Opinion
Review Granted Oct. 17, 1985.
Opinions on pages 1-118 omitted. [*]
[215 Cal.Rptr. 653]Rosenfeld, Meyer & Susman, Walter S. Weiss, Thomas Larry Watts and James Y. Leong, Beverly Hills, for plaintiffs and appellants.
Clausen, Harris & Campbell, Lon Harris, Marie D. Clause and Stanley T. Gilliam, Los Angeles, for defendant and respondent.
LUI, Acting Presiding Justice.
Doctors Alvin S. Isaacson and Sidney S. Grant, as individuals and as professional corporations, appeal from the judgment of nonsuit "and from the whole thereof." The judgment was in favor of defendant and respondent California Insurance Guarantee Association (CIGA), which had replaced Imperial Insurance Company (Imperial), an insolvent company that had insured appellants Grant and Isaacson for claims involved in a medical malpractice action brought against them. That action (the Ouellette litigation) settled for $500,000; $400,000 was paid by CIGA and $100,000 [215 Cal.Rptr. 654] was paid by appellants. CIGA's refusal to pay the additional $100,000 in settlement is the basis for the instant lawsuit.
Appellants clearly paid under protest. They claimed that CIGA should have paid the entire $500,000; appellants feared a jury verdict in excess of the limits of CIGA's coverage if the settlement were not implemented.
PROCEDURAL HISTORY
Appellants' first complaint alleged five causes of action against CIGA and others. Even before an answer was filed, appellants filed a first amended complaint. A demurrer was sustained with leave to amend as to causes of action in the first amended complaint that alleged bad faith and intentional infliction of emotional distress against CIGA. In sustaining the demurrer, the court cited Insurance Code section 1063.12 in its minute order.
In 1979, when the demurrer was sustained, Insurance Code section 1063.12, subdivision (a), provided: "The association, its member insurers, and its officers, directors, agents or employees of the association, or its member insurers, shall under no circumstances be liable for any sum in excess of the face amount of any policy of insurance of the insolvent insurer, as defined under subdivision (c) of Section 1063.1 of this article and the costs of administration and the costs of loss adjustment, investigation and defenses relating to claims thereunder." This section was amended by Statutes of 1979, chapter 384, section 4, page 1448, which in part replaced the words "of the face amount of any policy of insurance of the insolvent insurer" with "of the amount of covered claims of the insolvent insurer." Section 1063.1, subdivision (c), referred to in section 1063.12, subdivision (a), in part defines "covered claims" as "the obligations of an insolvent insurer ... (i) imposed by law and arising out of an insurance policy of the insolvent insurer; (ii) which were unpaid by the insolvent insurer...."
Unless otherwise indicated, all further statutory references are to the Insurance Code.
Appellants then filed a second amended complaint, as individual plaintiffs and as a professional corporation. The first cause of action sought damages against CIGA and its employee George Orr for the $100,000 paid for the alleged covered claim; this is the cause of action which was eventually the subject of the nonsuit judgment. The complaint alleged that the Ouellette complaint had asserted a "covered claim" against appellant Isaacson that CIGA must pay and discharge to the extent of $500,000 for each covered claim. It was further alleged that Michael Thomas, an attorney in the law firm responsible for preparing appellants' defense in the Ouellette action, told appellants there was a reasonable possibility that a judgment in the Ouellette litigation could substantially exceed $500,000. The first cause of action alleged that "Defendant CIGA had no reasonable grounds for rejecting claimant Ouellette's final settlement demand of Five Hundred Thousand Dollars ($500,000), although such demand constituted a covered claim." Appellants alleged that they were entitled to recover $100,000 from CIGA, which contribution should "rightfully have been made by CIGA pursuant to its obligations under the policy and the Act to pay and discharge covered claims which were the obligation of the insolvent insurer, IMPERIAL."
Orr was voluntarily dismissed after Division Four in Trunk v. Orr (1979) 94 Cal.App.3d 761, 764, 156 Cal.Rptr. 662, held he was not liable under similar circumstances.
The second cause of action alleged bad faith against CIGA and Orr. It alleged that the defense attorney had advised CIGA and Orr to offer the full amount under the policy and the Act to effectuate settlement of the Ouellette litigation; that CIGA and Orr failed and refused to enter into settlement negotiations on behalf of appellants, at one time refusing to send an authorized representative to participate in a scheduled mandatory settlement conference; and, in later negotiations, raised its offer of settlement from $350,000 to $400,000 [215 Cal.Rptr. 655] but would not pay the $500,000 demanded in settlement. The second cause of action alleged that "[t]he conduct of CIGA and ORR in failing diligently and honestly to evaluate the extreme personal financial risk to plaintiffs, and each of them, from failure to settle, and in failing and refusing to participate at all or in any meaningful way in negotiations to settle the Ouellette litigation and in failing to settle said litigation within the available limits of the covered claim for plaintiff ISAACSON, was willful, deliberate, and malicious, and constituted substantial breaches of said covenant of good faith and fair dealing."
The third cause of action, for intentional infliction of emotional distress against Orr and CIGA, in addition to the above allegations, further incorporated a letter from Orr to Attorney Thomas regarding tactics in the Ouellette litigation. In addition to recommending a reasonable settlement value of no more than $350,000, Orr was concerned that Ouellette's attorney might convince the doctors that they should stipulate to a judgment "to force CIGA into an unwarranted settlement amount." Orr continued: "This kind of activity is beginning to become standard operational procedure of plaintiff's attorneys and can not succeed without the cooperation of the defendant who will succumb to such pressure at his own peril. [p] Please keep us closely advised in this matter as CIGA intends to take a firm stand at this time in order to quash this sort of activity before it becomes too prevalent. An insured should not join in any adventure that might turn a possible victory into a defeat before the battle begins. This would be repugnant to fair dealing persons." The fourth and fifth causes of action in the second amended complaint did not involve respondent.
