Preview
FILED
SAN MATEO COUNTY
J. Edward Kerley (175695)
Dylan L. Schaffer (153612) FE) 05 2020
Kerley Schaffer LLP
1939 Harrison Street, #500 Cle Superior Gourt
Oakland, California 94612
Telephone: (510) 379-5801 —— DEPUTY CLERK
Facsimile: (510) 228-0350
Attomeys for Plaintiffs
SUPERIOR COURT OF THE STATE OF CALIFORNIA
SAN MATEO COUNTY — UNLIMITED CIVIL JURISDICTION
DONNA MARIE MESCHI, an individual, CLASS ACTION
VINCENT ANDREW MESCHI, an
10: individual, on behalf of themselves and a Case No. 16CIV02607
class of similarly situated persons,
STIPULATION OF PARTIES AND
Plaintiffs, PROPOSED ORDER RE LEAVE TO
FILE SECOND AMENDED CLASS
V; ACTION COMPLAINT
13,
MERCURY CASUALTY COMPANY, a
14 corporation, and Does 1 through 10, Assigned to Honorable Danny Y. Chou,
Dept. 22 for all purposes
48 Defendants.
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Date filed: November 29, 2016
1% Trial Date: TBD
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Stipulation and Proposed Order
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SAN MATE! 0 COUN
FEB 05 2020
Clerkof the Superior Court
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The parties, having met and conferred following the filing of Plaintiffs’ first amended
complaint, stipulate as follows:
1 Following the filing of Plaintiffs’ first amended complaint, the parties met and conferred
regarding pleading issues, but were unable to avoid the filing of Defendants’ demurrer and
motion to strike.
Thereafter the parties continued to meet and confer and asa result of that process Plaintiffs
have amended their complaint in an attempt to narrow issues to be litigated prior to the case
being at issue. |
The parties agree there is good cause for the Court to grant leave to Plaintiffs to file their
second amended complaint, which is attached for the Court’s review as Exhibit A.
10
By agreeing to the filing of the complaint, Defendants do not forfeit their right to respond
w either by answering or by filing a demurrer and/or motion to strike, pursuant to the deadlines
12 set by the Court’s order of January 22, 2020.
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Date: January 17, 2020 Hager & Dowling
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Attomeysfor Defendants
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Date: January 17, 2020 Kerley Schaffer LLP
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Attorneys for Plaintiffs
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Stipulation and Proposed Order
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Pursuant to the stipulation of the parties, and for good cause showing, the Court orders
the following:
1 Plaintiffs are given leave to file their Second Amended Complaint.
2. Plaintiffs shall file their complaint forthwith upon the filing of this order.
3 Defendants' shall either answer in 15 days, or file its demurrer and/or motion to strike
pursuant to the code and hearing date set by the Court in its order of January 22, 2020.
| Date:__‘Jaifzezo - LZ
Honorable Danny Y Chou
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Stipulation and‘Proposed Order
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EXHIBIT A
EXHIBIT A
J. Edward Kerley (175695)
Dylan L. Schaffer (153612)
Yasmeen Omidi (254962)
Kerley Schaffer LLP
1939 Harrison Street, #500
Oakland, California 94612
Telephone: (510) 379-5801
Facsimile: (510) 228-0350
Attorneys for Plaintiffs
SUPERIOR COURT OF THE STATE OF CALIFORNIA
SAN MATEO COUNTY — UNLIMITED CIVIL JURISDICTION
10
ll
DONNA MARIE MESCHI, an individual, Case No. 16CIV02607
12 VINCENT MESCHI, an individual, on
behalf of themselves and a class of similarly SECOND AMENDED CLASS ACTION
13 situated persons, and ROES 1-10. COMPLAINT AND DEMAND FOR
JURY TRIAL
14 Plaintiffs,
15 Vv.
16
MERCURY CASUALTY COMPANY, a
17 corporation, CALIFORNIA.
AUTOMOBILE INSURANCE
18 COMPANY, a corporation, MERCURY
INSURANCE SERVICES, LLC, a limited
19 liability corporation, and DOES 3 through 10,
20 Defendants.
21
22
23
24
25
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
Plaintiffs Donna Meschi, Vincent Meschi, and ROES 1-10, on behalf of themselves and
all others similarly situated allege as follows:!
PARTIES
1 Plaintiffs Donna and Vincent Meschi are residents of San Mateo, California
(Meschi Plaintiffs”).
2 Defendant Mercury Casualty Company (“MCC”) is a corporation licensed to
conduct business in the state of California.
3 Defendant California Automobile Insurance Company (“CAIC”) is a corporation.
licensed to conduct business in the state of California.
10 4 Defendant Mercury Insurance Services, LLC (“MIS”), is a limited liability
11 corporation licensed to conduct business in the state of California. MIS is a wholly owned
12 subsidiary of MCC.
13 5. MCC, CAIC, and MIS are each wholly-owned subsidies of Mercury General
14 Corporation, a California Corporation.
15 6 Defendants. are herein collectively referred to as “Mercury,” the brand name used
16 by defendants and each of them for marketing, advertising, and sales of property policies issued
17 by MCC and CAIC.
18 7. The true names of Plaintiffs ROES 1-10 are presently unknown and are therefore
19 suing by fictitious names. Each of the ROE Plaintiffs is insured under a Mercury property policy,
20 made a claim for repair or replacement of contents under a property policy issued by CAIC, was
21 harmed by Defendants’ conduct, and thus is a proper plaintiff and representative of the class in
22 this action.
23
24
25 1 All allegations made in this complaint are based upon information and belief, except those
allegations which pertain to the Meschis, which are based on personal knowledge. The
26 allegations of this Complaint stated on information and belief are likely to have evidentiary
support after a reasonable opportunity for further investigation and discovery.
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
8. The true names and capacities of Defendants DOES 3 through 10 are unknown
and are therefore sued by fictitious names. Each of the DOE Defendants is, in some manner,
responsible for the damages alleged.
9. Plaintiffs seek to represent the following class (“Declarative Relief Class”):
California residents insured under a CAIC or MCC property policy from
November 29, 2012 to the time of trial in this action.
10. Plaintiffs seek to represent subclasses (“Injury Classes”)
(a) The “ACV Claims Class,” defined as:
California residents insured under a CAIC or MCC property policy who
10 received a first party settlement, or offer for settlement, of a personal property
11 claim that was adjusted by MIS on an actual cash basis, for less than the
12 applicable policy limits, which claims were open between November 29, 2012,
13 and the time of trial of this action; and
14 (b) The “Replacement Cost Claims Class”, defined as:
15 California residents insured under a CAIC or MCC property policy who
16 received a first party settlement, or offer for settlement, of a personal property
17 claim that was adjusted by MIS on an actual cash basis, for less than the
18 applicable policy limits, which claims were open between November 29, 2012,
19 and the time of trial of this action.
20
21 VENUE AND JURISDICTION
22 11. The Meschi Plaintiffs were issued a policy of insurance by MCC, identified as
23 policy number HO 13187051 (“Policy”), insuring all risks of loss to Plaintiffs’ dwelling and
24 property located at 247 Avalon Drive, Daly City, California (“Property”), and providing various
25 other coverages, from March 15, 2015, to March 15, 2016. The Policy is attached as Exhibit A
26 to this Second Amended Complaint.
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
12. The ROE Plaintiffs were issued property policies by CAIC insuring all risks of
their insured properties, each of which is located in California.
13. Venue is proper in the Superior Court of California for the County of San Mateo
as Defendants transact business in the County and Defendants derive substantial revenue from
their activities in the County.
MIS, MCC, AND CAIC ARE MUTUAL ALTER-EGOS
Defendants are a single enterpris
14. MIS, MCC, and CACI have a complete unity of interest such that their separate
corporate personalities are merged—each is a mere adjunct of the other and they are part of a
10 single enterprise (Tran v. Farmers Group, 104 Cal.App.4® 1202 (2002).)
ll 15. The policies sold to the Meschis and ROE Plaintiffs misleadingly represent that
12 the insurer is a non-existent entity called “Mercury.”
13 16. In fact, there is no such entity as Mercury.
4 17. Rather, Mercury General Corporation, the parent organization, has two primary
15 insuring entities for property insurance in California—MCC and CAIC. The Meschis’ policy was
16 issued by MCC. The ROES’ policies were issued by CAIC.
17 18. MCC, CAIC, and MIS are a single enterprise due to a complete unity of interest
18 and ownership as follows:
19 e Property policies underwritten by both MCC and CAIC are marketed and sold by
20 Mercury Insurance, not the true insuring entity;
21 MIS, which like MCC and CAIC is a subsidiary of Mercury General Corporation,
22 contracts with MCC and CAIC to investigate and adjust property insurance
23 claims.
24 All investigation and adjusting of claims under MCC and CAIC policies is done
25 by employees of MIS.
