Opinion
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of Los Angeles County No. BC224380. James R. Dunn, Judge.
Krane & Smith, Marc Smith, Samuel Krane, and Mark E. Goodfriend for Defendants and Appellants.
Horvitz & Levy, Barry R. Levy and Mitchell C. Tilner; Crandall, Wade & Lowe, William R. Lowe and Curtis L. Metzgar for Plaintiffs and Respondents.
CHAVEZ, J.
Defendants and appellants D&G Autosound, Inc., Gabi Mashal, and David Shemula (collectively, D&G) appeal from a judgment that plaintiffs and respondents State Farm Fire and Casualty Company and State Farm General Insurance Company (collectively, State Farm) had no duty to indemnify D&G for its settlement of an underlying lawsuit. State Farm had defended D&G in the underlying lawsuit subject to a reservation of rights, and D&G settled the action without seeking or obtaining State Farm’s consent. D&G also appeals the trial court’s denial of its request for prejudgment interest on a $347,266.50 arbitration award for disputed independent counsel fees.
We affirm the judgment and the trial court’s denial of prejudgment interest.
BACKGROUND
A. The Policy
State Farm issued to D&G a comprehensive general liability policy covering the period from November 28, 1996 to November 28, 2001 (the policy). The insuring agreement of the policy provides in part: “We will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury, property damage, personal injury or advertising injury to which this insurance applies.” The term “advertising injury” is defined as “injury arising out of one or more of the following offenses: [¶] a. oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services; [¶] b. oral or written publication of material that violates a person’s right of privacy; [¶] c. misappropriation of advertising ideas or style of doing business; or [¶] d. infringement of copyright, title or slogan.”
The policy also contains a prohibition against voluntary payments by the insured: “Except at their own cost, no insureds will voluntarily make a payment, assume any obligation or incur any expense, other than for first aid, without our consent.”
B. The Underlying Lawsuit
General Mobile Electronics Company (GME), through its subsidiary, Mobile Electronic Product Systems (MEPS), was a franchisor of automobile sound system stores operating under the name “Al & Ed’s Autosound and Mobile Electronics Centers.” D&G was a franchisee that operated three Al & Ed’s Autosound stores between 1986 and 1991. In November 1998, D&G filed an action against GME and MEPS. Seven months later, GME and MEPS cross-complained against D&G, alleging breach of the franchise agreements, trademark infringement, trademark dilution, and unfair competition, among other claims. In August 1999, GME and MEPS amended their cross-complaint to include claims for injunctive relief.
D&G tendered the defense of the underlying GME/MEPS cross-action to State Farm, and State Farm agreed to defend D&G subject to a reservation of rights. State Farm acknowledged that its reservation of rights created a conflict with D&G that entitled D&G to select independent counsel pursuant to Civil Code section 2860. D&G retained the law firm of Krane & Smith as independent counsel.
In January 2000, State Farm paid $50,000 to GME and MEPS to settle all of the advertising injury claims asserted against D&G in the first amended cross-complaint. In December 2000, GME terminated its franchise agreements with D&G and instructed D&G to stop using the “Al & Ed’s” name. In April 2001, GME and MEPS filed a second amended cross-complaint alleging that D&G had improperly continued to use the “Al & Ed’s” name. D&G tendered the defense of the second amended cross-complaint to State Farm, and State Farm agreed to defend, subject to a reservation of rights.
On May 17, 2001, GME and MEPS demanded $1,485,000 to settle the remaining advertising injury claims against D&G. On May 31, 2001, GME and MEPS lowered their demand to $1 million, the limit of D&G’s policy with State Farm, to settle the underlying cross-action in its entirety.
In a series of transactions from August to October 2001, a company named Al & Ed’s Autosound, LLC (Al & Ed’s) acquired all of GME’s assets, including the “Al & Ed’s” name and GME’s pending claims against D&G. The parties stipulated to substitute Al & Ed’s in place of GME in the underlying cross-action against D&G.
In December 2001, Al & Ed’s demanded that State Farm pay $700,000 to settle the claims against D&G. In a letter dated December 26, 2001, Al & Ed’s counsel suggested that if State Farm refused to fund the settlement, Al & Ed’s and D&G might settle the matter pursuant to a stipulated judgment and a covenant not to execute in exchange for an assignment of D&G’s rights against State Farm. D&G’s counsel raised this same possibility in letters to State Farm dated December 27, 2001 and January 8, 2002. State Farm advised D&G that it objected to any stipulated judgment and that it would not be responsible for any settlement entered into without State Farm’s consent. In a letter dated January 10, 2002, State Farm informed Al & Ed’s that it was willing to settle the claims against D&G for $20,000.
