Opinion
NOT TO BE PUBLISHED
Santa Clara County Super. Ct. No. CV789114
Mihara, J.
Budget Rent a Car Corporation (Budget) brought a legal malpractice action against the dissolved law firm of Williams, Romanski, Polverari & Skelton (WRP&S). After Coregis Insurance Company (Coregis) ceased defending WRP&S in the malpractice action, WRP&S and Budget entered into a settlement agreement in which WRP&S stipulated to entry of judgment in favor of Budget, Budget agreed not to execute the judgment against WRP&S, and WRP&S assigned its rights against Coregis to Budget. Budget then brought an action against Coregis for, among other things, bad faith and fraud. The trial court granted Coregis’ motion for judgment on the pleadings on the ground that Budget’s second amended complaint failed to state viable causes of action because Budget’s assignor, WRP&S, suffered no economic loss, injury or damages. Following entry of judgment in favor of Coregis, Budget has filed a timely appeal and Coregis has filed a cross-appeal. We conclude that the trial court erred in granting the motion for judgment on the pleadings and reverse the judgment.
References to Coregis include its successor in interest, Westport Insurance Corporation, which is also a defendant, respondent, and cross-appellant.
I. Background
A. The Phan Action
In 1990, a 19-year-old man rented a car from Budget. While he was driving with seven passengers, he was involved in a single-vehicle accident in which three people were killed and five were injured. Beginning in 1991, the injured passengers and the estates of those who had been killed filed several lawsuits, which were eventually consolidated and referred to as the Phan action. The Phan action alleged a negligence claim against Budget and a products liability claim against both Ford Motor Company (Ford) as the manufacturer and Budget as part of the product’s supply chain. Budget retained the legal services of, among others, John Williams (Williams) as lead counsel and WRP&S to defend it in the Phan action.
Between September 1993 and early 1994, Ford settled with the Phan plaintiffs in the amount of $80,000 in exchange for their agreement to dismiss the products liability claim against it. After the trial court determined that the settlement was in good faith, Budget brought a motion for reconsideration on the ground that the Phan plaintiffs’ expert had recently concluded that the accident was the result of a manufacturing defect. The trial court then set aside the settlements. However, in an unpublished opinion, the First District Court of Appeal concluded that a trial court “may not... set aside its ruling merely because later-discovered evidence reveals a stronger underlying case against the settling defendant. Likewise, the court should not take such action because a nonsettling defendant has failed to present its best evidence or strongest arguments against the settlement at the original hearing or has failed to seek writ review in the appellate court.” (Ford Motor Company v. Superior Court (June 12, 1995) A066781, opn. ordered nonpub. Oct. 5, 1995.) Thus, the appellate court issued a writ of mandate directing the trial court to vacate its ruling and to reinstate its orders confirming the settlements. (Ibid.) In a letter dated June 15, 1995, Budget requested that Williams respond to the criticisms directed at Budget and its counsel in the opinion. In August 1996, Budget settled with the Phan plaintiffs in the amount of $3,500,000.
B. Dissolution of WRP&S
While the Phan action was pending, WRP&S ceased the practice of law on April 1, 1996. On that date, Williams formed Williams, Pinelli & Cullen (WP&C), and assumed the role of Budget’s defense in the Phan action. At the same time, Richard Romanski and John Skelton, formerly of WRP&S, formed Litigation Solutions Law Group (LSLG). Arrangements were also made for legal malpractice insurance coverage for WRP&S. Alburger, Basso, Degrosz Insurance Services, Inc. (ABD) was the insurance advisor for WRP&S and LSLG, and Seabury & Smith, Inc. (Seabury) was Coregis’ agent. Coregis, through Seabury, agreed to provide legal malpractice coverage to WRP&S when WRP&S’s business activity ended.
C. Budget’s Legal Malpractice Claim
In September 1997, Budget brought a legal malpractice and fraudulent transfer action against WRP&S, WP&C, Williams, LSLG, and other defendants. Budget alleged that Williams was the senior attorney at WRP&S and WP&C, and he performed certain legal services for Budget and supervised other attorneys in those firms who performed the remaining services. Budget also alleged that Williams, WP&C, and WRP&S failed to acquire sufficient evidence to prevent Ford from obtaining a determination that its settlement was made in good faith, failed to provide Budget with the opportunity to defend the products liability claim by obtaining admissible testimony from Ford engineers, and failed to seek indemnity from Ford for damages suffered by the plaintiffs. Budget further alleged that WRP&S’s conduct fell below the standard of care of litigation attorneys, and as a result, Budget was damaged by its payment of $3,500,000 to the Phan plaintiffs and $1,500,000 in litigation costs and attorney’s fees. In addition, Budget alleged that LSLG and WP&C engaged in the fraudulent transfer of assets that had previously belonged to WRP&S.
The other named defendants were Tressler, Soderstrom, Maloney & Priess and Howard K. Priess, II.