26
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
All supervision and management of claims investigation and adjusting of claim
under MCC and CAIC policies is done by employees of MIS.
All decisions regarding training and guidelines as applies to the investigation and
adjusting of claims under MCC and CAIC policies are taken by employees of
MIS.
All policy and insurer-wide decisions regarding claims investigation and claims
adjustment—including the application of depreciation to contents claims under
Mercury property policies, the payment of replacement cost claims for contents
under Mercury property policies, and compliance with 10 CCR § 2695.9.(f)}—are
10 made by employees of MIS on behalf of MCC and CAIC.
11 MIS employees, supervisors, and managers were solely responsible for accepting,
12 investigating, and adjusting the Meschis’ and ROES’ claims.
13 No employee, manager, or supervisor of MCC or CAIC accepted, investigated or
14 adjusted the Meschis’ or ROES’ property claims.
15 Neither the Meschis nor ROES have ever spoken with or communicated in
16 writing with any employee of either MCC or CAIC.
17 Every person Meschis and ROES have spoken with about their property claims
18 represented him or herself as working for “Mercury” or “Mercury Insurance.”
19 Every person Meschis and ROES have spoken with about their property claims is
20 in fact employed by MIS.
21 MIS, MCC, and CAIC are all wholly owned and controlled subsidiaries of
22 Mercury General Corporation.
23 MCC and CACTI cannot functionally sell property insurance policies, or accept,
24 investigate, adjust, or deny claims under property insurance policies without
25 MIS’s involvement.
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
MCC and CAIC are mere shells, conduits for the affairs of MIS and their mutual
parent, Mercury General Corporation.
MCC and CAIC have no employees responsible for accepting, investigating,
adjusting, or denying insurance claims under their property policies.
Through a management agreement, MCC and CAIC grant MIS sole and complete
authority to accept, investigate, adjust, and deny claims under their property
insurance policies.
MIS is solely responsible for and has sole authority for accepting, investigating,
adjusting, and denying insurance claims under all property policies underwritten
10 by MCC and CAIC.
11 Employees of MIS manage and control litigation in which MCC and CAIC are
12 involved.
13 Employees of MIS manage and control investigation, adjustment, and denial of
14 insurance claims under policies issued by MCC and CAIC.
15 MCC and CAIC have no employees responsible for accepting, investigating, or
16 adjusting insurance claims under its California property policies.
17 MCC and CAIC have no employees responsible for providing training as required
18 by 10 CCR §§ 2695.6 et seq.
19 MIS is responsible for all training required by 10 CCR §§ 2695.6 et seq.
20 MCC and CAIC neither create nor issue to any claims handling personnel
21 guidelines for the investigation or adjusting of insurance claims in California.
22 MIS, on behalf of its sister companies MCC and CAIC, creates and issues to its
23 claims handling personnel guidelines for the acceptance, investigation, adjusting,
24 and denial of insurance claims in California.
25
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
MIS is responsible for rewarding and disciplining employees responsible for the
acceptance, investigation, adjustment, and denial of claims under MCC and CAIC
property policies.
In accepting, investigating, adjusting and adjusting claims asserted under MCC
and CAIC policies, MIS employees and agents represent to policyholders, as they
did to the Meschis and ROES, in both oral and written communications, that they
are working on behalf of Mercury or Mercury Insurance, without explaining any
differences or distinctions between MCC, CAIC, or MIS, or at any time revealing
10 that they are employed by MIS, and not by MCC, CAIC, or any other Mercury
11 entity or affiliate;
12 MCC, CAIC, and MIS file consolidated federal tax returns.
13 MCC, CAIC, and MIS use the same bank for all accounts.
14 All MCC and CAIC profits are passed through to MIS by way of a management
15 agreement and debt structuring.
16 MCC, CAIC, and MIS have the same principle business address.
17 MCC, CAIC, and MIS have overlapping officers and directors.
18
19 An inequitable result will follow if
20 defendants are not treated as alter-ego:
21 19. Given the complete unity of interest among MCC, CAIC, and MIS, they should
22 be treated as alter egos because if no such treatment is applied an inequitable result will obtain.
23 20. “Whether an inequitable result exists turns on the degree of control a parent or
24 sister subsidiary has over the defendant that is in privity with the plaintiff.” (WGA Entertainment,
25 2012 WL 12894053 (C.D. California 2012).)
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
21. “An inequitable result exists where the parent or sister subsidiary caused the harm.
for which the plaintiff is suing the defendant-in-privity, and thus it would be unjust to hold only
the defendant-in-privity liable for what are essentially the decisions by the parent or sister
subsidiary. Courts have found an inequitable result—and, ultimately, an alter ego relationship
between an insurer and its parent—because it ‘would be unjust to permit those who control
companies to treat them as a single or a unitary enterprise and then assert their ... separateness in
order to commit frauds and other misdeeds with impunity.’” (MGA Entertainment, 2012 WL
12894053 (C.D. California 2012), 2012 WL 12894053 *14, quoting Tran v. Farmers Group, 104
10 Cal. App.4 1202, 1219 (2002).)
i 22. An inequitable outcome occurs if the party subject to liability for violation of laws
12 is not the party who did the acts giving rise to liability. (MGA Entertainment, 2012 WL
13 12894053 (C.D. California 2012).)
14
15 Mercury’s attempt to insulate its policies from
16 liability weighs in favor of alter-ego treatment
17 23. Beginning in 2016, during the class period at issue in this case, and without
18 alerting its policyholders, Mercury transferred a majority of its California property policies from
19 MCC to CAIC. For example, in 2014, MCC had property policy premiums of about $372
20 million. In that year CAIC had property policy premiums of about $20 million. By 2018, MCC’s
21 premiums were down to $129 million, but CAIC’s premiums had increased to $398 million.
24. Likewise, the average number of covered contents claims to MCC for the period
23 2013 to 2016 was about 3,500 claims annually. In 2017 the number fell to 396; in 2018 it was
24 down to 243. The falloff in claims is due to Mercury’s renewal of MCC policies by CAIC in the
25 years 2017-2018, which is likewise reflected in the shift in premium balance.
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
25. The unfair, illegal, and fraudulent conduct set forth below are the result of
decisions made and applied by managing agents of MIS, on behalf of Mercury property policy
holders, including holders of MCC and CAIC policies.
26. If MCC, CAIC, and MIS are not treated as alter-egos, a majority of Mercury
policyholders (holders of CAIC property policies) in the classes described above would not
benefit from this lawsuit if Mercury is permitted to hide its business from the impact of ongoing
litigation by moving its policies from a sued entity (MCC) to an insuring entity (CAIC) that is
effectively part of a single entity. Rather, given that MCC, CAIC, and the management entity
MIS are a single entity, each of those entities is a proper defendant here and all polices presently
10 in effect, as well as all claims under policies issued by MCC and CAIC during the class period,
11 are the proper subject of the causes of action set forth below.
12 27. Likewise, given that the unfair, illegal, and fraudulent conduct set forth below
13 was perpetrated by employees of MIS, an inequitable result would obtain if MIS, an alter ego of
14 MCC and CAIC, is excluded from liability here.
15 28. As holders of a Mercury policy, the Meschis are proper class representatives for
16 all class members under all property policies issued by MCC and CAIC and managed by MIS.
17 29. In the alternative, the ROE plaintiffs can represent class members with policies
18 issued by CAIC, and as to claims made under CAIC policies.
19
20 Additional inequitable effects from failing
21 to treat defendants as alter-egos
22 30. An inequitable result will further result if MCC, CAIC, and MIS are not found to
23 be alter-egos as follows:
24 e The Meschis’ contents claim was investigated, adjusted and supervised by
25 Gregory McLendon, Michael Burton, and Marlo Beeman-Curiel.
26 e Each of these individuals is employed by MIS, and not by MCC or CAIC.
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
Each of these individuals acts on behalf of MCC and CAIC and investigates and
adjusts claims under MCC and CAIC policies, pursuant to a management
agreement between MIS and the insuring entities, MCC and CACI, which
themselves have no employees capable of investigating or adjusting property
claims.
All correspondence to the Meschis from these individuals represented that they
worked for and represented a non-existent entity named “Mercury Insurance.”
In all communications, whether written or oral, between McLendon, Burton, and.
Beeman-Curiel, and the Meschis, McLendon, Burton, and Beeman-Curiel
10 represented themselves as working for and representing Mercury Insurance, and
11 no other entity.
12 Emails and correspondence relating to the Meschis’ property claim to the Meschis
13 was sent by McLendon, Burton, and Beeman-Curiel from
14 “mercuryinsurance.com” domain, rather than a domain which would indicate the
15 identity of the insuring entity (MCC) or the managing entity (MIS).
16 At no time did McLendon, Burton, or Beeman-Curiel explain or reveal to the
17 Meschis that they are employed by MIS, or that by way of a management
18 agreement they represent the entity that issued the property policy to the Meschis
19 (MCC).
