JULIE GOURLEY, Plаintiff and Respondent, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant and Appellant.
No. S014133
Supreme Court of California
Mar. 28, 1991
Rehearing Denied May 23, 1991
53 Cal.3d 121
Hill, Genson, Even, Crandall & Wade, Horvitz, Levy & Amerian, Horvitz & Levy, Ellis J. Horvitz, David M. Axelrad and Peter Abrahams for Defendant and Appellant.
Wylie A. Aitken and Wayne J. Austero for Plaintiff and Respondent.
Ian Herzog, Douglas Devries, Leonard Sachs, Bruce Broillet, David Harney, Laurence Drivon, Robert Steinberg, Roland Wrinkle, Harry R. Levine, Leonard Esquina, Evan D. Marshall and Hugh Hafif as Amici Curiae on behalf of Plaintiff and Respondent.
OPINION
LUCAS, C. J.—We granted review to resolve an issue that has engendered conflicting appellate decisions: whether a plaintiff is entitled to receive prejudgment interest under
As explained below, we hold that section 3291 interest is not available 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.1 Ac-
I. BACKGROUND
In December 1981, Gourley was a passenger in an automobile that was struck by an out-of-control vehicle driven by an uninsured drunk driver. Gourlеy, who was not wearing a seat belt at the time of the accident, suffered a fractured right shoulder. She made a claim under the uninsured motorist coverage in her automobile policy with defendant, State Farm. Gourley retained counsel and demanded arbitration under the terms of her policy.
State Farm consulted an accident reconstruction expert who advised the insurer that had Gourley been wearing a seat belt, she would have suffered only minor injuries. Based on this information, State Farm offered to settle the uninsured motorist claim for $20,000, an amount State Farm believed equaled the damages Gourley would have suffered had she been wearing a seat belt.
Gourley rejected the offer and demanded the policy limit of $100,000. She provided State Farm with a medical report from a dоctor who concluded she had suffered some permanent disability, would probably develop arthritis, and might require surgery in the future. The matter was then submitted to arbitration.
Before the conclusion of arbitration proceedings, Gourley reduced her demand to $60,000 and State Farm responded with a counteroffer of $25,000. The arbitrator concluded Gourley was not negligent in failing to wear a seat belt and awarded her approximately $88,000, which State Farm promptly paid.
Gourley and her husband later sued State Farm for breach of the implied covenant of good faith and fair dealing and violation of
After finding that State Farm violated the covenant of good faith and fair dealing as to Mrs. Gourley only, the jury returned a general verdict in her
In affirming the judgment, the Court of Appeal held that section 3291 interest could accrue in an insurance bad faith action as long as the statutory prerequisites to recovery were met. The court relied on Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809 [169 Cal.Rptr. 691, 620 P.2d 141], and Austero v. National Cas. Co. (1978) 84 Cal.App.3d 1, 29-30 [148 Cal.Rptr. 653], in reasoning that because the primary focus of the action is to vindicate personal interests, it becomes a “personal injury” action within the meaning of section 3291.
As discussed above, we limited our review to the sole issue whether Gourley was entitled to receive prejudgment interest under section 3291 on all or part of the bad faith award.
II. DISCUSSION
1. Legislative Overview
Section 3291 authorizes prejudgment interest on personal injury damages if the defendant fails to accept an offer to compromise pursuant to
Section 3291 was part of Senate Bill No. 203, 1981-1982 Regular Session, chapter 150, enacted in April 1982 (Stats. 1982, ch. 150, § 1, p. 493). Chapter 150 also added and amended other statutes by increasing the annual rate of interest accruing on judgments from 7 percent to 10 percent. Although the statute is silent as to its applicability to punitive damage awards, its history indicates the Legislature rejected several proposed amendments expressly providing that prejudgment interest would not accrue to that portion of the judgment representing punitive damages. (Sen. Bill No. 203, proposed amendments Aug. 31, 1981, 16 Assem. Final Hist. (1981-1982 Reg. Sess.) pp. 111, 116.)3
As noted above, section 3291 provides that a judgment on a personal injury damage award shall bear interest when a plaintiff‘s settlement offer is refused and the plaintiff recovers a more favorable judgment. Courts generally agree that the purpose of section 3291 is to provide a statutory incentive to settle personal injury litigation where plaintiff has been physically as well as economically impaired, and thus it has been considered inapplicable to contractual disputes, business-tort losses and arbitration proceedings. (See Morin v. ABA Recovery Service, Inc. (1987) 195 Cal.App.3d 200, 206-207, fn. 1 [240 Cal.Rptr. 509]; accord, Woodard v. Southern Cal. Permanente Medical Group (1985) 171 Cal.App.3d 656, 665-668 [217 Cal.Rptr. 514]; see also Ops. Cal. Legis. Counsel, No. 17984 (Nov. 2, 1982) Judgment and Prejudgment Interest [§ 3291 prejudgment interest imposed because of refusal to accept settlement offer, not because of refusal to pay sum owed].) With this background in mind, we now address whether section 3291 should apply in an insurance bad faith action.