None of these attorneys were identified in the complaint.
Budget did not refer to its potential liability under the negligence cause of action.
WRP&S tendered its defense of the malpractice action to Coregis. Coregis initially retained defense counsel for WRP&S. However, on April 17, 1998, Coregis withdrew its defense and denied coverage on the ground that WRP&S did not qualify as a predecessor firm to LSLG, which was the named insured on the policy. In February 2000, Budget offered to settle the malpractice claim against WRP&S and LSLG for $2,000,000, which was the amount of the policy limits. Coregis did not respond to the offer.
In March 2000, Budget, WRP&S, and LSLG entered into a settlement agreement. This agreement required the parties to stipulate to the entry of judgment in favor of Budget and against WRP&S in the amount of $3,500,000. Budget also agreed not to execute the judgment against WRP&S, and was assigned the rights of both LSLG and WRP&S to their causes of action against Coregis. On April 3, 2000, judgment was entered against WRP&S in the amount of $3,500,000 and LSLG was dismissed from the action without prejudice. Budget also continued its malpractice action against Williams and WP&C.
The WRP&S “ASSIGNMENT OF CLAIMS” is signed on its behalf by Skelton, Romanski, and Williams. The LSLG “ASSIGNMENT OF CLAIMS” is signed on its behalf by Skelton and Romanski.
The trial court subsequently granted summary judgment in favor of Williams in Budget v. Williams on the ground that Budget could not establish a causal link between the alleged malpractice and the damages that it sustained. On December 5, 2005, this court affirmed the judgment in an unpublished opinion (Budget v. Williams (Dec. 5, 2005, H026954 [nonpub opn.]). This court concluded that Budget had failed to establish a triable issue of fact as to whether Budget’s exposure for its own negligence did not exceed the $3,500,000 that it paid to settle the Phan action.
II. Statement of the Case
On April 13, 2000, Budget filed its original complaint in the present action against Coregis, Seabury, and ABD. The complaint alleged breach of contract and bad faith causes of action against Coregis. Budget alleged that WRP&S was insured under the policy. In the event that WRP&S was not covered as an insured, Budget also alleged negligence against Seabury and ABD in the third cause of action based on their failure to obtain the coverage that WRP&S had sought. Coregis was also named in this cause of action as vicariously liable for Seabury’s negligence.
In October 2002, the trial court granted Coregis’ motion for summary adjudication as to Budget’s causes of action for breach of contract and bad faith on the ground that the underlying litigation fell within an exclusion to coverage. This exclusion states that the policy does not apply to “any CLAIM arising out of any act, error, omission or PERSONAL INJURY occurring prior to the effective date of this policy if any INSURED at the effective date knew or could have reasonably foreseen that such act, error, omission or PERSONAL INJURY might be expected to be the basis of a CLAIM[.]” It was undisputed that the effective date of the policy was April 16, 1997 and that Budget believed in 1996 that Williams and WRP&S had committed legal malpractice. Budget’s writ petition was denied.
On March 28, 2003, Budget filed a second amended complaint against Coregis, Seabury, and ABD. In addition to the three causes of action stated in the original complaint, the second amended complaint added seven causes of action against Coregis: the fourth cause of action sought reformation of the LSLG policy to include WRP&S as an insured; the fifth and sixth causes of action alleged breach of contract and breach of the covenant of good faith and fair dealing in the reformed contract; the seventh and eighth causes of action alleged breach of contract and breach of the covenant of good faith and fair dealing in the oral contract based on essentially the same allegations in the fourth cause of action for reformation; and the ninth and 10th causes of action alleged fraud based on lack of intent to perform the contract and intentional misrepresentation. Regarding damages, Budget alleged that it had entered into a settlement agreement with WRP&S and LSLG, and that the agreement was reasonable because both WRP&S and LSLG were facing potential exposure that exceeded $6,000,000.
Budget acknowledges that the first two causes of action were no longer viable. However, Budget repeated these causes of action for “continuity purposes only.”
Though the second amended complaint referred to a description of the product liability theory in the Phan action, it omitted the negligence theory against Budget.
In November 2004, Budget voluntarily dismissed without prejudice its fifth cause of action for breach of the reformed contract. In February 2005, Budget dismissed without prejudice its seventh cause of action for breach of the oral contract.
In March 2007, the trial court granted Seabury’s motion for judgment on the pleadings as to the third and 10th causes of action, and dismissed Seabury from the case. This ruling effectively disposed of the third cause of action for negligence against Coregis since its liability was dependent on that of its agent Seabury. The trial court also denied Coregis’ motion for judgment on the pleadings based on collateral estoppel, finding that the issues of causation and damages in the present case and in Budget v. Williams were not identical.
Budget has appealed the dismissal of Seabury. (Case No. H031703.) This court has granted Budget’s motion to stay that appeal pending disposition of the present case.
