SUMMARY OPINION
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
DEAN, Special Trial Judge:
This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year at issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent determined for 2006 a deficiency of $3,521 in petitioner's Federal income tax.
The issue for decision is whether petitioner is entitled to deduct expenses for travel, meals, and entertainment in excess of those respondent allowed.
Background
Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits received in evidence are incorporated herein by reference. Petitioner resided in New York when the petition was filed.
Petitioner became in 2004 a tenured professor of mathematics at the City College of New York, part of the City University of New York (CUNY). In that same year petitioner started doing research in cryptography. His research in cryptography was related to his earlier work in a field of mathematics called group theory. Petitioner's research led to the idea of producing unique algorithms on software for cryptographic purposes to be sold to chip manufacturers. Petitioner found that in 2004 and 2005 there existed a substantial market for products like RFID (radio frequency identification) tags, "keyless" entry devices, and other small electronic devices that require code encryption. For a conference in 2005, "Crypto 2005", petitioner was listed on the program, along with Alexei Myasnikov and Alexander Ushakov, as being responsible for the topic "A Practical Attack on a Braid Group Based Cryptographic Protocol" from 2:25 to 2:50 p.m.
An algorithm is a step-by-step procedure for solving a problem or accomplishing some end. Webster's Ninth New Collegiate Dictionary 70 (1990). According to petitioner, cryptographic algorithms are very fast and use very little computer memory, making them ideal for tiny computer chips.
In 2006 petitioner traveled to Nashville, Tennessee, on two occasions. He also made trips in 2006 to Ithaca, New York, Beijing, China, his former home in Moscow, Russia, Cologne and Bonn, Germany, and an international conference on information security and cryptography in Busan, Korea. The purpose of the trip to Ithaca was to discuss group-based cryptography with a Professor Reilly. Professor Reilly was not a potential customer. Petitioner incurred no hotel expenses on his two trips to Moscow because he stayed with his family. On the application for the conference in Korea petitioner listed his affiliation as City College of New York.
Petitioner made two trips to Moscow lasting from June 17 to 30, 2006, and from July 7 to 15, 2006.
Petitioner purchased during 2006 over 70 books related to the study of abstract algebra including three directly related to cryptography.
Petitioner and his associates, Professors Myasnikov and Ushakov, could have used the commercialization office at CUNY to promote their cryptographic algorithms. They did in fact investigate using the office in 2007. They did not make earlier inquiries because petitioner did not know the office existed as he was not previously involved in business operations.
Petitioner timely filed his Federal income tax return for 2006 and attached to it a Schedule C, Profit or Loss From Business. The Schedule C listed the principal business or profession as "Research and Writing" and the business name as "Vladimir Shpilrain". Petitioner listed his home address as the business address. Petitioner reported gross receipts and gross income of $476. He reported expenses on the Schedule C of $15,397, including expenses for: (a) Supplies of $4,230, including books and computer equipment; (b) travel of $7,920; and (c) meals and entertainment of $2,140.
None of petitioner's products have a commercial name. Petitioner has no patent or copyright on his algorithms. Petitioner, however, citing the complexity of the mathematics of his algorithms, minimized the necessity for intellectual property protection. Petitioner, as of trial, had never sold a software program. Petitioner's business has no Web site, and petitioner has no Web site. Petitioner produced no physical evidence of his product at trial. Petitioner had at trial no records to document his meetings with potential buyers.
Discussion
Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer has the burden of proving that those determinations are erroneous. See Rule 142(a);Welch v. Helvering, 290 U.S. 111, 115 (1933). In some cases the burden of proof with respect to relevant factual issues may shift to the Commissioner under section 7491(a). Petitioner did not argue or present evidence that he satisfied the requirements of section 7491(a). Therefore, the burden of proof with respect to the issues in the notice of deficiency does not shift to respondent.
Petitioner argues that he is entitled to deduct the ordinary and necessary business expenses of his "research and writing" activity. Respondent in the notice of deficiency determined that petitioner did not establish that the claimed Schedule C expenses were paid or were ordinary and necessary to the extent they exceeded $5,337. In his pretrial memorandum respondent's counsel argued, in addition to the issues in the statutory notice, that petitioner was not in a trade or business either because he had no profit objective, or alternatively, because he was just starting up but had not yet commenced his business. Trade or Business Expenses
Section 162 generally allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Generally, no deduction is allowed for personal, living, or family expenses. See sec. 262. The taxpayer must show that any claimed business expenses were incurred primarily for business rather than personal reasons. See Rule 142(a);Walliser v. Commissioner, 72 T.C. 433, 437 (1979). To show that the expense was not for personal reasons, the taxpayer must show that the expense was incurred primarily to benefit his business, and there must have been a proximate relationship between the claimed expense and the business. See Walliser v. Commissioner, supra at 437.
Petitioner has, potentially, two trades or businesses. He is employed as a professor of mathematics, and he is engaged in research and writing on mathematical issues. He "wears two hats" but the "hats" are so similar in appearance that it is difficult to tell the difference between them. Because of this circumstance, it is particularly important that petitioner distinguish his research and writing activity from his activity as college professor as well as from his personal activities.
An employee's performance of services is a trade or business. E.g., Primuth v. Commissioner, 54 T.C. 374, 377 (1970).
