ALBERT BRANDT, Petitioner, v. THE SUPERIOR COURT OF SAN DIEGO COUNTY, Respondent; STANDARD INSURANCE COMPANY, Real Party in Interest.
L.A. No. 31859
Supreme Court of California
Jan. 28, 1985.
37 Cal.3d 813 | 210 Cal.Rptr. 211 | 693 P.2d 796
Neil M. Levy, Gordon S. Churchill and Robert J. Kaplan for Petitioner.
No appearance for Respondent.
Gibson, Dunn & Crutcher, John H. Scharer, Michael G. Yoder and Eloise S. Hock for Real Party in Interest.
Adams, Duque & Hazaltine, James L. Nolan, Martha G. Bannerman, Rogers, Joseph, O‘Donnell & Guinn, Joseph W. Rogers, Jr., and Leo F. Orenstein as Amici Curiae on behalf of Respondent and Real Party in Interest.
OPINION
KAUS, J.- When an insurer tortiously withholds benefits, are attorney‘s fees, reasonably incurred to compel payment of the policy benefits, recoverable as an element of the damages resulting from such tortious conduct?1 We hold that they are and accordingly issue a writ of mandate directing the trial court to reinstate the portion of the complaint seeking attorney‘s fees as damages.
According to the complaint real party in interest Standard Insurance Company (Standard) issued a group disability income insurance policy to Vicom Associates, petitioner‘s employer, under which petitioner was insured. Pe
In his causes of action for breach of the duty of good faith and fair dealing and for the statutory violations, petitioner listed attorney‘s fees incurred in connection with the contract cause of action as part of the resulting damage. Standard successfully moved to strike the portions of the complaint seeking attorney‘s fees. Petitioner then filed the present mandate proceeding.2
Although we are reluctant to exercise our discretion to review rulings at the pleading stage of a lawsuit, we do so here because of the compelling circumstances presented. (See Babb v. Superior Court (1971) 3 Cal.3d 841, 851 [92 Cal.Rptr. 179, 479 P.2d 379].) The issue is of widespread interest, and the Courts of Appeal are in conflict. Moreover, the trial court‘s ruling has effectively deprived petitioner of the opportunity to present a substantial portion of his cause of action. Under the circumstances, extraordinary relief is appropriate. (Ibid.; Taylor v. Superior Court (1979) 24 Cal.3d 890, 894 [157 Cal.Rptr. 693, 598 P.2d 854].)
As noted, the Courts of Appeal are in conflict on the question of the recoverability of attorney‘s fees. The seminal cases on each side are Mustachio v. Ohio Farmers Ins. Co. (1975) 44 Cal.App.3d 358 [118 Cal.Rptr. 581], which allowed recovery and Austero v. Washington National Ins. Co. (1982) 132 Cal.App.3d 408 [182 Cal.Rptr. 919] (hereafter Austero), which denied it. In Mustachio, attorney‘s fees incurred in connection with negotiations leading up to settlement of the insured‘s policy claim were held properly included as an element of damages in the insured‘s later tort action against the insurer for breach of its duty of good faith and fair dealing. In Austero, a divided court rejected the reasoning of Mustachio and reversed an award of attorney‘s fees, holding that in a bad faith tort action recovery of attorney‘s fees incurred to obtain benefits under the policy is precluded by
“It is well settled that if an insurer, in discharging its contractual responsibilities, ‘fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing.’ (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574 [108 Cal.Rptr. 480, 510 P.2d 1032], original italics.) When such a breach occurs, the insurer is ‘liable for any damages which are the proximate result of that breach.’ (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 925 [148 Cal.Rptr. 389, 582 P.2d 980].)” (Austero, supra, 132 Cal.App.3d at pp. 419-420 [dis. opn. of Morris, P. J.].)
