Opinion
NOT TO BE PUBLISHED
APPEAL from a Judgment of the Superior Court of Los Angeles County Nos. BC315673, BC334146, Judith C. Chirlin, Judge.
Shoecraft Burton, Robert D. Shoecraft, Michelle L. Burton for Defendant and Appellant.
Law Offices of C. Joe Sayas, Jr., C. Joe Sayas, Jr., Bill Daniels Law Offices, William A. Daniels; The Erlich Law Firm and Jeffrey Isaac Ehrlich for Plaintiffs and Respondents.
JOHNSON, J.
Pacific Specialty Insurance Company (Pacific) appeals a $1.3 million bench trial award to respondents in their bad faith action against it arising out of an accident in which a crane fell on respondents’ home. Pacific principally contends the trial court erred in permitting plaintiffs to amend their complaint on the eve of trial, and in finding it acted in bad faith pursuing a subrogation action against them. We reverse and remand.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
After an industrial crane fell on their home in February 2003, respondents Arnold Decena (Decena) and his daughter, Maria Palecek, sought indemnity from Pacific, their insurer, based on a policy obtained three days before the accident (2003 policy). In May 2004, plaintiffs commenced an action for breach of contract and bad faith, primarily based upon Pacific’s refusal to pay for mold damage to their home that resulted from rain leaking into the hole left in the roof by the crane impact. In January 2004, after plaintiffs received a $250,000 settlement from the crane operator without Pacific’s participation, Pacific asserted that it was entitled to rescind the 2003 policy based upon a misrepresentation in plaintiffs’ application.
In December 2006, with trial scheduled for January 2007, plaintiffs sought to amend their complaint to allege claims based upon a policy issued in July 2002 that Pacific had allegedly wrongfully canceled in November 2002 (2002 policy). The trial court permitted the amendment, and a bench trial commenced. The trial court found that although the 2003 policy was ineffective because it was procured with misrepresentations, the 2002 policy had been improperly canceled, and awarded plaintiffs compensatory, punitive damages and attorneys’ fees for their claims against Pacific based on the 2002 policy.
1. Plaintiffs’ Two Insurance Policies with Pacific
(a) The 2002 Policy
In June 2002, Decena applied for a Pacific homeowner’s policy, and obtained a policy effective July 22, 2002. The policy application did not contain a response to the question whether the house had a thermostat on the heating system. Pacific determined the risk was unacceptable due to the fact the house did not have a thermostatically controlled heating system, and advised plaintiffs on August 31, 2002 that their policy would be terminated on September 14, 2002.
On September 12, 2002, plaintiffs’ insurance broker Bayani Legaspi faxed Pacific information showing that the house in fact had a thermostat. However, on September 22, 2002, Pacific refunded plaintiffs’ premium of $117.83, and Pacific’s computer “notepad” for the policy indicates that on October 7, 2002, it advised Legaspi that pending receipt of corrected application and final payment of $212, the policy would be reinstated. On October 11, 2002, Legaspi again wrote to Pacific, sending it a copy of the September 12, 2002 fax, proof of transmission, a corrected application and a check for $117.83.
On October 31, 2002, Pacific sent a notice to plaintiffs that it was returning their premium check of $117.83 because the policy had been canceled, and because the policy was “missing final payment.” On November 4, 2002, Pacific advised Legaspi by phone that the policy remained canceled due to failure to make the final premium payment, and a new application would need to be submitted. Pacific’s computer notepad indicates the policy was canceled effective as of November 4, 2002.
(b) The 2003 Policy
On February 3, 2003, plaintiffs applied for a new policy, and Legaspi gave plaintiffs a binder on that policy. The policy application indicated that plaintiffs’ house did not have a pool, although Decena had told Legaspi about the pool. Pacific received the application on February 18, 2003.
On February 26, 2003, Pacific informed Decena the policy would be canceled because Legaspi used incorrect billing rates; Pacific sent out a corrected billing notice. On March 11, 2003, Decena mailed a premium check, and on March 18, 2003, Pacific reinstated the policy.
2. The Accident, Mold Problems From Rain, Pacific’s Handling of the Mold Claim
On February 7, 2003, Pouk & Steinle (Pouk), an electrical construction company, was installing telephone poles for the City of Anaheim. Pouk’s 65-ton crane fell onto the house owned by plaintiffs, seriously damaging the roof.
The Anaheim Fire Department red tagged the house as unsafe to occupy, and plaintiffs went to a local hotel. On February 7, 2003, Decena reported the loss to Legaspi, who told him he would report it to Pacific. During February 2003, Decena also called Pacific several times, but was told he did not have a policy with them.
Pouk removed the crane from the roof and put a tarp over the hole in the roof. Pouk’s insurer sent a contractor to inspect the house. Between February 11 and February 13, 2003, about two and half inches of rain fell, and the contractor noted that rain had leaked into the house. He and his crew adjusted the cover again, set up dehumidifiers and blowers in the house, and ran them for the next four days. The contractor estimated repairs would cost approximately $57,000 and would take about 30 days to complete.
On February 13, Decena entered the house and smelled a musty odor. The drapery was soaked, the ceiling was discolored and the house was full of water. On February 14, 2003, although the contractor had begun to repair the house, Decena’s attorney Conrado Joe Sayas, Jr. (Sayas) determined he wanted an environmental analysis conducted on the house before any more work on the house. On February 18, 2003, the contractor stopped work and placed a tarp on the house.
Sayas contacted a restoration company to inspect the home. The restorer, Speigel Certified Restoration (Speigel), found elevated moisture readings in the house and mold growing on the ceiling of a bathroom. Spiegel recommended additional testing to evaluate mold contamination. Sayas retained Bayshore Environmental, Inc. (Bayshore) to inspect the house; Bayshore’s inspection disclosed high levels of mold in the house. Sayas sent Bayshore’s report to Pacific and requested it pay for the remediation recommended in Bayshore’s report.
On March 14, 2003, Pacific acknowledged receipt of plaintiff’s claims. Plaintiffs contended their policy covered mold damage because the efficient proximate cause of the mold was the crane collapse, which was a covered event.
On May 6, 2003, Pacific denied plaintiffs’ claim for mold damage on the basis of the mold exclusion in the 2003 policy, which precluded coverage regardless of cause.
The exclusion, No. NM-CA-MEPL (04/02) provided, “MOLD EXCLUSION (PERSONAL LINES). This policy does not provide coverage for any loss, damage, cost, claim, expense, ‘bodily injury, ’ ‘property damage, ’ or medical payments arising from or in any way involving, directly or indirectly, mold, fungi, mildew, spores, wet or dry rot, or similar organisms, regardless of cause. [¶] The company shall have no duty to investigate, defend, or indemnify any claim or ‘suit’ seeking such damages.”
In July 2003, Pacific paid plaintiffs $66,438 for damage to their house from the crane impact, and paid them a total of $45,185 for ALE (additional living expenses). In July 2003, Speigel commenced mold remediation on the house.