If a particular expense is related to his employment, it might be deductible as an employee business expense on Schedule A, Itemized Deductions. Petitioner would have to show, however, that the expense was not subject to reimbursement from his employer, CUNY. An expense is not deductible as ordinary and necessary to the extent that it was subject to reimbursement by the employer. Podems v. Commissioner, 24 T.C. 21, 22-23 (1955).
For an expense to be deductible as a trade or business expense on Schedule C petitioner must show that the expense is not a personal expense and that the expense is that of a trade or business other than that of his services as an employee.
Petitioner spent a substantial sum for the purchase of books related primarily to abstract algebra. He included $1,859 as the cost of the books on Schedule C in "supplies", but he offered no evidence at trial, other than his own testimony, that the book purchases were related to a trade or business other than his employment.
Expenses Under Section 274
Certain business expense deductions described in section 274 are subject to strict rules of substantiation. See sec. 1.274-5T(c), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). Section 274(d) provides that no deduction shall be allowed with respect to: (a) Any traveling expense, including meals and lodging away from home; (b) any item related to an activity of a type considered to be entertainment, amusement, or recreation; or (c) the use of any "listed property", as defined in section 280F(d)(4), unless the taxpayer substantiates certain elements.
"Listed property" includes any computer or peripheral equipment. Sec. 280F(d)(4)(A)(iv).
For an expense described in one of the above categories, the taxpayer must substantiate by adequate records or sufficient evidence to corroborate the taxpayer's own testimony: (1) The amount of the expenditure or use; (2) the time and place of the expenditure or use; (3) the business purpose of the expenditure or use; and in the case of entertainment, (4) the business relationship to the taxpayer of each expenditure or use. See sec. 274(d).
To meet the adequate records requirements of section 274(d) a taxpayer must maintain some form of records and documentary evidence that in combination are sufficient to establish each element of an expenditure or use. See sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). A contemporaneous log is not required, but corroborative evidence to support a taxpayer's reconstruction of the elements of expenditure or use must have "a high degree of probative value to elevate such statement" to the level of credibility of a contemporaneous record. Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
Included in petitioner's deduction for supplies was $2,108 for a Sony Vaio notebook computer. Petitioner offered no substantiation for the purchase of the computer, and the expense fails to meet the requirements of section 274(d). See sec. 1.274-5T(d)(3), Temporary Income Tax Regs., 50 Fed. Reg. 46026 (Nov. 6, 1985).
Petitioner's traveling expense deductions, including meals and lodging away from home, are subject to section 274(d) and the regulations thereunder. Petitioner presented receipts and travel documents that meet the adequate records requirements to substantiate the amount of his claimed travel expenditures and the time and place of the expenditures. Where he has failed is at providing adequate records of the business purpose of the expenditures. Petitioner testified that he did not keep formal records because he did not think he would "need them" (for IRS).
Petitioner testified that his business was a joint venture with Professors Ushakov and Myasnikov and that there was a simple partnership agreement to share profits. Petitioner explained that his business operations include promotion and advertising and that the expenses at issue are related to promoting and advertising his product. Petitioner stated that he was promoting and advertising his products at various meetings. Petitioner testified that his associates, who helped him create the software programs, also traveled abroad to conferences. According to petitioner, some of these meetings were conferences in cryptography that were attended not only by academic researchers but also by potential buyers "from the industry".
This testimony seems to conflict with his previous testimony that he did not contact the commercialization office at CUNY before 2007 because he was not previously involved in "business operations".
Petitioner explained that during presentations at the conferences, he described the benefits and features of his product and invited contacts from interested parties.
According to petitioner, there was feedback from his meetings: potential buyers made comments, asked questions and suggested improvements. He had to think about the feedback and contact his partners to come up with improvements. The meetings were "quite useful" because they gave him a feeling of what a particular industry wanted from a product like his.
Petitioner's testimony is reasonable; however, he has failed to provide the Court with any adequate records or sufficient evidence to corroborate his own testimony. There is documentary evidence of only one trip to a "conference" on cryptography in 2006, in Busan, Korea. At that conference petitioner listed himself as an affiliate of CUNY. Petitioner testified that he met with "potential customers" in China, Russia, and Germany. He failed, however, to provide any documentary evidence to substantiate his own testimony on the business purpose of any of the trips to Nashville, Tennessee, Ithaca, New York, Beijing, China, Moscow, Russia, and Cologne and Bonn, Germany.
Were petitioner to have met the requirements of sec. 274(d), with respect to the trips to Moscow, he would be required to show that portion of each trip that was spent on business as opposed to personal activities. See sec. 274(c).
Petitioner has failed to show that he is entitled to Schedule C deductions in excess of those respondent allowed. Because petitioner has failed to adequately substantiate his deductions, the Court need not address the profit objective, trade or business, and startup issues respondent raised in his pretrial memorandum.
To reflect the foregoing,
Decision will be entered for respondent.
ode, §§ 1550, 1565.) "Mutual assent is determined under an objective standard applied to the outward manifestations or expressions of the parties, i.e., the reasonable meaning of their words and acts, and not their unexpressed intentions or understandings." (
Alexander v. Codemasters Group Limited (2002)
104 Cal.App.4th 129, 141 [
127 Cal.Rptr.2d 145].) Mutual assent is a question of fact. (
Ibid.)