Between January 2002 and June 2002, the parties engaged in settlement discussions by telephone and in person. In a letter dated February 28, 2002, State Farm advised D&G that the terms of its policy required D&G’s cooperation, that State Farm had not been provided with a draft of any proposed settlement agreement, and that State Farm would not fund a settlement entered into without its knowledge and consent.
On June 13, 2002, D&G settled the underlying action and cross-action with Al & Ed’s for $865,000, without first seeking or obtaining State Farm’s consent. In September 2002, State Farm settled MEPS’s remaining claims against D&G for $7,500.
C. The Instant Declaratory Relief Action
While the underlying action was still pending, State Farm filed this action against D&G, GME, and MEPS, seeking a declaration that State Farm had no duty to defend or indemnify D&G against any cause of action alleged in the underlying cross-action. In response, D&G filed a cross-complaint against State Farm for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of duty under Business and Professions Code section 17200, and declaratory relief. Because the underlying action and cross-action had settled, the parties stipulated to an order relieving State Farm from any further obligation to defend D&G in the underlying cross-action.
1. D&G’s Claim for Independent Counsel Fees
Among the claims asserted by D&G in its cross-complaint against State Farm was a claim for independent counsel fees. The dispute over independent counsel fees had arisen while State Farm was defending D&G in the underlying cross-action, and concerned independent counsel’s hourly rate, and the allocation of counsel’s time between prosecuting D&G’s claims against GME and MEPS and defending against the potentially covered cross-claims.
State Farm filed a motion pursuant to Civil Code section 2860 to arbitrate the dispute concerning independent counsel fees, and the trial court granted the motion. At the conclusion of the arbitration, D&G was awarded a total of $347,266.50. The arbitration award stated: “[I]nterest and costs, if any, to be determined by the Court.” Four days after the arbitrator issued the final arbitration award, State Farm paid the amount of the award in full.
2. D&G’s Request for Prejudgment Interest
D&G filed a motion under Civil Code sections 3287, subdivision (a), and 3289, subdivision (b), seeking $109,076.21 in interest and costs on the arbitration award, with further interest on that amount from the date of the award until payment. The trial court denied the motion on the ground that “the amount in controversy is not subject to certainty.” D&G subsequently renewed its motion for prejudgment interest, adding claims for interest under Civil Code section 3288 and Code of Civil Procedure sections 657 to 663 and 1008, in conjunction with a motion for a new trial on the attorney fee issue. The trial court again denied the motion.
3. Adjudication of State Farm’s Duty to Defend and Indemnify
The trial court bifurcated the trial of State Farm’s complaint and D&G’s cross-complaint. Phase one of the trial addressed State Farm’s duty to defend D&G in the underlying cross-action, whether State Farm was entitled to reimbursement of any sums it paid to defend D&G, and whether State Farm had a duty to indemnify D&G for the $865,000 settlement with Al & Ed’s.
Following a trial based on stipulated undisputed facts and joint exhibits, the trial court issued a statement of decision concluding that State Farm was not obligated to indemnify D&G for the $865,000 settlement, because D&G had breached the policy’s prohibition against voluntary payments without State Farm’s consent. D&G subsequently dismissed its claims against State Farm, except for the bad faith cause of action based on State Farm’s failure to indemnify D&G for the $865,000 settlement. At the same time, D&G filed a motion for entry of judgment on the bad faith cause of action, noting that the trial court’s ruling that State Farm had no duty of indemnity effectively resolved D&G’s bad faith claim in State Farm’s favor and rendered further proceedings unnecessary. The trial court granted D&G’s motion and entered judgment on the indemnity issue in favor of State Farm. The judgment states that each party shall bear its respective costs and attorney fees.
The trial court further concluded that State Farm had a duty to defend D&G in the underlying cross-action and that State Farm was not entitled to reimbursement of any sums paid to defend D&G. Those rulings are not at issue in this appeal.
D&G appeals from that portion of the judgment concluding that State Farm had no duty to indemnify D&G, that D&G shall recover nothing from State Farm, and that each party shall bear its own costs and attorney fees. D&G contends that the trial court erred by concluding that D&G’s failure to comply with the voluntary payments provision of the policy obviated State Farm’s duty to indemnify D&G for the underlying settlement.