2. Section 3291 and Insurance Bad Faith
We first discuss the nature of an insurance bad faith action to determine whether it falls within the ambit of section 3291 as an “action
It is true that Crisci, supra, 66 Cal.2d 425, and Gruenberg, supra, 9 Cal.3d 566, allow an insured to recover in tort for damages flowing from the breach. Nonetheless, as State Farm observes, those same cases directly contravene the assertion of both Gourley and the Court of Appeal that the nature or gist of the tort action is recovery for personal injury. As we explain below, both Crisci and Gruenberg emphasize that the nature of an insurance bad faith action is one seeking recovery of a property right, not personal injury.
We have long recognized that an implied covenant of good faith and fair dealing exists to assure prompt payment of claims made by the insured. (Crisci, supra, 66 Cal.2d at p. 429.) In third party cases, where liability insurance is involved, an insurer‘s allegedly tortious refusal to accept the third party‘s offer to settle a claim against the insured may expose the insurer to liability in the full amount of the third party judgment as well as mental distress which constitutes an aggravation of damages when it ensues from the breach. (Id. at p. 433; see also Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658 [328 P.2d 198, 68 A.L.R.2d 883].) The covenant in third party matters is based on the principle that “neither party will do anything which will injure the right of the other to receive the benefits of the agreement.” (Crisci, supra, at p. 429; accord, Comunale, supra, 50 Cal.2d at p. 658.)
A similar implied covenant exists to assure the insurer makes prompt payment of claims to the insured. The substance of a bad faith action in these first party matters is the insurer‘s unreasonable refusal to pay benefits under the policy. (Gruenberg, supra, 9 Cal.3d 566, 575.) In both the first and third party contexts, however, we have observed that “the obligations of the insurer ‘are merely two different aspects of the same duty.‘” (Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 818, quoting from Gruen-berg, supra, 9 Cal.3d at p. 573; accord, Austero v. National Cal. Co., supra, 84 Cal.App.3d 1, 26-31.)
Based on these principles, we have allowed the insured to recover in tort for emotional distress damages flowing from the insurer‘s breach. In so doing, however, we reсognized that the bad faith action is not a suit for personal injury, but rather “relates to financial damage.” (Crisci, supra, 66 Cal.2d at p. 432) Nonetheless, we determined that “mental suffering constitutes an aggravation of damages when it naturally ensues from the act complained of.” (Id. at p. 433.) We emphasized that “[s]uch awards are not confined to cases where the mental suffering award was in addition to an award for personal injuries; damages for mental distress have also been awarded in cases where the tortious conduct was an interference with property rights without any personal injuries apart from the mental distress.” (Ibid.)
In Gruenberg, supra, we further explained the nature of a bad faith action—i.e., that it is an action for the interference with property rights, not personal injury. (9 Cal.3d at p. 580.) We observed that damages for emotional distress arе compensable as incidental damages flowing from the initial breach, not as a separate cause of action: “[Because] we are concerned with mental distress resulting from a substantial invasion of property interests of the insured and not with the independent tort of intentional infliction of emotional distress, we deem [the requirements of outrageous conduct and severe emotional distress] to be inapplicable.” (Ibid.) Thus, once the threshold requirement of economic loss is met, the insured need not show additional loss or injury to recover damages for his mental distress as long as such damages were proximately caused by his insurer‘s breach of the implied covenant. (See Sprague v. Equifax, Inc. (1985) 166 Cal.App.3d 1012, 1029-1031 [213 Cal.Rptr. 69].)