PSIC and McGraw argue PSIC never assented to the EOI as a binder because it never received the EOI, the Mustains' application, or the premium payment, and had no knowledge of the transaction. However, AMZ's actions in issuing the EOI constituted assent. Whether the EOI lacked mutual assent therefore depends on whether AMZ was acting as PSIC's actual or ostensible agent, an issue that was presented to the jury to decide.
d. Consideration (8) Every executory contract requires consideration, which may be an act, forbearance, change in legal relations, or a promise. (1 Witkin, Summary of Cal. Law, supra, Contracts, § 202, p. 236.) "`[F]or the contract to bind either party, both must have assumed some legal obligations.'" ( Bleecher v. Conte (1981) 29 Cal.3d 345, 350 [ 213 Cal.Rptr. 852, 698 P.2d 1154].)
PSIC and McGraw argue the EOI lacked consideration because it imposed no legal obligation on the Mustains or Chicago Title to pay the premium. A binder need not identify any consideration because an agreement to pay the insurer's usual premium will be implied. ( Apparel Mfrs. Supply Co. v. National Auto. Cas. Ins. Co., supra, 189 Cal.App.2d at p. 456.) Nonetheless, the EOI gives the total annual premium as $776, and included an invoice from AMZ to Chicago Title, stating the premium of $776 was "Due and Payable upon Receipt." No evidence was presented to suggest Chicago Title did not believe it was legally obligated to pay the premium.
e. Whether the EOI Obligated PSIC
Citing Insurance Code section 382.5, subdivision (a), PSIC and McGraw argue the EOI could not be a binder because it did not contain language obligating them to provide any insurance coverage pending issuance of the policy. PSIC and McGraw again misconstrue the nature and contents of a binder.
(9) The first sentence of subdivision (a) of Insurance Code section 382.5 divides the definition of binder into two parts. The first part of the definition, following the number (1), is prescriptive, and lists the prescribed contents of a binder such as the name and address of the insured. The second part of the definition, following the number (2), is descriptive, not prescriptive, and describes the legal effect of the binder as "temporarily obligat[ing] the insurer to provide that insurance coverage pending issuance of the insurance policy." Thus, the binder need only identify the nature and amount of coverage and any special exclusions not contained in a standard policy. The EOI satisfied that requirement. The EOI obligated PSIC to provide insurance according to "the terms, conditions and exclusions customarily contained in the standard policy" used by PSIC. ( National Emblem Ins. Co. v. Rios, supra, 275 Cal.App.2d at p. 76.)
3.
PSIC and McGraw's Failure to Offer Jury Instructions on Contract Formation
PSIC and McGraw argue the trial court erred by refusing to give PSIC and McGraw's proposed jury instructions on contract formation, CACI Nos. 300, 302 to 307, and 309. PSIC and McGraw provide no record citations to support their assertion they offered contract formation instructions. By failing to cite to the record, PSIC and McGraw have waived the argument. ( Dietz v. Meisenheimer Herron (2009) 177 Cal.App.4th 771, 799-800 [ 99 Cal.Rptr.3d 464]; see Cal. Rules of Court, rule 8.204(a)(1)(C).) "When an appellant's brief makes no reference to the pages of the record where a point can be found, an appellate court need not search through the record in an effort to discover the point purportedly made." ( In re S.C. (2006) 138 Cal.App.4th 396, 406 [ 41 Cal.Rptr.3d 453].) Despite this lack of record citations, we have reviewed those instructions in the appellants' appendix marked refused or withdrawn, and instructions on contract formation are not among them.
PSIC and McGraw's failure to offer proposed jury instructions on contract formation means any error in instructing the jury the EOI was a binder was harmless. Instructional error in a civil case is prejudicial "`where it seems probable' that the error `prejudicially affected the verdict.'" ( Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 580 [ 34 Cal.Rptr.2d 607, 882 P.2d 298].) Because the record shows PSIC and McGraw failed to offer proposed instructions on contract formation, the jury could not have decided the purported factual issues that PSIC and McGraw contend were necessary to determine whether the EOI was a binder.
E.
The Trial Court Did Not Err by Denying PSIC and McGraw's Motion for a JNOV.
PSIC and McGraw argue the trial court erred in denying their motion for a JNOV because the evidence introduced at trial established the EOI was not a binder as a matter of law under basic contract principles. We disagree. As we have explained, there were no factual issues on contract formation for the jury to decide other than agency, and, on the evidence presented at trial, the EOI was a binder as a matter of law.
In addition, Chicago Title's expert witness Clinton Miller testified the EOI constituted a binder. When asked why the EOI was a binder, Miller answered: "Industry standards. That's what the insurance industry uses to bind coverage." Miller testified that, in his experience, the EOI form is routinely used as a binder.
Substantial evidence supported the verdict; therefore, the trial court did not err by denying PSIC and McGraw's motion for a JNOV. ( Clemmer v. Hartford Insurance Co., supra, 22 Cal.3d at pp. 877-878.)