DISCUSSION
I. Voluntary Payments Provision
The policy’s prohibition against voluntary payments is a common provision in liability insurance policies. (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2007) ¶ 7:439.5, p. 7A-140.) It is intended “to ensure that responsible insurers that promptly accept a defense tendered by their insureds thereby gain control over the defense and settlement of the claim” and to prevent insureds from unilaterally settling a claim before the claim is established against them. (Jamestown Builders, Inc. v. General Star Indemnity Co. (1999) 77 Cal.App.4th 341, 346 (Jamestown).)
“California law provides that where an insurer provides a defense to its insured – even under a reservation of rights – the insured may not settle the matter without its insurer’s consent. [Citation.]” (Fuller-Austin Insulation Co. v. Highlands Ins. Co (2006)135 Cal.App.4th 958, 984 (Fuller-Austin); accord, Low v. Golden Eagle Ins. Co. (2003) 110 Cal.App.4th 1532 (Low); Safeco Ins. Co. v. Superior Court (1999) 71 Cal.App.4th 782, 787 (Safeco).) An insured who does so under these circumstances relieves the insurer of any obligation to indemnify the insured for the settlement. (Low, supra, 110 Cal.App.4th at p. 1547.)
D&G cites out-of-state case authority as support for its argument that settlement of the underlying action without State Farm’s consent did not result in a forfeiture of D&G’s indemnity rights under the policy. (See, e.g., Miller v. Shugart (Minn. 1982) 316 N.W.2d 729.) The law in California, however, is to the contrary. (See, e.g., Low, supra, 110 Cal.App.4th 1532; Safeco, supra, 71 Cal.App.4th 782.) It is undisputed that D&G did not seek State Farm’s consent before entering into the underlying settlement. Its failure to do so was a breach of the policy’s prohibition against voluntary payments. Under California law, breach of the voluntary payments provision relieves an insurer of its indemnity obligations under the policy “in the absence of economic necessity, insurer breach, or other extraordinary circumstances. [Citation.]” (Jamestown, supra, 77 Cal.App.4th at p. 346.)
D&G contends that State Farm should be precluded from enforcing the policy’s voluntary payments provision because the provision is ambiguous, State Farm breached its duty to defend and indemnify D&G, the underlying settlement was reasonable and prompted by economic necessity, and State Farm failed to demonstrate any prejudice. As we discuss, none of these alleged impediments bars enforcement of the voluntary payments provision in this case.
A. Alleged Ambiguity
D&G asserts that “NVP provisions have been held ambiguous and subject to ‘the normal rules of interpretation of an insurance contract and the particular circumstances of a case.’” It fails to explain, however, how or why the voluntary payments provision at issue here is ambiguous, and fails to provide any reasonable interpretation different than the one applied by the trial court. In any event, we conclude that the policy language at issue is clear, explicit, and unambiguous. (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264 [“If contractual language is clear and explicit, it governs”].)
B. Reasonableness of Settlement
D&G contends that the reasonableness of its settlement with State Farm is a triable issue of fact that precluded the trial court from concluding that State Farm had no duty of indemnity under the policy. The reasonableness of an underlying settlement is relevant when an insurer has erroneously denied coverage, refused to defend, or refused to accept a settlement presented by its insured. (See Fuller-Austin, supra, 135 Cal.App.4th at p. 1002.) State Farm did not deny coverage, refuse to defend, or refuse to consent to a settlement presented by D&G. The reasonableness of the underlying settlement is therefore not relevant here.
C. Alleged Breach of Duty to Defend
D&G contends that State Farm should be precluded from enforcing the policy’s voluntary payments provision because State Farm breached its duty to defend by withholding payment of disputed independent counsel fees. D&G further contends that the $347,266.50 arbitration award in its favor was an adjudication that State Farm failed to pay defense costs properly incurred by D&G and is res judicata on the issue of whether State Farm breached its duty to defend.
The arbitration adjudicated only the amount of legal fees and the hourly billing rate to be paid to D&G’s independent counsel. It did not adjudicate the issue of State Farm’s duty to defend. Res judicata only applies to issues that were or could have been adjudicated in arbitration. (Levy v. Cohen (1977) 19 Cal.3d 165, 171.) The doctrine does not apply here.
Had the arbitrator’s decision encompassed the duty to defend, that decision would have been improper. (See, e.g., Truck Ins. Exchange v. Superior Court, supra, 51 Cal.App.4th at p. 998; Handy v. First Interstate Bank of California (1993) 13 Cal.App.4th 917, 924.)