On March 12, 1980, the trial court sustained demurrers by CIGA to the second and third causes of action. The minute order read as follows: "Cause of action 2 sustained without leave to amend. No contractual relation between moving party and plaintiffs. Insurance Code Section 1063.12. Cause of action 3 sustained without leave to amend. Insufficient allegation of outrageous conduct. Insurance Code Section 1063.12."
The case went forward on the first cause of action. Discovery proceeded. In its second set of requests for admissions and interrogatories, CIGA asked appellants to admit either that they were not negligent or that they were negligent in caring for Ouellette. Appellants objected to this request for admission on the grounds that whether or not they were legally negligent "is not relevant for purposes of this action." CIGA filed a motion for order requiring further answers, to which appellants filed opposition. The trial court denied CIGA's motion on grounds of relevancy. In its minute order, the court stated: "The central issue in this case does not involve the negligence of the doctors (plaintiffs) in the underlying case. The issue is whether there is a 'covered claim'. Resolution of that issue does not depend upon the negligence of the plaintiffs in the underlying case, but upon the conduct of the defendants (alleged) in the instant case."
Thereafter, appellants' motion to add a cause of action for breach of the Unfair Practice Act (Insurance Code sections 790 et seq.) was denied. The court decided that the issue had been previously adjudicated on a demurrer and a petition for a writ to review the prior demurrer had been denied by the Court of Appeal.
When this matter was called for trial in November 1983, the trial court stated that it believed the issue presented in the case at bench must be resolved in the trial of the underlying medical malpractice action. If upon trial of the malpractice action the verdict was more than $400,000, CIGA would be liable for that excess up to $100,000 and possibly interest and attorneys' fees. If the verdict was $400,000 or less, the court believed appellants would lose on the complaint.
Appellants' trial counsel felt that the trial court was wrong and that its approach would force the doctors to prove that they were "butchers" in order to prevail against [215 Cal.Rptr. 656] CIGA. During the discussion, counsel for CIGA conceded that at no time was CIGA alleging this was not a "covered claim." Rather, counsel stated "[i]t was just the amount of the claim and how you determine it that has been the issue." The trial court agreed to rule that it is a covered claim but would not find that CIGA is obligated to pay the $100,000 in part because there had been no breach of contract by denying coverage or refusing to defend.
Appellants argued that there is a duty "where there is an excess situation, to insulate an insured from that type of a catastrophe. And the failure to do it in this case subjects the carrier--and I suggest CIGA is a carrier--subjects them to this exposure over and above the limits, whether they are statutory or contractual." The court stated that it agreed with Judge Hayden, who had sustained the demurrer to the second and third causes of action alleged in the second amended complaint, that this is not a case for application of the bad faith doctrine because CIGA was not the party with whom the doctors contracted. He also based his ruling on the "no action" clause in the policy and on the clause that the carrier agrees to pay only such sums as the Insured is "legally obligated to pay." The court thought that the $100,000 payment was "an obligation that they assumed in order to buy their peace for the future, but they were not legally obligated to pay that."
In response to the court's decision that appellants would have to try the underlying medical malpractice case in these proceedings in order to establish their right to recover, appellants' counsel stated that they were not prepared to try the matter in that fashion. Therefore, they chose to make an offer of proof with respect to their theory of the case, after which the court granted CIGA's motion for nonsuit.
APPELLANTS' OFFER OF PROOF
Since it is significant to appellants' position on appeal, we summarize appellants' offer of proof as to what each of their witnesses would testify to, given such an opportunity:
Appellant Dr. Alvin Isaacson would have testified as to his educational and professional background. After relating the details of the insurance policies purchased from Imperial by himself and Dr. Grant for the years 1972 to 1974, each involving a deductible of $1,000 and insuring him and Dr. Grant against medical malpractice claims in the aggregate amount of $1,000,000, Dr. Isaacson would testify that he and Dr. Grant performed a surgical procedure on Ouellette in April 1974 and that less than a year thereafter a suit was filed against them by Ouellette alleging medical malpractice.
Isaacson and Grant then tendered the defense of that action to Imperial under the relevant insurance policies. Imperial assigned the defense to the law firm of Hagenbaugh & Murphy. Michael Thomas, an attorney with Hagenbaugh & Murphy, assumed principal responsibility for the defense. Both Thomas and Dr. Isaacson would have identified a letter signed by Van A. Hagenbaugh to Imperial, dated July 29, 1975, in which the concluding paragraph reads: " 'My reaction to these interrogatories is that if plaintiff is telling anything near the truth, we have a really very bad result with high potential.' " Thus, Thomas and Isaacson would both testify that in July 1975, all of the defense parties to the medical malpractice case recognized that this was a case of potential serious exposure.
In a letter dated October 5, 1976, Thomas wrote regarding a Dr. Thomas Redden, who had been one of the examining physicians: " 'It is Dr. Redden's impression after a thorough orthopedic examination that the plaintiff is, in fact, severely crippled.' "
George Orr would testify regarding CIGA's participation in the Ouellette lawsuit after Imperial became insolvent. Hagenbaugh & Murphy and Michael Thomas continued to handle the medical malpractice defense after CIGA took over Imperial. Thomas would identify a letter dated February 5, 1979, which he wrote to CIGA, [215 Cal.Rptr. 657] stating: " 'The liability picture is beginning to favor plaintiff and the damages are potentially very extensive. You should be prepared for a policy limits demand. The case has that kind of jury verdict potential.' " On February 13, 1979, Thomas sent another letter to CIGA which stated in reference to an examining physician: " 'In his opinion the patient in his present condition is totally and permanently disabled unless he undertakes a surgical procedure which would stabilize the low back and prevent its apparent intermittent protrusion on nerve roots.' "
Thomas sent another letter on March 2, 1979, in which he stated, " 'After completing most of the depositions of plaintiff's experts, it is still the undersigned's opinion that this case is a 50/50 proposition. The verdict value is approximately $750,000 in the event of an adverse verdict. It could go higher and it could come in for less. Because there is a substantial risk of an adverse verdict in excess of the policy limits that you have asserted, we must recommend and request that you tender your total coverage to plaintiff to settle this action.' " (Emphasis added.)