20 The named MIS employees repeatedly violated California law and regulation (Ins.
21 Code §§ 2051, 2051.5 and 10 CCR 2695.9(f)) in the investigation and adjusting of
22 the Meschis’ property claims, as is further set forth below.
23 MIS, CAIC, and MCC failed to guide and train its employees, including without
24 limitation McLendon, Burton, and Beeman-Curiel, to comply with California law
25 and regulation that applies to the investigation and adjusting of property claims;
26
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
MIS, on behalf of MCC and CAIC, has engaged in an illegal scheme to violate
Ins. Code §§ 2051, 2051.5 and 10 CCR 2695.9(f) in the investigation and
adjusting of property claims.
The means of that scheme include but are not limited to:
° Illegally taking depreciation on the basis of factors barred under California
law in violation of Ins. Code § 2051.
Failing to pay replacement cost claims pursuant to the requirements of Ins.
Code § 2051.5; and
Failing to adequately document depreciation in its claim files and/or
10 failing to explain the basis of its depreciation to policyholders in violation
11 of 10 CCR 2695.9(f).
12 MIS exercised complete control over the investigation, adjusting, and denial of
13 the Meschis property claim.
14 All decisions vis-a-vis the Meschis’ claim investigation and adjusting were made,
15 ratified, and approved by employees, supervisors, and managing agents of MIS.
16 All harm to the Meschis was done by MIS employees, supervisors and managing
17 agents, including McLendon, Burton, and Beeman-Curiel.
18 Although MIS employees and supervisors accepted, investigated, and adjusted the
19 Meschis claim, without involvement of a single employee of MCC, MCC has no
20 obligation to produce any of those witnesses for deposition, requiring Plaintiffs to
21 separately subpoena each of them;
22 MIS employees and supervisors involved in the investigation and adjusting of the
23 Meschis claim may reside outside California, which means it those witnesses may
24 never be compelled to provide testimony in this case.
25 MIS will not be subject to written discovery including interrogatories and requests
26 for admissions unless it is a party to this action.
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
Although the Meschi insurance policy was issued by MCC, no MCC employee
had any role whatsoever in the Meschi claim.
No employee of MCC communicated with the Meschis during the claim.
Because no MCC employee accepted, investigated, or adjusted the Meschis’
claim, if MCC is the sole defendant, the Meschis will be precluded from
demonstrating that a managing agent of the defendant participated in, approved,
or ratified conduct amounting to fraud, malice, and oppression, as required to
justify an award of punitive damages under California Civil Code section 3294;
MCC has a small fraction of the assets of the combined entities—thus, to evaluate
10 the ability to pay a punitive damages award and the adequacy of a punitive
ll damages award to deter future misconduct, the failure to include MIS and CAIC
12 as a parties would misrepresent Mercury’s true financial condition.
13 Because MCC, CAIC, and MIS treat themselves as a single and unitary entity it
14 would be unjust to permit them to assert their separateness in order to violate
15 California law with impunity (Tran v. Farmers Group, Inc., 104 Cal.App.4th
16 1202, 1219 (2002).)
17
18 Mercury’s improper purposes for separating insuring and claims adjusting
19 functions among multiple entities
20 31. In addition to the avoidance of liability described above by means of transfer of
21 thousands of property policies from MCC to CAIC in the course of this litigation, Mercury has
22 an improper purpose for dividing insuring and claims handling functions between MCC/CAIC
23 and MIS, which weighs strongly in favor of treating the Mercury companies as a single entity for
24 the purpose of this lawsuit. To wit:
25 e Purposefully increasing claims expenses to MCC and CAIC by transferring the
26 investigation and adjusting functions to a management company (MIS), which in
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
turn bills MCC and CAIC for claims investigation expenses, thus justifying
requests to California regulators for premium increases;
Purposefully maintaining relatively small asset size of Mercury’s insuring entities,
thus avoiding large punitive damages awards;
Reducing the total number of policies issued by any one insuring entity, and thus
claims made to that entity, to avoid assertions of institutional bad faith, malice,
oppression, and fraud, against Mercury by confining claims of malfeasance to the
insuring entity rather than MIS, which makes all claims handling decisions,
provides all claims handling guidance and training, and supplies all approvals and
10 ratification of claims outcomes; and
ll Purposefully shielding from discovery entities as to which MIS makes all claims
12 handling decisions, provides all claims handling guidance and training, and
13 supplies all approvals and ratification of claims outcomes, by dividing insuring
14 and claims handling functions between a series of small insuring entities which
15 have no employees, and MIS;
16 Deliberately shielding from discovery reports from consultants to MIS, as well as.
17 internal communications, relating to claims savings to be obtained vis a vis
18 property claims;
19 Deliberately shielding from discovery, including deposition, senior management
20 of MIS and Mercury General Corporation where policy decisions are made vis a
21 vis property claims;
22 Purposefully shielding MIS from discovery and liability--MIS is responsible for
23 harm in the event of unfair, illegal, fraudulent, and bad faith claims handling
24 practices; MIS is responsible for malice, fraud, oppression, and institutional bad
25 faith claims handling practices; MIS’s conduct relates specifically and only to
26 claims made under property policies issued by MCC and CACTI, which are
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
themselves shell companies that act as insuring entities alone, and as to which
MIS provides exclusive claims investigation and adjusting services pursuant to a
management agreement; and
As Mercury sought to accomplish here, purposefully shielding from class liability
unfair, illegal, and fraudulent practices undertaken by MIS on behalf of one or
insuring entities which are part of a single entity, Mercury.
MERCURY’S VIOLATION OF INSURANCE CODE § 2051 IN THE PAYMENT OF
ACTUAL CASH VALUE FOR PROPERTY
10 32. Plaintiffs and the Class are the holders of written policies of insurance issued by
ll Mercury wherein Mercury agreed to provide, inter alia, coverage for losses to property resulting
12 from sudden and accidental loss such as fire and other perils.
13 33. Under the 2004 Homeowners Bill of Rights, codified at California Insurance
14 Code § 2051 et seq., Mercury was obligated in the case of a partial loss caused by any peril not
15 expressly excluded to first pay the actual cash value (“ACV”) of property up to the limits of the
16 policy. ACV is defined in Insurance Code § 2051, which provides in relevant part:
17 (b) Under an open policy that requires payment of actual cash
18 value, the measure of the actual cash value recovery, in whole or
19 partial settlement of the claim shall be determined as follows: . . .
20 (2) In case ofa partial loss to the structure, or loss to its contents,
21 the amount it would cost the insured to repair, rebuild, or replace
22 the thing lost or injured less a fair and reasonable deduction for
23 physical depreciation based upon its condition at the time of the
24 injury or the policy limit, whichever is less.
25 34. Section 2051 permits the insurer to take a “fair and reasonable” deduction for
26 “physical depreciation” based upon the actual condition of the item “at the time of the injury.”
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
35. Physical depreciation refers to the physical wearing-out of property; it is a
measure of actual wear and tear. Physical depreciation does not include the separate concept of
functional obsolescence—that is, loss of value due to external conditions. Physical depreciation
does not include spreading the cost of an object over its useful life for accounting or tax
purposes.
36. Section 2051’s limitation of “depreciation” to physical depreciation is consistent
with claims adjusting practices throughout the United States which recognize that depreciation
for actual cash value purposes is limited to physical depreciation (wear and tear), and does not
include other concepts of depreciation that may be used for tax or accounting purposes.
10 37. To protect California insureds from arbitrary or improper deductions for
11 depreciation, California Code of Regulation 10 CCR § 2695.9(f) states, in pertinent part “[w]hen
12 the amount claimed is adjusted for betterment, depreciation or salvage, all justification for the
13 adjustment shall be contained in the claim file . . .The basis for the adjustment shall be fully
14 explained to claimant in writing.”
15 38. By operation of law, Insurance Code §790.03(h) is made part of every property
16 insurance contract between Mercury and every member of the Class.
17 39. Pursuant to operation of law, Insurance Code § 2051 is made part of every
18 property insurance contract between Mercury and every member of the Class.
19 40. Pursuant to operation of law, 10 CCR § 2695.4(a) is made part of every property
20 insurance contract between Mercury and every member of the Class.
21 41. Pursuant to operation of law, 10 CCR § 2695.9(f) is made part of every property
22 insurance contract between Mercury and every member of the Class.
23 42. In violation of Insurance Code § 2051, Mercury calculates the ACV of damaged
24 contents by calculating depreciation according to a straight-line schedule based on the age of
25 each item, rather than by reference solely to the true physical condition and deterioration of the
26 item prior to the loss.
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
43. Alternatively, Mercury calculates depreciation based on a combination of age and
condition in violation of § 2051.
