3305-3321 20th St. Rez, LLC v. State Farm General Insurance Company

Background

The plaintiff owned a mixed-use building containing commercial and residential units. In August 2022, a broken water supply line damaged three units. Sajeel Dattani, who manages properties for the M. Dattani Credit Trust, spent $7,000 removing water. The Trust then submitted an insurance claim to State Farm under a Commercial Apartment Policy.

State Farm’s adjuster estimated the damage at $111,000, while the Trust submitted a contractor’s estimate of $441,000. The Trust requested appraisal under the policy after the parties disagreed about the repair costs. State Farm initially refused, but later agreed to appraisal. The appraisal panel awarded the plaintiff $474,000 as the replacement cost for the loss.

The Trust also sought $158,000 for lost rental income. State Farm requested tax returns, rent rolls, and other information. The Trust responded that the damaged units had not generated income for more than five years and that it did not have the requested records. State Farm denied the lost-income claim, citing the lack of supporting documents, its view that the Trust did not intend to rent the units, and its belief that prior Ellis Act evictions made the units unrentable.

Claims and Summary-Judgment Standard

The plaintiff asserted breach of contract and breach of the implied covenant of good faith and fair dealing. The implied-covenant claim was based on State Farm’s initial refusal of appraisal and its denial and investigation of the lost-income claim. The contract claim was based on the appraisal dispute, the lost-income claim, and the $7,000 in water-removal expenses.

Summary judgment is appropriate only when the evidence shows no genuine dispute about a fact that could affect the result and the moving party is entitled to judgment under the law. At this stage, the court does not decide credibility or weigh conflicting evidence; it views the evidence favorably to the party opposing the motion.

Analysis

Implied Covenant of Good Faith and Fair Dealing

The court said a plaintiff must show that an insurer withheld benefits unreasonably or without proper cause. The appraisal theory survived because a jury could find State Farm’s refusal unreasonable. The policy allowed either party to request appraisal when the parties failed to agree on the actual cash value or amount of the loss. State Farm initially treated the dispute as involving coverage questions that could not be decided through appraisal, but State Farm managers later conceded that the issues were appraisable under California law. The court also found factual disputes about the reasons for State Farm’s refusal and rejected State Farm’s argument that appraisal required the parties first to agree that they had reached an impasse.

The lost-income theory also survived. The court found that a jury could conclude State Farm’s denial was unreasonable because the reasons in the denial letter did not directly address whether the Trust intended to rent the damaged units. The court cited the principle that an insurer may breach the implied covenant by failing to investigate a claim properly.

Breach of Contract

The court held that none of the three alleged contract breaches failed as a matter of law. First, the appraisal claim survived because the policy did not require the parties to reconcile their differing estimates or agree that they had reached an impasse before appraisal became available. State Farm estimated the loss at $111,000, while the Trust estimated it at $441,000, and the policy allowed a written appraisal request when the parties disagreed about the amount of loss.

Second, factual disputes prevented summary judgment on the lost-income claim. State Farm identified evidence suggesting that the Trust did not intend to rent the units, including the lack of certain notices and direct evidence of a rental listing or rental inquiries. The Trust offered evidence describing a decision to rent, a Craigslist listing, inquiries from potential renters, photographs, and calendar entries showing open houses. The court held that it could not resolve this issue at summary judgment.

Third, the court held that the $7,000 water-removal claim could proceed because the scope of the appraisal award was unclear. State Farm argued that the appraisal had included all remediation costs, but declarations from the Trust’s counsel and expert stated that the appraisal submission did not include the immediate water-removal expenses. The award’s reference to restoring the units to their pre-loss condition was ambiguous, so summary judgment was not warranted.

Disposition

Judge Laurel Beeler denied State Farm’s motion for summary judgment. The court stated that a jury could find State Farm’s denial of appraisal and lost rental income objectively unreasonable, and that disputes of material fact prevented summary judgment on the breach-of-contract claim.