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Court of Appeal:
Good Faith Wasn’t Required of Insured During Negotiations
Bendix Says That Policy Providing That Value of Art Works Following Partial Damage Would Be Determined by
Auctioning Them Did Not Require Genuine Effort by Policyholders to Work Out Pre-Sale Agreement
By a MetNews Staff Writer
The covenant of good faith and fair dealing did not apply to a contract for insurance coverage on an art collection which provided that the parties would try to reach an agreement as to the extent of partial damage to any works and, if they were not in accord, that the value would be established by auctioning the pieces, with the insurer paying the difference between the value stated in the policy and the sale price, the Court of Appeal held yesterday.
Los Angeles Superior Court Judge Randolph Hammock told a jury that if the insureds, Stanley and Gail Hollander, “did not try in good faith to reach an agreement” with the insurer, XL Specialty, “then the Hollanders are not entitled to collect from XL Specialty the $181,850 difference between the scheduled value of the paintings under the policy and the auction proceeds received by the Hollanders.”
That was error, Justice Helen I. Bendix of this district’s Div. One said in an unpublished opinion that reverses a judgment in favor of Gail Hollander (individually and as executor of the estate of her husband who died in 2016) in the amount of $19,500—nearly identiocal to the sum specified by Specialty in a statutory offer of compromise—and in favor of the insurer for $664,862.61 in pre- and post-offer costs.
Bendix declared that the language of the policy does not invest “Specialty with a contractual right to require the Hollanders to negotiate the paintings’ postrestoration partial loss in value reasonably and in good faith before they could recover the auction formula benefit.”
Damage by Handler
Damage was done by an unpacker who ripped carboard from three paintings, insured for $399,000, thinking it was packaging when it was actually part of the works. Restoration work was performed, at the insurer's expense. At an auction on Oct. 14, 2006, at Sotheby’s auction house in London, the paintings fetched $269,500.
Factoring in a commission they paid and incidental costs, the Hollanders made a claim for $181,850. Specialty denied it, pointing to its appraiser’s view that the works were diminished in value by only $9,975, but provided its offer of $19,950.
Paragraph 8 of the insurance policy provides, in part:
“Loss in value, if any, after Restoration, to be agreed upon between the Insured and the Company.
“In the event the Insured and the Company cannot agree on the amount of loss in value, the Property will be sold at public auction and the net proceeds shall inure to the Insured. The Company will pay the Insured the difference between the amount so realized and the insured value of the Property.”
Defeating Purpose
Disagreeing with Hammock’s view that the Hollanders were obliged to display good faith and fair dealing in the negotiation phase of a resolution, Bendix said:
“[W]e conclude the court’s instruction was erroneous because it ran afoul of a key limitation on the scope of the covenant of good faith and fair dealing, that is the covenant cannot be implied to defeat the purpose of the contract.”
She explained:
“The apparent purpose of paragraph 8’s two-part valuation process was to create a dispute mechanism that would serve as an alternative to litigation. Thus, it first gives the parties the opportunity themselves to reach agreement on the loss in value to the artwork knowing that if they could not, the market would determine that value through a public auction process that would set the compensation due to the Hollanders. Under either scenario, the parties would avert the costs and delay attendant to litigating the postrestoration loss in value of the artwork.”
Bendix said the instruction “scuttled this alternative dispute resolution process by directing the jury to evaluate the sincerity and reasonableness of the parties’ valuation negotiations, and by allowing the jury to utilize a new and different measure of valuation found nowhere in the policy.”
She went on to say:
“With this instruction, the court thus required the parties to litigate a valuation issue that would otherwise have been resolved by the public auction process and formula provided in paragraph 8. In doing so, the trial court turned a relatively expeditious and self-executing dispute resolution process into protracted litigation and a trial on an issue that paragraph 8 was intended to avoid.”
The case is Hollander v. XL America Group, B308142.
Gail Hollander was represented by Los Angeles attorneys A. Tod Hindin and Karen L. Hindin and by Claremont lawyer Jeffrey I. Ehrlich. Counsel for Specialty were Richard E. Walden of the Woodland Hills firm of Hymes, Schreiber & Walden and by Stephen O’Donnell and Elissa L. Isaacs of the Chicago firm of McCullough, PC.
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