Receiver Can Recover Punitive Damages on Behalf of Recivership Estate in Insurance Bad Faith Action

Brant Attorney Fees Can Be Recovered For Defending a Judgment on Appeal

Baron v. Fire Insurance Exchange (Sept. 4, 2007, H029830, Sixth Appellate District)
18 p. opinion

While an arbitration was in process between the two owners of a property, the property was extensively damaged by a fire. After issuing his decision, the arbitrator, on the stipulation of the two owners, appointed respondent Baron to be the receiver of the property. Baron was authorized to take possession of the property and all fire insurance proceeds. He was also empowered to restore or sell the property and to engage in any legal proceedings that he thought necessary to care for the property. For these services he was to be compensated at an hourly rate.

Fire Insurance Exchange, which had issued a policy that included fire insurance for the property, then engaged in a series of actions that provide a perfect example of insurer bad faith. Baron sued Fire Ins. for breach of the insurance contract, bad-faith refusal to pay policy benefits, declaratory relief, negligence, fraudulent misrepresentation and negligent misrepresentation. At trial the jury found in favor of Baron on all issues and awarded compensatory damages of $96,462 and punitive damages of $1.5 million.

In its appeal Fire Ins. argued that the receiver's appointment was void because the arbitrator had no jurisdiction to appoint him. Fire Ins. had not sought dismissal of the lawsuit in the trial court and the Court of Appeal held that Fire had waived this argument. Because the statute of limitations had run on any bad faith action by the insured, invalidating the appointment of the receiver would work a substantial injustice.

What Fire Ins. had argued in the trial court was that the receiver was not authorized to pursue the purely personal tort causes of action. The trial court had rejected this upon equitable grounds (the insured's statute had already run). In addition the arbitrator's appointment of the receiver had been explicitly confirmed when the arbitration award had been confirmed by the superior court. The superior court had statutory authority to appoint a receiver.

Fire Ins.' second contention on appeal was that the receiver lacked standing to pursue the tort causes of action and therefore could not obtain an award of punitive damages because punitive damages could only be awarded in a tort action. (Fire Ins. did not raise the issue of whether the receiver had the authority to bring the actual tort claims of bad faith and fraud, just whether he could obtain an award of punitive damages on them.) Fire Ins. argued that the turning over of the insurance claims to the receiver was in essence an assignment of them to him. The personal tort causes of action associated with insurance bad faith cannot be assigned.

The Court of Appeal disagreed with this characterization of the receiver's role. The respondent was not acting as an assignee. He had been explicitly authorized by the arbitrator's appointment (confirmed as an order of the court) to pursue the tort claims. The damages recovered on them would go to the receivership estate. The receiver would be permitted to retain his contractual compensation, not the full recovery on the cause of action, the way an assignee would.

Finally the Court of Appeal addressed the respondent's request for Brandt attorney fees for defending the judgment on appeal. After strongly implying that it would have declined to address this issue if Fire Ins. had objected to the extreme lateness of the respondent's papers on it, the Court found for the respondent on the merits. The pupose of the Brandt rule is to see to it that an insured gets the full benefits of his insurance policy. This does not occur if the insured is out-of-pocket for the attorney fees expended to get those benefits. This reasoning logically extends to the attorney fees spent to defend a judgment on appeal.
Justice Elia wrote the opinion. Presiding Justice Rushing and Justice Premo concurred.

Comment: This opinion is the source of the quote of the week for the week of September 3rd on the Civil Litigation Quote of the Week blog.

An Excess Judgment Can Be Recovered as Damages in a Contract Action Based Upon a Breach of the Covenant of Good Faith in an Insurance Policy

The Statute of Limitations is Equitably Tolled During the Time Between Entry of a Judgment and the Date That it Becomes Final

Archdale v. American International Specialty Lines Insurance Co. (Aug. 22, 2007, B188432, Second Appellate District, Division Three)
Opinion on Rehearing
43 page opinion

There is extensive case law concerning tort liability for breach of the covenant of good faith and fair dealing in insurance contracts but considerably less about contract actions based upon breach of the covenant. Fewer plaintiffs elect to pursue a contract claim because a tort claim permits recovery of greater damages. Emotional distress damages, punitive damages and Brandt fee awards are available in tort claims but do not qualify as contract damages. This opinion discusses a contract cause of action based upon breach of the covenant.