3. Plaintiffs’ 2003 Complaint Against Pouk; Settlement
In April 2003, plaintiffs filed a complaint for damages against the City of Anaheim and Pouk (Pouk Action). Sayas contacted Pacific by telephone about an October 2003 mediation with Pouk in order to coordinate plaintiffs’ damages claim with Pacific’s subrogation claim. Pacific’s subrogation department had referred the subrogation claim for collection, and Pouk’s insurer had offered Pacific $52,000. Pacific rejected the offer because Pacific valued its subrogation claim at $66,000.
During October 2003, Sayas wrote to Pacific numerous times about plaintiffs’ contention that the 2003 policy covered mold damage to the house. None of the letters mentioned the upcoming mediation with Pouk.
After plaintiffs failed to settle with Pouk in October 2003, the parties scheduled another mediation in December 2003. Sayas attempted several times to contact Pacific regarding its position before the mediation, and at the December 2, 2003 mediation, plaintiffs agreed to settle their claims against Pouk for $250,000, although Sayas believed the case had a value of $600,000 if plaintiffs’ emotional distress claims were included. The settlement obligated plaintiffs to indemnify Pouk against Pacific’s subrogation claim. Sayas placed $60,000 of the settlement proceeds in a trust pending settlement of Pacific’s subrogation claim.
The mediator valued the case at $250,000, based upon damages to plaintiffs’ home of approximately $126,000 ($60,000 in structural repairs, $59,000 for mold remediation), Arnold Decena’s emotional distress, and attorneys’ fees and costs of approximately $150,000.
With respect to subrogation, the Settlement Agreement provided, “The intent of this Agreement is resolve completely claims of [plaintiffs] which form the basis of the claims in the [Pouk Action] against [Pouk]. [Plaintiffs] will be fully responsible for satisfying any outstanding subrogation claims or liens associated with the [Pouk Action].”
4. Plaintiffs’ May 2004 Complaint Against Pacific
During early 2004, Sayas attempted to negotiate a settlement of Pacific’s subrogation claim. In January 2004, Sayas informed Pacific that because Pacific had not participated in the settlement of the Pouk Action and the settlement of $250,000 was insufficient to make plaintiffs whole, Pacific had no right to subrogation. On January 27, 2004, Pacific for the first time advised Sayas it was entitled to rescind the 2003 policy because the application for that policy contained misrepresentations the property did not contain a pool with a slide when in fact it did, and Pacific did not insure such risk. Sayas responded in February 2004 that plaintiffs had insufficient funds to complete repairs to their home, and asserted that Pacific had slept on its subrogation rights and should have investigated whether the house had a pool in July 2002.
On May 17, 2004, plaintiffs filed a complaint against Pacific based upon the 2003 policy stating claims for breach of contract, breach of the duty of good faith and fair dealing, unfair business practice, and declaratory relief regarding Pacific’s subrogation rights (Bad Faith Action).
The complaint also stated claims against Legaspi for professional negligence and breach of contract. Pacific filed a cross-complaint against Legaspi and his insurance agency for declaratory relief, indemnity and contribution. Plaintiffs took Legaspi’s default after he failed to appear.
5. Pacific’s 2005 Subrogation Action Against Pouk
Sayas attempted to resolve the subrogation claim, and in March 2005 wrote to Pacific and proposed binding mediation. Pacific rejected the suggestion, and advised Sayas it intended to file a subrogation action against Pouk. Sayas told Pacific that the Pouk Action obviated the need for a separate subrogation action because the declaratory relief claim in the Bad Faith Action would resolve identical issues, and that if Pacific filed a separate action, Pouk would file a cross-complaint against plaintiffs. Pacific advised Sayas it intended to file a separate subrogation action.
Plaintiffs’ policy provided that, “An insured may waive in writing before a loss all rights of recovery against any person. If not waived, we may require an assignment of rights of recovery for a loss to the extent that payment is made by us.”
Plaintiffs’ declaratory relief claim sought a declaration of whether the mold exclusion was enforceable, and whether Pacific had any right to the proceeds plaintiffs obtained from Pouk.
At trial, Sayas testified that he had called Pacific and requested that it not file a subrogation action against Pouk because that would trigger Pouk’s cross-complaint against plaintiffs. Pacific’s counsel responded, “Wouldn’t it be nice for [Pacific] to file and complain against [Pouk]? And, you know... your client[s] will have to face that cross-complaint.”
On May 27, 2005, Pacific filed its subrogation action against Pouk in which it sought all sums Pacific had paid to plaintiffs on account of the crane accident (Subrogation Action). Pouk filed a cross-complaint against plaintiffs on October 11, 2005 in the Bad Faith Action for indemnity and contribution on the grounds plaintiffs’ release was void as contrary to law. The Bad Faith Action and the Subrogation Action were consolidated.
6. Pacific’s Summary Judgment Motion
In July 2005, Pacific moved for summary judgment, contending it was entitled to rescind the 2003 policy based upon the misrepresentation in plaintiffs’ application that the property did not have a pool with a slide. Plaintiffs argued Pacific was on notice of the pool and could not rescind the 2003 policy because its files contained photographs of their house showing a pool with a slide, pointing to Pacific’s actions taken in connection with the 2002 policy, including its October 29, 2002 inspection of plaintiffs’ house that disclosed the pool. They further argued that even if the 2003 policy could be rescinded, the 2002 policy was still in effect because Pacific’s cancellation was ineffective. In support of this last contention, plaintiffs argued that the 2002 policy was cancelled on November 4, 2002 based on their failure to pay the premium, not their failure to provide information on their thermostat. Plaintiffs asserted they had never received any notice a premium payment was required to reinstate the policy.
In response, Pacific asserted that it had canceled the 2002 policy because premiums were due and it had not determined the risk under the 2002 policy to be unacceptable, but what it knew about the 2002 policy was not relevant to the issue of rescission. Pacific cited to the deposition of Susan Valencia, its vice president of underwriting, where she stated that the October 29, 2002 inspection report in connection with the 2002 policy (disclosing the pool) was not reviewed because at the time, the policy had already been cancelled.
The trial court denied the motion, finding the photographs created triable issues of fact of Pacific’s notice of the state of plaintiffs’ property and whether the misstatement on the application was material; furthermore, triable issues existed whether Pacific’s cancellation of the 2002 policy was effective.
7. Plaintiffs’ December 2006 Motion to File an Amended Complaint
On December 20, 2006, plaintiffs filed a motion to file a first amended complaint to include allegations based upon the 2002 policy and Pacific’s conduct in pursuing its subrogation claim against them. Pacific opposed, contending the eve-of-trial motion was untimely. The trial court granted the motion.
8. Trial Court’s Decision
A bench trial commenced on January 16, 2007. Experts testified concerning the effectiveness of Pacific’s cancellation of the 2002 policy, Arnold Decena’s emotional distress, and Pacific’s assertion of its subrogation rights. Experts offered conflicting testimony whether Pacific’s handling of its subrogation action against Pouk constituted bad faith. During trial, Pacific’s general counsel Brian McSweeney was questioned at trial by Sayas, who inquired whether Pacific would dismiss the Subrogation Action, to which McSweeney responded, “Are you ready to dismiss the bad faith [claim?]”