When an insurer‘s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney‘s fees are an economic loss-damages-proximately caused by the tort. (Mustachio v. Ohio Farmers Ins. Co., supra, 44 Cal.App.3d at p. 363.) These fees must be distinguished from recovery of attorney‘s fees qua attorney‘s fees, such as those attributable to the bringing of the bad faith action itself. What we consider here is attorney‘s fees that are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action.
“When a pedestrian is struck by a car, he goes to a physician for treatment of his injuries, and the motorist, if liable in tort, must pay the pedestrian‘s medical fees. Similarly, in the present case, an insurance company‘s refusal to pay benefits has required the insured to seek the services of an attorney to obtain those benefits, and the insurer, because its conduct was tortious, should pay the insured‘s legal fees.” (Austero, supra, at p. 421.)
The fact that-here as well as in Austero-the fees claimed as damages are incurred in the very lawsuit in which their recovery is sought, does not in itself violate
The dual nature of the present action distinguishes this case from Lowell v. Maryland Casualty Co. (1966) 65 Cal.2d 298 [54 Cal.Rptr. 116, 419 P.2d 180], Patterson v. Insurance Co. of North America (1970) 6 Cal.App.3d 310 [85 Cal.Rptr. 665], and Carroll v. Hanover Insurance Co. (1968) 266 Cal.App.2d 47 [71 Cal.Rptr. 868]. ”Lowell, Patterson, and Carroll were not bad faith cases. The plaintiffs’ entire actions there were
The Austero majority‘s reliance on Lowell, Patterson, and Carroll blurred the distinction between bad faith conduct and nontortious but erroneous withholding of benefits. “[A]n erroneous interpretation of an insurance contract by an insurer does not necessarily make the insurer liable in tort for violating the covenant of good faith and fair dealing; to be liable in tort, the insurer‘s conduct must also have been unreasonable. [Citations.] When no bad faith has been alleged and proved, Lowell, Patterson, and Carroll preclude the award of attorney‘s fees incurred in obtaining benefits that the insurer erroneously, but in good faith, withheld from the insured. However, 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 Mustachio has correctly held 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 tortious conduct.”6 (Austero, supra, at p. 422.) The fees recoverable, however, 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.
Since the attorney‘s fees are recoverable as damages, the determination of the recoverable fees must be made by the trier of fact unless the parties stipulate otherwise. (See Dinkins v. American National Ins. Co. (1979) 92 Cal.App.3d 222, 234 [154 Cal.Rptr. 775].) A stipulation for a postjudgment allocation and award by the trial court would normally be preferable since the determination then would be made after completion of the legal services (see Beneficial Standard Properties, Inc. v. Scharps (1977) 67 Cal.App.3d 227, 232, fn. 3 [136 Cal.Rptr. 549]), and proof that otherwise would have been presented to the jury could be simplified because of the court‘s expertise in evaluating legal services. (Fed-Mart Corp. v. Pell Enterprises, Inc. (1980) 111 Cal.App.3d 215, 227 [168 Cal.Rptr. 525]; Melnyk v. Robledo (1976) 64 Cal.App.3d 618, 623 [134 Cal.Rptr. 602].)7 If, however, the matter is to be presented to the jury, the court should instruct along the following lines: “If you find (1) that the plaintiff is entitled to recover on his cause of action for breach of the implied covenant of good faith and fair dealing, and (2) that because of such breach it was reasonably necessary for the plaintiff to employ the services of an attorney to collect the benefits due under the policy, then and only then is the plaintiff entitled to an award for attorney‘s fees incurred to obtain the policy benefits, which award must not include attorney‘s fees incurred to recover any other portion of the verdict.”8
The alternative writ is discharged. Let a peremptory writ of mandate issue, commanding the trial court to vacate its order striking portions of petitioner‘s complaint.
Bird, C. J., Broussard, J., Reynoso, J., and Grodin, J., concurred.
MOSK, J.-I concur.