The trial court then held a bench trial on the fourth cause of action for reformation. The fourth cause of action alleged that LSLG asked Coregis in April 1996 to provide coverage to WRP&S for legal malpractice committed at any time, and that Coregis, through its agent Seabury, agreed to do so after WRP&S ceased doing business in August 1996. More specifically, it alleged that Seabury advised WRP&S that it should maintain legal malpractice liability coverage under its own policy until it ceased all business operations at which time it should cancel its separate policy and transfer its prior acts coverage to the LSLG policy, and WRP&S would then be considered the predecessor firm to LSLG. It further alleged that Coregis was equitably estopped from denying that WRP&S was a predecessor firm to LSLG, and that the policy should be reformed to reflect the parties’ intention.
After hearing evidence presented by the parties, briefing and argument, the trial court found that “the intention of the parties was for Coregis to provide full ‘prior acts’ (i.e., ‘no-gap’) legal malpractice insurance coverage for LSLG and its predecessor firm, WRP&S, under the new policy.... [¶]... [T]he parties agreed that Coregis would issue a new policy to LSLG with full ‘prior acts’ coverage upon cessation of all business by WRP&S and the cancellation of its existing Coregis policy, and that WRP&S would be considered the ‘predecessor firm’ of LSLG and would be thereby fully covered under the new policy.” The trial court concluded that Coregis would be estopped from denying “predecessor firm” status to WRP&S, and that the policy should be reformed to reflect the parties’ intention and agreement. The trial court also found that Coregis’ affirmative defenses regarding the statute of limitations, election of remedies, and the failure to disclose a potential claim had no merit. Thus, the trial court entered judgment in favor of Budget on the fourth cause of action.
In October 2007, shortly before trial was to begin on the sixth, eighth, ninth, and 10th causes of action, Coregis filed a motion for judgment on the pleadings. While this motion was pending, Budget voluntarily dismissed without prejudice its 10th cause of action for fraud based on intentional misrepresentation. At issue in this appeal then are the viability of the sixth, eighth, and ninth causes of action.
The sixth cause of action for breach of the covenant of good faith and fair dealing on the reformed contract alleged that Coregis breached its duties by failing to provide all benefits to which WRP&S was entitled, that is, by wrongfully denying coverage for WRP&S, failing to defend the underlying malpractice action, and failing to pay the policy limits.
The eighth cause of action for breach of the covenant of good faith and fair dealing in the oral contract alleged that Coregis owed duties to WRP&S under an oral agreement to provide “all benefits to which it would be entitled had its own malpractice policy never been canceled, ” and that these obligations remained in place as a matter of public policy and in light of Coregis’ conduct. The allegations relating to the oral contract were essentially the same as the allegations in the fourth cause of action for reformation. Budget further alleged that Coregis breached its duties by wrongfully denying coverage, failing to investigate the circumstances under which WRP&S was afforded coverage for legal malpractice claims, failing to provide a defense for WRP&S, and failing to indemnify WRP&S.
The ninth cause of action for fraud alleged that, despite the representations of Coregis’ agent Seabury, Coregis never intended to provide WRP&S with malpractice coverage.
Following a hearing, the trial court granted Coregis’ motion for judgment on the pleadings in connection with the sixth, eighth, and ninth causes of action. The trial court stated that, “under applicable law and the facts alleged and matter of record in this action as asserted in defendants’ moving papers, the plaintiff’s assignor, the defunct [WRP&S], suffered no real or actionable economic loss, injury or damage by reason of the stipulated judgment or Coregis’ denial of policy benefits, premiums paid, interest, or otherwise. [¶] The Court therefore finds that each of the remaining three causes of action fails to state a viable cause of action in that the requisite element of damages is lacking as a matter of law.”
The trial court also acknowledged Coregis’ objection to Budget’s use of the collateral source rule to conceal from the jury that Budget had paid $500,000 of the Phan settlement while its own insurer paid the remaining $3,000,000. In the trial court’s view, “had this matter gone to trial, that would have been a key issue with respect to the element of damages.”
III. Discussion
Budget contends that the trial court erred in granting Coregis’ judgment on the pleadings as to the sixth, eighth, and ninth causes of action. Budget argues the trial court erred in concluding that it was required to “plead WRP&S incurred an ‘economic loss’ before damages for bad faith and fraud could exist.” (Caps. omitted.) We agree.
Coregis claims that Budget has waived any arguments regarding the eighth and ninth causes of action because it failed to provide any supporting argument or legal authorities in its opening brief. This claim is without merit. It is clear that Budget’s arguments pertain to all three causes of action.
“In an appeal from a motion granting judgment on the pleadings, we accept as true the facts alleged in the complaint and review the legal issues de novo. ‘A motion for judgment on the pleadings, like a general demurrer, tests the allegations of the complaint..., supplemented by any matter of which the trial court takes judicial notice, to determine whether plaintiff... has stated a cause of action. [Citation.] Because the trial court’s determination is made as a matter of law, we review the ruling de novo, assuming the truth of all material facts properly pled.’ [Citation.]” (Angelucci v. Century Supper Club (2007) 41 Cal.4th 160, 166 (Angelucci).)