On December 24, 2007, the trial court issued a minute order in which it found (1) Pacific had not properly canceled the 2002 policy; (2) plaintiffs had no rights under the 2003 policy; (3) under the 2002 policy, the mold exclusion did not preclude coverage for mold damage where the efficient proximate cause was a covered loss (the crane accident), although because the law was unsettled in this area, Pacific’s assertion of the exclusion did not constitute bad faith; (4) the amended complaint related back to the filing of the first complaint because the essence of that complaint was the damage done to the house; and (5) Pacific engaged in bad faith in its handling of its subrogation claim by using it as a weapon to pressure the plaintiffs to settle. The court awarded $600,000 in compensatory damages, including Brandt fees, and $600,000 in punitive damages.
Brandt v. Superior Court (1985) 37 Cal.3d 813 (Brandt).
The compensatory damages consisted of: real property damage, $50,000; housing expenses, $20,000; personal property damage, $5,000; subrogation defense fees, $100,000; Brandt attorney fees, $200,000; Brandt litigation costs, $80,000; emotional distress damages for Arnold Decena, $120,000; and emotional distress damages for Maria Palecek, $20,000.
Although Pacific prepared a statement of decision, the court did not enter one. The court’s judgment mistakenly stated that a statement of decision had been filed, and awarded plaintiffs a total of $1,380,000, ordered Pacific to pay plaintiffs the $60,000 in trust, and offset that amount from the total award. The court dismissed Pacific’s cross-complaint against Pouk.
DISCUSSION
I. TRIAL COURT’S FAILURE TO PREPARE STATEMENT OF DECISION
Here, the trial court never signed or filed a statement of decision, but prepared a lengthy minute order setting forth the basis of its decision. Normally, a court’s tentative ruling or memorandum decision does not constitute a statement of decision, and cannot be used to fill the void left by the failure to file a statement of decision. (Shaw v. County of Santa Cruz (2008) 170 Cal.App.4th 229, 268.) Rather, where a statement of decision is requested but the court fails to prepare one, the error is reversible. In that instance, the matter must be remanded to the trial court to prepare a statement of decision. (Karlsen v. Superior Court (2006) 139 Cal.App.4th 1526, 1530-1531.) Ordinarily, the matter is remanded to the trial judge who originally presided over the trial to complete the process. (Id. at p. 1531.)
However, pursuant to Rule 3.1590, subd. (c) of the California Rules of Court, the trial court in a nonjury trial may convert its written ruling into a statement of decision.
Here, however, the parties have both requested we treat the minute order as the court’s statement of decision. We therefore will treat for purposes of this appeal the trial court’s minute order as a statement of decision.
II. AMENDMENT OF COMPLAINT
Pacific argues that the trial court erred in permitting plaintiffs to file their eve-of-trial amended complaint because it alleged new claims based upon new facts and did not relate back to the date of the original complaint on those claims on which it argues the statute of limitations had expired. Plaintiffs’ claims were based upon the wrongfully canceled 2002 policy, which was in effect until September 14, 2002; under the four-year statute of limitations for contract claims (Code of Civil Procedure section 337) and two-year statute for bad faith claims (section 339, subd. (a)), the amendment filed in December 2006 was untimely. Plaintiffs disagree, contending that the statute began running in May 2004 with Pacific’s denial of its mold claim, and the bad faith claim accrued in May 2005 when Pacific filed its subrogation complaint against Pouk.
All statutory references herein are to the Code of Civil Procedure unless otherwise noted. Section 337 provides, “[a]n action upon any contract, obligation or liability founded upon an instrument in writing” shall be brought “[w]ithin four years.” A tort action for bad faith (breach of the implied covenant of good faith and fair dealing) would have a two-year statute of limitations under section 339, subd. (1). (Archdale v. American Internat. Specialty Lines Ins. Co. (2007) 154 Cal.App.4th 449, 467, fn. 19.)
A. Factual Background
1. The Original Complaint Filed May 2004
The original complaint alleged the following: (1) Pacific breached the 2003 policy by denying or delaying benefits under the policy, including mold remediation, damages to personal property, and rental and relocation expenses; (2) Pacific breached the covenant of good faith and fair dealing by failing to promptly process their claim, unreasonably delaying and denying benefits to plaintiffs; unreasonably interpreting the policy, and unreasonably employing inadequate procedures to investigate, remediate, and repair their home, and as a result, plaintiffs suffered economic damages and extreme emotional distress; (3) Pacific engaged in unfair business practices pursuant to Business and professions Code, section 17200, et seq.; and (4) a dispute existed between plaintiffs and Pacific concerning whether the mold exclusion was enforceable and whether Pacific had a right to any of the proceeds obtained by plaintiffs in their settlement with the City.
2. First Amended Complaint December 20, 2006
The first amended complaint (FAC) made new allegations that plaintiffs were entitled to coverage under the 2002 policy because it was wrongfully canceled; Pacific improperly attempted to rescind the 2003 policy, and Pacific filed and prosecuted the Subrogation Action in bad faith despite knowing that plaintiffs would not be made whole. The FAC alleged that Pacific canceled the 2002 Policy in November 2002 although it had received the information it requested from Legaspi. The FAC further alleged Pacific never informed plaintiffs of its subrogation claim; did not participate in the settlement of the Pouk Action or inform plaintiffs of the amount of its subrogation claim; and refused to settle its subrogation claim. Plaintiffs sought to recover benefits under both the 2002 policy and 2003 policy, contending the 2002 policy was still in effect.
3. Hearing on Motion to Amend
In support of their motion to amend, plaintiffs argued that the improper cancellation of the 2002 policy was not discovered until after the original complaint was filed; Pacific’s answer to the original complaint, filed July 28, 2004, raised rescission as an affirmative defense; in November 2005, in ruling on summary judgment, the court found that triable issues existed whether the second policy could be rescinded based upon evidence in Pacific’s files it knew of the pool and slide, and whether the 2002 policy had been validly canceled; and Pacific’s conduct in connection with the subrogation action occurred in 2005, after the filing of the original complaint.
Pacific opposed, contending plaintiffs’ eve-of-trial motion would prejudice it because the FAC was based on an entirely new set of facts, brought a new claim for breach of contract based upon the 2002 policy, added numerous allegations regarding the subrogation claim, and would require extensive discovery to permit it to prepare for trial. Pacific contended plaintiffs had been aware of the allegedly improper cancellation of the 2002 policy since the November 2005 summary judgment motion and the problems with the cancellation of the 2003 policy and the subrogation action since July 2004, when Pacific filed a cross-complaint against Pouk for subrogation.
Plaintiffs responded that no prejudice to Pacific existed with respect to the 2002 policy allegations because Pacific was aware that plaintiffs might assert claims under the 2002 policy in 2004 when Pacific filed its answer and asserted rescission of the 2003 policy, at the very least in November 2005, at the summary judgment motion; furthermore, Pacific had conducted discovery on the issue of the cancellation of the 2002 policy. Finally, they argued Pacific was not prejudiced by the additional allegations pertaining to subrogation because Pacific had been aware since May 2004 that plaintiffs disputed their right to subrogation because they had not been made whole.
At the hearing, Pacific advised the court it had “some issues” with starting trial the next week because plaintiffs’ motion to amend the complaint sought to allege claims under the 2002 policy. The court observed that Pacific had known about the issue for “quite a while.” Pacific responded that the mention of the policy in the 2005 summary judgment motion was improper because it outside the scope of the pleadings. Plaintiffs pointed out that at the 2005 deposition of Pacific’s underwriter, the issue of the proper cancellation of the 2002 policy came up. The court asked plaintiffs why the amendment had not been made earlier. Plaintiffs stated Pacific had designated an expert on policy cancellation, and plaintiffs were merely attempting to conform the pleading to what the parties had learned through discovery.