In a letter dated March 6, 1979, Orr wrote to Thomas: " 'First, I agree with your evaluation, as does the file, that the liability is no worse than 50/50. I also agree that a verdict could reach a $750,000 figure if we disregard our defense possibilities.... On that basis, a reasonable settlement value would not be more than $350,000.' "
In a letter dated March 30, 1979, Orr wrote to counsel for CIGA: " 'The enclosed summons and complaint was served upon CIGA March 27, 1979. This is the classic "Harney syndrome" in that it faithfully follows the pattern established earlier and, in my opinion, designed and calculated to force CIGA into paying $500,000 on every malpractice claim without proper regard for the negligence factors or defensive possibilities.' " In the same letter, he wrote: " 'At the settlement conference on March 29, 1979, before Judge McClosky, the pattern was followed. The court agreed on the "bad faith" angle and added to the defendant's fear of a jury verdict in excess of the $500,000. A final offer of $400,000 was made by CIGA and, amazing as it sounds, Judge McClosky suggested plaintiff accept it and advised the defendants to personally contribute $100,000 and thereafter sue CIGA.' " That same letter by Orr contained the following language: " 'I suspect you get the feeling that this greatly disturbs me and unless we stand firm right now we will be forced, on the fear of bad faith, to pay $500,000 on every malpractice claim regardless of negligence.' "
The offer of proof further contained testimony regarding the hearing held before Judge McClosky on March 29, 1979. It is clear from that discussion that counsel for the doctors took the position that they consented to pay the $100,000 only because of duress and threats they felt existed. Counsel for the physicians stated: " 'My doctors will pay the $100,000 because they feel that to do otherwise would subject them to the possibility of total ruination, bankruptcy, and destruction of their property and their lives. It is under those circumstances that we are making this payment.' " Judge McClosky was advised by counsel for the doctors that Thomas had advised CIGA to offer to plaintiff in full settlement of the case the $500,000 that CIGA contends is its maximum and, notwithstanding that advice CIGA refused to pay the $500,000. The $100,000 settlement amount was paid by appellants.
During the time of all of these proceedings, particularly discussions of settlement, CIGA had never contacted Dr. Isaacson or Dr. Grant and had never expressed any interest or concern for their welfare, nor had CIGA advised them that they had any significant potential exposure with respect to this claim. Orr would have testified that the only consideration that he ever gave on behalf of CIGA was to the interests of CIGA and that at no time did CIGA consider the potential damage that would have befallen Drs. Isaacson and Grant had the verdict come in excess of $500,000.
[215 Cal.Rptr. 658]Both doctors would have testified as to their substantial emotional upset as the result of CIGA's conduct and that they were forced to hire separate counsel to represent them and were advised to do so by Attorney Thomas, thereby incurring in excess of $50,000 for legal fees.
Mr. Joseph Martin, a deputy insurance commissioner and the individual who had in the past ten years liquidated almost all of the companies that were declared insolvent by the California Insurance Department and the courts of California, would testify that the liquidation of Imperial occurred under his direction. It was his understanding and impression from his many years with the Department that the individual doctors here were persons intended to be benefitted by the Guarantee Act and were the persons for whom the act was passed; that in his opinion CIGA should have paid the full $500,000 to have settled this case; and that CIGA did not satisfy or fulfill its duties imposed by the Legislature. When he contacted CIGA's representatives regarding this claim, he was advised that they would take no action and " '[t]he matter is in litigation and let's let the courts decide what should happen in this case.' "
THE TRIAL COURT'S JUDGMENT OF NONSUIT
The trial court's judgment provides:
"WHEREAS, after hearing and considering the arguments of counsel and an offer of proof made by the [appellants], and
"WHEREAS, [appellants] were barred by prior rulings of this Court from prosecuting any claims based upon alleged violations of the California Insurance Code by [respondent]; and
"WHEREAS, before a jury was called or selected the Court ruled as a matter of law that in order for [appellants] to prevail, [appellants] would be required to try the underlying medical malpractice action establishing, by a preponderance of the evidence that medical malpractice was committed by [appellants] upon a former patient, Andrew Ouellette [sic ] and prove by a preponderance of evidence that Andrew Ouellette [sic ] in such case was entitled to Judgment against [appellants] herein in a sum in excess of $400,000.00. That in such event recovery against the [respondent] in the instant case would be limited to any excess over $400,000.00, but in no event could [appellants] herein recover more than $100,000.00 and further that [appellants] would not be allowed to pursue any claim or seek recovery against [respondent] for other damages in the instant action including bad faith by [respondent], emotional distress suffered by [appellants], or punitive damages against [respondent]; and
"WHEREAS, [appellants] declined to proceed with the prosecution of the instant action under these restrictions and conditions and it having been agreed by the parties that the proper resolution of these issues should be accomplished by an appeal after a motion by [respondent] for nonsuit would be made; and
"WHEREAS, such a motion for nonsuit was thereafter made and granted.
"IT IS ORDERED, ADJUDGED AND DECREED,
"That judgment of nonsuit be entered against [appellants], and that [respondent], have and recover from [appellants], costs and disbursements amounting to the sum of $1,035.70."
CONTENTIONS ON APPEAL
Appellants' basic contention is that, upon the insolvency of the insurer, CIGA steps into the shoes of the insurer and must not only pay for the settlement up to policy limits in this case but also has a duty to deal with the insureds in good faith; is subject to civil liability for engaging in unfair and deceptive practices prohibited by Insurance Code section 790.03, subdivision (h)(5); is liable for the tort of intentional infliction of emotional distress; and is liable for compensatory and punitive damages as well as attorneys' fees for breach of the above duties.