44. Mercury uniformly applies the foregoing illegal claims adjusting methods to all of
its property claims in California in violation of § 2051.
45. Mercury uses a standard depreciation method in California based upon criteria not
permitted by § 2051 and does not independently justify the depreciation in the claim file as
required by 10 CCR § 2695.9(f).
46. Mercury uses a depreciation guide, or relies on third party vendors to use such
depreciation guides, which settle property claims contrary to the condition-only approach
10 mandated by § 2051, including by reference to the age and type of property at issue. Mercury
11 neither provides its method of depreciation to insureds nor explains to them how it calculates
12 depreciation in violation of 10 CCR §2965.9(f).
13 47. Accordingly, during the relevant time period, Mercury violated its contracts,
14 Insurance Code § 2051, and 10 CCR § 2695.9(f) by improperly calculating “depreciation” and
15 refusing to pay for such depreciation through use of arbitrary and illegal depreciation
16 calculations that were not based solely upon the actual condition of each damaged item, and by
17 failing to justify in writing the depreciation amounts it claims. Mercury has no written or
18 systematic communication with its policyholders about their rights to an appropriate calculation
19 under California law and the policy based solely upon actual physical condition. Mercury has no
20 written or systematic communication with its policyholders about the physical condition of items
21 at the time of loss. Mercury has no written or systematic communication with its policyholders
22 about the manner of its depreciation of property, all in violation of 10 CCR § 2695.9(f).
23 48. Plaintiffs and the Class are informed and believe that through use of the foregoing
24 unfair, illegal, and fraudulent depreciation methods, Mercury substantially reduces its claim
25 liabilities and increases its profits, by applying high levels of depreciation when adjusting
26 contents claims.
27
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SECOND Amended CLASS ACTION
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49. Plaintiffs and the Class first became aware of the violations only in or about
November 2012, because Mercury hid from Plaintiffs and the Class its illegal practices relating
to calculation of depreciation.
50. Plaintiffs and the Class had no right to seek appraisal once they learned of
Mercury’s illegal practices because the illegal practices at issue were beyond the scope of
appraisal under the insurance policies and relate to a loss settlement practice rather than
valuation issue. Likewise, an appraisal panel would have no authority to decide whether
Mercury’s conduct violates the UCL, merits declaratory relief, or amounts to a breach of its
policies with thousands of holders of Mercury property policies in California. Thus, it would be
10 entirely futile for Plaintiffs and the Class to submit any of their claims or following causes of
11 action for appraisal as to the correct actual cash value.
12
13 MERCURY’S VIOLATION OF INSURANCE CODE § 2051.5 IN THE PAYMENT OF
14 REPLACEMENT COST FOR PROPERTY
15 51. Under the 2004 Homeowners Bill of Rights, codified at California Insurance
16 Code § 2051.5, Mercury was obligated in the case of partial losses caused by perils not expressly
17 excluded to first pay actual cash value. If a policyholder with a replacement cost value policy
18 then makes a replacement cost claim after replacing or repairing the damaged item, § 2051.5
19 requires Mercury to pay the difference between the initial actual cash value payment for the item,
20 and the amount reasonably paid by the insured to replace the property, up to the policy limits.
21 52. Insurance Code § 2051.5(a) provides:
22 Under an open policy that requires payment of the
23 replacement cost for a loss, the measure of indemnity is the amount
24 that it would cost the insured to repair, rebuild, or replace the thing
25 lost or injured, without a deduction for physical depreciation, or the
26 policy limit, whichever is less.
27
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SECOND Amended CLASS ACTION
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If the policy requires the insured to repair, rebuild, or replace
the damaged property in order to collect the full replacement cost,
the insurer shall pay the actual cash value of the damaged property,
as defined in Section 2051, until the damaged property is repaired,
tebuilt, or replaced. Once the property is repaired, rebuilt, or
replaced, the insurer shall pay the difference between the actual
cash value payment made and the full replacement cost reasonably
paid to replace the damaged property, up to the limits stated in the
policy.
10 53. Mercury’s insurance policies violate Insurance Code § 2051.5 by providing for a
ll contrary method of loss settlement.
12 34, Mercury’s policies state in relevant part that it will pay replacement cost as
13 follows:
14 4. Loss Settlement. Covered property losses are settled as follows:
15 b. Full Value. Personal Property under Coverage C, unless listed under 4.c.
16 below, and awnings, carpeting, domestic appliances, outdoor antennas and
17 outdoor equipment, whether or not attached to buildings, at replacement cost at
18 the time of loss subject to the following:
19 (1) We will pay the full cost of repair or replacement, but not exceeding the
20 smallest of the following amounts:
21 (a) the limit of liability of this policy applicable to damaged, destroyed or
22 stolen property;
23 (b) the replacement cost of the property or any part;
24 (c) the full amount actually and necessarily spent by the insured in
25 repairing or replacing the property or any part;
26 (d) the direct financial loss you incur; or
27
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SECOND Amended CLASS ACTION
Complaint & Demand for Jury Trial
(e) our pro-rata share of any loss when divided with any other valid and
collectible insurance applying to the covered property at the time of loss.
55. The Mercury policy defines replacement cost as:
18. “Replacement cost” ...
b. In case of loss to personal property, replacement cost means the
cost, at the time of loss, of a new article identical to the one damaged,
destroyed or stolen. When the identical article is no longer manufactured
or is not available, replacement cost shall mean the cost of a new article
similar to the one damaged or destroyed and which is of comparable
10 quality and usefulness, without deduction for depreciation.
11 56. Pursuant to operation of law, § 2051.5 is made part of every property insurance
12 contract between Mercury and every member of the Class.
13 37. In violation of § 2051.5, in the event of replacement of contents covered under a
14 replacement cost policy, Mercury does not pay policy holders the amount actually paid by them
15 to replace the property. Instead, pursuant to the terms of Mercury’s policy, Mercury pays the
16 lesser of the amount reasonably expended by the insured to replace or repair the items, and
17 Mercury’s own calculation of the “cost, at the time of loss, of a new article identical to the one
18 damaged, destroyed or stolen.”
19 58. Here is an example of how Mercury uses its policy to increase its profits in
20 violation of Insurance Code § 2051.5: Mercury arrives at a hypothetical replacement cost value
21 of a lamp. If, in replacing the lamp, the insured pays Jess than that replacement cost, Mercury
22 pays the amount the policyholder actually spends. But if, in replacing the lamp, the policyholder
23 reasonably spends more than Mercury’s hypothetical replacement cost, Mercury limits its
24 liability to that lower amount, paying less than is required by § 2051.5.
25 59. Mercury uniformly applies the foregoing illegal claims adjusting methods to all of
26 its property claims in California in violation of § 2051.5.
27
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SECOND Amended CLASS ACTION
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60. Through use of the foregoing illegal depreciation methods, Mercury substantially
reduces its claim liabilities and increases its profits.
61. Plaintiffs and the Class first became aware of the violations only in or about
November 2012, because Mercury hid from Plaintiffs and the Class its illegal practices relating
to payment of replacement cost claims. Mercury likewise misrepresented and concealed from its
insureds their rights under § 2051.5, in violation of Insurance Code §790.03(h) and 10 CCR §
2695.4.
62. Plaintiffs and the Class had no right to seek appraisal once they learned of
Mercury’s illegal practices because the illegal practices at issue were beyond the scope of
10 appraisal under the insurance policies and relate to a loss settlement practice rather than
11 valuation issue. Likewise, an appraisal panel would have no authority to decide whether
12 Mercury’s conduct violates the UCL, merits declaratory relief, or amounts to a breach of its
13 property policies with thousands of California insureds. Thus, it would be entirely futile for
14 Plaintiffs and the Class to submit any of their claims or following causes of action for appraisal
15 as to the correct replacement cost value.
16 63. Mercury’s pre-appraisal conduct was and is intended to evade the requirements of
17 Insurance Code sections 2051 and 2051.5 and 10 Cal. Code Reg. § 2695.9(f).
18 64. Personal property claims are settled based on pre-appraisal offers from Mercury
19 which violate Insurance Code sections 2051 and 2051.5, California Code of Regulations section
20 2695.9(f) and Mercury’s insurance policies. For this reason, Mercury’s pre-appraisal offers to
21 settle personal property claims for less than the true value of such claims has resulted in damage
22 to Plaintiffs and the Class equal to the difference between the value of the claim with
23 depreciation properly calculated according to California law and regulation, and the amount
24 offered by Mercury, and/or equal to the difference between the replacement cost properly
25 calculated according to California law and regulation, and the amount offered by Mercury.