As our Supreme Court stated in Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718 (Hamilton), “the denial of coverage and a defense entitles the policyholder to make a reasonable, noncollusive settlement without the insurer’s consent and to seek reimbursement for the settlement amount in an action for breach of the covenant of good faith and fair dealing. ‘ “[W]here the insurer has repudiated its obligation to defend[, ] a defendant in the absence of fraud may, without forfeiture of his right to indemnity, settle with the plaintiff upon the best terms possible, taking a covenant not to execute.” ’ (Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 240, quoting Zander v. Texaco, Inc. (1968) 259 Cal.App.2d 793, 802.) [¶]... Thus, the policyholder denied a defense for covered claims by its liability insurer may make a reasonable settlement with the plaintiff, in good faith, and then maintain (or assign) an action against the insurer for breach of its defense duties. In such an action, ‘a reasonable settlement made by the insured to terminate the underlying claim against him may be used as presumptive evidence of the insured’s liability on the underlying claim, and the amount of such liability.’ (Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 791.)” (Hamilton, at pp. 728-729.)
In the present case, assuming the truth of the facts alleged in the operative complaint, WRP&S committed legal malpractice in its defense of Budget in the Phan action. Coregis provided malpractice coverage to WRP&S, and Coregis initially retained defense counsel for WRP&S. However, Coregis then withdrew its defense and denied coverage. After Coregis failed to accept Budget’s settlement offer, Budget entered into a settlement agreement with WRP&S in which they stipulated to entry of judgment in favor of Budget in the amount of $3,500,000 and WRP&S assigned its claims against Coregis to Budget. Applying the principles stated in Hamilton, WRP&S, an insured that had been denied a defense for a covered claim, could make a reasonable settlement with Budget and assign its action against Coregis for breach of its defense and indemnification duties. In that action, the amount of the settlement would be presumptive evidence of Coregis’ liability on the malpractice claim and the amount of its liability. (Hamilton, supra, 27 Cal.4th at p. 729.)
Noting allegations in the second amended complaint that WRP&S had gone out of business on April 1, 1996, which was two years before Coregis denied coverage in April 1998 and four years before WRP&S assigned its rights against Coregis to Budget, Coregis argues that any presumption of damages was “conclusively rebutted by Budget’s admission of no actual economic detriment independent of empty shell WRP&S’ stipulated judgment.” (Bold & caps. omitted.) Coregis appears to be arguing that WRP&S’s status as a dissolved corporation was dispositive.
However, “[a] corporation which is dissolved nevertheless continues to exist for the purpose of winding up its affairs, prosecuting and defending actions by or against it and enabling it to collect and discharge obligations....” (Corp. Code, § 2010.) “Causes of action against a dissolved corporation, whether arising before or after the dissolution of the corporation, may be enforced against... the dissolved corporation, to the extent of its undistributed assets, including, without limitation, any insurance assets held by the corporation that may be available to satisfy claims.” (Corp. Code, § 2011, subd. (a)(1)(A).)
As our Supreme Court explained in Penasquitos, Inc. v. Superior Court (1991) 53 Cal.3d 1180 (Penasquitos), “a claim for damages based on the corporation’s predissolution activities is an affair of the corporation needing to be wound up after the corporation’s normal business activities have ceased. Participating in a judicial resolution of such claims is part of the winding-up process for which section 2010 expressly requires the dissolved corporation’s existence to continue.” (Id. at p. 1190.) Penasquitos also recognized that the enforceability of any judgment against the dissolved corporation is a separate issue. “[I]f the corporation has liability insurance coverage, its dissolution provides no reason to excuse the insurer from defending the action and indemnifying those injured by the predissolution activities of its insured, just as a corporation’s insolvency or bankruptcy does not release its insurer from payment for damages the corporation has caused (see Ins. Code, § 11580, subd. (b)(1)).” (Id. at p. 1192.) Here, given that WRP&S’s status as a dissolved corporation did not preclude a finding of liability in the underlying malpractice action and that Coregis wrongfully failed to defend and indemnify WRP&S, we see no reason not to extend the principles articulated in Hamilton that an abandoned insured is entitled to “make a reasonable, noncollusive settlement without the insurer’s consent and to seek reimbursement for the settlement amount.” (Hamilton, supra, 27 Cal.4th at p. 728.)
Relying on Shapero v. Allstate Ins. Co. (1971) 14 Cal.App.3d 433 (Shapero), Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883 (Doser), Gourley v. State Farm Mut. Auto. Ins. Co. (1991) 53 Cal.3d 121 (Gourley), and Nagy v. Nagy (1989) 210 Cal.App.3d 1262 (Nagy), Coregis argues that an action for bad faith requires some actual economic detriment to an insured from the denial of coverage. Coregis’ reliance on these cases is misplaced.