Whether an action for the tortious breach of the covenant of good faith and fаir dealing is an action for personal injury was also addressed in Richardson v. Allstate Ins. Co. (1981) 117 Cal.App.3d 8, 12-13 [172 Cal.Rptr. 423]. In Richardson, an 18-year-old woman sued her automobile insurer under several causes of action, including breach of the implied covenant of good faith and fair dealing. She sought recovery for economic loss and emotional distress because her insurer had refused to pay for surgical expenses incurred by her after she was injured in an accident at the age of 15. The trial court had ruled the bad faith action was barred by the one-year statute of limitations which applies to infringements of personal rights. (
The Richardson v. Allstate Ins. Co. court (supra, 117 Cal.App.3d 8) reversed the trial court‘s decision and held that a cause of action for an
In conclusion, the Richardson v. Allstate Ins. Co. court reasoned it would be erroneous to find “a tort action against an insurer for bad faith is based upon an alleged interference with a personal right merely because mental distress is alleged. Breach of the implied covenant of good faith is actionable because such conduct causes financial loss to the insured, and it is the financial loss or risk of financial loss which defines the cause of action. Mental distress is compensable as an aggravation of the financial damages, not as a separate cause of action.” (117 Cal.App.3d at p. 13, fn. omitted.)
The present Court of Appeal rejected the Richardson v. Allstate Ins. Co. rationale that a breach of the implied covenant action is based on the infringement of property rights, not personal injury. The court attempted to distinguish Richardson on the ground that it concerned a statute of limitations defense rather than the applicability of section 3291 to bad faith actions. In our view, the court overlooked an important observation made by the Richardson court—the substantive requirements for recovery of emotional distress damages in an action for breach of the implied covenant of good faith and fair dealing. We agree with Richardson‘s discussion of the nature of a bad faith action as an action for the interference with a property right, and will not dismiss its reasoning simply because it was concerned with a statute of limitations defense.
Indeed, we believe the same principles apply in the present case. Breach of the implied covenant is actionable in the insurance context because such conduct causes financial loss to the insured, and it is that loss which defines the cause of action. Had the Legislature intended to apply section 3291 to such an action for interference with property rights, including a breach of the implied сovenant of good faith and fair dealing, it could have expressly so provided. Indeed, the language of the statute reveals that
Finally, although we have found no out-of-state case that poses the issue before us, we have found that other states generally do not award prejudgment interest in analogous cases relating to a tortious interference with economic rights. For example, in Wainauskis v. Howard Johnson Co. (1985) 339 Pa. Super. 266 [488 A.2d 1117, 1125], plaintiff sought prejudgment interest in a malicious prosecution action under a Pennsylvania statute which provided, “[I]n an action seeking monetary relief for bodily injury, death, or property damage, or any combination thereof, the court . . . shall (1) add to the amount of compensatory damages . . . in the verdict of the jury . . . damages for delay at ten (10) percent per annum, not compounded, which shall become part of the . . . verdict.” (488 A.2d at p. 1124, fn. 4.) Although the court observed that damages for malicious prosecution “may include compensation for mental anguish, humiliation, and injury to feelings” (Id. at p. 1125), it rejected the claim for prejudgment interest after determining that a malicious prosecution action is based on financial loss rather than personal injury as required by the statute. (See also, Temporaries, Inc. v. Krane (1984) 325 Pa. Super. 103 [472 A.2d 668] [no recovery of prejudgment interest under same statute in action for tortious interference with contractual relations]; Sade v. Northern Natural Gas Company (10th Cir. 1974) 501 F.2d 1003 [no prejudgment interest in action for fraud and deceit under Oklahoma statute providing for prejudgment interest in actions for damages for personal injuries].)