[215 Cal.Rptr. 659]Respondent argues that the determination of the existence and amount of the "covered claim," if any, required proof of appellants' liability to Ouellette and that the fact of settlement and the opinions of others were not sufficient to establish appellants' liability on that claim. Respondent contends that CIGA is not an "insurance company" and is protected from liability for any sum in excess of the amount of "covered claim" pursuant to Insurance Code section 1063.12, subdivision (a), and that policy considerations compel denying such liability, including awards of exemplary damages and attorneys' fees.
DISCUSSION
I. The Trial Court Erred in Granting the Judgment of Nonsuit
Appellants contend that the reasonable settlement of the Ouellette action created a presumption that appellants were liable for a section 1063 covered claim for the entire $500,000 settlement and that respondent failed to rebut that presumption. Respondent, on the other hand, contends that the determination of the existence and amount of the "covered claim," if any, required proof of appellants' liability to Ouellette and that the fact of settlement and the opinions of others were not sufficient to establish appellants' liability on that claim. Respondent relies on Clark v. Bellefonte Ins. Co. (1980) 113 Cal.App.3d 326, 169 Cal.Rptr. 832; Ritchie v. Anchor Casualty Co. (1955) 135 Cal.App.2d 245, 250, 286 P.2d 1000; Lamb v. Belt Casualty Co. (1935) 3 Cal.App.2d 624, 631, 40 P.2d 311; and Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883, 892-893, 162 Cal.Rptr. 115. Respondent especially relies on the "no action" and "legally obligated to pay" clauses in Imperial's contract with appellants.
The insurance policy states in part: "No action shall lie against the Company unless, as a condition precedent thereto, the Insured shall have fully complied with all the terms of this policy, nor until the amount of the Insured's obligation to pay shall have been finally determined either by judgment against the Insured after actual trial or by written agreement of the Insured, the claimant and the Company." The policy also provides regarding liability coverage that: "The Company agrees to pay on behalf of the Insured ... all sums which the Insured shall become legally obligated to pay as damages because of injury...."
The trial court relied on Clark v. Bellefonte Ins. Co., and the two clauses quoted in footnote 4.
The cases cited, however, may prove more helpful to appellants than to respondent. For example, in Lamb, supra, 3 Cal.App.2d at pages 631-632, 40 P.2d 311, the court stated: "[W]here there is no trial and no judgment establishing the liability of the insured, but a settlement of the litigation has been made, the question whether the liability of the insured was one which the contract of insurance covered is still open, as is also the question as to the fact of liability and the extent thereof, and these questions may be litigated and determined in the action brought by the insured to recover the amount so paid in settlement. The settlement, or a judgment rendered upon a stipulation of such a settlement, becomes presumptive evidence only of the liability of the insured and the amount thereof, which presumption is subject to being overcome by proof on the part of the insurer. [Citations.]" (Emphasis added; see also Ritchie, supra, 135 Cal.App.2d at p. 250, 286 P.2d 1000.)
Clark v. Bellefonte Ins. Co., supra, 113 Cal.App.3d 326, 169 Cal.Rptr. 832 is probably the most helpful case for respondent, but is nevertheless distinguishable. Plaintiff Clark operated an automobile "detailing" business insured by defendant Bellefonte Insurance Co. Two automobiles were stolen from Clark's premises, and he claimed from his insurer the costs of repairing those automobiles once they were recovered. The jury found against Clark [215 Cal.Rptr. 660] on a breach of good faith theory but for Clark on a breach of contract theory. The appellate court reversed the judgment against the insurer on the breach of contract, stating that the "no action" provision of the policy gives the insurer the right to control the defense of claims and the liability insurer acts within its contract rights when it refuses voluntarily to settle a claim and insists there be an adjudication of the matter on its merits, absent a demonstration of bad faith. (Id., at pp. 335-337, 169 Cal.Rptr. 832.) In Clark, the jury found against the claim of bad faith; in the case before us, the contention of bad faith never reached the trier of fact since it was eliminated by the sustaining of the demurrer to the second amended complaint on that cause of action.
The relevant insuring clause in Clark's liability policy provided: " 'The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of: ... loss of an automobile caused by theft of the entire automobile; ... occurring while such automobile is in the custody of the insured for safekeeping, storage, service or repair....' " (Clark v. Bellefonte Ins. Co., supra, at p. 330, 169 Cal.Rptr. 832.)
The insurer may also be liable for breach of contract, despite the "no action" clause, when the carrier erroneously denies coverage and/or improperly refuses to defend the insured. (Clark v. Bellefonte Ins. Co., supra, 113 Cal.App.3d at p. 335, 169 Cal.Rptr. 832.) In Clark, the insurer acknowledged that coverage existed but denied the claims on the ground that Clark was not legally liable to the automobile dealers.
Neither is Doser v. Middlesex Mutual Ins. Co., supra, authority binding us on the facts of this case. In Doser, supra, assignees of the original insured assignor did not prevail because there was no "judgment" but only a compromise settlement initiated by counsel apparently without negotiation. (Id., 101 Cal.App.3d at p. 893, 162 Cal.Rptr. 115.) The court in Doser was especially mindful of the possibility of collusion where the liability of the insured "has not been determined in a manner approved by the case law or contemplated by the insurance contract." (Id., at p. 894, 162 Cal.Rptr. 115.) According to the offer of proof in the case before us, Judge McClosky suggested the settlement in the case at bench. While here may be facts that CIGA can present showing collusion between appellants and Ouellette's counsel, no such demonstration has been made thus far.