In Shapero, the plaintiffs, who were injured in an automobile accident, brought an action against the estate of the insured, who was killed in the accident. (Shapero, supra, 14 Cal.App.3d at p. 435.) The insurer assumed the defense of the action on behalf of the administrator of the estate. (Ibid.) After the plaintiffs’ offer to settle their claims within the policy limits was rejected, the matter went to trial and one of the plaintiff’s recovered $6,350 and the other recovered judgment in excess of the policy limits. (Ibid.) The insurer satisfied the judgment in the amount of $6,350 and paid the amount of the policy limits to the other plaintiff. (Ibid.) The insured’s estate then assigned to one of the plaintiffs its rights for breach of contract and bad faith. (Ibid.) The assignee in turn filed a bad faith action against the insurer for its failure to negotiate in good faith for a settlement, thereby resulting in damages to the insured for the amount of the judgment in excess of the policy limits. (Id. at p. 436.) After the jury returned a verdict in favor of the insurer, the assignee appealed and argued that the trial court erred in informing the jury that it could consider that the insured’s estate had no assets in reaching its decision. (Ibid.)
Shapero reasoned that the insurer “could not be found guilty of bad faith for accepting as a working hypothesis the fact... that the estate had no interest, no financial stake in the outcome of the litigation, and no assets which would be exposed to risk by a failure of [the insurer] to settle.” (Shapero, supra, 14 Cal.App.3d at p. 438.) Consequently, Shapero affirmed the judgment on the ground that “there was no interest to be damaged.” (Id. at p. 439.)
Shapero is distinguishable from the present case. The insurer in Shapero did not breach its duty to negotiate a settlement because the estate, which had no assets, could not suffer economic detriment. Here, however, WRP&S’s status as a dissolved corporation is not the equivalent of an estate with no assets. As previously stated, WRP&S continued to exist for the purpose of defending the malpractice action (Corp. Code, § 2010; Penasquitos, supra, 53 Cal.3d at p. 1190), and WRP&S had malpractice insurance coverage for acts that occurred prior to its dissolution. If we were to accept Coregis’ position, an insurer, who wrongfully denied coverage to a dissolved corporation, could defend a breach of contract and bad faith action by merely claiming the corporation could not be injured. Penasquitos, however, concluded that an insurer was not excused from its obligations by the corporation’s dissolution. (Penasquitos, supra, 53 Cal.3d at p. 1192.)
Like Shapero, Doser involved a bad faith action for a defending insurer’s failure to settle. In Doser, the pilot and his passenger were killed in an airplane crash. (Doser, supra, 101 Cal.App.3d at p. 885.) The pilot was a member of a flying club which had leased the airplane involved in the accident. (Ibid.) Though the pilot’s estate was “practically worthless, ” there was an insurance policy that covered both the corporation that leased the airplane as well as members of the flying club. (Ibid.) The plaintiffs, the heirs of the passenger, initially brought a $500,000 claim against the estate, and then filed a wrongful death action for $1 million. (Id. at p. 886.) After the insurer denied their demands for the $100,000 policy limits, the plaintiffs entered into a settlement agreement in which all claims were compromised in the amount of $980,000, and the plaintiffs took an assignment of the estate’s claim against the insurer. (Id. at p. 888.) The plaintiffs then left the wrongful death action in abeyance and filed a bad faith and breach of contract action against the insurer. (Id. at p. 889.) Meanwhile, prior to trial against the insurer, the insurer’s agent hired counsel to defend the estate and offered the policy limits to the plaintiffs in the wrongful death action. (Ibid.) Following trial on the bad faith and breach of contract action, the trial court entered judgment in favor of the insurer. (Id. at p. 890.) Five months later, the plaintiffs dismissed their wrongful death action against the estate. (Id. at p. 888.)
Doser affirmed the judgment on the ground that “[n]o legal liability was ever imposed as a result” of the breach. (Doser, supra, 101 Cal.App.3d at p. 891.) The court observed that no judgment had been rendered in the wrongful death action when the action against the insurer was tried, and legal liability in the wrongful death action was never imposed because the plaintiffs dismissed this case after judgment in the insurance action was entered. (Ibid.) Doser was also concerned with the circumstances in which the settlement had been reached. In that court’s view, the “glaring flaw in the [plaintiffs’] case against [the insurer was] the unprecedented manner in which they arrived at the $980,000 damage figure. They bootstrapped their damages with the ingenious assistance of counsel.” (Id. at p. 892.)
Doser is inapposite. First, here, there was a judgment in the underlying action. Second, Coregis was not a defending insurer and did not offer the policy limits. Third, the circumstances in which Budget, WRP&S, and LSLG entered into the settlement of the underlying action have not yet been litigated, and thus a factual determination as to “ ‘the illusory nature of the agreement’ ” has not yet be made. (Doser, supra, 101 Cal.App.3d at p. 893.)
