Opinion
G029532
Filed May 28, 2003
Appeal from a judgment of the Superior Court of Orange County, No. 811992, Mason L. Fenton, Judge. (Retired judge of the Orange Sup. Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.) Affirmed in part; reversed with directions in part.
Koletsky, Mancini, Feldman Morrow, Andrew M. Morrow, III, Raymond C. Dion; Sonnenschein Nath Rosenthal, Paul E.B. Glad, Kevin P. Kamraczewski, Ronald D. Kent and Jenifer M. Placzek for Defendant and Appellant.
Songstad, Randall Ulich and Andrew K. Ulich for Plaintiff and Respondent.
OPINION
I
Robert and Ali Bartholomew bought a new home in a housing development built by Taylor Woodrow (we will call the firm "Woodrow") in October 1997. A defective washing machine shut-off valve caused a major leak in the house. The Bartholomews contacted Woodrow, and Woodrow in turn contacted New Plumbing, the original plumbing subcontractor. As part of that subcontract, New Plumbing had added Woodrow as an insured to New Plumbing's standard commercial general liability policy with Acceptance Insurance.
This is a bad faith case brought by Woodrow against Acceptance. The basis of the bad faith is that Acceptance reneged on a specific promise to cover Woodrow's liability to the Bartholomews. Specifically, an adjustor from Acceptance visited the site and verbally acknowledged financial responsibility for the loss. Acceptance also sent a letter formally promising to "provide coverage to Taylor Woodrow for this claim." Based on that representation, Woodrow paid New Plumbing for its work. It might have, instead, withheld money to cover New Plumbing's liability to Woodrow. Then, however, Acceptance decided, based on two recent California Supreme Court decisions, that it didn't have to pay Woodrow after all because the Bartholomews never filed a suit. At the bad faith trial the parties stipulated that any breach of contract damages were $293,000 (including Woodrow's attorney fees against Acceptance). The jury awarded that amount as compensatory damages and added another $5 million in punitive damages.
We will affirm the award of compensatory damages, and will agree that punitive damages are appropriate. However, we will reduce the punitive damage award to bring it into line with the United States Supreme Court's recent decision in State Farm v. Campbell (2003) ___ U.S. ___, 123 S.Ct 1513, 1523.
II
The two California Supreme Court cases on which Acceptance relies are Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857 and Certain Underwriters at Lloyd's of London v. Superior Court (2001) 24 Cal.4th 945. The latter is known in insurance coverage circles as the Powerine case and that is how we shall refer to it here. From these cases Acceptance derives the rule that absent any underlying court suit against the policyholder — regardless of the reason for the absence of such a suit — there can never be an obligation to indemnify. Hence, as the reasoning goes, Acceptance could with impunity dishonor its promise to cover the claim against Woodrow.
Context is everything, and it is a gross and rather self-serving distortion of the rules articulated in the Foster-Gardner and Powerine cases to say that they allow insurers to dishonor specific promises to indemnify insureds merely because a case gets settled without suit.
Foster-Gardner was our Supreme Court's major confrontation with the "suit" clause in the standard commercial general liability policy. The court said that the duty to defend is limited to civil actions prosecuted in a court. (See Foster-Garner, supra, 18 Cal.4th at pp. 878-888.) Powerine followed in Foster-Garner's wake, and dealt with the implications of Foster-Gardner in an indemnity context. Powerine concluded that the duty to indemnify is impliedly linked to the duty to defend. (See Powerine, supra, 24 Cal.4th at pp. 962 [the "provision imposing the duty to indemnify impliedly links `damages' to a `suit'"] 969-970 ["That the provision imposing the duty to indemnify happens to be limited to money ordered by a court more impliedly than expressly is of no consequence. An implied limitation is sufficient. . . ."].) The court reasoned that if there is no duty to defend because there is no "suit," there is no duty to indemnify because there is no payment of money ordered by a court. (See id. at p. 966.)
But both Foster-Gardner and Powerine were major battles in a billion dollar war between insurers and chemical companies (and other "polluters") over who would pay for environmental clean up actions (both administrative and in the courts) initiated by government. (Cf. ACL Technologies, Inc. v. Northbrook Property Casualty Ins. Co. (1993) 17 Cal.App.4th 1773, 1777 ["a legal war that has raged in both federal and state courts from Maine to California"].) Large commercial firms had looked to insurers to pay their legal fees and clean up costs, regardless of whether the legal fees were incurred in dealing with administrative agencies in or out of court, and regardless of whether the clean up costs were incurred proactively, as the result of administrative proceedings, or as the result of a court judgment. Little by little, over the course of two decades, almost every word of the various versions of the CGL has been parsed and litigated.