The court granted the motion, stating that Pacific could raise the statute of limitations problem in its trial brief. Further, the court noted that trial would not be starting for another week and Pacific could conduct discovery during that time. Pacific asked for leave to designate an underwriting expert; plaintiffs did not object.
B. Discussion
1. Leave to Amend
In general, motions for leave to amend pleadings are directed to the sound discretion of the trial court, and leave to amend is liberally granted. (§ 473, subd. (a)(1) [“The court may, in furtherance of justice, and on such terms as may be proper, allow a party to amend any pleading....”]; Nestle v. City of Santa Monica (1972) 6 Cal.3d 920, 939.) “If the motion to amend is timely made and the granting of the motion will not prejudice the opposing party, it is error to refuse permission to amend and where the refusal also results in a party being deprived of the right to assert a meritorious cause of action or meritorious defense, it is not only error but an abuse of discretion.” (Morgan v. Superior Court (1959) 172 Cal.App.2d 527, 530; see also Mabie v. Hyatt (1998) 61 Cal.App.4th 581, 596.) Prejudice to the opposing party exists where the amendment would require the trial court to delay trial, resulting in the loss of critical evidence or the added costs of preparation. (Magpali v. Farmers Group, Inc. (1996) 48 Cal.App.4th 471, 486–488; see also Solit v. Tokai Bank (1999) 68 Cal.App.4th 1435, 1448.)
Here, Pacific cannot show prejudice from plaintiffs’ eve-of-trial amendment. The record establishes that Pacific was aware of the assertion of claims under the 2002 policy at least a year prior to trial, at the time of the summary judgment motion. Plaintiffs’ summary judgment motion makes numerous references to the facts underlying the cancellation of the 2002 policy (including the deposition of Pacific’s underwriter) in order to demonstrate that Pacific was aware of the presence of the pool on their property, and the trial court’s order denying summary judgment specifically found triable issues of fact existed with respect to the cancellation of the 2002 policy. Finally, at the motion giving plaintiffs leave to amend, the court advised Pacific it could conduct any necessary discovery in the week prior to trial. Pacific never requested a continuance, nor did it ask to reopen discovery.
2. Relation Back of Claims for Breach of Contract, Breach of Covenant of Good Faith and Fair Dealing
Pacific contends plaintiffs’ claims for breach of contract and bad faith are time-barred and do not relate back to the filing of the original complaint. The original complaint alleged it breached the 2003 policy and acted in bad faith by not paying for mold damage; on the other hand, the FAC alleged claims based upon the 2002 policy and that it was breached on or about November 2, 2002 when Pacific wrongfully canceled the policy. Under the four-year statute of limitations for contract claims, the amendment filed more than four years later was untimely under Code of Civil Procedure section 337; bad faith claims asserted based upon this cancellation more than two years later are also untimely under Code of Civil Procedure section 339, subdivision (1).
We must consider two issues: (1) when plaintiffs’ contract and tort claims accrued, and (2) if, based upon their accrual dates, such claims are time-barred by the statute of limitations, whether they relate back to the filing of the original complaint.
(a) Accrual of Claims
To decide when plaintiffs’ claims accrued, we must determine the primary right violated. For pleading purposes, whether a complaint in fact asserts one or more discrete causes of action depends on whether it alleges an invasion of one or more primary rights. (Hindin v. Rust (2004) 118 Cal.App.4th 1247, 1257–1258.) “The most salient characteristic of a primary right is that it is indivisible: the violation of a single primary right gives rise to but a single cause of action.” (Crowley v. Katleman (1994) 8 Cal.4th 666, 681.) The cause of action will therefore always be the factsfrom which the plaintiff’s primary right and the defendant’s primary duty have arisen, together with the factswhich constitute the defendant’s wrongful conduct. (Davaloo v. State Farm Ins. Co. (2005) 135 Cal.App.4th 409, 415.)
An action for breach of contract generally accrues when the contract is breached. (Romano v. Rockwell Internat., Inc. (1996) 14 Cal.4th 479, 488.) The statute of limitations will not be triggered by a breach that produces no immediate harm, or only nominal damages. The period begins to run when the plaintiff suffers appreciable and actual harm. (Garver v. Brace (1996) 47 Cal.App.4th 995, 995–1000.) A bad faith claim accrues upon the conduct constituting bad faith. (Frazier v. Metropolitan Life Ins. Co. (1985) 169 Cal.App.3d 90, 103–104.)
Here, applying the primary right doctrine, we conclude two of plaintiff’s claims were timely under the FAC.
Plaintiffs were not required to file suit for wrongful cancellation of their policy until that wrongful cancellation produced damages. In November 2002 they had no pending loss and hence no measurable damages at the time of the cancellation and they acted reasonably in obtaining the 2003 policy so that their coverage would not lapse. In other words, the primary right sued on was plaintiffs’ right to coverage under insurance purchased from Pacific. Therefore, their contract claims accrued in May 2003, when Pacific refused to pay for the mold damage; the FAC filed December 2006, was within four years under Code of Civil Procedure section 337.
Plaintiff’s bad faith subrogation claim based upon Pacific’s subrogation action accrued in May 2005 with the filing of the Subrogation Action; the FAC filed in December 2006 was within two years under Code of Civil Procedure section 339, subdivision (1).
Only plaintiff’s bad faith claim based upon Pacific’s bad faith refusal to pay for mold damage was untimely under the two-year limitations period Code of Civil Procedure section 339, subdivision (1) because the December 2006 FAC was filed more than two years after Pacific’s May 2003 refusal to pay for mold remediation. We therefore consider whether that claim related back to the filing of the original complaint.
(b) Relation Back
Under the relation-back doctrine, an amendment to a complaint will relate back to the date of the filing of the original complaint for statute of limitations purposes if it is based upon the same general set of facts, seeks recovery against defendants for the same injuries as alleged in the original complaint, or based upon the same incident alleged in the original complaint. (Barrington v. A.H. Robins Co. (1985) 39 Cal.3d 146, 150–151; Amaral v. Cintas Corp. No. 2 (2008) 163 Cal.App.4th 1157, 1199–1200; Austin v. Massachusetts Bonding & Insurance Co. (1961) 56 Cal.2d 596, 600.)
To benefit from the relation-back doctrine, the amended complaint may rest upon a different legal theory or state a different cause of action as long as it alleges the same general set of facts. (Coronet Manufacturing Co. v. Superior Court (1979) 90 Cal.App.3d 342, 345.) Plaintiffs’ bad faith claim based upon failure to pay for mold damage was the same claim asserted in the May 2004 complaint, and therefore related back. However, the trial court found no bad faith in assertion of Pacific’s rights relating to mold coverage, and plaintiffs do not dispute this ruling.