Gourley also does not assist Coregis’ position. Gourley interpreted Civil Code section 3291, which allows the plaintiff to claim interest on a damages award in a personal injury action when the plaintiff’s offer to compromise has been rejected and the plaintiff then obtains a judgment in excess of the offer. (Gourley, supra, 53 Cal.3d 121, 123.) Gourley held that this statute does not apply “in insurance bad faith actions because such actions are brought primarily to recover economic loss caused by the tortious interference with a property right, and any damages recovered for actual personal injury, including emotional distress, are incidental to the award of economic damages.” (Ibid.) Gourley, however, does not provide any guidance as to whether there must be an economic loss to support a bad faith claim when an insured has been denied coverage and a defense.
Relying on Nagy, supra, 210 Cal.App.3d 1262, Coregis focuses on the ninth cause of action for fraud based on lack of intent to perform and argues that Budget is not “even hypothetically entitled to a presumption of damage under case precedent applicable to bad faith on a written policy.” Though Nagy refers to the damages element of a fraud claim, it is factually distinguishable from the present case. In Nagy, the plaintiff sued his former wife for fraud, alleging that she told him that she was pregnant with his child, he developed a close relationship with the child, and she told him that he was not the father of the child during the dissolution proceedings. (Id. at p. 1266.) The appellate court concluded that the plaintiff’s complaint was defective because he did not allege a definite amount of damage. (Id. at p. 1269.) In contrast, here, Budget, as WRP&S’s assignee, has alleged that the amount of its damages is reflected in the stipulated judgment.
However, we agree with Coregis that punitive damages are recoverable only by the immediate person injured, and not by an assignee. (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 942.) Accordingly, Budget cannot recover punitive damages as alleged in the fraud cause of action.
Coregis contends, however, that “the conflicts between Budget’s pleadings, and the record it omitted or materially distorted in them, conclusively show as a matter of law that public policy calls for Budget to be chastened, not rewarded, for the manner in which it pursued this action. [¶] Budget’s misconduct in that regard began with its knowingly false allegations of Coregis’ bad faith denial of coverage to create the illusion that Budget was entitled to a presumption of damages from its ‘empty shell’ assignor’s stipulated judgment given in an inherently collusive settlement.”
Coregis focuses on Budget’s allegation that Coregis owed a duty of good faith and fair dealing to “WRP&S, as an insured” and that it breached this duty in that: “(a) it wrongfully denied coverage to WRP&S under the subject policy for the legal malpractice claim asserted against it in the underlying malpractice action - the very type of claim against which that policy was designed to protect WRP&S - on the improper basis that WRP&S was not a ‘predecessor firm’ to LSLG, when COREGIS knew or easily could have ascertained that WRP&S’s status as an insured under that policy was never intended or designed to be based upon it qualifying as a ‘predecessor’ to LSLG.” Coregis then refers to its memorandum of points and authorities in support of its motion for summary judgment in which Coregis outlined its attempts to determine whether WRP&S was a predecessor firm. Coregis also relies on language in the policy stating that “this policy embodies all agreements between all INSUREDS and the Company or any of its agents relating to this insurance, ” and Coregis asserts that it did not act unreasonably in relying on this language or its agreement with Seabury. Coregis next claims that “Budget specifically alleged that the purpose of the plan for insurance to protect the former principals of WRP&S individually had been achieved by the endorsement of the LSLG policy to cover their prior acts. Otherwise, Budget alleged only a side agreement between the brokers that WRP&S would be covered under the LSLG policy... contrary to the policy’s Section XI. ‘ENTIRE AGREEMENT, ’ which expressly provided that its written terms constituted the entire agreement between the parties.”
Here, there has been a trial in which the court ordered reformation of the contract after it found that the parties intended that Coregis would provide legal malpractice insurance for WRP&S after it ceased doing business. Other issues relating to Coregis’ liability for its failures to defend and indemnify WRP&S have not yet been litigated. As previously stated, this court must assume the truth of facts alleged in the complaint. (Angelucci, supra, 41 Cal.4th at p. 166.) The pleadings and the record before us do not show as a matter of law that Budget has engaged in misconduct.
Coregis next contends that “the stipulated judgment was part of an inherently unreasonable and collusive settlement, which Budget materially misrepresented in its pleadings.” (Bold & caps. omitted.)
“Where the insurer declines the defense, the insured ‘is free to make the best settlement possible with the third party claimant, including a stipulated judgment with a covenant not to execute. Provided that such settlement is not unreasonable and is free from fraud or collusion, the insurer will be bound thereby.’ [Citations.] In this context, collusion occurs when the insured and the third party claimant work together to manufacture a cause of action for bad faith against the insurer or to inflate the third party’s recovery to artificially increase damages flowing from the insurer’s breach. [Citations.] [¶] The insurer may raise collusion as a defense in a subsequent bad faith action. Where there is substantial evidence of collusion, its existence is a question of fact for the jury to determine. [Citation.]” (Safeco Ins. Co. of America v. Parks (2009) 170 Cal.App.4th 992, 1013.)