D. Alleged Breach of Duty to Indemnify
D&G argues that State Farm breached its duty of indemnity by reserving its right to deny coverage and by filing this declaratory relief action. D&G argues that by doing so, State Farm “left D&G to twist in the wind,” with no option but to settle without State Farm’s consent.
Under California law, an insurer may properly agree to defend its insured subject to a reservation of its right to seek reimbursement of costs advanced for noncovered claims. (Scottsdale Ins. Co. v. MV Transportation (2005) 36 Cal.4th 643, 656; Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 503; Truck Ins. Exchange v. Superior Court (1996)51 Cal.App.4th 985, 994.) Neither a reservation of rights, nor the filing of a subsequent declaratory relief action, constitutes a breach of the insurer’s duty to defend or indemnify its insured. (Prichard v. Liberty Mut. Ins. Co. (2000) 84 Cal.App.4th 890, 909 [insurer’s conditioning its defense obligation subject to reservation of rights did not breach its duty to defend]; Atlas Assurance Co. v. McCombs Corp. (1983) 146 Cal.App.3d 135, 150 [“Assuming the insurer has not otherwise abandoned, compromised or rejected the insured’s claim, an action seeking declaratory relief does not in any way frustrate the insured’s enjoyment of his contract rights”].) State Farm did not breach its duty of indemnity.
E. Prejudice
D&G contends that State Farm may not avoid its indemnity obligations unless it can prove it was substantially prejudiced by D&G’s failure to provide notice of the underlying settlement. Under California law, an insurer need not demonstrate prejudice before avoiding liability on the basis of the insured’s breach of the voluntary payments provision. (Insua v. Scottsdale Ins. Co. (2002) 104 Cal.App.4th 737, 746; Jamestown, supra, 77 Cal.App.4th at p. 350; Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, ¶ 7:439.10, pp. 7A-141-142 [“insured’s voluntary payment deprives the insurer of its right to investigate and negotiate a settlement. No other prejudice to the insurer need be shown”].)
F. Involuntariness/Economic Necessity
D&G claims that its making of the underlying settlement was involuntary because State Farm “would contend” the settlement was not covered and “would seek to disavow any indemnity obligation” in the pending declaratory relief action. State Farm’s reservation of rights and filing of a declaratory relief action did not render the underlying settlement “involuntary,” nor did they obviate D&G’s obligation under the policy to obtain State Farm’s consent before entering into the underlying settlement. (Fuller-Austin, supra, 135 Cal.App.4th at p. 984; Low, supra, 110 Cal.App.4th 1532; Safeco, supra, 71 Cal.App.4th at p. 787.)
D&G asserts that the voluntary payments provision should not be enforced because the underlying settlement was the product of “economic necessity” and “other extraordinary circumstances.” It fails to explain, however, what “extraordinary circumstances” existed, and why the settlement was motivated by “economic necessity.” D&G also offers no evidence to support these assertions. Its failure to do so waives the argument, and we treat the issue as effectively abandoned. (Benach v. County of Los Angeles (2007) 149 Cal.App.4th 836, 852.)
G. Estoppel
D&G contends that State Farm is estopped from enforcing the voluntary payments provision because State Farm “expressly represented to D&G that it would not authorize anything other than a nuisance or costs-of-defense settlement” and “D&G justifiably relied upon State Farm’s representations.” D&G cites no evidence to support this factual assertion, and the record on appeal contains no evidence that State Farm made such an express representation. We therefore disregard the argument. (Ojavan Investors, Inc. v. California Coastal Com. (1997) 54 Cal.App.4th 373, 391.)
II. Bad Faith Claim
D&G argues that State Farm may not assert breach of the voluntary payments provision as a defense to D&G’s bad faith claim. The only bad faith claim D&G did not dismiss with prejudice is its claim that State Farm improperly refused to indemnify it for the settlement with Al & Ed’s. As discussed, D&G’s breach of the voluntary payments provision relieved State Farm of any duty of indemnity under the policy. “‘[A] bad faith claim cannot be maintained unless policy benefits are due. . . .’ [Citation.]” (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 36.) D&G accordingly cannot maintain a bad faith action against State Farm.