III. The Evidence at Trial Supported the Jury's Finding That AMZ Was PSIC's Agent.
The jury specifically found that AMZ was PSIC's actual or ostensible agent. PSIC and McGraw contend AMZ was not PSIC's actual agent for two reasons: (1) AMZ did not have an appointment on file with the Department of Insurance to act as PSIC's agent, and (2) the producer's agreement between McGraw and AMZ creates a broker relationship and expressly denies AMZ authority to bind PSIC without written authorization. We conclude substantial evidence supported the jury's finding of agency.
An insurance broker is "a person who, for compensation and on behalf of another person, transacts insurance other than life insurance with, but not on behalf of, an admitted insurer." (Ins. Code, § 1623, subd. (a).) A broker is not an agent of and cannot bind the insurer, and the insurer is not liable for the broker's acts or omissions. ( Rios v. Scottsdale Ins. Co. (2004) 119 Cal.App.4th 1020, 1026 [ 15 Cal.Rptr.3d 18]; Kurtz, Richards, Wilson Co. v. Insurance Communicators Marketing Corp. (1993) 12 Cal.App.4th 1249, 1257-1258 [ 16 Cal.Rptr.2d 259].)
(10) "Any person acting as a licensee under this chapter shall not act as an agent of an insurer unless the insurer has filed with the commissioner a notice of appointment, executed by the insurer, appointing the licensee as the insurer's agent." (Ins. Code, § 1704, subd. (a).) "`In addition to possessing a license, an insurance agent must be authorized by an insurance carrier to transact insurance business on the carrier's behalf. This authorization must be evidenced by a notice of agency appointment on file with the Department of Insurance. [Citation.]'" ( Krumme v. Mercury Ins. Co. (2004) 123 Cal.App.4th 924, 929 [ 20 Cal.Rptr.3d 485].)
It is undisputed that AMZ did not have a notice of appointment from PSIC on file with the Department of Insurance. While the lack of a notice of appointment might subject AMZ to fines or a disciplinary proceeding, AMZ's actions in issuing the EOI as a binder could bind PSIC if the facts otherwise support an agency relationship. "[Insurance Code section 1704, subdivision (a)] may simply impose further requirements on the conduct of an insurance agent, rather than establishing additional criteria for the creation of an agency relationship. In other words, it may be unlawful for an entity to act as an agent of the insurer without complying with section 1704[, subdivision ](a), but that entity would still constitute an insurance agent for the present purposes." ( Oakland-Alameda County Coliseum, Inc. v. National Union Fire Ins. Co. (N.D.Cal. 2007) 480 F.Supp.2d 1182, 1196.) We agree with this reasoning.
(11) The evidence established AMZ had actual authority to bind PSIC by issuing EOFs for escrow transactions. Actual authority can arise as a result of the principal's conduct that causes the agent reasonably to believe that the principal consents to the agent's act on the principal's behalf. ( Tomerlin v. Canadian Indemnity Co. (1964) 61 Cal.2d 638, 643 [ 39 Cal.Rptr. 731, 394 P.2d 571]; see Civ. Code, § 2316 ["Actual authority is such as a principal . . . intentionally, or by want of ordinary care, allows the agent to believe himself to possess."].) Testimony at trial established that Jacob had instructed and authorized Zibara and Torres at AMZ to bind PSIC in escrow transactions by issuing EOFs before receipt of the premium payment and a signed application. Zibara and Torres understood they could issue binders on behalf of PSIC by following those procedures. AMZ had bound PSIC in this fashion 30 to 40 times without complaint from PSIC or instructions to cease.
(12) PSIC and McGraw argue AMZ acted outside the scope of authority to act as PSIC's agent by issuing an EOI as a binder in violation of written guidelines for binding homeowners policies. This argument ignores the evidence that Jacob had instructed and authorized AMZ to issue EOI's as binders for escrow transactions before receiving premium payments and signed applications. In addition, "the general rule is that `. . . in the absence of notice, actual or constructive, to the insured of any limitations upon such agent's authority, a general agent may bind the company by any acts, agreements or representations that are within the ordinary scope and limits of the insurance business entrusted to him, although they are in violation of private instructions or restrictions upon his authority.'" ( Troost v. Estate of DeBoer (1984) 155 Cal.App.3d 289, 298 [ 202 Cal.Rptr. 47], quoting Cronin v. Coyle (1935) 6 Cal.App.2d 205, 213 [ 44 P.2d 385].) Neither the Mustains nor Chicago Title was informed that AMZ's authority to issue EOFs as binders of homeowners insurance was limited in any way.
(13) The evidence also supported a finding of ostensible authority. "[O]stensible authority arises as a result of conduct of the principal which causes the third party reasonably to believe that the agent possesses the authority to act on the principal's behalf." ( Tomerlin v. Canadian Indemnity Co., supra, 61 Cal.2d at p. 643; see Civ. Code, § 2300.) "Ostensible authority may be established by proof that the principal approved prior similar acts of the agent." ( United States Credit Bureau, Inc. v. Cheney (1965) 235 Cal.App.2d 357, 360 [ 45 Cal.Rptr. 525].) "`[W]here the principal knows that the agent holds himself out as clothed with certain authority, and remains silent, such conduct on the part of the principal may give rise to liability. [Citation.]' [Citation.]" ( Gulf Ins. Co. v. TIG Ins. Co. (2001) 86 Cal.App.4th 422, 439 [ 103 Cal.Rptr.2d 305], quoting Preis v. American Indemnity Co. (1990) 220 Cal.App.3d 752, 761 [ 269 Cal.Rptr. 617].)