The court found that “[Pacific’s] mold exclusion does not preclude coverage for mold remediation when the efficient proximate cause of the loss was a covered event, to wit, the crashing of a construction crane on the home of the insured. While the Court makes this finding, it recognizes that this is an unsettled area of the law. Thus, [Pacific’s] taking the position that the mold exclusion applies does not constitute bad faith under the ‘genuine dispute’ doctrine.”
III. BAD FAITH FILING AND PURSUIT OF SUBROGATION ACTION
A. Pacific’s Subrogation Action
Pacific contends that (1) its pursuit of the Subrogation Action is not bad faith because it did not constitute the withholding of policy benefits and bad faith is limited to the insurer’s claims-related conduct-its duties to defend, settle, and pay claims; (2) its conduct in pursuing subrogation was permitted under the contract; and (3) the Subrogation Action was privileged under Civil Code section 47, subdivision (b)(2).
Plaintiffs respond that Pacific’s action constituted bad faith under the made-whole rule because it had failed to pay the entire amount due under the policy and was therefore not entitled to subrogation; the question of whether benefits have been paid to the insured is not dispositive of the bad faith issue; breach of the implied covenant does not require proof of a breach of an express covenant; and Pacific’s conduct is not privileged under Civil Code section 47, subdivision (b)(2) because their allegations of Pacific’s misconduct put its mental state at issue and may be used for evidentiary issues, which use bypasses the privilege.
1. Standard of Review
The parties dispute the proper standard of review. Pacific contends we apply a de novo standard because the material facts are undisputed that Pacific filed the Subrogation Action against Pouk, and the FAC does not allege Pacific breached the underlying contract by filing the Subrogation Action. Plaintiffs contend we apply the substantial evidence standard because the finding of bad faith rests on the factfinder’s determination. In general, an insurer’s bad faith is a fact question for the jury because it involves conflicting evidence regarding the insurer’s conduct and motives. (See Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 921.) We therefore review a judgment of bad faith under the substantial evidence standard. (Id. at p. 921–922.) However, although an insurer’s bad faith is ordinarily a question of fact, it becomes a question of law “when, because there are no conflicting inferences, reasonable minds could not differ. [Citations.]” (Walbrook Ins. Co. v. Liberty Mutual Ins. Co. (1992) 5 Cal.App.4th 1445, 1454–1455.) Thus, the issue of bad faith may, in specific instances, be treated as an issue of law, which we review de novo. (Id. at p. 1457; Crocker National Bank v. City and County of San Francisco (1989) 49 Cal.3d 881, 888.) Here, because the parties do not dispute the material facts regarding Pacific’s handling of the Subrogation Action, we resolve the issue as one of law.
2. No Bad Faith in Filing of Subrogation Action Against Pouk
To state a cause of action for breach of the covenant of good faith and fair dealing, the insured must show (1) benefits due under the policy were withheld, and (2) the reason for withholding benefits was unreasonable or without proper cause. (Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1151.) If no benefits are withheld or delayed, there is no cause of action for breach of the covenant of good faith and fair dealing. (Id. at p. 1152–1153.) “The gravamen of a claim for breach of the covenant of good faith and fair dealing, which sounds in both contract and tort, is the insurer’s refusal, without proper cause, to compensate the insured for a loss covered by the policy.” (Brizuela v. CalFarm Ins. Co. (2004) 116 Cal.App.4th 578, 592.)
In Jonathan Neil & Assoc., Inc. v. Jones (2004) 33 Cal.4th 917, 939 (Jonathan Neil), the Supreme Court refused to find that an insurer’s billing practices could constitute bad faith. “First, the billing dispute does not, by itself, deny the insured the benefits of the insurance policy-the security against losses and third party liability.... Second, the dispute does not require the insured to prosecute the insurer in order to enforce its rights, as in the case of bad faith claims and settlement practices.... [¶] Third, traditional tort remedies may be available to the insured who is wrongfully billed a retroactive premium.” (Ibid., citations omitted.) In Progressive West Ins. Co. v. Superior Court (2005) 135 Cal.App.4th 263 (Progressive), the insurer sought reimbursement from its insured for monies paid in excess of what it was entitled to under the made-whole rule. (Id. at p. 276.) Progressive found the insurer did not act in bad faith in doing so because it had not withheld policy benefits. (Id. at p. 279.) Progressive applied the other two Jonathan Neil factors to conclude no claim for bad faith would lie because the insured did not have to sue to enforce its rights, and it retained the traditional tort remedy of malicious prosecution if wrongfully sued. (Ibid.)
When an insurance company pays a claim to its insured, the insurer is subrogated to the rights of the insured against any tortfeasor who is liable to the insured for the insured’s damages. (Progressive, supra, 135 Cal.App.4th at p. 272.) Subrogation can be equitable or a contractual provision of the policy. (Ibid.) Subrogation places the insurer in the shoes of its insured to the extent it has made payments to the insured. Partial payment results in partial subrogation. (Hodge v. Kirkpatrick Development Inc. (2005) 130 Cal.App.4th 540, 548.) The insurer may recoup its losses directly from the tortfeasor or from the proceeds of the insured’s action against the tortfeasor. (Plut v. Fireman’s Fund Ins. Co. (2000) 85 Cal.App.4th 98, 104.)
Under the “made-whole” rule, the insurer may not recover against the insured until the insured has been made whole for losses. (Plut, supra, 85 Cal.App.4th at p. 104.) The rule prevents the insurer from recovering any third party funds unless the insured has been made whole, whether from the wrongdoer or from another source. (Progressive, supra, 135 Cal.App.4th at p. 273.) Further, where the tortfeasor was aware of the insurer’s payment or subrogation claim, the insured’s settlement with the tortfeasor does not bar the insurer’s claim against the tortfeasor. (Griffin v. Calistro (1991) 229 Cal.App.3d 193, 196.)
Here, plaintiffs’ theory of bad faith was that Pacific used the Subrogation Action against Pouk for the wrongful purpose of coercing a settlement out of them. However, this theory fails to support a bad faith action because the Subrogation Action did not operate to withhold policy benefits from plaintiffs. Second, plaintiffs instituted the declaratory relief claim to establish the parties’ respective entitlement to the Pouk settlement proceeds. They claimed declaratory relief was necessitated by Pacific’s failure, with knowledge that the action was pending, to join in the Pouk Action. However, plaintiffs agreed in their settlement with Pouk to indemnify it for any amounts Pacific would seek in subrogation, and therefore necessarily expected Pouk’s cross-claim. Whether plaintiffs had been made whole by the Pouk settlement is irrelevant to determine whether Pacific’s subrogation action was brought in bad faith; rather, if plaintiffs contended they had not been made whole, that defense could have been raised in the Subrogation Action. Thus, Pacific was entitled to pursue its subrogation rights against Pouk to the extent it had paid benefits under the policy, and Pacific’s conduct in filing and prosecuting the Subrogation Action did not constitute bad faith.
Although the insurer may bring a separate subrogation action against the tortfeasor, the rule against splitting a cause of action is violated where both the insurer and insured pursue separate actions against the tortfeasor. (Bright v. American Termite Control Co. (1990) 220 Cal.App.3d 1464, 1468–1469.) To avoid a violation of the rule against splitting a cause of action, the insured and insurer “should join in a single suit against the tortfeasor.” (Ferraro v. Southern Cal. Gas Co. (1980) 102 Cal.App.3d 33, 41.)
