protection or guaranteed
replacement coverage. It is plain that Farmers grossly underestimated the replacement cost of Desai's
property, but that is Farmer's problem, not Desai's. Reading the policy language as a whole, and
interpreting it in favor of the insured as we must where there is a patent ambiguity of this sort, we conclude
that an objectively reasonable insured layperson would believe the policy guaranteed replacement
coverage, regardless of what the purported policy limits were. Accordingly, the trial court erred in
construing the policy in favor of the insurer and in sustaining the demurrer to this cause of action.

[35] 4. Respondeat Superior Liability

[36] Desai alleges that Sacramone is an agent for Farmers and acted within the course and scope of that
agency and with the permission and consent of Farmers when negligently selling inadequate insurance to
him. Desai argues that Farmers is vicariously liable for Sacramone's negligence because of their agency

[37] An insurer, as a principal, may be vicariously liable for the torts of its agent if the insurer directed or
authorized the agent to perform the tortious acts, or if it ratifies acts it did not originally authorize. (Shultz
Steel Co. v. Hartford Accident Indemnity Co. (1986) 187 Cal.App.3d 513, 518-519.) Layered atop the
principal/agent relationship of the insurer to its agent is the insurer's fiduciary duty to conduct itself with the
utmost good faith for the benefit of its insured. (Id. at p. 519.)

[38] Farmers relies on four cases which it claims establish that it cannot be held liable for Sacramone's
negligence: Ahern v. Dillenback (1991) 1 Cal.App.4th 36, 42-43; Schultz Steel Co. v. Hartford Accident
Indemnity Co., supra, 187 Cal.App.3d 513, 522-523 [public policy militates against imposing duty on
insurer to advise of availability of coverage beyond what was requested by insured]; Gibson v. Government
Employees Ins. Co. (1984) 162 Cal.App.3d 441, 448, 452 [insurer who made no representation,
promise, guarantee or warranty regarding the nature and extent of the coverage it offered was not liable for
failing to advise insured to purchase uninsured motorist coverage which the insured never requested]; and
Jones v. Grewe (1987) 189 Cal.App.3d 950, 956.

[39] None of the cited cases are on point. In each instance, the insured was suing its insurer for failing to
(1) recommend additional coverage or (2) spontaneously procure unrequested additional coverage for its
insured or (3) advise that additional coverage was available. That is not the case here. Desai is suing
because the insurer (through its agent) negligently represented that the policy in fact provided the 100
percent replacement cost coverage that Desai demanded from his insurance before he ever purchased the
policy from Farmers.

[40] This is not a situation wherein an insured belatedly realized -- after an accident occurred and a claim
was made and denied-- that he or she should have had more or different coverage. Rather, Desai
demanded a particular level of coverage at the outset, before he agreed to purchase a policy. It was then
represented to him that he was receiving the demanded level of coverage from Farmers, and only
afterwards did he discover the coverage he purchased was not what he had demanded nor what the insurer
and its agent warranted it was. This is not a "failure to recommend more coverage" case; it is a "failure to
deliver the agreed-upon coverage" case.

[41] A "failure to deliver the agreed-upon coverage" case is actionable, unlike the "failure to recommend"
cases cited by Farmers. An insurance agent has an "obligation to use reasonable care, diligence, and
judgment in procuring insurance requested by an insured." (Jones v. Grewe, supra, 189 Cal.App.3d at p.
954; Kurtz, Richards, Wilson & Co. v. Insurance Communicators Marketing Corp. (1993) 12
Cal.App.4th 1249, 1257.) A broker's failure to obtain the type of insurance requested by an insured may
constitute actionable negligence and the proximate cause of injury. (Nowlon v. Koram Ins. Center, Inc.
(1991) 1 Cal.App.4th 1437, 1447.) Moreover, if the agent fails to exercise reasonable care in procuring
the type of insurance that the insured demanded and bargained for, the cases hold that the insurer may be
liable under theories of ratification and ostensible authority.

[42] For example, where an insurance agent negligently failed to name the insured's lessor as an additional
insured on the policy, so that the lessor was exposed to liability when someone was injured on the insured
premises, a claim which survived demurrer was stated against the insurance carrier based on the negligence
of its agent. (Jackson v. Aetna Life & Casualty Co. (1979) 93 Cal.App.3d 838, 840, 848.) The court
observed that the insurance carrier --as a "quasi-public" entity-- may be held vicariously liable for failing to
fulfill its basic obligation to provide the insurance required by the policy's intended beneficiary and
demanded from the agent. (Id. at pp. 846-847.)

[43] As a further example, an insured instructed an authorized agent of Fireman's Fund Insurance Company
to procure $15,000 in personal property insurance in Lippert v. Bailey (1966) 241 Cal.App.2d 376. After
a fire on the insured premises, the insured discovered that the agent had obtained only $5,000 in insurance.
The insurance carrier maintained that it was only liable for the face amount of the policy as written for
$5,000, and the insured sued. (Id. at p. 379.) The appellate court disagreed with the insurer, noting that
"the plaintiffs bargained for and entered into a contract of fire insurance for an adequate consideration with
Fireman's Fund Insurance Company in exchange for certain guaranties of insurance protection in specified
amounts. The defendants herein have failed to obtain the specified amounts of insurance protection from the
company which had been bargained for. These factors would indicate a primary right of the plaintiffs in the
insurance contract and a breach of duty pertaining to that right in failing to provide the bargained for
coverage." (Id. at p. 381.) Though the carrier settled with the plaintiffs prior to trial, the court stated that the
negligence of the agent was attributable to the insurer and that a legal remedy could have been properly
pursued against the insurer. (Id. at pp. 382-384.)

[44] In a case from this Division reciting facts remarkably similar to those alleged here, this court concluded
that the insured's lawsuit survived demurrer where it was claimed that the insurer --through its agent-- failed
to insure adequately the insured's house against loss. (Free v. Republic Ins. Co. (1992) 8 Cal.App.4th
1726.) The insured requested coverage adequate to rebuild his home. He was informed by the defendant
insurance company's agent that the policy would cover reconstruction. The insured's home was destroyed
by fire, at which point he discovered that the policy limit was less than it would cost to replace his home.
(Id. at p. 1729.) This court observed that the insured sought to be protected against a very specific
eventuality: the destruction of his home. The defendants assured him that his coverage was sufficient for this
purpose, which created a viable claim of negligence when it later became evident that the policy limit was
less than it would cost to rebuild. (Id. at p. 1730.) That is precisely what is alleged in the case at bar.

[45] In light of the authorities we have cited, the trial court erred in finding that Desai had no actionable
claim against Farmers for Sacramone's negligence.


[47] The judgment (order of dismissal) in favor of Farmers Insurance Company is reversed. Desai is
entitled to recover his costs on appeal from Farmers.

[48] BOREN, P.J.

[49] We concur:

[50] FUKUTO, J.



[52] *fn1 To the extent that some of this language is contained in a premium renewal notice sent to Desai
by Farmers, to induce policyholders like Desai to renew their policies, we shall treat it as an affirmative
representation by the insurer to its insured regarding the scope and meaning of the policy.

***** END FOOTNOTE(S) HERE *****


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