26
27
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SECOND Amended CLASS ACTION
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65. This action is not about a dispute between Mercury and the Class as to the
ultimate value of the lost or damaged personal property of Plaintiffs and proposed class
members. Further, this action is not about a dispute between Mercury and the Class about
whether the Actual Cash Va
Preview
FILED SAN MATEO COUNTY J. Edward Kerley (175695) Dylan L. Schaffer (153612) FE) 05 2020 Kerley Schaffer LLP 1939 Harrison Street, #500 Cle Superior Gourt Oakland, California 94612 Telephone: (510) 379-5801 —— DEPUTY CLERK Facsimile: (510) 228-0350 Attomeys for Plaintiffs SUPERIOR COURT OF THE STATE OF CALIFORNIA SAN MATEO COUNTY — UNLIMITED CIVIL JURISDICTION DONNA MARIE MESCHI, an individual, CLASS ACTION VINCENT ANDREW MESCHI, an 10: individual, on behalf of themselves and a Case No. 16CIV02607 class of similarly situated persons, STIPULATION OF PARTIES AND Plaintiffs, PROPOSED ORDER RE LEAVE TO FILE SECOND AMENDED CLASS V; ACTION COMPLAINT 13, MERCURY CASUALTY COMPANY, a 14 corporation, and Does 1 through 10, Assigned to Honorable Danny Y. Chou, Dept. 22 for all purposes 48 Defendants. 16 Date filed: November 29, 2016 1% Trial Date: TBD 18 ag. “po 02807 20, Stipulation a order ‘AM wt 2238194 24 - 22 . — ao 24 25 Stipulation and Proposed Order EC EIVEDTY SAN MATE! 0 COUN FEB 05 2020 Clerkof the Superior Court —samee The parties, having met and conferred following the filing of Plaintiffs’ first amended complaint, stipulate as follows: 1 Following the filing of Plaintiffs’ first amended complaint, the parties met and conferred regarding pleading issues, but were unable to avoid the filing of Defendants’ demurrer and motion to strike. Thereafter the parties continued to meet and confer and asa result of that process Plaintiffs have amended their complaint in an attempt to narrow issues to be litigated prior to the case being at issue. | The parties agree there is good cause for the Court to grant leave to Plaintiffs to file their second amended complaint, which is attached for the Court’s review as Exhibit A. 10 By agreeing to the filing of the complaint, Defendants do not forfeit their right to respond w either by answering or by filing a demurrer and/or motion to strike, pursuant to the deadlines 12 set by the Court’s order of January 22, 2020. 13 Date: January 17, 2020 Hager & Dowling 15 ih 16 Tora Dydd ail Attomeysfor Defendants 17 Date: January 17, 2020 Kerley Schaffer LLP 18 19 Lhe 20 Dyl: L. Schaller Attorneys for Plaintiffs 21 22 23 24 25 ws [es Stipulation and Proposed Order wan lao a os Pursuant to the stipulation of the parties, and for good cause showing, the Court orders the following: 1 Plaintiffs are given leave to file their Second Amended Complaint. 2. Plaintiffs shall file their complaint forthwith upon the filing of this order. 3 Defendants' shall either answer in 15 days, or file its demurrer and/or motion to strike pursuant to the code and hearing date set by the Court in its order of January 22, 2020. | Date:__‘Jaifzezo - LZ Honorable Danny Y Chou 10 1 13 15 16 17 18 19 20 21 22 23 25 aa Dom Stipulation and‘Proposed Order i ese me wee EXHIBIT A EXHIBIT A J. Edward Kerley (175695) Dylan L. Schaffer (153612) Yasmeen Omidi (254962) Kerley Schaffer LLP 1939 Harrison Street, #500 Oakland, California 94612 Telephone: (510) 379-5801 Facsimile: (510) 228-0350 Attorneys for Plaintiffs SUPERIOR COURT OF THE STATE OF CALIFORNIA SAN MATEO COUNTY — UNLIMITED CIVIL JURISDICTION 10 ll DONNA MARIE MESCHI, an individual, Case No. 16CIV02607 12 VINCENT MESCHI, an individual, on behalf of themselves and a class of similarly SECOND AMENDED CLASS ACTION 13 situated persons, and ROES 1-10. COMPLAINT AND DEMAND FOR JURY TRIAL 14 Plaintiffs, 15 Vv. 16 MERCURY CASUALTY COMPANY, a 17 corporation, CALIFORNIA. AUTOMOBILE INSURANCE 18 COMPANY, a corporation, MERCURY INSURANCE SERVICES, LLC, a limited 19 liability corporation, and DOES 3 through 10, 20 Defendants. 21 22 23 24 25 26 27 --1-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial Plaintiffs Donna Meschi, Vincent Meschi, and ROES 1-10, on behalf of themselves and all others similarly situated allege as follows:! PARTIES 1 Plaintiffs Donna and Vincent Meschi are residents of San Mateo, California (Meschi Plaintiffs”). 2 Defendant Mercury Casualty Company (“MCC”) is a corporation licensed to conduct business in the state of California. 3 Defendant California Automobile Insurance Company (“CAIC”) is a corporation. licensed to conduct business in the state of California. 10 4 Defendant Mercury Insurance Services, LLC (“MIS”), is a limited liability 11 corporation licensed to conduct business in the state of California. MIS is a wholly owned 12 subsidiary of MCC. 13 5. MCC, CAIC, and MIS are each wholly-owned subsidies of Mercury General 14 Corporation, a California Corporation. 15 6 Defendants. are herein collectively referred to as “Mercury,” the brand name used 16 by defendants and each of them for marketing, advertising, and sales of property policies issued 17 by MCC and CAIC. 18 7. The true names of Plaintiffs ROES 1-10 are presently unknown and are therefore 19 suing by fictitious names. Each of the ROE Plaintiffs is insured under a Mercury property policy, 20 made a claim for repair or replacement of contents under a property policy issued by CAIC, was 21 harmed by Defendants’ conduct, and thus is a proper plaintiff and representative of the class in 22 this action. 23 24 25 1 All allegations made in this complaint are based upon information and belief, except those allegations which pertain to the Meschis, which are based on personal knowledge. The 26 allegations of this Complaint stated on information and belief are likely to have evidentiary support after a reasonable opportunity for further investigation and discovery. 27 --2-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial 8. The true names and capacities of Defendants DOES 3 through 10 are unknown and are therefore sued by fictitious names. Each of the DOE Defendants is, in some manner, responsible for the damages alleged. 9. Plaintiffs seek to represent the following class (“Declarative Relief Class”): California residents insured under a CAIC or MCC property policy from November 29, 2012 to the time of trial in this action. 10. Plaintiffs seek to represent subclasses (“Injury Classes”) (a) The “ACV Claims Class,” defined as: California residents insured under a CAIC or MCC property policy who 10 received a first party settlement, or offer for settlement, of a personal property 11 claim that was adjusted by MIS on an actual cash basis, for less than the 12 applicable policy limits, which claims were open between November 29, 2012, 13 and the time of trial of this action; and 14 (b) The “Replacement Cost Claims Class”, defined as: 15 California residents insured under a CAIC or MCC property policy who 16 received a first party settlement, or offer for settlement, of a personal property 17 claim that was adjusted by MIS on an actual cash basis, for less than the 18 applicable policy limits, which claims were open between November 29, 2012, 19 and the time of trial of this action. 20 21 VENUE AND JURISDICTION 22 11. The Meschi Plaintiffs were issued a policy of insurance by MCC, identified as 23 policy number HO 13187051 (“Policy”), insuring all risks of loss to Plaintiffs’ dwelling and 24 property located at 247 Avalon Drive, Daly City, California (“Property”), and providing various 25 other coverages, from March 15, 2015, to March 15, 2016. The Policy is attached as Exhibit A 26 to this Second Amended Complaint. 27 w-3-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial 12. The ROE Plaintiffs were issued property policies by CAIC insuring all risks of their insured properties, each of which is located in California. 13. Venue is proper in the Superior Court of California for the County of San Mateo as Defendants transact business in the County and Defendants derive substantial revenue from their activities in the County. MIS, MCC, AND CAIC ARE MUTUAL ALTER-EGOS Defendants are a single enterpris 14. MIS, MCC, and CACI have a complete unity of interest such that their separate corporate personalities are merged—each is a mere adjunct of the other and they are part of a 10 single enterprise (Tran v. Farmers Group, 104 Cal.App.4® 1202 (2002).) ll 15. The policies sold to the Meschis and ROE Plaintiffs misleadingly represent that 12 the insurer is a non-existent entity called “Mercury.” 13 16. In fact, there is no such entity as Mercury. 4 17. Rather, Mercury General Corporation, the parent organization, has two primary 15 insuring entities for property insurance in California—MCC and CAIC. The Meschis’ policy was 16 issued by MCC. The ROES’ policies were issued by CAIC. 17 18. MCC, CAIC, and MIS are a single enterprise due to a complete unity of interest 18 and ownership as follows: 19 e Property policies underwritten by both MCC and CAIC are marketed and sold by 20 Mercury Insurance, not the true insuring entity; 21 MIS, which like MCC and CAIC is a subsidiary of Mercury General Corporation, 22 contracts with MCC and CAIC to investigate and adjust property insurance 23 claims. 24 All investigation and adjusting of claims under MCC and CAIC policies is done 25 by employees of MIS. 26 27 --4-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial All supervision and management of claims investigation and adjusting of claim under MCC and CAIC policies is done by employees of MIS. All decisions regarding training and guidelines as applies to the investigation and adjusting of claims under MCC and CAIC policies are taken by employees of MIS. All policy and insurer-wide decisions regarding claims investigation and claims adjustment—including the application of depreciation to contents claims under Mercury property policies, the payment of replacement cost claims for contents under Mercury property policies, and compliance with 10 CCR § 2695.9.