By issuing the EOI as a binder before payment of the premium and receipt of the signed application, AMZ was acting according to PSIC's instructions and with PSIC's authorization. Zibara testified AMZ had issued EOI's as binders in such circumstances 30 to 40 times without objection from PSIC. Mrozek testified she had seen EOI's issued by AMZ naming PSIC as the insurer five to 10 times and believed AMZ had authority to prepare and issue the EOI for the Mustains.
Citing Civil Code section 2334, PSIC and McGraw argue they cannot be held liable based on ostensible authority because the Mustains and Chicago Title were negligent. Civil Code section 2334 states: "A principal is bound by acts of his agent, under a merely ostensible authority, to those persons only who have in good faith, and without want of ordinary care, incurred a liability or parted with value, upon the faith thereof." PSIC and McGraw's argument the Mustains were negligent for failing to return a signed insurance application ignores Cheryl Mustain's testimony that she never received an application. PSIC and McGraw assert Chicago Title was negligent for failing to pay the premium; however, Chicago Title's negligence is not material because, as the jury found, the EOI was not lawfully cancelled.
IV. The Jury's Finding That the EOI Was Not Legally Cancelled Is Binding on PSIC.
The jury found PSIC and McGraw did not legally cancel the EOI before Cheryl Mustain's fire loss. PSIC and McGraw did not challenge that finding in their opening brief or in their motion for a JNOV. For that reason, Chicago Title asserts in the respondent's brief that PSIC and McGraw forfeited any challenge to the jury's finding the EOI was not legally cancelled. For the first time, in the reply brief PSIC and McGraw argue the evidence does not support that finding. We deem the argument waived and conclude PSIC and McGraw are bound by the jury's finding the EOI was not lawfully cancelled. ( Employers Mutual Casualty Co. v. Philadelphia Indemnity Ins. Co. (2008) 169 Cal.App.4th 340, 349-350 [ 86 Cal.Rptr.3d 383]; Cold Creek Compost, Inc. v. State Farm Fire Casualty Co. (2007) 156 Cal.App.4th 1469, 1486 [ 68 Cal.Rptr.3d 216] ["Arguments cannot properly be raised for the first time in an appellant's reply brief, and accordingly we deem them waived in this instance."]; Heiner v. Kmart Corp. (2000) 84 Cal.App.4th 335, 351 [ 100 Cal.Rptr.2d 854] [argument raised for the first time in the litigation in appellant's reply brief is "doubly waived"].)
V. The Evidence at Trial Supported the Jury's Finding of Bad Faith.
PSIC and McGraw argue (1) the evidence did not support the jury's finding they acted in bad faith by failing to properly investigate Cheryl Mustain's claim and (2) the trial court erred in denying PSIC and McGraw's motion for a JNOV based on insufficiency of the evidence to support that finding. In making those arguments, PSIC and McGraw ignore evidence supporting a finding of bad faith and recite only evidence in their favor. Most strikingly, PSIC and McGraw assert Cheryl Mustain "never demanded coverage" and "[t]he only evidence presented at trial was that PSIC did not provide coverage."
(14) "`[T]he ultimate test of [bad faith] liability in the first party cases is whether the refusal to pay policy benefits was unreasonable.'" ( Morris v. Paul Revere Life Ins. Co. (2003) 109 Cal.App.4th 966, 973 [ 135 Cal.Rptr.2d 718].) An insurer cannot reasonably and in good faith deny insurance benefits to its insured without fully investigating the grounds for its denial. ( Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818-819 [ 169 Cal.Rptr. 691, 620 P.2d 141].)
An insurer is not liable in bad faith for denying or delaying payment of policy benefits based on a genuine dispute with the insured as to the existence or amount of coverage. ( Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 723 [ 68 Cal.Rptr.3d 746, 171 P.3d 1082].) "The genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured's claim. A genuine dispute exists only where the insurer's position is maintained in good faith and on reasonable grounds." ( Ibid.)
The evidence fully supported the jury's finding of bad faith. After the fire, Cheryl Mustain timely contacted Vu at Security to report the loss to PSIC and make a claim. Vu gave her the telephone number for Torres and suggested she contact him. Cheryl Mustain contacted Torres, who told her he did not believe any insurance policy was in force but he would investigate and call her back. Torres did not call Cheryl Mustain back. Shortly thereafter, Zibara gave notice of the loss and claim to Jacob at PSIC. Zibara testified he provided Jacob with copies of all of the documents from the Mustains' file, including the original EOI and the EOI stamped "void." Jacob told Zibara, "don't be concerned" because "[w]e've done everything by the book." Jacob said he would take over handling the matter.
Jacob then discussed the matter with Weaver, PSIC's vice-president of sales and marketing. Jacob did not give Weaver a copy of the EOI or other relevant documents but threw away the copies he received from Zibara. When Jacob explained that PSIC had not received a signed application or a premium payment, Weaver commented, "it probably would end up in court." Jacob determined the EOI issued to the Mustains' escrow was legally "inconsequential" and not even worth forwarding to PSIC's claims department.