In contrast to Foster-Gardner and Powerine, which were simply among the very last battles of the war to be fought in California before policies with the absolute pollution exclusions finally obviated pollution claims, the case here is absolutely prosaic in its essence — the sort of thing that happens in tens of thousands of auto accident cases: An insured gets into an accident, it looks like the insured is at least partly at fault, and the insurer pays off any claims against the insured, all without anyone ever filing a lawsuit. How many times a day does an insurer pay money on behalf of an insured after there has been an auto accident so that the insured is spared the ignominy of being named as a defendant in a formal court suit?
Which leads us to the next question: What if insurers, citing Foster-Gardner, decided not to settle cases on behalf of their insureds, but forced every single case to be filed in court? The habitual practice of forcing litigation in cases where there is no real dispute over liability would most surely be the proper target of disciplinary proceedings by the Insurance Commissioner: The Insurance Code requires insurers to promptly settle cases when "liability has become reasonably clear." (Ins. Code, § 790.03, subd. (h)(5).) We might add that once upon a time that sort of thing could also subject an insurer to additional civil damages as well. (See Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 313 (dis. opn. of Mosk, J.) [" Royal Globe (1979-1988), may it Rest in Peace. During its life it served the People of California well, particularly the victims of unfair and deceptive practices."].) Add to the equation specific promises made by the insurer to settle a case, and it becomes inescapably clear that whatever room Acceptance might have hypothetically to force a third-party's claim against its insured into court disappears here.
It can be argued, of course, that breaking a promise, extrinsic to an insurance contract, to settle a claim prior to suit is not the same as breaking a promise, set forth in the insurance contract itself, to pay the claim in the event of suit. Hence it might be argued that the breach of a promise to settle is just an ordinary contract breach, not the breach of an insurance contract, and therefore cannot give rise to anything but contract damages. In the context of this case, however, that is a distinction without a difference. The reason for Acceptance's promise to cover the claim was the policy itself.
Tort damages are allowed in cases of the unreasonable breach of a contract of insurance because of the inability of policyholders to find substitutes in the marketplace. (See Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 692.) Here, because the promise to settle only existed because of the contract of insurance, the same policy reasons allowing tort damages against insurers applies: Since the loss had already occurred, Woodrow was in no position to "cover" by finding a substitute in the marketplace, and therefore Acceptance's breach of its promise to settle was tantamount to a breach of its insurance contract in the first place. So there is no doubt that the $297,487.54 judgment was correct.
III
Next question: Was it an unreasonable breach? Clearly, yes. To read Foster-Gardner and Powerine for a rule which would absolutely immunize an insurer to repudiate a promise to settle a clearly covered claim is legal analysis taken to the point of solipsism. Coverage attorneys should know better. Only someone transfixed with what he or she thought was a loophole to get out of what was justly owing would seize on those two cases to do what Acceptance did here.
IV
Now a harder question: Was the unreasonable breach worth $5 million in punitive damages?
Punitive damage awards are considered in light of several guideposts, including (1) the reprehensibility of the wrongdoer's conduct, (2) the relationship between the harm (or potential harm) suffered by the plaintiff and punitive damages, and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. ( BMW of North America v. Gore (1996) 517 U.S. 559, 574-575.) Only one of these factors (reprehensibility) strongly favors punitive damages here; the other two factors tend in the opposite direction.
First, let us take reprehensibility. Acceptance deliberately broke its promise to settle. Functionally, Woodrow was left holding the bag for a loss which it had every right to think would be avoided by being itself listed on Acceptance's policy. There is something distastefully opportunistic in Acceptance's conduct, compounded by distorting opinions of the Supreme Court into something they never intended to say. On top of that there is the violation of a duty that is unique to the insurer-insured relationship, which is that the insured contracts to eliminate the need to pay money up front. Putting claimants through the hassle of using the court system to reduce their claim to real money is a classic abusive insurance practice which Insurance Code section 790.03, subdivision (h)(5) was meant to abate.