(f)}—are 10 made by employees of MIS on behalf of MCC and CAIC. 11 MIS employees, supervisors, and managers were solely responsible for accepting, 12 investigating, and adjusting the Meschis’ and ROES’ claims. 13 No employee, manager, or supervisor of MCC or CAIC accepted, investigated or 14 adjusted the Meschis’ or ROES’ property claims. 15 Neither the Meschis nor ROES have ever spoken with or communicated in 16 writing with any employee of either MCC or CAIC. 17 Every person Meschis and ROES have spoken with about their property claims 18 represented him or herself as working for “Mercury” or “Mercury Insurance.” 19 Every person Meschis and ROES have spoken with about their property claims is 20 in fact employed by MIS. 21 MIS, MCC, and CAIC are all wholly owned and controlled subsidiaries of 22 Mercury General Corporation. 23 MCC and CACTI cannot functionally sell property insurance policies, or accept, 24 investigate, adjust, or deny claims under property insurance policies without 25 MIS’s involvement. 26 27 --5-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial MCC and CAIC are mere shells, conduits for the affairs of MIS and their mutual parent, Mercury General Corporation. MCC and CAIC have no employees responsible for accepting, investigating, adjusting, or denying insurance claims under their property policies. Through a management agreement, MCC and CAIC grant MIS sole and complete authority to accept, investigate, adjust, and deny claims under their property insurance policies. MIS is solely responsible for and has sole authority for accepting, investigating, adjusting, and denying insurance claims under all property policies underwritten 10 by MCC and CAIC. 11 Employees of MIS manage and control litigation in which MCC and CAIC are 12 involved. 13 Employees of MIS manage and control investigation, adjustment, and denial of 14 insurance claims under policies issued by MCC and CAIC. 15 MCC and CAIC have no employees responsible for accepting, investigating, or 16 adjusting insurance claims under its California property policies. 17 MCC and CAIC have no employees responsible for providing training as required 18 by 10 CCR §§ 2695.6 et seq. 19 MIS is responsible for all training required by 10 CCR §§ 2695.6 et seq. 20 MCC and CAIC neither create nor issue to any claims handling personnel 21 guidelines for the investigation or adjusting of insurance claims in California. 22 MIS, on behalf of its sister companies MCC and CAIC, creates and issues to its 23 claims handling personnel guidelines for the acceptance, investigation, adjusting, 24 and denial of insurance claims in California. 25 26 27 --6-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial MIS is responsible for rewarding and disciplining employees responsible for the acceptance, investigation, adjustment, and denial of claims under MCC and CAIC property policies. In accepting, investigating, adjusting and adjusting claims asserted under MCC and CAIC policies, MIS employees and agents represent to policyholders, as they did to the Meschis and ROES, in both oral and written communications, that they are working on behalf of Mercury or Mercury Insurance, without explaining any differences or distinctions between MCC, CAIC, or MIS, or at any time revealing 10 that they are employed by MIS, and not by MCC, CAIC, or any other Mercury 11 entity or affiliate; 12 MCC, CAIC, and MIS file consolidated federal tax returns. 13 MCC, CAIC, and MIS use the same bank for all accounts. 14 All MCC and CAIC profits are passed through to MIS by way of a management 15 agreement and debt structuring. 16 MCC, CAIC, and MIS have the same principle business address. 17 MCC, CAIC, and MIS have overlapping officers and directors. 18 19 An inequitable result will follow if 20 defendants are not treated as alter-ego: 21 19. Given the complete unity of interest among MCC, CAIC, and MIS, they should 22 be treated as alter egos because if no such treatment is applied an inequitable result will obtain. 23 20. “Whether an inequitable result exists turns on the degree of control a parent or 24 sister subsidiary has over the defendant that is in privity with the plaintiff.” (WGA Entertainment, 25 2012 WL 12894053 (C.D. California 2012).) 26 27 --7-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial 21. “An inequitable result exists where the parent or sister subsidiary caused the harm. for which the plaintiff is suing the defendant-in-privity, and thus it would be unjust to hold only the defendant-in-privity liable for what are essentially the decisions by the parent or sister subsidiary. Courts have found an inequitable result—and, ultimately, an alter ego relationship between an insurer and its parent—because it ‘would be unjust to permit those who control companies to treat them as a single or a unitary enterprise and then assert their ... separateness in order to commit frauds and other misdeeds with impunity.’” (MGA Entertainment, 2012 WL 12894053 (C.D. California 2012), 2012 WL 12894053 *14, quoting Tran v. Farmers Group, 104 10 Cal. App.4 1202, 1219 (2002).) i 22. An inequitable outcome occurs if the party subject to liability for violation of laws 12 is not the party who did the acts giving rise to liability. (MGA Entertainment, 2012 WL 13 12894053 (C.D. California 2012).) 14 15 Mercury’s attempt to insulate its policies from 16 liability weighs in favor of alter-ego treatment 17 23. Beginning in 2016, during the class period at issue in this case, and without 18 alerting its policyholders, Mercury transferred a majority of its California property policies from 19 MCC to CAIC. For example, in 2014, MCC had property policy premiums of about $372 20 million. In that year CAIC had property policy premiums of about $20 million. By 2018, MCC’s 21 premiums were down to $129 million, but CAIC’s premiums had increased to $398 million. 24. Likewise, the average number of covered contents claims to MCC for the period 23 2013 to 2016 was about 3,500 claims annually. In 2017 the number fell to 396; in 2018 it was 24 down to 243. The falloff in claims is due to Mercury’s renewal of MCC policies by CAIC in the 25 years 2017-2018, which is likewise reflected in the shift in premium balance. 26 27 --8-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial 25. The unfair, illegal, and fraudulent conduct set forth below are the result of decisions made and applied by managing agents of MIS, on behalf of Mercury property policy holders, including holders of MCC and CAIC policies. 26. If MCC, CAIC, and MIS are not treated as alter-egos, a majority of Mercury policyholders (holders of CAIC property policies) in the classes described above would not benefit from this lawsuit if Mercury is permitted to hide its business from the impact of ongoing litigation by moving its policies from a sued entity (MCC) to an insuring entity (CAIC) that is effectively part of a single entity. Rather, given that MCC, CAIC, and the management entity MIS are a single entity, each of those entities is a proper defendant here and all polices presently 10 in effect, as well as all claims under policies issued by MCC and CAIC during the class period, 11 are the proper subject of the causes of action set forth below. 12 27. Likewise, given that the unfair, illegal, and fraudulent conduct set forth below 13 was perpetrated by employees of MIS, an inequitable result would obtain if MIS, an alter ego of 14 MCC and CAIC, is excluded from liability here. 15 28. As holders of a Mercury policy, the Meschis are proper class representatives for 16 all class members under all property policies issued by MCC and CAIC and managed by MIS. 17 29. In the alternative, the ROE plaintiffs can represent class members with policies 18 issued by CAIC, and as to claims made under CAIC policies. 19 20 Additional inequitable effects from failing 21 to treat defendants as alter-egos 22 30. An inequitable result will further result if MCC, CAIC, and MIS are not found to 23 be alter-egos as follows: 24 e The Meschis’ contents claim was investigated, adjusted and supervised by 25 Gregory McLendon, Michael Burton, and Marlo Beeman-Curiel. 26 e Each of these individuals is employed by MIS, and not by MCC or CAIC. 27 --9-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial Each of these individuals acts on behalf of MCC and CAIC and investigates and adjusts claims under MCC and CAIC policies, pursuant to a management agreement between MIS and the insuring entities, MCC and CACI, which themselves have no employees capable of investigating or adjusting property claims. All correspondence to the Meschis from these individuals represented that they worked for and represented a non-existent entity named “Mercury Insurance.” In all communications, whether written or oral, between McLendon, Burton, and. Beeman-Curiel, and the Meschis, McLendon, Burton, and Beeman-Curiel 10 represented themselves as working for and representing Mercury Insurance, and 11 no other entity. 12 Emails and correspondence relating to the Meschis’ property claim to the Meschis 13 was sent by McLendon, Burton, and Beeman-Curiel from 14 “mercuryinsurance.com” domain, rather than a domain which would indicate the 15 identity of the insuring entity (MCC) or the managing entity (MIS). 16 At no time did McLendon, Burton, or Beeman-Curiel explain or reveal to the 17 Meschis that they are employed by MIS, or that by way of a management 18 agreement they represent the entity that issued the property policy to the Meschis 19 (MCC). 20 The named MIS employees repeatedly violated California law and regulation (Ins. 21 Code §§ 2051, 2051.5 and 10 CCR 2695.9(f)) in the investigation and adjusting of 22 the Meschis’ property claims, as is further set forth below. 