Plaintiffs extensively rely on White v. Western Title Ins. Co. (1985) 40 Cal.3d 870 (White), where the court held that because the contractual relationship between insurer and insured does not terminate with the commencement of litigation, the insurer’s conduct with respect to a mid-litigation settlement offer was relevant to establish breach of the covenant of good faith and fair dealing. (Id. at pp. 885–888.) Further, the conduct was not barred by the litigation privilege of Civil Code section 47, subd. (b) because while a pleading standing alone would be privileged, conduct extraneous to the pleading could be used as evidence of bad faith. “It is obvious, however, that even if liability cannot be founded upon a judicial communication, it can be proved by such communication.... Defendant’s argument, consequently, forces us to draw a careful distinction between a cause of action based squarely on a privileged communication, such as an action for defamation, and one based upon an underlying course of conduct evidenced by the communication.” Thus, admission of the settlement offer was proper under Evidence Code section 1152. (Id. at p. 888.) White therefore does not stand for the proposition that a subrogation action is not privileged, but merely states an evidentiary rule that conduct in litigation may be used as evidence in a bad faith action.
The trial court erred in concluding that Pacific acted in bad faith in the pursuit of its subrogation claim. Plaintiffs do not contest the trial court’s finding that there was no bad faith in Pacific’s denial of its mold claim. Therefore, because all assertions of bad faith are based upon Pacific’s assertion of its subrogation rights, plaintiffs’ bad faith award must be reversed. Plaintiffs’ punitive damage claim, which depends upon a finding of bad faith for its vitality, fails. (McLaughlin v. National Union Fire Ins. Co. (1994) 23 Cal.App.4th 1132, 1163.)
B. Attorneys’ Fees on Subrogation
Pacific contends plaintiffs were not entitled to Brandt fees because there was no basis for the court’s finding it breached the covenant of good faith and fair dealing. Furthermore, even if plaintiffs established bad faith, they were only entitled to Brandt fees to the extent they expended fees to recover benefits due under the policy, and may not recover fees for pursuing their bad faith action or for defending the subrogation action.
An insured’s reasonable attorneys’ fees incurred to compel payment of benefits due under an insurance policy (distinguished from fees attributable to proving the insurer’s bad faith) are recoverable as damages in a “bad faith” action against the insurer. (Brandt, supra, 37 Cal.3d at p. 817.) “The Brandt rule is now a well-settled but narrow exception to the general rule that each party in litigation must pay its own attorney fees.” (Essex Ins. Co. v. Five Star Dye House, Inc. (2006) 38 Cal.4th 1252, 1259.) Brandt fees amount to a type of damages, rather than attorneys’ fees. “The attorney’s fees are an economic loss-damages-proximately caused by the tort. [Citation.] These fees must be distinguished from recovery of attorneys’ fees qua attorney’s fees.” (Brandt, supra, 37 Cal.3d at p. 817.) But only those fees attributable to the insured’s efforts to recover contract benefits may be awarded. Fees expended to obtain extracontractual relief are not recoverable. (Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 806–807.)
Here, because there was no finding of bad faith, there can be no Brandt fees, and the award of such fees is reversed. For the same reason, the court’s award of “subrogation defense fees” also has no basis, and must be reversed.
IV. ISSUES RELATING TO BREACH OF CONTRACT CLAIMS
A. Rescission of 2002 Policy
Pacific contends the trial court erred in finding it could not rescind the 2002 policy based on plaintiffs’ misrepresentation in their application that the house did not have a pool. Pacific contends the court’s conclusion that the ostensible misrepresentation was not material because it was not related to the nature of the loss is erroneous because the misrepresentation need not have a causal connection to the loss. We find Pacific waived its right to rescind by failing to timely notify plaintiffs of this ground for rescission after it discovered the presence of a pool on the property.
If an insurer has grounds to rescind and the insurer properly exercises its right to rescind, the insured’s contract right rare extinguished as if the policy never existed. (Ins. Code, § 359; LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co. (2007) 156 Cal.App.4th 1259, 1266–1267 (LA Sound).) Rescission is accomplished by giving notice of rescission and tendering a refund of all premiums paid. (Civ. Code, § 1691.) Rescission may be asserted as an affirmative defense in an action on the insurance contract. (Resure, Inc. v. Superior Court (1996) 42 Cal.App.4th 156, 166.)
Grounds for rescission include a material representation or concealment in the insurance application, even where the misrepresentation is unintentional. (Ins. Code, § 331; LA Sound, supra, 156 Cal.App.4th at pp. 1266–1267.) The representation must be false and material, and a causal connection to the loss is not required. (Ins. Code, § 334 [materiality of a misrepresentation is determined by its probable and reasonable effect upon the insurer]; Mitchell v. United National Ins. Co. (2005) 127 Cal.App.4th 457, 474.) “The test for materiality is whether the information would have caused the underwriter to reject the application, charge a higher premium, or amend the policy terms, had the underwriter known the true facts.” (Mitchell, supra, 127 Cal.App.4th at p. 474; Old Line Life Ins. Co. v. Superior Court (1991) 229 Cal.App.3d 1600, 1604.)
Further, an insurer’s right to rescind may be limited by several factors, including the timeliness of its attempt to rescind and principles of waiver. Rescission, as an equitable remedy, is subject to the defense of laches. Unreasonable delay that prejudices the insured may bar rescission. (See Hailey v. California Physicians’ Service (2007) 158 Cal.App.4th 452, 467–471.) Furthermore, an insurer may waive its right to material information by neglecting to make inquiries as to material facts, but to be able to rescind in such case it must also be unaware of the falsity of the representations. (Lunardi v. Great-West Life Assurance Co. (1995) 37 Cal.App.4th 807, 824 [because waiver is intentional relinquishment of known right, no waiver where insurer was unaware of falsity of representations].) An insurer has the right to rely on the representations made in an application without verifying their accuracy. (LA Sound, supra, 156 Cal.App.4th at p. 1271.)
Here, the trial court found that the failure to disclose the pool and slide was not material because “the falling of a crane on the roof of the house is not material to the failure to disclose a pool and a slide, especially since [Pacific] had-somewhere in its files-a photo of the pool with the slide and did nothing about it until it sought a ground to articulate a right to rescind the policy.” Here, Pacific was aware of plaintiffs’ misrepresentation on the policy application regarding the pool but took no action; therefore, it waived its right to rescind. Furthermore, the trial court also correctly concluded Pacific waived its right to rescind the policy based upon its tardy assertion of that right. Pacific had information in its files in late 2002 that the plaintiffs’ property had a pool; the accident occurred in February 2003, at which time Pacific could not deny the property contained a pool and a slide. However, Pacific did not seek to rescind the policy on the basis of misrepresentations in the insurance application until January 2004, eleven months later.
B. Evidentiary Error Relating to Issue of Cancellation of 2002 Policy
Pacific contends the court abused its discretion in admitting Legaspi’s facsimile of September 12, 2002 advising it that the house had a thermostat because the fax was hearsay and lacked foundation, and the error was prejudicial because the facsimile was the linchpin of plaintiffs’ theory the 2002 policy had been wrongfully canceled and was still in effect.