The analogy to these cases involving insurers is helpful because under section 1063.1, subdivision (c), "covered claims," which CIGA is obligated to pay are defined as "the obligations of an insolvent insurer ... imposed by law and arising out of an insurance policy of the insolvent insurer...." We look to above cases to determine if insured's claim is one "imposed by law and arising out of an insurance policy of the insolvent insurer...." Under the offer of proof made by appellants, we conclude that the claim falls within the above definition unless respondent can demonstrate collusion or bad faith in arriving at the $500,000 settlement amount.
The lack of negotiation and strong possibility of collusion present in Doser, supra, 101 Cal.App.3d at pages 892-893, 162 Cal.Rptr. 115 is not present here. The demonstration of bad faith by the insurer, lacking in Clark v. Bellefonte Ins. Co., supra, 113 Cal.App.3d at pages 335-337, 169 Cal.Rptr. 832, is contained in the offer of proof. Assuming appellants can show bad faith by CIGA in its settlement process, the "no action" provision of the policy would not control even under Clark. Under these circumstances, the settlement should be presumptive evidence of the liability of the insured and the amount thereof, a presumption which can be overcome by sufficient proof by CIGA. (See Lamb, supra, 3 Cal.App.2d at p. 631, 40 P.2d 311.) The trial court, therefore, erred in granting the nonsuit on the grounds that appellants should have to prove their own negligence in the medical malpractice case before the suit could go forward.
Appellants also argue that, should they prevail in their efforts against CIGA on this cause of action, they are entitled to damages in excess of the $100,000 they paid in settlement of the covered claim. We disagree. CIGA has already paid $400,000 in settlement. We believe the legislation enacting CIGA entitles appellants in a cause of action based on the covered [215 Cal.Rptr. 661] claim to the amount of the "covered claim," up to the policy limits of the insolvent insurer or $500,000, whichever is less. Under the facts of this case, if appellants prevail on the covered claim, they will reach the $500,000 maximum recovery.
However, we are sympathetic to appellants' assertion that reasonable attorneys' fees incurred in obtaining what was due them from CIGA under the Insurance Code should be recoverable under "costs of administration" pursuant to section 1063.12 if and when they prevail. Appellants should be given an opportunity to demonstrate CIGA's bad faith in the settlement process and establish the settlement figure as presumptive evidence of CIGA's liability. CIGA should then be allowed to rebut the presumption. If appellants then prevail on this issue, attorneys' fees are recoverable as "costs of administration."
To equalize the situation and discourage frivolous litigation in these actions, the Legislature might consider making insureds liable for CIGA's attorneys' fees if CIGA is the prevailing party.
II. CIGA Is Not Immune from Liability for Bad Faith in Failing to Settle Reasonably Claims Made Against It When Such Failure Violates the Unfair Practices Act
Appellants contend that CIGA should not be insulated from liability for failure to settle reasonably the Ouellette litigation against appellants. Appellants argue that CIGA is liable on the theory of breach of a duty of good faith and fair dealing to one's insured; violation of the Unfair Practices Act; and intentional infliction of emotional distress. Appellants urge that the recognition of such liability is the only way to protect insureds against insolvent insurers and the combined insurance industry that allegedly governs CIGA for its own interests and not the interests of the public. Appellants believe that CIGA stepped into the shoes of the insolvent insurer Imperial in this case, and is bound to the duties and obligations that the courts have imposed on other insurers.
Our review of the legislative scheme and case law pertaining to good faith and fair dealing in the insurance context convinces us that CIGA is not immune from liability for the "covered claims" of an insolvent insurer, as limited by statute, for violations of the Unfair Practices Act and for intentional infliction of emotional distress.
"CIGA is an involuntary, unincorporated association of insurers admitted to transact business in California. Each insurer is required to participate in CIGA as a condition of doing business in this state. The statutory purpose of CIGA is to provide for each insurer member insolvency insurance to pay the claims arising out of policies issued by an insolvent insurer. (Ins.Code, § [sic] 119.5, 1063 et seq.) Funds for the payment of such claims are obtained by collecting premium payments from its members. (Ins.Code, § 1063.5.) CIGA is limited to the payment of 'covered claims' which are defined in relevant part as 'obligations of an insolvent insurer, ... imposed by law and arising out of an insurance policy of the insolvent insurer ... which were unpaid by the insolvent insurer....' (Ins.Code, § 1063.1, subd. (c)(1).) [Fn. omitted.]" (In re Imperial Insurance Co. (1984) 157 Cal.App.3d 290, 293, 203 Cal.Rptr. 664.)
As the court in Biggs v. California Ins. Guarantee Assn. (1981) 126 Cal.App.3d 641, 644, 179 Cal.Rptr. 16, observed, the "primary objective [of CIGA] is to provide insurance against 'loss arising from the failure of an insolvent insurer to discharge its obligations under its insurance policies.' (Ins.Code, § 119.5.)"
Since the code gives CIGA many of the rights of insurance companies, appellants argue that CIGA is also bound by the duties imposed on those companies. However, the "role of CIGA differs from that of the ordinary insurer. It was created to provide relief in the case of an insurance carrier becoming insolvent (Interstate Fire & Casualty Ins. Co. v. California [215 Cal.Rptr. 662] Ins. Guarantee Assn. (1981) 125 Cal.App.3d 904 [178 Cal.Rptr. 673] ) and in so doing is given certain powers and certain protections. CIGA, however, does not 'stand in the shoes' of the insolvent insurer for all purposes." (Emphasis in original.) (Biggs, supra, 126 Cal.App.3d at p. 645, 179 Cal.Rptr. 16.)