There was no question Cheryl Mustain's loss came within the coverage identified in the EOI. The evidence established AMZ issued the EOI as a binder in accordance with instructions from PSIC for binding insurance in escrow transactions. AMZ followed PSIC's procedures to the letter; as Zibara stated, "[w]e followed the guidelines of [PSIC] in issuing the evidence of insurance. . . ." PSIC did not investigate whether its policy of authorizing AMZ to cancel a binder by stamping "void" on the EOI was lawful.
The evidence supported the inference too that PSIC's policies and practices for issuing EOI's were created in bad faith to allow PSIC to try to evade liability precisely in the circumstances presented by this case. To capitalize on the need for immediate issuance of binders for escrow transactions, PSIC authorized and instructed AMZ to issue EOI's as insurance binders before receiving the premium payment and a signed application. If a problem later arose, PSIC would claim, as it did here, that AMZ was not its agent, the EOI is not a binder, and PSIC's written guidelines and policies for issuing binders were not followed.
Because substantial evidence supported the jury's finding of bad faith, the trial court did not err in awarding Chicago Title attorney fees. (See Brandt v. Superior Court (1985) 37 Cal.3d 813, 817 [ 210 Cal.Rptr. 211, 693 P.2d 796].) PSIC and McGraw do not challenge the amount of attorney fees awarded.
VI. Chicago Title Had Superior Equities to PSIC and Did Not Act as a Volunteer. A. Chicago Title Had Superior Equities.
PSIC and McGraw argue the trial court erred in denying their posttrial motion for judgment based on the doctrine of superior equities. PSIC and McGraw argue that under the doctrine of superior equities, Chicago Title had no right to sue because its equities were inferior to those of PSIC and McGraw.
In making that argument, PSIC and McGraw again do not fairly state the evidence and do not cite the evidence supporting the trial court's ruling. PSIC and McGraw go so far as to characterize themselves as "innocent insurers" that did not give AMZ authority to bind coverage, and, ignoring the jury's finding the binder was not lawfully cancelled, blame Chicago Title for failing to pay the premium.
In denying PSIC and McGraw's motion based on the doctrine of superior equities, the trial court found: "[T]he equities weigh heavily in favo[]r of [Chicago Title] despite [its] error in not sending the premium for the insurance earlier. PS[IC] allowed its producer, AMZ Insurance Inc. to issue binders of insurance in violation of their producer agreement and failed to recognize coverage when obligated to do so. In view of these findings, it is inconceivable to find that the equities favo[]r . . . PS[IC]. This factual pattern does not approach the cases in which the court of appeal found equities barred equitable subrogation."
(15) The doctrine of superior equities prevents a subrogated party from recovering against a party having equal or superior equities. ( State Farm General Ins. Co. v. Wells Fargo Bank, N.A. (2006) 143 Cal.App.4th 1098, 1107 [ 49 Cal.Rptr.3d 785].) "Under the doctrine of superior equities, although an insurer might have a subrogation interest in the insured's claim against the party that caused the loss, it cannot enforce its subrogation rights unless it has equities superior to those of the wrongdoer." ( Id. at p. 1108.)
Chicago Title argues the doctrine of superior equities only applies to subrogated insurers; as Chicago Title is not an insurer, but received a contractual assignment of Cheryl Mustain's claims, it argues the doctrine is inapplicable here. We do not resolve that issue because the evidence supported the trial court's finding Chicago Title had superior equities.
"In comparing the relative positions of the parties, a court is required to determine who ultimately ought to bear the loss." ( State Farm General Ins. Co. v. Wells Fargo Bank, N.A., supra, 143 Cal.App.4th at p. 1112.) "[T]here is no facile formula for determining superiority of equities, for there is no formula by which to determine the existence or nonexistence of an equity except to the extent that certain familiar fact combinations have been repeatedly adjudged to create an equity in the surety or the third party. The cases in other jurisdictions refer to various factors which spell fault in the . . . third party, but whatever the criteria mentioned each case comes down to the question of fault of some kind. . . ." ( Hartford Ace. Indem. Co. v. Bank of America (1963) 220 Cal.App.2d 545, 558 [ 34 Cal.Rptr. 23].) "A more balanced statement is that the right of subrogation `may be invoked against a third party only if he is guilty of some wrongful conduct which makes his equity inferior to that of [the surety or insurer].' [Citations.]" ( Golden Eagle Ins. Co. v. First Nationwide Financial Corp. (1994) 26 Cal.App.4th 160, 171 [ 31 Cal.Rptr.2d 815].)
Chicago Title at worst acted negligently by failing to pay the premium on the policy evidenced by the EOI. Its negligence was not the direct cause of the loss; as the jury found, the EOI was not lawfully cancelled after AMZ failed to receive the premium payment. PSIC, in contrast, engaged in bad faith. It authorized AMZ to issue EOI's as binders before receipt of the premium payment and signed application, instructed AMZ to cancel binders in an improper manner, and declined to submit Cheryl Mustain's claim to its claims department. The trial court correctly concluded Chicago Title's equities were superior to PSIC's.