Coregis argues that Budget entered into the settlement agreement “with actual knowledge that it was collusive and illusory” and made materially false or misleading allegations about the settlement agreement in its second amended complaint. Coregis asserts Budget failed to disclose: the underlying action included a fraudulent transfer cause of action against LSLG, which was not sued for malpractice; Budget dismissed the fraudulent transfer action against LSLG; and Budget did not dismiss the legal malpractice claim against Williams individually or WP&C. Coregis further argues that Budget made additional misleading allegations that WRP&S and LSLG faced “a potential exposure in a sum exceeding $6,000,000, ” though WRP&S had ceased doing business in 1996 and LSLG had no potential exposure on the malpractice claim. Coregis concludes that “it was advantageous for LSLG for Skelton to give up nothing in sacrificing the corpse of his already dead former firm WRP&S to get Budget off of LSLG’s back. And, nice deal for Budget to take a $3.5 million... in non-existent ‘damage.’ And to sweeten the deal further for Budget, it retained the right to pursue its unmeritorious malpractice claim against Jack Williams, and his new firm.”
Coregis also points out that the trial court had previously granted summary adjudication for breach of contract and bad faith on the ground that the underlying litigation fell within an exclusion to coverage. Coregis acknowledges in its respondent’s brief that the issue of whether this exclusion in the reformed policy similarly barred coverage “would have been yet another battle in a jury trial had [the trial court] not dismissed the case.”
The issues that Coregis has raised regarding Budget’s alleged “material false or misleading allegations” have never been litigated. Though Coregis has presented compelling arguments that the settlement agreement between Budget, WRP&S, and LSLG was unreasonable and collusive, this issue cannot be resolved as a matter of law at this stage of the proceedings. (Safeco, supra, 170 Cal.App.4th at p. 1013.)
In sum, we conclude that the trial court erred in granting Coregis’ motion for judgment on the pleadings on the ground that WRP&S suffered no economic loss, injury, or damages. We also reject Coregis’ argument that the record before us establishes that the settlement between Budget, WRP&S, and LSLG was fraudulent or collusive as a matter of law.
Coregis next argues that the trial court properly dismissed the sixth cause of action for bad faith on the reformed contract because Budget had previously dismissed its fifth cause of action for breach of the reformed contract.
To establish breach of the covenant of good faith and fair dealing in the insurance context, the insured must prove: “(1) benefits due under the policy must have been withheld; and (2) the reason for withholding benefits must have been unreasonable or without proper cause. [Citations.]” (Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1151 (Love).) As our Supreme Court explained in Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, “[t]he covenant of good faith is read into contracts in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract’s purposes.” (Id. at p. 690.) Thus, “[t]he covenant of good faith and fair dealing is implied in law to assure that a contracting party ‘refrain[s] from doing anything to injure the right of the other to receive the benefits of the agreement.’ [Citation.] [¶] In essence, the covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party’s rights to the benefits of the contract.” (Italics in original.) (Love, at p. 1153.)
Here, the sixth cause of action alleged that WRP&S was insured under the reformed contract, Coregis owed duties to WRP&S to provide benefits under this reformed contract, and Coregis breached these duties by withdrawing its defense, failing to fund a settlement within the policy limits, and denying payment for a resulting judgment, and the breach of these duties resulted in damage to WRP&S. By alleging that Coregis withheld benefits due to WRP&S under the reformed contract, Budget alleged breach of the reformed contract, which is the first element of its bad faith action. Thus, Budget has not foreclosed its right to pursue its cause of action for breach of the covenant of good faith implied in the reformed contract.
Coregis also contends that Budget’s sixth and eighth cause of action for bad faith are not actionable under R&B Auto Center, Inc. v. Farmers Group, Inc. (2006) 140 Cal.App.4th 327 (R&B Auto).
In R&B Auto, a used car dealership requested lemon law coverage from the insurer, and the insurer’s agent confirmed that the insurer would provide coverage for used car sales. (R&B Auto, supra, 140 Cal.App.4th at pp. 332, 334.) However, the insurer issued a policy that covered only the sale of new vehicles. (Id. at p. 332.) When a purchaser of a used car brought a lemon law suit against the dealership, the insurer refused to either defend or indemnify the dealership. (Ibid.) The dealership then sued the insurer for, among other things, reformation and bad faith. (Ibid.) Following an in limine motion, the trial court dismissed the bad faith cause of action and granted the insurer’s motion for nonsuit on the reformation cause of action before the dealership had made an opening statement or presented evidence. (Id. at p. 336.) R&B Auto held that the facts supported the reformation cause of action, and thus the trial court erred in granting the motion for nonsuit. (Id. at pp. 337, 348-349.)