CIGA is a creation of the Legislature. Article 14.2 of the Insurance Code was added by Statutes of 1969, chapter 1347, section 3, page 2699, and was effective September 2, 1969. In forming CIGA, the Legislature clearly wanted to help the members of the public whose insurers became insolvent; however, it just as clearly did not intend that CIGA should provide identical coverage as that provided by the insolvent insurer. For example, section 1063.1, subdivision (c), and section 1063.2, subdivisions (f) and (g), preclude certain situations from being payable as "covered claims." The $500,000 limit on all claims other than workers' compensation benefits has been a part of the code since the inception of CIGA, as has a $100 deductible. ( § 1063.1, subd. (c)(5) and (6).) In addition to monetary limits, there are also substantive limits. For example, the court in Biggs, supra, 126 Cal.App.3d at page 645, 179 Cal.Rptr. 16, relied on section 1063.2, subdivision (g), now subdivision (f), which then and now precluded default judgments against the insolvent insurer or the insured or obligations "resulting from alleged or proven torts" from being binding against CIGA.
Statutes of 1984, chapter 433, section 1, page ---, amended subdivision (f) to add "or stipulated judgment" to the category of judgments against the insolvent insurer or the insured of the insolvent insurer that would not be binding against the association.
The Legislature further limited the liability of CIGA by providing that CIGA "shall under no circumstances be liable for any sum in excess of the face amount of any policy of insurance [now the 'amount of covered claims'] of the insolvent insurer, as defined under subdivision (c) of Section 1063.1 ... and the costs of administration and the costs of loss adjustment, investigation and defenses relating to claims thereunder." ( § 1063.12.)
Respondent contends the above limitations on coverage by CIGA preclude appellants' causes of action. We conclude that the court below properly sustained demurrers to appellants' cause of action all ging bad faith, but erred in disallowing the cause of action based on violation of the Unfair Practices Act. Appellants have abandoned the cause of action based on intentional infliction of emotional distress by failing to brief the issue of "outrageous conduct."
A. Breach of Good Faith and Fair Dealing
Interstate Fire & Casualty Ins. Co. v. California Ins. Guarantee Assn., supra, 125 Cal.App.3d 904, 178 Cal.Rptr. 673 is instructive. The majority opinion in Interstate rejected the alleged cause of action for violation of a duty of good faith and fair dealing primarily because the statute creating CIGA specifically forbids CIGA to pay claims based on equitable subrogation ( § 1063.1, subd. (c)(7)), a situation that does not apply to the case at bench. In addition, the Interstate court noted that "[a]lthough an insurer's breach of duty to use good faith and fair dealing in seeking to settle a claim sounds in tort, the duty has been said to arise out of the insurance contract. [Citation.]" (Id., at p. 910, 178 Cal.Rptr. 673.) In Trunk v. Orr (1979) 94 Cal.App.3d 761, 764, 156 Cal.Rptr. 662, the court held that Orr, an employee at CIGA, was not bound by any implied covenant arising out of insurance contracts in part [215 Cal.Rptr. 663] because he was not a party to any insurance contract. CIGA never contracted with appellants and is not liable on the cause of action alleging nonstatutory breach of good faith and fair dealing.
See Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 941, 132 Cal.Rptr. 424, 553 P.2d 584, where our Supreme Court disallowed a nonstatutory bad faith claim against an insurer by third party claimant for lack of a contractual relationship. The court has since allowed a third party claimant to urge a bad faith claim under section 790.03 if the suit is brought after the action between the injured party and the insured is concluded. (Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 884, 153 Cal.Rptr. 842, 592 P.2d 329.)
B. Unfair Practices Act
As for the Unfair Practices Act ( § 790 et seq.), section 790.03, subdivision (h)(5), defines the following as an unfair method of competition and unfair and deceptive act or practice in the business of insurance: "Knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices: (5) Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear." Pursuant to section 790.01, the Unfair Practices Act applies to, among others, "all other persons engaged in the business of insurance." Since section 19 defines "person" as "any person, association, organization, partnership, business trust, or corporation," appellants argue that CIGA is bound by the Unfair Practices Act. Respondent relies on the majority opinion in Interstate Fire & Casualty Ins. Co. v. California Ins. Guarantee Assn., supra, 125 Cal.App.3d 904, 178 Cal.Rptr. 673.
The majority in Interstate, supra, in addition to rejecting the nonstatutory cause of action for breach of good faith and fair dealing discussed above, also rejected a claim based on the Unfair Practices Act, Insurance Code section 790 et seq. (Id., at pp. 911-914, 178 Cal.Rptr. 673.) The court first relied on the fact that plaintiff in Interstate was not either "the injured party nor the insured," whom the statute was intended to benefit. (Id., at pp. 911-912, 178 Cal.Rptr. 673, citing Royal Globe Ins. Co. v. Superior Court, supra, 23 Cal.3d at p. 888, 153 Cal.Rptr. 842, 592 P.2d 329.) Appellants in the instant case are insureds, parties the Unfair Practices Act was designed to protect from unfair settlement practices.
The other grounds set forth by the majority in Interstate in denying the Unfair Practices Act cause of action are persuasively met in Justice Woods' concurring and dissenting opinion. We set forth and adopt her reasoning:
"[We] disagree, however, with the analysis of, and conclusion that, CIGA is immune from tort liability for violation of the Unfair Practices Act, Insurance Code section 790 et seq.
"The purpose of the act as set forth in section 790 'is to regulate trade practices in the business of insurance ... by defining, or providing for the determination of, all such practices in this State which constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined.' It is contended that CIGA is not engaged in the business of insurance and therefore cannot be held liable under the act, even though CIGA's members are specifically prohibited from engaging in unlawful trade practices by Insurance Code section 1063.13. This position is untenable. It is irrelevant that CIGA does not sell insurance policies, it is engaged in one of the very portions of the insurance business that the Unfair Practices Act is intended to cover; it is engaged in the business of claims handling.
"Section 790.03 defines unfair methods of competition and unfair and deceptive acts or practices in the business of insurance as: '(h) Knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices:
" '...
" '(5) Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.'
"...