PSIC and McGraw contend Lawyers Title Ins. Corp. v. Feldsher (1996) 42 Cal.App.4th 41 [ 49 Cal.Rptr.2d 542] ( Feldsher) is a similar case. In Feldsher, Greenberg loaned $300,000 to Razzano. The loan was secured by real property in La Canada. ( Id. at p. 44.) Greenberg's loan was used to retire a loan secured by a second trust deed on the same property and was to become senior to a fourth deed of trust in favor of the Feldshers. Greenberg obtained a title policy from Lawyers Title Insurance Corporation, which allowed escrow to close without following an instruction to record Greenberg's trust deed senior to the Feldshers' trust deed. Razzano defaulted on the Feldshers' trust deed, prompting the Feldshers to foreclose and purchase the property at the trustee's sale, wiping out the Greenberg trust deed. ( Ibid.) Lawyers Title ultimately indemnified Greenberg, received an assignment of his claim against the Feldshers, and filed a complaint against the Feldshers under a theory of equitable subrogation. ( Id. at pp. 44-45.)
The trial court granted summary judgment in favor of the Feldshers on the ground they had superior equities. ( Feldsher, supra, 42 Cal.App.4th at p. 45.) The Court of Appeal affirmed, based on Greenberg's culpable conduct: "While the equities in this case appear more or less evenly balanced, the undisputed fact remains Greenberg had actual knowledge of all the facts necessary to protect his interests and, unlike the Feldshers who were unaware of Greenberg's contemplated loan, was in a position to avoid any harm. Nevertheless, despite this knowledge Greenberg failed to take any affirmative steps to protect those interests. Greenberg's actual knowledge of the crucial facts, combined with his negligence in allowing the transaction to close despite the absence of a subordination agreement, is the type of `culpable and inexcusable neglect' which justifies denial of equitable subrogation under the overall circumstances of this case." ( Id. at pp. 53-54.)
This case is different from Feldsher in several important respects. Here, the equities are far from evenly balanced. PSIC, unlike the Feldshers, was in a position to avoid harm and engaged in bad faith conduct. Cheryl Mustain, unlike Greenberg, did not have actual knowledge of any failure to pay the premium and testified she never received the insurance application.
B. Chicago Title Did Not Act as a Volunteer.
PSIC and McGraw also contend that if Chicago Title breached no duties, then it acted as a volunteer by paying Cheryl Mustain and cannot maintain an action for subrogation.
(16) Subrogation arises when one party (the subrogee) indemnifies or pays the principal debtor's obligation to the creditor or claimant (the subrogor). ( Morgan Creek Residential v. Kemp (2007) 153 Cal.App.4th 675, 690 [ 63 Cal.Rptr.3d 232].) The subrogee succeeds to the claimant's position or rights against the principal debtor or obligor. ( Ibid.) "`By undertaking to indemnify or pay the principal debtor's obligation to the creditor or claimant, the "subrogee" is equitably subrogated to the claimant (or "subrogor"), and succeeds to the subrogor's rights against the obligor.'" ( Ibid.) A party claiming to be equitably subrogated to the rights of a creditor must meet these requirements: (1) the subrogee made payment to protect the subrogee's own interest; (2) the subrogee must not have acted as a volunteer; (3) the debt paid must be one for which the subrogee was not primarily liable; (4) the entire debt must have been paid; and (5) subrogation must not cause injustice to the rights of others. ( Caito v. United California Bank (1978) 20 Cal.3d 694, 704 [ 144 Cal.Rptr. 751, 576 P.2d 466].)
PSIC and McGraw argue the second requirement has not been met. According to them, Chicago Title acted as a volunteer because it did not need to pay Cheryl Mustain to protect its own interest if, as Chicago Title contends, the EOI was an enforceable binder of insurance.
Chicago Title did not act as a volunteer. Chicago Title failed to pay the premium on the policy before the fire loss and therefore faced potential liability at the time it paid Cheryl Mustain and accepted an assignment of her rights. Chicago Title's potential liability was a protectable interest sufficient to create subrogation rights.
In Employers etc. Ins. Co. v. Pac. Indem. Co. (1959) 167 Cal.App.2d 369 [ 334 P.2d 658], a question arose whether the insured's loss was covered by a comprehensive liability policy or an automobile insurance policy. The comprehensive liability insurer paid the insured and brought an equitable subrogation action against the automobile insurer. ( Id. at pp. 373-374.) The trial court determined the loss was covered under the automobile policy. An issue on appeal was whether the comprehensive liability insurer was a volunteer because it had no legal obligation under the comprehensive liability policy. ( Id. at p. 376.) The Court of Appeal concluded the comprehensive liability insurer was not a volunteer: "Even though there was no legal obligation on plaintiff to make the payment it nevertheless had an interest to protect in making it. That interest arose from the fact that there was a dispute between it and defendant as to which policy, plaintiffs or defendant's, covered the accident. That this was such a dispute as justified plaintiff in settling for a less sum than it might have been liable for if its contention that its policy did not cover the accident were incorrect, is shown by defendant's insistence here that the policy did cover the accident." ( Id. at p. 377.)