III. Prejudgment Interest
D&G contends the trial court erroneously denied D&G’s request for prejudgment interest on the $347,266.50 in attorney fees and costs awarded in the arbitration and paid by State Farm in October 2003. It claims it is entitled to interest on this amount under Civil Code sections 3287, subdivisions (a) and (b) or under Civil Code section 3288.
A. Civil Code section 3288
Civil Code section 3288 states: “In an action for the breach of an obligation not arising from contract, and in every case of oppression, fraud, or malice, interest may be given, in the discretion of the jury.” A court, acting as the trier of fact, may decide the issue of prejudgment interest under the statute. (Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1587.) A trial court’s decision to award or deny prejudgment interest under Civil Code section 3288 will not be disturbed on appeal absent an abuse of discretion. (Bullis v. Security Pac. Nat. Bank (1978) 21 Cal.3d 801, 814.)
D&G has failed to establish any abuse of discretion by the trial court, and the record discloses none.
B. Civil Code Section 3287, Subdivision (b)
Civil Code section 3287, subdivision (b) states: “Every person who is entitled under any judgment to receive damages based upon a cause of action in contract where the claim was unliquidated, may also recover interest thereon from a date prior to the entry of judgment as the court may, in its discretion, fix, but in no event earlier than the date the action was filed.” A trial court’s decision to deny interest under section 3287, subdivision (b) will not be overturned absent an abuse of discretion. (Moreno v. Jessup Buena Vista Dairy (1975) 50 Cal.App.3d 438, 448 (Moreno).)
D&G fails to explain how the trial court’s ruling was an abuse of discretion. It simply argues that denying prejudgment interest in this case “would be unfair to D&G and unjustly enrich State Farm,” and that “[a]n award of prejudgment interest is necessary in the circumstances.” These conclusory statements are insufficient to demonstrate any abuse of discretion by the trial court. (Moreno, supra, 50 Cal.App.3d at p. 448.)
C. Civil Code Section 3287, Subdivision (a)
Civil Code section 3287, subdivision (a) provides in part: “Every person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him on a particular day, is entitled also to recover interest thereon from that day . . . .” The trial court denied prejudgment interest under this statute on the ground “that the amount in controversy is not subject to certainty.” When the facts are not in dispute, a trial court’s determination as to whether and when damages were certain or capable of being made certain by calculation is reviewed de novo. (KGM Harvesting Co. v. Fresh Network (1995) 36 Cal.App.4th 376, 390-391 (KGM).)
“The test for recovery of prejudgment interest under section 3287, subdivision (a) is whether defendant (1) actually knows the amount of damages owed plaintiff, or (2) could have computed that amount from reasonably available information. [Citation.]” (KGM, supra, 36 Cal.App.4th at p. 391.) Here, the arbitration concerned the rate at which D&G’s independent counsel was to be paid. Civil Code section 2860, subsection (c), states that “[t]he insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” State Farm argued that an hourly rate of $150 to $180 per hour was consistent with the amounts it normally paid to independent counsel for similar actions. D&G claimed that it was entitled to $250 per hour, the rate at which independent counsel normally calculated its fees.
After hearing testimony from both sides on the issue, the arbitrator found that although State Farm’s evidence clearly established that the rate of $150 or $185 per hour was consistent with the amounts ordinarily paid by State Farm to independent counsel, there was no evidence that State Farm could have retained counsel with expertise in the field of franchise law at such rates. The arbitrator therefore determined that Civil Code section 2860 did not limit independent counsel’s fees to the rates State Farm ordinarily paid. The arbitrator stated, however, that both State Farm’s standard rates and the rate normally billed by D&G’s independent counsel were factors it considered in determining an appropriate rate: “This does not mean, however, that the panel rates [paid by State Farm] are to be ignored in the determination of an appropriate hourly rate or that the rate charged by [independent counsel] must be accepted. Both the panel rates, and the rates charged by [independent counsel] must be considered in the fixing of a rate.” The arbitrator ultimately set a rate of $220 per hour, an amount between State Farm’s panel rate and independent counsel’s normal billing rate.
The record shows that the arbitration award was based on an hourly rate used neither by State Farm nor by D&G’s independent counsel, but on a combination of the two. The amount of the award accordingly could not have been known by either party at the outset of the arbitration, nor could it have been computed from the information available at the time. D&G is therefore not entitled to prejudgment interest under Civil Code section 3287, subdivision (a).
DISPOSITION
The judgment is affirmed. State Farm is awarded its costs on appeal.
We concur: DOI TODD, Acting P. J., ASHMANN-GERST, J.