However, R&B Auto held that there was no error in the dismissal of the bad faith cause of action. (Id. at p. 354.) R&B Auto reasoned that “ ‘before an insurer can be found to have acted tortiously (i.e., in bad faith), for its delay or denial in the payment of policy benefits, it must be shown that the insurer acted unreasonably or without proper cause. [Citations.]’ (Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co. (2001) 90 Cal.App.4th 335, 347 [].) Generally speaking, ‘the reasonableness of the insurer’s decisions and actions must be evaluated as of the time that they were made.... [Citation.]’ (Ibid.; accord, Flippo Industries, Inc. v. Sun Ins. Co. (1999) 74 Cal.App.4th 1429, 1441 [].) When an insured submits a claim to an insurer and there is no potential for coverage of that claim under the policy, the insurer has no duty to defend and it may reasonably deny the claim. (Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at p. 36 [].) Since it is reasonable to deny the claim at the time, if the policy is later reformed to provide retroactive coverage, the insurer may not be held liable for bad faith for failing to have the foresight to know that the policy would be reformed.” (R & B Auto, at p. 354.) In a footnote to this statement, R&B Auto stated that it rejected the “suggestion that court opinions rendered after an insurer has made its coverage decision can never be considered in determining whether the insurer acted in bad faith. [Citation.]” (Id. at p. 354, fn. 12.) However, the court found that “it would be inequitable to use a judgment of reformation to provide a retroactive basis for a bad faith claim in the particular context before us.” (Ibid.)
R&B Auto is not controlling in the present case. In that case, the written policy did not cover the type of claim presented by the dealership and thus the appellate court could conclude that the insurer’s decision was reasonable as a matter of law. Here, the application for coverage included WRP&S as an insured. Coregis then conducted an investigation and determined that WRP&S was not a predecessor firm to LSLG under the policy and therefore WRP&S was not entitled to malpractice coverage. However, the issue of whether it was reasonable to deny the claim at that time has not yet been litigated. Though Coregis has asserted that its decision was reasonable, Budget has alleged in both the sixth and eighth causes of action that Coregis “failed to make a proper investigation of the circumstances under which WRP&S was to be afforded such coverage.” Thus, the rationale of R&B Auto does not apply to either of these causes of action.
In its cross-appeal, Coregis contends that the trial court erred in reforming the written policy because WRP&S, as Budget’s assignor, was not an “aggrieved party” under Civil Code section 3399.
Civil Code section 3399 provides: “When, through fraud or a mutual mistake of the parties, or a mistake of one party, which the other at the time knew or suspected, a written contract does not truly express the intention of the parties, it may be revised on the application of a party aggrieved, so as to express that intention, so far as it can be done without prejudice to rights acquired by third persons, in good faith and for value.”
The remedy of reformation is equitable in nature. (Demetris v. Demetris (1954) 125 Cal.App.2d 440, 443.) As the court explained in Tyler v. Larson (1951) 106 Cal.App.2d 317, “ ‘[t]he party aggrieved in the sense of the statute means one whose pecuniary interest is affected by the mistake.... But the section was never intended to overthrow well-settled principles upon which equity has been administered under the common law. The section certainly does not contain all the law with respect to the correction of mistakes in courts of equity. It is only where it clearly appears that a long-established principle is intended to be overthrown that the court will give such effect to such a statute. [Citation.]’ ” (Id. at p. 319.)
Here, following trial, the court found that the parties had agreed that Coregis would provide malpractice coverage for WRP&S’s prior acts after it ceased doing business. Consequently, it ordered the equitable remedy of reformation. As previously discussed, WRP&S, though a dissolved corporation, could be found liable for legal malpractice. Thus, WRP&S was an aggrieved party in the sense that it had been deprived of insurance coverage for its prior acts. To conclude otherwise would be to encourage insurers to fail to defend or indemnify insureds when they ceased doing business even though the insureds were entitled to the benefits of insurance coverage.
Coregis also contends that Budget’s fourth cause of action for reformation was moot on two grounds: (1) Budget’s sixth cause of action for breach of the covenant of good faith and fair dealing in the reformed contract lacked the prerequisite claim for breach of the reformed contract because Budget dismissed that cause of action in 2004; and (2) Budget’s sixth cause of action for breach of the covenant of good faith and fair dealing in the reformed contract “was improper ‘piggy backing’ and otherwise ‘unclean hands’ that precluded such a cause of action as a matter of law.”
“It is well settled that an appellate court will decide only actual controversies. Consistent therewith, it has been said that an action which originally was based upon a justiciable controversy cannot be maintained on appeal if the questions raised therein have become moot by subsequent acts or events.” (Finnie v. Town of Tiburon (1988) 199 Cal.App.3d 1, 10.) Here, there is no issue relating to mootness. Coregis is referring to events which occurred before the trial on the reformation cause of action. Accordingly, we reject this contention.
IV. Disposition
The judgment is reversed. Costs on appeal are awarded to Budget.
WE CONCUR: Bamattre-Manoukian, Acting P. J., McAdams, J.
Retired Associate Justice of the Court of Appeal, Sixth Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.