"The majority opinion contends that plaintiff's tort theory conflicts with language in section 1063.12, subdivision (a), which provides that under no circumstances [215 Cal.Rptr. 664] shall CIGA be liable for sums in excess of the amount of covered claims of the insolvent insurer.
"Clearly, section 1063.12 means that under no circumstances can CIGA be liable for any sum in excess of the face amount of the policy on a covered claim. It was the obvious intent of the Legislature to insure that CIGA not be made to pay an excess claim against an insolvent carrier, nor be made vicariously liable for the bad faith torts of an insolvent carrier. There is no reason to believe that this language was intended, nor should it be interpreted, to mean that CIGA was granted immunity from tort liability by the Legislature. Section 1063.12 has no application to any judgment against CIGA based on its own tortious conduct.
"The majority also makes much of the responsibilities of the Insurance Commissioner, as the enforcer of the Unfair Practices Act, to act as a bulwark against capricious action by CIGA in the processing of claims. It is their decision that appellant has failed to show a need for holding CIGA civilly liable, apparently concluding that the power of the commissioner to, after notice and hearing, issue a cease and desist order ( § 790.05) and impose a penalty of $50, or for a wilful violation $500, is an adequate remedy. [We] disagree.
"...
"In any event, the authority of the commissioner to issue cease and desist orders to its members is not the only remedy available to Interstate and is not determinative of the issue before us. The Supreme Court held, in Royal Globe Ins. Co. v. Superior Court [supra ] 23 Cal.3d 880 [153 Cal.Rptr. 842, 592 P.2d 329], that the commissioner does not have the sole authority to regulate trade practices with regard to unfair or deceptive acts. Section 790.09 of the act provides that a cease and desist order issued by the commissioner under the provisions of the act shall not absolve an insurer from 'civil liability or criminal penalty under the laws of this state arising out of the methods, acts or practices found unfair or deceptive.' "
(Interstate, supra, 125 Cal.App.3d at pp. 915-917, 178 Cal.Rptr. 673.)
The trial court erred in sustaining the demurrer to the second cause of action.
III. CIGA Is Liable in Damages If It Intentionally Inflicts Emotional Distress. However, the Issue of "Outrageous Conduct" Has Not Been Briefed; the Issue Is Therefore Deemed Abandoned
The trial court sustained CIGA's demurrer to the third cause of action, which pleaded intentional infliction of emotional distress, stating "Insufficient allegation of outrageous conduct. Insurance Code section 1063.12." For the same reasons stated above in relation to the Unfair Practices Act, we do not believe section 1063.12 protects CIGA from its own tortious conduct.
Appellants, however, have not briefed the issue of whether respondent's conduct amounts to "outrageous conduct," one of the lements of a prima facie case for the tort of intentional infliction of emotional distress (Fletcher v. Western National Life Ins. Co. (1970) 10 Cal.App.3d 376, 394, 89 Cal.Rptr. 78), and the second ground upon which the trial court relied in sustaining respondent's demurrer to the third cause of action. When appellants fail to furnish this court with either argument or authority upon a point urged as grounds for reversal, the point will be deemed [215 Cal.Rptr. 665] abandoned. (Utz v. Aureguy (1952) 109 Cal.App.2d 803, 807, 241 P.2d 639; Estate of Scott (1949) 90 Cal.App.2d 21, 24-25, 202 P.2d 357.)
Appellants note in their opening brief the second ground for sustaining the demurrer to the third cause of action. They also list as an issue presented for review: "Whether CIGA may be liable for the tort of intentional infliction of emotional distress," and ask this court to reverse the judgment with directions to allow them to proceed on, inter alia, the cause of action alleging intentional infliction of emotional distress. While appellants argue they are entitled to damages for mental distress due to CIGA's tortious conduct, they do not brief the distinct issue of the adequacy of the allegations of the tort of intentional infliction of emotional distress. Unlike the situation in Fletcher, supra, 10 Cal.App.3d at page 394, 89 Cal.Rptr. 78, respondent herein does not concede that its conduct was outrageous. In the absence of such concession or of proper briefing by appellants, we must deem the point abandoned.
IV. Damages
Appellants contend that their damages are not limited to the $100,000 sum CIGA allegedly illegally failed to pay as part of the "covered claim." They argue that they are additionally entitled to attorney's fees, compensatory damages pursuant to Civil Code section 3333, and punitive damages pursuant to Civil Code section 3294, subdivision (a).
A. Attorney's Fees
As noted above, we conclude that attorney's fees reasonably incurred to collect on the covered claim are recoverable as "costs of administration" pursuant to section 1063.12.
Our Supreme Court has recently permitted the recovery of attorney's fees as damages resulting from tortious conduct when an insurer tortiously withholds benefits. (Brandt v. Superior Court (1985) 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796.) The holding in Brandt was limited to attorney's fees under a cause of action for breach of good faith and fair dealing; the court declined to reach the issue of attorney's fees as damages for violation of the statutory prohibitions against unfair claims practices. (Id., at p. 816, fn. 2, 210 Cal.Rptr. 211, 693 P.2d 796.) The court further decided that the recoverable attorney's fees "may not exceed the amount attributable to the attorney's efforts to obtain the rejected payment due on the insurance contract. Fees attributable to obtaining any portion of the plaintiff's award which exceeds the amount due under the policy are not recoverable." (Id., at p. 819, 210 Cal.Rptr. 211, 693 P.2d 796.)