23 MIS, CAIC, and MCC failed to guide and train its employees, including without 24 limitation McLendon, Burton, and Beeman-Curiel, to comply with California law 25 and regulation that applies to the investigation and adjusting of property claims; 26 27 --10-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial MIS, on behalf of MCC and CAIC, has engaged in an illegal scheme to violate Ins. Code §§ 2051, 2051.5 and 10 CCR 2695.9(f) in the investigation and adjusting of property claims. The means of that scheme include but are not limited to: ° Illegally taking depreciation on the basis of factors barred under California law in violation of Ins. Code § 2051. Failing to pay replacement cost claims pursuant to the requirements of Ins. Code § 2051.5; and Failing to adequately document depreciation in its claim files and/or 10 failing to explain the basis of its depreciation to policyholders in violation 11 of 10 CCR 2695.9(f). 12 MIS exercised complete control over the investigation, adjusting, and denial of 13 the Meschis property claim. 14 All decisions vis-a-vis the Meschis’ claim investigation and adjusting were made, 15 ratified, and approved by employees, supervisors, and managing agents of MIS. 16 All harm to the Meschis was done by MIS employees, supervisors and managing 17 agents, including McLendon, Burton, and Beeman-Curiel. 18 Although MIS employees and supervisors accepted, investigated, and adjusted the 19 Meschis claim, without involvement of a single employee of MCC, MCC has no 20 obligation to produce any of those witnesses for deposition, requiring Plaintiffs to 21 separately subpoena each of them; 22 MIS employees and supervisors involved in the investigation and adjusting of the 23 Meschis claim may reside outside California, which means it those witnesses may 24 never be compelled to provide testimony in this case. 25 MIS will not be subject to written discovery including interrogatories and requests 26 for admissions unless it is a party to this action. 27 --ll-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial Although the Meschi insurance policy was issued by MCC, no MCC employee had any role whatsoever in the Meschi claim. No employee of MCC communicated with the Meschis during the claim. Because no MCC employee accepted, investigated, or adjusted the Meschis’ claim, if MCC is the sole defendant, the Meschis will be precluded from demonstrating that a managing agent of the defendant participated in, approved, or ratified conduct amounting to fraud, malice, and oppression, as required to justify an award of punitive damages under California Civil Code section 3294; MCC has a small fraction of the assets of the combined entities—thus, to evaluate 10 the ability to pay a punitive damages award and the adequacy of a punitive ll damages award to deter future misconduct, the failure to include MIS and CAIC 12 as a parties would misrepresent Mercury’s true financial condition. 13 Because MCC, CAIC, and MIS treat themselves as a single and unitary entity it 14 would be unjust to permit them to assert their separateness in order to violate 15 California law with impunity (Tran v. Farmers Group, Inc., 104 Cal.App.4th 16 1202, 1219 (2002).) 17 18 Mercury’s improper purposes for separating insuring and claims adjusting 19 functions among multiple entities 20 31. In addition to the avoidance of liability described above by means of transfer of 21 thousands of property policies from MCC to CAIC in the course of this litigation, Mercury has 22 an improper purpose for dividing insuring and claims handling functions between MCC/CAIC 23 and MIS, which weighs strongly in favor of treating the Mercury companies as a single entity for 24 the purpose of this lawsuit. To wit: 25 e Purposefully increasing claims expenses to MCC and CAIC by transferring the 26 investigation and adjusting functions to a management company (MIS), which in 27 --12-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial turn bills MCC and CAIC for claims investigation expenses, thus justifying requests to California regulators for premium increases; Purposefully maintaining relatively small asset size of Mercury’s insuring entities, thus avoiding large punitive damages awards; Reducing the total number of policies issued by any one insuring entity, and thus claims made to that entity, to avoid assertions of institutional bad faith, malice, oppression, and fraud, against Mercury by confining claims of malfeasance to the insuring entity rather than MIS, which makes all claims handling decisions, provides all claims handling guidance and training, and supplies all approvals and 10 ratification of claims outcomes; and ll Purposefully shielding from discovery entities as to which MIS makes all claims 12 handling decisions, provides all claims handling guidance and training, and 13 supplies all approvals and ratification of claims outcomes, by dividing insuring 14 and claims handling functions between a series of small insuring entities which 15 have no employees, and MIS; 16 Deliberately shielding from discovery reports from consultants to MIS, as well as. 17 internal communications, relating to claims savings to be obtained vis a vis 18 property claims; 19 Deliberately shielding from discovery, including deposition, senior management 20 of MIS and Mercury General Corporation where policy decisions are made vis a 21 vis property claims; 22 Purposefully shielding MIS from discovery and liability--MIS is responsible for 23 harm in the event of unfair, illegal, fraudulent, and bad faith claims handling 24 practices; MIS is responsible for malice, fraud, oppression, and institutional bad 25 faith claims handling practices; MIS’s conduct relates specifically and only to 26 claims made under property policies issued by MCC and CACTI, which are 27 --13-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial themselves shell companies that act as insuring entities alone, and as to which MIS provides exclusive claims investigation and adjusting services pursuant to a management agreement; and As Mercury sought to accomplish here, purposefully shielding from class liability unfair, illegal, and fraudulent practices undertaken by MIS on behalf of one or insuring entities which are part of a single entity, Mercury. MERCURY’S VIOLATION OF INSURANCE CODE § 2051 IN THE PAYMENT OF ACTUAL CASH VALUE FOR PROPERTY 10 32. Plaintiffs and the Class are the holders of written policies of insurance issued by ll Mercury wherein Mercury agreed to provide, inter alia, coverage for losses to property resulting 12 from sudden and accidental loss such as fire and other perils. 13 33. Under the 2004 Homeowners Bill of Rights, codified at California Insurance 14 Code § 2051 et seq., Mercury was obligated in the case of a partial loss caused by any peril not 15 expressly excluded to first pay the actual cash value (“ACV”) of property up to the limits of the 16 policy. ACV is defined in Insurance Code § 2051, which provides in relevant part: 17 (b) Under an open policy that requires payment of actual cash 18 value, the measure of the actual cash value recovery, in whole or 19 partial settlement of the claim shall be determined as follows: . . . 20 (2) In case ofa partial loss to the structure, or loss to its contents, 21 the amount it would cost the insured to repair, rebuild, or replace 22 the thing lost or injured less a fair and reasonable deduction for 23 physical depreciation based upon its condition at the time of the 24 injury or the policy limit, whichever is less. 25 34. Section 2051 permits the insurer to take a “fair and reasonable” deduction for 26 “physical depreciation” based upon the actual condition of the item “at the time of the injury.” 27 --14-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial 35. Physical depreciation refers to the physical wearing-out of property; it is a measure of actual wear and tear. Physical depreciation does not include the separate concept of functional obsolescence—that is, loss of value due to external conditions. Physical depreciation does not include spreading the cost of an object over its useful life for accounting or tax purposes. 36. Section 2051’s limitation of “depreciation” to physical depreciation is consistent with claims adjusting practices throughout the United States which recognize that depreciation for actual cash value purposes is limited to physical depreciation (wear and tear), and does not include other concepts of depreciation that may be used for tax or accounting purposes. 10 37. To protect California insureds from arbitrary or improper deductions for 11 depreciation, California Code of Regulation 10 CCR § 2695.9(f) states, in pertinent part “[w]hen 12 the amount claimed is adjusted for betterment, depreciation or salvage, all justification for the 13 adjustment shall be contained in the claim file . . .The basis for the adjustment shall be fully 14 explained to claimant in writing.” 15 38. By operation of law, Insurance Code §790.03(h) is made part of every property 16 insurance contract between Mercury and every member of the Class. 17 39. Pursuant to operation of law, Insurance Code § 2051 is made part of every 18 property insurance contract between Mercury and every member of the Class. 19 40. Pursuant to operation of law, 10 CCR § 2695.4(a) is made part of every property 20 insurance contract between Mercury and every member of the Class. 21 41. Pursuant to operation of law, 10 CCR § 2695.9(f) is made part of every property 22 insurance contract between Mercury and every member of the Class. 23 42. In violation of Insurance Code § 2051, Mercury calculates the ACV of damaged 24 contents by calculating depreciation according to a straight-line schedule based on the age of 25 each item, rather than by reference solely to the true physical condition and deterioration of the 26 item prior to the loss. 27 --15-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial 43. Alternatively, Mercury calculates depreciation based on a combination of age and condition in violation of § 2051. 44. Mercury uniformly applies the foregoing illegal claims adjusting methods to all of its property claims in California in violation of § 2051. 45. Mercury uses a standard depreciation method in California based upon criteria not permitted by § 2051 and does not independently justify the depreciation in the claim file as required by 10 CCR § 2695.9(f). 