III. CONCLUSION
Based on the principles discussed above, we conclude that section 3291 prejudgment interest is unavailable in insurance bad faith actions because such actions are not “brought to recover damages for personal injury.” Accordingly, we reverse the Court of Appeal with directions to vacate the award of prejudgment interest.
Panelli, J., Kennard, J., Arabian, J., and Baxter, J., concurred.
BROUSSARD, J.—I dissent. By denying recovery of interest the majority reward the insurer for delaying payment of its just debt and refusing to accept a statutory settlement offer in an amount less than the amount owed. The majority reach this result by ignoring in their analysis of
“The fundamental rule of statutory construction is that the court should ascertain the intent of the Legislature so as to effectuate the purpose of the law. [Citations.] Moreover, ‘every statute should be construed with reference to the whole system of law of which it is a part so that all may be harmonized and have effect.’ [Citation.] If possible, significance should be given to every word, phrase, sentence and part of an act in pursuance of the legislative purpose. [Citation.]” (Select Base Materials v. Board of Equal. (1959) 51 Cal.2d 640, 645 [335 P.2d 672]; see Taxpayers to Limit Campaign Spending v. Fair Pol. Practices Com. (1990) 51 Cal.3d 744, 764 [274
Accordingly, in ascertaining the legislative intent in enacting section 3291, we must consider the related provisions for prejudgment interest of sections 3287 and 3288 and
Section 3287, subdivision (a) is the basic provision governing prejudgment interest or interest as damages. It provides: “Every person who is entitled to rеcover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled also to recover interest thereon from that day, except during such time as the debtor is prevented by law, or by the act of the creditor from paying the debt. . . .”
It has long been settled that section 3287 should be broadly interpreted to provide just compensation to the injured party for loss of use of money during the prejudgment period. (Cox v. McLaughlin (1888) 76 Cal. 60, 68-69 [18 P. 100] [tracing modification of early rule from ascertainment of sum due from face of contract to reference to standards providing debtor with “proximate knowledge” of amount due]; Chesapeake Industries, Inc. v. Togova Enterprises, Inc. (1983) 149 Cal.App.3d 901, 906, 914 [197 Cal.Rptr. 348].) Thus, when value of property can be readily ascertained, prejudgment interest is allowed for its taking or destruction. (Leff v. Gunter (1983) 33 Cal.3d 508, 519-520 [189 Cal.Rptr. 377, 658 P.2d 740]; Hamer v. Hathaway (1867) 33 Cal. 117, 119-120; Levy-Zentner Co. v. Southern Pac. Transportation Co. (1977) 74 Cal.App.3d 762, 797-798 [142 Cal.Rptr. 1]; 6 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 1397, p. 868.) Prejudgment interest is awarded where the value of the destroyed property is established by estimates of appraisers. (Leff v. Gunter, supra, 33 Cal.3d 508, 519-520; Koyer v. Detroit F. &. M. Ins. Co. (1937) 9 Cal.2d 336, 345-346 [70 P.2d 927].) Prejudgment interest must be awarded as a matter of right under section 3287, subdivision (a), in “tort actions for property damages where the value of the property destroyed can be readily calculated by reference to market values or expert testimony. . . .” (Levy-Zentner Co. v. Southern Pac. Transportation Co., supra, 74 Cal.App.3d 762, 797-798.) Prejudgment interest is also awarded on a cost-plus contract notwithstanding that some of the cost items include percentages of the plaintiff‘s indirect and overhead costs. (Coleman Engineering Co. v. North American Aviation, Inc. (1966) 65 Cal.2d 396, 407-409 [55 Cal.Rptr. 1, 420 P.2d 713].)
The fact that liability may be disputed does not preclude prejudgment interest. (Olson v. Cory (1983) 35 Cal.3d 390, 402 [197 Cal.Rptr. 843, 673
While the provision for prejudgment interest in section 3287, subdivision (a) has been broadly construed to provide compensation for loss of use of property, money, or contractual performance during the prejudgment period, the Legislature has been aware that in some cases damages are not subject to calculation even under the broad construction of subdivision (a). Subdivision (b) of the section provides for interest in contract cases where damages are uncertain or not capable of being made certain. “Every person who is entitled under any judgment to recеive damages based upon a cause of action in contract where the claim was unliquidated, may also recover interest thereon from a date prior to the entry of judgment as the court may, in its discretion, fix, but in no event earlier than the date the action was filed.”