It is time, however, that we forthrightly overruled the decision, rendered by a divided court, in Davis v. Air Technical Industries, Inc. (1978) 22 Cal.3d 1 [148 Cal.Rptr. 419, 582 P.2d 1010]. (Maj. opn., ante, at p. 818, fn. 4.) In our unanimous opinion in Gray v. Don Miller & Associates, Inc. (1984) 35 Cal.3d 498, 508 [198 Cal.Rptr. 551, 674 P.2d 253], we restricted the Davis rule so severely that it is now limited in effect to one narrow category: products liability cases. Why there should be a different rule on attorney fees in products liability cases as distinguished from all other causes has never been adequately explained.
To avoid further confounding the bench and bar, we should make it clear that Davis is no longer viable and that the rule of the present case and of Prentice v. North Amer. Title Guar. Corp. (1963) 59 Cal.2d 618, 620 [30 Cal.Rptr. 821, 381 P.2d 645], prevails in California.
The American rule has long been that each party to litigation should bear his own attorney fees. (E.g., Fleischmann Corp. v. Maier Brewing (1967) 386 U.S. 714, 717-718 [18 L.Ed.2d 475, 478, 87 S.Ct. 1404].) The California Legislature first adopted this rule in 1851. (Stats. 1851, ch. 5, § 494, p. 128.)
The current statute on the subject reads, “Except as attorney‘s fees are specifically provided for by statute, the measure and mode of compensation of attorneys is left to the agreement, express or implied, of the parties . . . .” (
Although this court may have an inherent equitable power to award attorney fees in certain cases, we have “moved cautiously in expanding the nonstatutory bases on which awards of attorney‘s fees may be predicated.” (Bauguess v. Paine (1978) 22 Cal.3d 626, 636 [150 Cal.Rptr. 461, 586 P.2d 942].) We have acknowledged limited exceptions only “when overriding considerations of justice seemed to compel such a result.” (Fleishmann Corp., supra, 386 U.S. at p. 718.) “Three of these exceptions, discussed at length in Serrano v. Priest (1977) 20 Cal.3d 25, 34-47 [141 Cal.Rptr. 315, 569 P.2d 1303], base recovery of attorney fees to the prevailing party on the fact that the litigation has conferred benefits on others. Thus, if the litigation has succeeded in creating or preserving a common fund for the benefit of a number of persons, the plaintiff may be awarded attorney fees out of that fund. (Estate of Stauffer (1939) 53 Cal.2d 124, 131-132 [346 P.2d 748].) Likewise, if a judgment confers a substantial benefit on a defendant, such as in a corporate derivative action, the defendant may be required to pay the attorney fees incurred by the plaintiff. (See, e.g., Fletcher v. A. J. Industries, Inc. (1968) 266 Cal.App.2d 313, 323-325 [72 Cal.Rptr. 146].) Finally, under the ‘private attorney general’ concept attorney fees may be awarded to those who by litigation secure benefits for a broad class of persons by effectuating a strong public policy. (Serrano v. Priest, supra, 20 Cal.3d 25, 42-47.)” (Gray v. Don Miller & Associates, Inc. (1984) 35 Cal.3d 498, 505 [198 Cal.Rptr. 551, 674 P.2d 253].) Petitioner does not contend that his request for attorney fees comes within any of these exceptions.
A fourth exception is the “third-party tort” situation. “A person who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover compensation for the reasonably necessary loss of time, attorney‘s fees, and other expenditures thereby suffered or incurred. [Cita-
Petitioner suggests, however, that
But in fact
In Davis v. Air Technical Industries, Inc., supra, 22 Cal.3d 1, we held that defendant seller in a products liability suit could not recover attorney fees from defendant manufacturer, although ultimately all fault was laid at the manufacturer‘s feet. We reasoned that even though the manufacturer‘s tort (faulty design) was responsible for bringing the seller into litigation with the buyer, the seller could not recover attorney fees he had incurred exclusively to defend against allegations of his own negligence. (22 Cal.3d at pp. 6-7.)