In the underlying action a multi-vehicle collision led to a lawsuit by the Archdales (the appellants here) against the driver of the truck that caused the accident and his employer. American International Specialty Lines Insurance Company (AIS), the company's insurer provided a defense and apparently acknowledged coverage. The policy limits were $500,000. Before trial the Archdales offered to settle for policy limits but AIS rejected the settlement offer. The trial resulted in a judgment of $1,292,495 in favor of the Archdales. After it rejected the Archdales settlement offer, AIS settled with another claimant from the same accident for $142,500. Following an unsuccessful appeal of the underlying judgment, AIS paid the Archdales the $357,500 remaining on the policy.

In this action the Archdales pursued the truck driver's contract causes of action against AIS (breach of express policy provisions and breach of the implied covenant) which had been assigned to them by the truck driver. The truck driver himself pursued his unassignable purely personal tort claim for emotional distress.

Statute of Limitations, Equitable Tolling and Assignment
The trial court granted AIS summary judgment based upon the statute of limitations because the judgment in the underlying action had been entered on May 3, 1999 and this action was filed on Sept. 12, 2003.

The Court of Appeal upheld the summary judgment against the truck driver because the two year statute on his tort action had run before this action was filed. However, the court concluded that the Archdales' contract claims were timely because the statute of limitations had been equitably tolled between the May 3, 1999 entry of the judgment and Nov. 27, 2001, when the judgment became final after remittur issued following the appeal.

There was evidence that although the Archdales' Sept. 12, 2003 complaint was based upon the assignment to them of the truck driver's contract claims, those claims were not actually assigned to them until Sept., 2004. However, the four year limitations period still had not run by Sept., 2004 which meant that the retroactive assignment did not prejudice AIS and therefore it was not barred by Civil Code section 2313.

Contract Action for Breach of the Covenant of Good Faith and Fair Dealing
The Court found that the Archdales' cause of action for breach of an express contract provision failed because there were no allegations of such a breach. AIS had provided a defense and had paid out the policy limits. The cause of action for breach of the implied covenant, however, stated a valid cause of action.

An insurer's failure to accept a reasonable settlement offer to resolve a third party claim against its insured constitutes a breach of the covenant of good faith and fair dealing. If the failure to settle leads to an excess judgment, that excess judgment is a consequential of the breach within the meaning of Civil Code 3300 and therefore is recoverable in a contract action.

An insurer has a duty to accept a reasonable offer to settle a claim against its insured. The Court quoted the following language from Johansen v. California State Auto. Assn. Inter-Ins Bureau (1975) 15 Cal.3d 9, 16 as the standard for determining if a settlement offer is reasonable: "the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim's injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer. Such factors as [1] the limits imposed by the policy, [2] a desire to reduce the amount of future settlements, or [3] a belief that the policy does not provide coverage should not affect a decision as to whether the settlement offer in question is a reasonable one."
Justice Croskey wrote the opinion. Presiding Justice Klein and Justice Kitching concurred.

Comment: The Court here was dealing with a summary judgment based upon a statute of limitations defense. The merits of the contract action had not been litigated. The issue of the reasonableness (and the associated evidence) of the Archdales' settlement offer was not before it. In footnote 23 the Court noted the existence of case law stating that the size of the judgment furnishes an inference of the value of the claim. A question not before the court, but perhaps on the minds of practitioners, is how to ensure that an insurance company fulfills its good faith duty to its insured when there are multiple claimants, as there were here after the multi-vehicle collision? Even if a claimant's damages indisputably exceed the policy limits, can the insurance company pay the full policy amount when there are other claims? That leaves the insured exposed for the complete amount of those other claims, a very serious situation for the insured if those claims are also substantial. In addition, once the policy limits have been paid there is no additional coverage and when there is no possibility of coverage can there be any duty to defend? These are questions that the trial court will may have to address during the trial of this action.