The discretion conferred is limited by the purposes underlying interest awards, and, when the trial court abuses its discretion by denying interest, the matter may be remedied on appeal. (Esgro Central, Inc. v. General Ins. Co. (1971) 20 Cal.App.3d 1054, 1064-1065 [98 Cal.Rptr. 153].)
Section 3288 provides for discretionary interest in cases other than contractual cases, including tort cases. Unlike section 3287, subdivision (b), interest for the period prior to filing of the action is not precluded. The section reads: “In an action for the breach of an obligation not arising from contract, and in every case of oppression, fraud, or malice, interest may be given, in the discretion of the jury.”
To recover under section 3288, a plaintiff need not prove both a breach of a noncontractual obligation and oppression, fraud, or malice; a noncontractual obligation is sufficient. Prejudgment interest is awarded for loss of property and under this section is not limited to the date of the filing of the complaint. (Bullis v. Security Pac. Nat. Bank (1978) 21 Cal.3d 801, 814-815 [148 Cal.Rptr. 22, 582 P.2d 109, 7 A.L.R.4th 642]; Harsany v. Cessna Aircraft Co. (1983) 148 Cal.App.3d 1139, 1143-1144 [196 Cal.Rptr. 374].)
It is thus clear that the Legislature has broadly provided for interest as damages to compensate for the loss of use of property, funds, and contractual performance caused by the delay in payment. The provisions are in furtherance of the general provisions for contract and tort damages, the
When the debtor has delayed payment of the damages caused by his or her wrongdoing, the debtor is able to invest the money at interest, and the effect of denying recovery of prejudgment interest is to require the plaintiff to make an interest-free loan to the defendant from the time of loss until judgment. Because noninterest bearing loans are very valuable, it is in the interest of the “borrower” to prolong the loan as long as possible, and denial of interest provides a substantial incentive for defendants to prolong settlement negotiations or to refuse settlements contrary to our policy of encouraging settlements. (See Morin v. ABA Recovery Service, Inc. (1987) 195 Cal.App.3d 200, 207 [240 Cal.Rptr. 509]; Gutierrez v. State Ranch Services (1983) 150 Cal.App.3d 83, 85, fn. 4 [198 Cal.Rptr. 16].)
However, the courts have traditionally refused to apply sections 3287 and 3288 in situations where the defendant could not know the amount owed (e.g., Cox v. McLaughlin, supra, 76 Cal. 60, 67; Chesapeake Industries, Inc. v. Togova Enterprises, Inc., supra, 149 Cal.App.3d 901, 906-907), as in claims for damages for the noneconomic aspects of physical, mental and emotional injury. “They are inherently nonpecuniary, unliquidated and not readily subject to precise calculation. The amount of such damages is necessarily left to the subjective discretion of the trier of fact. Retroactive interest on such damages adds uncertain conjecture to speculation. Moreover where, as here, the injury was of a continuing nature, it is particularly difficult to determine when any particular increment of intangible loss arose . . . [] [A] fact finder in assessing a claim of general damages for physical, mental and emotional suffering, possesses full authority to consider the duration of the alleged suffering. Accordingly, the disallowance of any interest on such a claim does not deprive the claimant of compensation for an element of actual damage. To the contrary, its allowance, in fact, may in a given case create a double recovery.” (Greater Westchester Homeowners Assn. v. City of Los Angeles, supra, 26 Cal.3d 86, 103.)
On the other hand, it should be recognized that by delaying payment of damages the defendant obtains the benefit of investing the money between the time of injury and the time of judgment. While the amount of benefit
With this background of the related prejudgment-interest code sections we may now turn to section 3291. Sections 3287 and 3288 were first enacted in 1872, and no doubt the Legislature was well aware of their provisions when it enacted section 3291 in 1982. (Stats. 1982, ch. 150, § 1, p. 493.) The latter section provides for limited prejudgment interest in cases involving personal injury where the plaintiff makes a statutory offer to settle and then recovers a judgment in excess of the offered settlement.