The Legaspi fax was an out-of-court statement submitted for the truth of the matter asserted. (Evid. Code, § 1200, subd. (a).) Evidence Code section 1271 provides for the business records exception to the hearsay rule, and permits introduction of a business record if it was made in the regular course of business, at or near the time of the relevant event, and the custodian or other qualified witness testifies to its identity and mode of preparation, and sources of information regarding its method and time preparation indicate its trustworthiness. (Evid. Code, § 1271.) “The object of Evidence Code section 1271 is to eliminate the calling of each witness involved in preparation of the record and substitute the record of the transaction instead.” (County of Sonoma v. Grant W. (1986) 187 Cal.App.3d 1439, 1451.) All that is required is testimony from a knowledgeable witness about the reliability, accuracy, and trustworthiness of the procedures used by the business. Here, Legaspi was not available to testify concerning the preparation and sending of the fax, and the admission of the facsimile was in error.
Evidence Code section 1271 provides an exception to the hearsay rule for business records, as follows: “Evidence of a writing made as a record of an act, condition, or event is not made inadmissible by the hearsay rule when offered to prove the act, condition, or event if: [¶] (a) The writing was made in the regular course of a business; [¶] (b) The writing was made at or near the time of the act, condition, or event; [¶] (c) The custodian or other qualified witness testifies to its identity and the mode of its preparation; and [¶] (d) The sources of information and method and time of preparation were such as to indicate its trustworthiness.”
However, any error in admitting Legaspi’s fax was not prejudicial. (People v. Watson (1956) 46 Cal.2d 818, 836.) There is additional evidence in the record indicating that Legaspi informed Pacific that the information on the application for the 2002 Policy was incorrect prior to the deadline of September 30, 2002: Pacific’s notepad reflects an entry that it had conversed with Legaspi’s office concerning the error on plaintiffs’ application on October 11, 2002, and Legaspi’s October 11, 2002 letter, which was properly admitted into evidence, contained a copy of the September 12, 2002 fax cover page and proof of its transmission.
We review a trial court’s admission of evidence for abuse of discretion. (Great American Ins. Cos. v. Gordon Trucking, Inc. (2008) 165 Cal.App.4th 445, 449.) Here, however, the admission of the Bayshore Report in any event cannot form the basis of a finding of error. Not only does the minute order fail to find that the house had unhealthy levels of mold as Pacific complains, the court’s compensatory damage award was not based upon unhealthy mold levels, but mold and other damage to the structure of the house.
D. Failure to Consider Plaintiffs’ Mitigation of Damages
Pacific contends plaintiffs were obligated under the insurance contract to protect the property from further damage and to make necessary repairs, and breached this duty by not securing the roof and allowing water to enter the home. It contends the trial court failed to consider plaintiffs’ failure to mitigate in determining damages. We disagree.
“A plaintiff cannot be compensated for damages which he [or she] could have avoided by reasonable effort or expenditures.... The doctrine does not require the injured party to take measures which are unreasonable or impracticable or which would involve expenditures disproportionate to the loss sought to be avoided or which may be beyond his [or her] financial means.” Reasonableness is to be evaluated in light of the situation at the time of the loss. (Green v. Smith (1968) 261 Cal.App.2d 392, 396, citations omitted.)
Here, Pacific raised the issue of mitigation of damages an affirmative defense to the issue of the amount of coverage due under the policy. The minute order made specific findings on relating to mitigation: plaintiffs immediately reported the loss to their broker; plaintiffs could not remain in the home due to the damage there; Pouk retained a contractor, who placed a tarp over the home and commenced repairs; after the tarp proved inadequate, more rain entered the house; Sayas stopped repairs while mold testing was done; considerable time passed before repairs were made, and it rained some of time during this period. However, the court made no finding as to whether these efforts were sufficient to satisfy plaintiffs’ mitigation obligations under the policy. Nonetheless, it was Pacific’s obligation to seek a specific finding on its affirmative defense in the trial court, and we therefore find no error. (World Financial Group, Inc. v. HBW Ins. & Financial Services, Inc. (2009) 172 Cal.App.4th 1561, 1569.)
E. Emotional Distress Damages Not Recoverable for Simple Breach
Pacific argues that plaintiffs are not entitled to emotional distress damages, or in the alternative, that the emotional distress damages the court awarded were excessive.
In insurance bad faith cases, emotional distress damages are compensable as incidental damages flowing from the initial breach, and do not constitute a separate cause of action. (Gourley v. State Farm Mut. Auto. Ins. Co. (1991) 53 Cal.3d 121, 127–128.) Here, however, plaintiffs’ only basis for recovery is for simple breach of contract; they have failed to establish Pacific acted in bad faith. In that case, their damages are limited to those “reasonably contemplated” by the parties at the time the contract was entered into, even if anguish or emotional distress resulted from the breach. (Erlich v. Menezes (1999) 21 Cal.4th 543, 558–559 (Erlich) [emotional distress damages are not includable as consequential damages in a contract claim].)
Erlich found that cases permitting recovery for breach of contract “typically involve[d] mental anguish stemming from more personal undertakings the traumatic results of which were unavoidable.” (Erlich, supra, 21 Cal.4th at p. 559.) Therefore, where “the express object of the contract is the mental and emotional well-being of one of the contracting parties, the breach of the contract may give rise to damages for mental suffering or emotional distress.” (Ibid.) Erlich noted that such cases included an agreement by two gambling clubs to exclude the husband’s gambling-addict wife and not to cash her checks (Wynn v. Monterey Club (1980) 111 Cal.App.3d 789, 799–801); a cemetery’s agreement to keep burial service private and to protect a grave from vandalism (Ross v. Forest Lawn Memorial Park (1984) 153 Cal.App.3d 988, 992–996); and a bailment for heirloom jewelry of great sentimental value (Windeler v. Scheers Jewelers (1970) 8 Cal.App.3d 844, 851–852.) Therefore, to permit recovery for emotional distress based upon breach of contract, emotional concerns must be the essence of the contract. (Erlich, supra, 21 Cal.4th at p. 559; Butler-Rupp v. Lourdeaux (2005) 134 Cal.App.4th 1220, 1229 [recovery of emotional distress damages permitted where emotional distress is predictable result of negligence].) We find that insurance contracts do not fall within this category of contracts that directly affect the happiness, comfort, or personal welfare of the insured. Therefore, the emotional distress claim is reversed.
F. Damages for “Housing Expenses”
Pacific contends the court erred in finding it owed benefits for ALE (additional living expenses for loss of use) in the amount of $20,000 because Pacific had already overpaid ALE benefits by $14,185.00 (the policy had a limit of $31,000 and it paid $45,185). Plaintiffs, on the other hand, characterize the additional $20,000 as damages due to the delay in payment, rather than ALE.
We review the compensatory damage award for substantial evidence. (George v. California Unemployment Ins. Appeals Bd. (2009) 179 Cal.App.4th 1475, 1489.) From the record, we are unable to ascertain the basis of the court’s award; the minute order merely states it awards $20,000 in “housing expenses.” However, Pacific failed to seek a specific finding clarifying the basis of this award, and provides no guidance to us on appeal. We therefore find no error. (Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 58 [we presume the judgment is correct; all intendments and presumptions are indulged in favor of correctness; and the appellant must provide an adequate record affirmatively proving error].)