The logic of the Brandt court in allowing attorney's fees as damages for breach of the covenant of good faith and fair dealing applies equally to attorney's fees as damages for a cause of action based on Insurance Code section 790.03, subdivision (h)(5). If there has not been a good faith effort to settle where liability has become reasonably clear, and such conduct "compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable ... for that expense. The attorney's fees are an economic loss--damages--proximately caused by the [violation]. [Citation.]" (Id., at p. 817, 210 Cal.Rptr. 211, 693 P.2d 796.) Section 790.03, subdivision (h)(5), like the tort involved in Brandt, requires more than a mere erroneous withholding of benefits by the insurer or a good faith legal dispute (id., at p. 819, fn. 6, 210 Cal.Rptr. 211, 693 P.2d 796); it requires "[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear." When the insurer's conduct is unreasonable, " 'a plaintiff is allowed to recover for all detriment proximately resulting from the insurer's bad faith, which detriment ... includes those attorney's fees that were incurred to obtain the policy benefits and that would not have been incurred but for the insurer's ... conduct [in violation of section 790.03, subdivision (h)(5) ].' " (Id., at p. 819, 210 Cal.Rptr. 211, 693 P.2d 796.)
Under either the Brandt or the "costs of administration" theory, attorney's fees may not exceed the amount attributable to the attorney's efforts to obtain the payment due under the policy.
B. Compensatory Damages
Appellants contend that they are entitled to damages for mental distress, citing Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 433, 58 Cal.Rptr. 13, 426 P.2d 173, and Civil Code section 3333. Crisci recognizes [215 Cal.Rptr. 666] damages for mental suffering, in conjunction with injury to person or property, when there has been breach of the "duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing." (Id., at p. 430, 58 Cal.Rptr. 13, 426 P.2d 173.) In the absence of contrary legislative intent, we see no reason to deny such damages for violation of Insurance Code section 790.03, subdivision (h)(5). Therefore, if appellants prevail on a cause of action grounded in section 790.03, subdivision (h)(5), they may be entitled to compensatory damages for mental suffering.
Civil Code section 3333 provides: "For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this Code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not."
Respondent contends that the issue of punitive damages is not before this court because the trial court never considered the issue. The judgment itself states the trial court ruled as a matter of law that appellants are not entitled to punitive damages.
Finally, appellants claim they are entitled to punitive damages pursuant to Civil Code section 3294, subdivision (a).
Civil Code section 3294, subdivision (a), provides: "In an action for the breach of an obligation not arising from contract, where the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant."
Unfair settlement practices, whether based on section 790.03, subdivision (h), or on the breach of good faith and fair dealing, may give rise to a claim for punitive damages against an ordinary insurer. (Colonial Life & Accident Ins. Co. v. Superior Court (1982) 31 Cal.3d 785, 790-792, 183 Cal.Rptr. 810, 647 P.2d 86; Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 922, 148 Cal.Rptr. 389, 582 P.2d 980.)
There are limitations in the awarding of punitive damages even for ordinary insurers. For example, our Supreme Court in Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, 463, 113 Cal.Rptr. 711, 521 P.2d 1103 approved the trial court's decision "that the evidence was insufficient to justify an award of punitive damages because defendant was not put on notice by cases previously decided that its interpretation of the policy was incorrect and because there was insufficient evidence of a practice in the insurance industry to pay a disputed claim and then file a lien in the workmen's [sic] compensation proceeding to recover the payments made." In addition, subdivision (b) of Civil Code section 3294 limits an employer's liability based on the acts of an employee "unless the employer had advance knowledge of the unfitness of the employee and employed him or her with a conscious disregard of the rights or safety of others or authorized or ratified the wrongful conduct for which the damages are awarded or was personally guilty of oppression, fraud, or malice. With respect to a corporate employer, the advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice must be on the part of an officer, director, or managing agent of the corporation." (See also Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d at p. 928, 148 Cal.Rptr. 389, 582 P.2d 980 regarding the standards for assessing punitive damages.)
Assuming that these or other limitations do not apply and that appellants can prove the elements necessary to recover punitive damages, the question remains whether CIGA should be liable for punitive damages. We conclude it should not.
We have rejected respondent's argument that CIGA, because of its very nature, should be protected from lawsuits based on violations of the Unfair Practices Act. CIGA should not be able blithely to violate settlement standards that apply to ordinary insurers, and appellants should be able to recover compensatory damages for the alleged violations, if proven.
Nevertheless, we accept respondent's argument that CIGA's nature as a legislative creation designed to protect the public from the insolvency of insurers, with definite limitations on the payments of covered claims, negates the rationale for imposition of punitive damages on CIGA.
[215 Cal.Rptr. 667]As this division recently stated in Magallanes v. Superior Court (1985) 167 Cal.App.3d 878, 213 Cal.Rptr. 547, denying punitive damages in a case based on the market share theory of liability, " 'The concept of punitive damages embodies a rule for individualized punishment of a wrongdoer whose conduct toward the plaintiff is particularly outrageous.' " (Emphasis in original.) Aside from the difficulty of assessing CIGA's net worth, upon which the recovery of punitive damages is usually based, we are confronted with the nature of CIGA as an association of certain insurers (Ins.Code, § 1063), funded by premium payments from its member insurers (Ins.Code, § 1063.5), which ultimately receive their funding from the insured public. Imposing punitive damages on an individual insurer makes sense; presumably, its premiums will rise and its customers will seek coverage from insurers with lower premiums. The impact on the insured public in such a case is not counter to the punitive and deterrent purposes sought to be achieved by the imposition of punitive damages.
However, if punitive damages are imposed on CIGA, the increased premiums would be spread among all insurers, and ultimately to all insureds, regardless of the culpability of the individual insurer. There might indeed be a deterrent effect on CIGA; but compensatory damages will achieve that effect, without the possible devastating effect on the public. Appellants are not entitled to recover punitive damages against CIGA.
DISPOSITION
The judgment is reversed. The case is remanded for further proceedings consistent with this opinion.
DANIELSON and ARABIAN, JJ., concur.
[*] See post, page 1698 for opinions withdrawn and case subsequent histories.
Here, CIGA admits coverage and some liability, having paid $400,000. It is the extent of CIGA's financial liability that is at issue.