46. Mercury uses a depreciation guide, or relies on third party vendors to use such depreciation guides, which settle property claims contrary to the condition-only approach 10 mandated by § 2051, including by reference to the age and type of property at issue. Mercury 11 neither provides its method of depreciation to insureds nor explains to them how it calculates 12 depreciation in violation of 10 CCR §2965.9(f). 13 47. Accordingly, during the relevant time period, Mercury violated its contracts, 14 Insurance Code § 2051, and 10 CCR § 2695.9(f) by improperly calculating “depreciation” and 15 refusing to pay for such depreciation through use of arbitrary and illegal depreciation 16 calculations that were not based solely upon the actual condition of each damaged item, and by 17 failing to justify in writing the depreciation amounts it claims. Mercury has no written or 18 systematic communication with its policyholders about their rights to an appropriate calculation 19 under California law and the policy based solely upon actual physical condition. Mercury has no 20 written or systematic communication with its policyholders about the physical condition of items 21 at the time of loss. Mercury has no written or systematic communication with its policyholders 22 about the manner of its depreciation of property, all in violation of 10 CCR § 2695.9(f). 23 48. Plaintiffs and the Class are informed and believe that through use of the foregoing 24 unfair, illegal, and fraudulent depreciation methods, Mercury substantially reduces its claim 25 liabilities and increases its profits, by applying high levels of depreciation when adjusting 26 contents claims. 27 --16-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial 49. Plaintiffs and the Class first became aware of the violations only in or about November 2012, because Mercury hid from Plaintiffs and the Class its illegal practices relating to calculation of depreciation. 50. Plaintiffs and the Class had no right to seek appraisal once they learned of Mercury’s illegal practices because the illegal practices at issue were beyond the scope of appraisal under the insurance policies and relate to a loss settlement practice rather than valuation issue. Likewise, an appraisal panel would have no authority to decide whether Mercury’s conduct violates the UCL, merits declaratory relief, or amounts to a breach of its policies with thousands of holders of Mercury property policies in California. Thus, it would be 10 entirely futile for Plaintiffs and the Class to submit any of their claims or following causes of 11 action for appraisal as to the correct actual cash value. 12 13 MERCURY’S VIOLATION OF INSURANCE CODE § 2051.5 IN THE PAYMENT OF 14 REPLACEMENT COST FOR PROPERTY 15 51. Under the 2004 Homeowners Bill of Rights, codified at California Insurance 16 Code § 2051.5, Mercury was obligated in the case of partial losses caused by perils not expressly 17 excluded to first pay actual cash value. If a policyholder with a replacement cost value policy 18 then makes a replacement cost claim after replacing or repairing the damaged item, § 2051.5 19 requires Mercury to pay the difference between the initial actual cash value payment for the item, 20 and the amount reasonably paid by the insured to replace the property, up to the policy limits. 21 52. Insurance Code § 2051.5(a) provides: 22 Under an open policy that requires payment of the 23 replacement cost for a loss, the measure of indemnity is the amount 24 that it would cost the insured to repair, rebuild, or replace the thing 25 lost or injured, without a deduction for physical depreciation, or the 26 policy limit, whichever is less. 27 --17-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial If the policy requires the insured to repair, rebuild, or replace the damaged property in order to collect the full replacement cost, the insurer shall pay the actual cash value of the damaged property, as defined in Section 2051, until the damaged property is repaired, tebuilt, or replaced. Once the property is repaired, rebuilt, or replaced, the insurer shall pay the difference between the actual cash value payment made and the full replacement cost reasonably paid to replace the damaged property, up to the limits stated in the policy. 10 53. Mercury’s insurance policies violate Insurance Code § 2051.5 by providing for a ll contrary method of loss settlement. 12 34, Mercury’s policies state in relevant part that it will pay replacement cost as 13 follows: 14 4. Loss Settlement. Covered property losses are settled as follows: 15 b. Full Value. Personal Property under Coverage C, unless listed under 4.c. 16 below, and awnings, carpeting, domestic appliances, outdoor antennas and 17 outdoor equipment, whether or not attached to buildings, at replacement cost at 18 the time of loss subject to the following: 19 (1) We will pay the full cost of repair or replacement, but not exceeding the 20 smallest of the following amounts: 21 (a) the limit of liability of this policy applicable to damaged, destroyed or 22 stolen property; 23 (b) the replacement cost of the property or any part; 24 (c) the full amount actually and necessarily spent by the insured in 25 repairing or replacing the property or any part; 26 (d) the direct financial loss you incur; or 27 --18-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial (e) our pro-rata share of any loss when divided with any other valid and collectible insurance applying to the covered property at the time of loss. 55. The Mercury policy defines replacement cost as: 18. “Replacement cost” ... b. In case of loss to personal property, replacement cost means the cost, at the time of loss, of a new article identical to the one damaged, destroyed or stolen. When the identical article is no longer manufactured or is not available, replacement cost shall mean the cost of a new article similar to the one damaged or destroyed and which is of comparable 10 quality and usefulness, without deduction for depreciation. 11 56. Pursuant to operation of law, § 2051.5 is made part of every property insurance 12 contract between Mercury and every member of the Class. 13 37. In violation of § 2051.5, in the event of replacement of contents covered under a 14 replacement cost policy, Mercury does not pay policy holders the amount actually paid by them 15 to replace the property. Instead, pursuant to the terms of Mercury’s policy, Mercury pays the 16 lesser of the amount reasonably expended by the insured to replace or repair the items, and 17 Mercury’s own calculation of the “cost, at the time of loss, of a new article identical to the one 18 damaged, destroyed or stolen.” 19 58. Here is an example of how Mercury uses its policy to increase its profits in 20 violation of Insurance Code § 2051.5: Mercury arrives at a hypothetical replacement cost value 21 of a lamp. If, in replacing the lamp, the insured pays Jess than that replacement cost, Mercury 22 pays the amount the policyholder actually spends. But if, in replacing the lamp, the policyholder 23 reasonably spends more than Mercury’s hypothetical replacement cost, Mercury limits its 24 liability to that lower amount, paying less than is required by § 2051.5. 25 59. Mercury uniformly applies the foregoing illegal claims adjusting methods to all of 26 its property claims in California in violation of § 2051.5. 27 --19-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial 60. Through use of the foregoing illegal depreciation methods, Mercury substantially reduces its claim liabilities and increases its profits. 61. Plaintiffs and the Class first became aware of the violations only in or about November 2012, because Mercury hid from Plaintiffs and the Class its illegal practices relating to payment of replacement cost claims. Mercury likewise misrepresented and concealed from its insureds their rights under § 2051.5, in violation of Insurance Code §790.03(h) and 10 CCR § 2695.4. 62. Plaintiffs and the Class had no right to seek appraisal once they learned of Mercury’s illegal practices because the illegal practices at issue were beyond the scope of 10 appraisal under the insurance policies and relate to a loss settlement practice rather than 11 valuation issue. Likewise, an appraisal panel would have no authority to decide whether 12 Mercury’s conduct violates the UCL, merits declaratory relief, or amounts to a breach of its 13 property policies with thousands of California insureds. Thus, it would be entirely futile for 14 Plaintiffs and the Class to submit any of their claims or following causes of action for appraisal 15 as to the correct replacement cost value. 16 63. Mercury’s pre-appraisal conduct was and is intended to evade the requirements of 17 Insurance Code sections 2051 and 2051.5 and 10 Cal. Code Reg. § 2695.9(f). 18 64. Personal property claims are settled based on pre-appraisal offers from Mercury 19 which violate Insurance Code sections 2051 and 2051.5, California Code of Regulations section 20 2695.9(f) and Mercury’s insurance policies. For this reason, Mercury’s pre-appraisal offers to 21 settle personal property claims for less than the true value of such claims has resulted in damage 22 to Plaintiffs and the Class equal to the difference between the value of the claim with 23 depreciation properly calculated according to California law and regulation, and the amount 24 offered by Mercury, and/or equal to the difference between the replacement cost properly 25 calculated according to California law and regulation, and the amount offered by Mercury. 26 27 --20-- 28 SECOND Amended CLASS ACTION Complaint & Demand for Jury Trial 65. This action is not about a dispute between Mercury and the Class as to the ultimate value of the lost or damaged personal property of Plaintiffs and proposed class members. Further, this action is not about a dispute between Mercury and the Class about whether the Actual Cash Va