IV. PACIFIC’S SUBROGATION CLAIM AGAINST POUK
Pacific contends the trial court improperly failed to make requested findings regarding its subrogation action against Pouk, and improperly ruled that Pacific would recover nothing on its claim. Pacific contends that Sayas and Pouk knew about Pacific’s assertion of subrogation before the settlement, but Pouk did not include Pacific’s name on the check, and instead agreed to satisfy Pacific’s rights out the settlement proceeds. For these reasons, Pacific argues we should conclude the court should have found for it on its subrogation claim, or in the alternative, remand the matter for a factual determination of the issue.
The court found that “If [it is] not clear from all of the previous determinations by this Court, the Court determines that [Pacific] shall receive nothing from [Pouk] in [the Pouk Action]. That case shall be dismissed.”
Here, the court failed to make findings on the Subrogation Action other than to conclude that because the action was brought in bad faith, Pacific could not recover against Pouk. However, as discussed above, Pacific was entitled to subrogation to the extent it made payments to plaintiffs that were caused by Pouk’s negligence. Therefore, the matter is remanded for a retrial on the merits of Pacific’s subrogation claim against Pouk.
V. RELIANCE ON PRIVILEGED STATEMENTS FROM MEDIATION IN CALCULATING DAMAGES
Pacific contends that the court improperly relied on the mediator’s report from Decena’s mediation with Pouk, and adopted its findings in awarding damages. Pacific bases this contention on the virtual identity of the damage amounts from the mediator’s report and the court’s actual award.
Evidence Code section 1121 provides that a mediator’s report is not admissible at trial, and Evidence Code section 1119 provides that no statements or writings prepared for purposes of mediation are admissible at trial. However, Pacific’s argument does nothing more than draw an inference from the congruence of the damage award in the mediator’s report and the court’s damage award. The mediator valued the damage to plaintiffs’ house at approximately $126,000, found approximately $150,000 in attorneys’ fees and costs, and noted plaintiff’s emotional distress. The trial court remarked in its minute order that Sayas valued the case at $500,000 to $600,000 based upon comments of the mediator. Ultimately, the trial court awarded $600,000 in compensatory damages, including $280,000 in Brandt fees and costs, $125,000 in emotional distress damages, and $175,000 in housing expense, property damage, and subrogation attorneys’ fees. These figures are not so congruent as Pacific alleges, and without more, we cannot conclude the trial impermissibly relied on the mediator’s report. “A reviewing court need not consider alleged error when the appellant merely complains of it without pertinent argument.” (Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co. (1987) 189 Cal.App.3d 1072, 1090.)
VI. COST OF PROOF SANCTIONS.
Pacific contends the court erred in awarding fees under section 2033.420 for plaintiffs’ costs in proving request for admission No. 25. It argues that plaintiffs did not need to prove it unfairly handled their claim; it had reasonable grounds to believe it would prevail at trial; and it “had other good reasons” for its failure to admit request for admission No. 25.
A. Factual Background.
Plaintiffs sought cost of proof sanctions pursuant to section 2033.410 for Pacific’s denials of Requests for Admission Nos. 24, 25, and 26 (RFA). RFA No. 25 requested Pacific to admit that its “handling of Plaintiff[s’] claims [was] unfair.” Plaintiffs contended the issue was one of “substantial importance, ” because it related to the central issues of the case, which were bad faith and emotional distress, Pacific had no reasonable basis to deny it acted in bad faith. Plaintiffs sought $222,412.50 as costs of proving RFA Nos. 24, 25, and 26. The court granted the motion as to RFA No. 25, finding that “the question of whether [Pacific’s] handling of Plaintiffs’ claim was unfair was central to the litigation of this case and Plaintiffs’ proof of that fact was central to the Court’s ultimate ruling.” The court awarded $180,000 in cost of proof sanctions.
B. Plaintiffs’ Proof of the Legal Import of Pacific’s Conduct Did Not Constitute Proof of a Fact and Therefore Cannot Form the Basis of Cost of Proof Sanctions
Pursuant to section 2033.420, a party may obtain cost of proof sanctions where a party fails to admit the truth of any matter when requested to do so in requests for admissions. The court shall award sanctions unless, among other things, the party failing to admit the fact had reasonable grounds to believe that the party would prevail on the matter, or there was other good reason for the failure to admit. Here, the trial court erred in awarding sanctions to plaintiffs in proving that Pacific “acted unfairly.” Whether Pacific acted unfairly is a legal, not a factual, conclusion resulting from the application of the law (breach of the implied covenant of good faith and fair dealing) to a set of facts. As the legal import of its conduct constituted an issue subject to dispute at trial, Pacific therefore had reasonable grounds to deny RFA 25.
We conclude that Pacific did not act in bad faith as a matter of law in filing and pursuing its subrogation action against Pouk. Furthermore, the following damage awards based upon the trial court’s finding of bad faith must be reversed: the court’s awards of (a) $100,000 in subrogation defense fees, (b) $200,000 in Brandt attorneys’ fees, (c) $80,000 in Brandt litigation costs, (d) Arnold Decena’s $125,000 in emotional distress damages, (e) Maria Palecek’s $20,000 award of emotional distress damages, and (f) $600,000 in punitive damages.
(2) The trial court failed to address Pacific’s Subrogation Action against Pouk, instead concluding it had no merit because Pacific had pursued that action in bad faith; as Pacific did not act in bad faith in pursuing the Subrogation Action, we therefore must reverse and remand the Subrogation Action for retrial.
(3) Plaintiffs’ compensatory damage awards of $50,000 in real property damages, $5,000 in personal property damages, and additional housing expenses of $20,000 are affirmed.
(4) The cost of proof sanctions in the amount of $180,000 are reversed.
DISPOSITION
The judgment of the superior court is reversed with respect to plaintiffs’ bad faith claims and the damages related thereto (subrogation defense fees, Brandt attorneys’ fees, Brandt litigation costs, emotional distress and punitive damages) and cost of proof sanctions; the judgment awarding plaintiffs compensatory damages is affirmed. The parties are to bear their own costs on appeal.
NOT TO BE PUBLISHED
We concur: MALLANO, P. J.CHANEY, J.
White has been questioned in subsequent decisions. In California Physician’s Service v. Superior Court (1992) 9 Cal.App.4th 1321, the court found, after analyzing and rejecting White (“[w]e have some doubt as to the current vitality of White”) that the insurer’s assertion of an affirmative defense, even of patently untenable, could not constitute bad faith under the litigation privilege of Civil Code section 47, subd. (b)(2). (Id. at pp. 1327–1328.) California Physicians limited White to the admissibility of settlement communications: “Since the offers of compromise in White were utilized merely as evidence of the prior course of tortious conduct, they were admissible.” (Id. at p. 1327.) Therefore, California Physicians concluded “White stands for the proposition that ridiculously low statutory offers of settlement may be introduced in a bifurcated trial, after liability has been established, as bearing on the issue of bad faith of the insurance company.” (Id. at p. 1330.) Therefore, California Physicians concluded that defensive pleadings, including the assertion of affirmative defenses that were false, interposed in bad faith, or asserted for inappropriate purposes, could not be used as the basis of a bad faith action against an insurer. (Ibid.)