Similarly here, at the time Chicago Title paid Cheryl Mustain, there was a dispute whether PSIC or Chicago Title was responsible for covering her loss. Cheryl Mustain had retained an attorney and sought compensation from both PSIC and Chicago Title. PSIC and McGraw asserted, and continue to assert, they have no liability under the EOI. That dispute, Cheryl Mustain's claim, and Chicago Title's potential liability created the necessary interest for Chicago Title to protect. By paying Cheryl Mustain, Chicago Title acted not as a volunteer, but to protect that interest.
VII. PSIC and McGraw Were Not Entitled to Judgment Against AMZ for Indemnity.
PSIC and McGraw argue the trial court erred by denying their posttrial motion for judgment of indemnity against AMZ. PSIC and McGraw assert the "unequivocal language" in an indemnification provision in the producer's agreement between McGraw and AMZ entitled PSIC to judgment against AMZ.
In denying PSIC and McGraw's motion for judgment of indemnity against AMZ, the trial court stated: "Despite the jury's determination that the producer's agreement which on its face did not allow AMZ to send out insurance binders was not dispositive of the issue in light of PSIC/McGraw's conduct in knowingly allowing such practices to continue by its producer, PSIC/McGraw continues to assert that this provision now entitles it to indemnification from AMZ. The court cannot and refuses to make a factual determination that is inconsistent with the jury's determination, a determination which the court now adopts, despite the fact that AMZ is in default. The finding of bad faith conduct clearly bars PSIC/McGraw from indemnification of these intentional tort damages. [Code of Civil Procedure,] section 875[, subdivision](d). Its bad faith conduct in refusing to acknowledge coverage most likely bars it from indemnification for the remaining damages. Moreover, no authority has been provided to the contrary in light of PSIC/McGraw's continual failure to acknowledge the effect of the jury's finding and to propose a factual scenario which entitles it to indemnification that is consistent with the jury's findings."
The relevant portion of the indemnity provision in the producer's agreement states: "In the event of an unauthorized binder or other unauthorized statement of coverage by Producer, Producer shall and will at all times indemnify and keep indemnified McGraw and Insurance company from and against any and all liability, claims, demands, losses, damages, costs, counsel fees, judgments and expense of whatever kind or nature." (Italics added.)
PSIC and McGraw are not entitled to indemnity under that provision because AMZ did not issue an unauthorized binder or statement of insurance. PSIC authorized AMZ to issue EOI's as binders in escrow transactions before receipt of the premium payment and a signed application, and authorized AMZ to attempt to cancel binders in an unlawful manner.
(17) In addition, as the trial court found, the indemnity provision does not permit PSIC to recover for its intentional and bad faith conduct. "An indemnity agreement which is broadly worded and refers only generally to indemnification for claims or losses, is interpreted as providing indemnity, at most, for the indemnitee's passive negligence; to obtain greater indemnity, more specific language must be used." ( Smoketree-Lake Murray, Ltd. v. Mills Concrete Construction Co. (1991) 234 Cal.App.3d 1724, 1737 [ 286 Cal.Rptr. 435]; see Gonzales v. R. J. Novick Constr. Co. (1978) 20 Cal.3d 798, 809-810 [ 144 Cal.Rptr. 408, 575 P.2d 1190] [a general indemnity clause "will not be interpreted to provide indemnity if an indemnitee has been actively negligent"].)
In Edmondson Property Management v. Kwock (2007) 156 Cal.App.4th 197, 207 [ 67 Cal.Rptr.3d 243], the parties had entered into an indemnification agreement stating: "`Owner shall indemnify and save the Agent harmless from any and all costs, expenses, attorney's fees, suits, liabilities, damages from or connected with the management of the property by Agent, or the performance or exercise of any of the duties, obligations, powers, or authorities herein or hereafter granted to Agent. [ID `Owner shall not hold Agent liable for any error of (judgment], or for any mistake of fact or law, or for anything which Agent may do or refrain from doing hereinafter, except in cases of willful misconduct or gross negligence'" The court held this was a general indemnity provision and therefore did not indemnify against claims arising out of the agent's active negligence. ( Id. at p. 208.) "Language imposing this liability must be express and unequivocal so that the contracting party is advised fully in definite terms that it has agreed to indemnify the active negligence of the other party." ( Ibid.)
The indemnification provision in the producer's agreement is a general indemnity, similar to that in Edmondson Property Management v. Kwock, because it "`does not address itself to the issue of an indemnitee's negligence'" ( Gonzales v. R. J. Novick Constr. Co., supra, 20 Cal.3d at p. 809). The indemnification provision in the producer's agreement does not expressly and unequivocally impose liability for anything other than PSIC's passive negligence. The evidence established PSIC and McGraw at the very least engaged in intentional conduct; the jury found they engaged in bad faith. The trial court correctly denied PSIC and McGraw's motion for a judgment of indemnity against AMZ.
DISPOSITION
The judgment, the order granting Chicago Title's motion for attorney fees, the order denying PSIC and McGraw's motion for a JNOV, the order denying PSIC and McGraw's motion for judgment of indemnity against AMZ, and the order denying PSIC and McGraw's motion based on the doctrine of superior equities are affirmed. Respondent Chicago Title to recover costs incurred on appeal.
Moore, Acting P. J., and Aronson, J., concurred.
The petition of respondent AMZ Insurance Services, Inc., for review by the Supreme Court was denied December 15, 2010, S187413.