The second factor, the relationship between the harm suffered and the damages awarded, however, cuts the other way. Is $5 million — 17 times $293,000 — necessary to make the point that Acceptance misread Foster-Gardner and Powerine? There is, under such circumstances, a judicial temptation to get on a high horse because of the deliberate nature of the breach of the contract to settle. But suppose things had gone as Acceptance thought they should have gone. Acceptance would have reneged on its promise to settle, Woodrow would have been sued by the Bartholomews (or whoever first paid the Bartholomews), Acceptance would then have been forced to pay for a defense, it would have lost, and Acceptance would have ended up paying what it promised in the first place (Woodrow's attorney fees in the cost of defending the Bartholomew claim), but Acceptance would also be able to offset those losses with recoveries in subrogation from New Plumbing or the valve manufacturer. In such a scenario, Woodrow would not have been out of pocket at all. In that light, 17 times $293,000 is way too much to punish an insurer.
The third factor, comparable civil penalties, also mandates a conclusion that the $5 million award is excessive. As Acceptance points out, even a willful violation of a cease and desist order for habitually violating, say, the requirement of the Insurance Code to settle when liability is reasonably clear is only $55,000. (See Ins. Code, § 790.07.) Well, punitive damages in one case can hardly be 90 times a maximum civil fine for habitual conduct.
V
The toughest question is, what should the punitive damages be? Under Cooper Industries, Inc. v. Leatherman Tool Group, Inc. (2001) 532 U.S. 424, 436, the determination on appeal is made de novo.
We begin with the proposition that punitive damages cannot be so low as to allow the defendant to absorb the award with little or no discomfort. ( Adams v. Murakami (1991) 54 Cal.3d 105, 110.) Nor should an award be so small "that it can be simply written off as part of doing business." ( Grimshaw v. Ford Motor Co. (1981) 119 Cal.App.3d 757, 820.)
On the other hand, we must consider the fallout on third parties of imposing punitive damage awards on insurers. We don't care a fig for the company's profits as such, but we do care about the ability of other policyholders of Acceptance to be paid their claims, and about Acceptance's solvency. It doesn't accomplish anything to penalize a company, only to see its obligations taken over by the Insurance Commission. When that happens, there isn't even the big stick of bad faith and punitive damage awards to insure that claims get paid. (See Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 783-789 [entity that takes over claims of insolvent insurers cannot be sued for bad faith in claims handling].) Moreover, high punitive damage awards against insurers may only result in higher insurance premiums to businesses, which may result in the loss of jobs, because businesses can't afford the necessary insurance and keep all their employees.
Recently, as is well known to these parties, the United States Supreme Court handed down a decision which puts some outside due process limits on punitive damages. In State Farm v. Campbell (2003) ___ U.S. ___ [ 123 S.Ct 1513, 1524] the federal high court stated that "few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." In fact, the State Farm court said that a punitive damage of four times the compensatory damages "might be close to the line of constitutional impropriety." ( Ibid.) However, it must be noted that in State Farm the conduct was alleged to cross state lines, an impermissible consideration which might have skewed the award upwards.
The facts here are not as bad as they were in State Farm. There, the insured was an individual who caused an accident killing someone and permanently disabling someone else, and yet the insurer ignored its own investigator's advice and refused to settle the case for policy limits, with the result that the insured was hit with a judgment for three times the policy limits; only after the insured himself took an appeal to the state Supreme Court did the insurer pay the entire judgment. Here, the insured has suffered no excess exposure, and we have no indication that Acceptance would not have paid for a defense had the Bartholmews sued Woodrow or for any ensuing judgment (in fact, given its position, we have every indication it would have paid if Woodrow had been sued). On the other hand, it was just about as blatant and opportunistic a breach of an insurance contract as might be imagined, and that must count for something too. Under such circumstances, we are agreed that the punitive damages here can only be sustained as far as $1 million, which is somewhat less than four times the compensatories.
VI
The judgment is affirmed to the extent that it awards Woodrow approximately $293,487.54 in compensatory damages, but is reversed to the extent that it awards it $5 million in punitive damages. As to the latter, the case is remanded back to the trial court with directions to enter a new judgment providing for punitive damages of $1 million.
In the interests of justice Woodrow will recover its costs on appeal.
We Concur:
BEDSWORTH, J.
ARONSON, J