Section 3291 reads: “In any action brought to recover damages for personal injury sustained by any person resulting from or occasioned by the tort of any other person, corporation, association, or partnership, whether by negligence or by willful intent of the other person, corporation, association, or partnership, and whether the injury was fatal or otherwise, it is lawful for the plaintiff in the complaint to claim interest on the damages alleged as provided in this section.
“If the plaintiff makes an offer pursuant to
Under
Section 3291 obviously reflects a legislative purpose to encourage sеttlement by providing for a potential award of prejudgment interest. The Legislature in adopting section 3291 has clearly determined two matters. The fact
In accordance with the language of section 3291 and its legislative purpose to promote settlement, we should hold that section 3291 may be applied in any case where the plaintiff seeks to recover damages for personal injury in a tort action, irrespective of the legal theory upon which he or she proceeds. The language of the section is: “In any action brought to recover damages for personal injury by any person resulting from or occasioned by the tort of any other person, . . .” (Italics added.) The code section does not say “personal injury action” but rather refers to “any” action to recover personal injury damages. The test is whether thе action sounds in tort and whether personal injury damages are sought. There is thus no justification to limit the section to actions which may be characterized as personal injury actions as opposed to actions which involve personal injury damages whether they be characterized as personal injury actions, or property actions. The code section refers to “tort.” It does not purport to distinguish between tort actions based on property interest invasions and other tort actions. The requirement is only that damages for personal injury be sought. I see no reason to depart from the plain language of the section and engraft a requirement that the action seeking damages for personal injury must not only seek such damages but must also be such that the аction as a whole would be characterized as a personal injury action rather than a property damage action.
The fact that only part of a plaintiff‘s damages qualify for prejudgment interest, with other parts unqualified, should not preclude recovery of prejudgment interest on the portion qualified. When a case involves multiple types of damages, a plaintiff who recovers judgment should be permitted to recover prejudgment interest as to each type if warranted under the statutory provisions. For example, in the common automobile collision the plaintiff ordinarily should be permitted to recover prejudgment interest under section 3287, subdivision (a) for the damage or destruction of the automobile because the damages are capable of being made certain by calculation. The plaintiff also ought to be able to recover prejudgment interest under subdivision (a) of section 3287 for loss of earnings if the damages can be deter-
Although other damages such as pain or suffering may be uncertain or speculative precluding prejudgment interest in the absence of a statutory settlement offer, this fact should not preclude recovery of prejudgment interest as to the damages to the car or loss of earnings. There is no reasonable basis to conclude that the plaintiff‘s joinder of claims warranting prejudgment interest with claims which do not permit prejudgment interest should work a forfeiture of the right to prejudgment interest on the former claims.
Similarly, the fact that the multiple injuries of a plaintiff may warrant prejudgment interest under different code sections should not require a forfeiture of any of the rights to prejudgment interest. The code sections may be easily applied to allow appropriate prejudgment interest for each class of damages.
It is well settled that an action, like that involved here, for breach of the covenant of good faith and fair dealing sounds in both contract and tort and ordinarily the plaintiff will have freedom of election between an action of tort and one of contract. (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 432 [58 Cal.Rptr. 13, 426 P.2d 173]; Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 653 [328 P.2d 198, 68 A.L.R.2d 883].) In the bad faith action, the plaintiff may recover damages for economic loss and, as the majority point out, may recover damages for mental distress due to the invasion of property rights. (Maj. opn., ante, pp. 127-128; Crisci v. Security Ins. Co., supra, 66 Cal.2d 425, 432 et seq.) In my view, when the plaintiff has made an offer to settle pursuant to
The majority interpret section 3291 as being limited to an “action . . . for personal injury” (omission marks in maj. opn.; maj. opn., ante, pp. 126-
In the instant action, plaintiff sought “to recovеr damages for personal injury.” Section 3291 does not require that the action be a personal injury action, or provide that it is inapplicable to actions involving an interference with property rights. The Court of Appeal concluded that the section was applicable, and I would affirm its judgment.
Mosk, J., concurred.
Appellant‘s petition for a rehearing was denied May 23, 1991, and the opinion was modified to read as printed above.