Furthermore, even if there were some general exception for collateral litigation, the present type of case would not appear to qualify. It is contended that we can find collateral litigation in the fact that the insured has
But this analysis appears to mistake the nature of the bad faith tort. When an insurance company withholds payments in bad faith its actions amount to both a breach of contract and a tort, but two separate breaches of duty are not involved. The single duty breached-the covenant of good faith and fair dealing-“springs from the contractual relationship between the parties.” (Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, 18 [123 Cal.Rptr. 288, 538 P.2d 744].) The plaintiff may bring suit on both contract and tort theories, but ultimately he must elect which remedy to pursue. (See Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 432 [58 Cal.Rptr. 13, 426 P.2d 173].) There simply is no collateral suit from which attorney fees may be recovered.
The analysis of the Court of Appeal in Mustachio v. Ohio Farmers Ins. Co. (1975) 44 Cal.App.3d 358 [118 Cal.Rptr. 581], is similarly flawed. Focusing on the fact that the insurer‘s breach of the duty of good faith constitutes a tort, the court concluded that plaintiff insured was entitled to attorney fees because his employment of an attorney was proximately caused by the insurer‘s tort. (P. 363.) Admittedly, plaintiff‘s employment of an attorney was a foreseeable consequence of defendant insurer‘s breach, but this logic would apply to any tort suit to which a collateral cause of action is attached, effectively allowing the exception to swallow the American rule on attorney fees.1
The Mustachio opinion failed to follow the logic of the proposed collateral litigation exception to its end. Rather, the court argued that there is something special about an insurance contract that requires its bad faith breach by an insurer to be treated differently from any other tort suit. The relationship between an insured and his insurer may involve a fiduciary relationship (see Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 820 [169 Cal.Rptr. 691, 620 P.2d 141]), but we have recently held that tortious breach of such a relationship is not a sufficient basis for creating an exception to
Even if emotional distress damages are insufficient, an insured may seek numerous additional items of damage in an action for bad faith breach of contract that he could not obtain for simple breach of contract. He may recover for awards against him in excess of the policy limits if the insurer has refused in bad faith to settle within the policy limits. (Crisci, supra, 66 Cal.2d at p. 430.) He may recover all economic loss proximately caused. (Fletcher v. Western National Life Ins. Co. (1970) 10 Cal.App.3d 376, 401-402 [89 Cal.Rptr. 78, 47 A.L.R.3d 286].) If he can prove oppression, fraud or malice, he may recover punitive damages. (Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d at pp. 819-821.) Given the numerous types of damages that the plaintiff may recover for a tortious breach of his insurance contract, any or all of which can and often do exceed the policy limits, I can see no persuasive need to create an exception to the general rule that each party must bear his own attorney fees.
The Mustachio opinion implies that tortious breach of an insurance contract is such a serious abuse that attorney fees must be awarded as well: “If the insurer, instead of bargaining with the insured in good faith, tortiously violates its covenant of good faith and fair dealing and thereby makes it reasonable for the insured to seek the protection of counsel, plain justice demands that the insurer be financially responsible for an expense which but for its tortious conduct would not have been incurred. [Fn. omitted.]” (44 Cal.App.3d at p. 364.)
But it must be remembered that an insured need not establish the level of misconduct shown by the insurance company in Mustachio in order to recover on a bad faith tort. He must prove only that the insurance company acted negligently, i.e., that a “prudent insurer” would have paid the claim. (See Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d at p. 818.) Mere breach of the duty of good faith is “not meant to connote the absence or presence of positive misconduct of a malicious or immoral nature . . . .” (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 921-922, fn. 5 [148 Cal.Rptr. 389, 582 P.2d 980].) Such negligence on the part of the insurer is enough to warrant an award of damages for emotional distress, economic loss, and the like because of the special nature of the insurance contract,
For the reasons stated, I would deny the peremptory writ.