Opinion
Review Granted Aug. 20, 1997.
Previously published at 54 Cal.App.4th 1171
Dolores M. Donohoe, Gibbons, Lees & Conley, for Plaintiff and Respondent Agricultural Excess and Surplus Ins. Co.
James F. Thacher, Arthur R. Albrecht, Frank E. Solomon, Thacher, Albrecht & Ratcliff, Stuart Parsons, Kevin P. Crooks, Katherine H. Grebe, Quarles & Brady, for Plaintiff and Appellant Kransco.
Jeffrey T. Bolson, Engstrom, Lipscomb & Lack, for Plaintiffs and Respondents International Ins. Co. and Transco Syndicate No. 1.
Bertrand LeBlanc II, Donald T. Ramsey, David M. Rice, Rosemary Springer, Carroll, Burdick & McDonough, J. Ric Gass, Janice A. Rhodes, Kravit, Gass & Weber, for Defendant and Appellant American Empire Surplus Lines Ins. Co.
STRANKMAN, Presiding Justice.
A liability insurer breached its duty of good faith and fair dealing owed its insured manufacturer by unreasonably failing to settle an injured party's action against the insured within policy limits and exposing the insured to a verdict awarding the injured party compensatory and punitive damages far in excess of policy limits. The insurer does not deny its bad faith but argues that the insured's comparative bad faith and comparative negligence as a litigant in the underlying action should reduce its liability.
The trial court initially accepted this argument and asked the jury to determine if the insured itself breached its duty of good faith and fair dealing or failed to exercise ordinary care in handling the underlying action. The jury found that the insured's conduct did contribute to the amount of the excess verdict and set the insured's fault at 90 percent. The trial court later decided that it erred in instructing the jury and entered judgment notwithstanding the verdict in favor of the insured for the full amount of the insured's damages, without reduction for the insured's fault as allocated by the jury. (Code Civ. Proc., § 629.)
The insurer appeals, seeking reinstatement of the allocation of fault and exclusion of certain items of damages. On damages, the insurer principally asserts that the punitive damages component of the underlying judgment is not recoverable because public policy prohibits indemnification of punitive damages, and that a stipulated judgment founded on an excess verdict is not a proper measure of the insured's damages. The insured also appeals, contending that the trial court erred in dismissing its punitive damages claim on a pretrial motion for summary adjudication. We affirm the judgment in its entirety.
I. FACTS
In June 1987, 35-year-old Michael Hubert jumped head-first onto his Wisconsin neighbor's backyard water slide toy and broke his neck, instantly rendering him a quadriplegic. Hubert brought suit in Wisconsin against the California manufacturer of the Slip 'N Slide toy, Kransco. Kransco was defended by its Ohio insurer, American Empire Surplus Lines Insurance Company (AES), which had agreed to defend Kransco against bodily injury suits in any state and indemnify it for all sums which Kransco became legally obligated to pay as damages up to $1 million, $900,000 over and above Kransco's $100,000 self-insured retention.
Kransco also had three successive layers of excess insurance above its AES primary insurance coverage: International Insurance Company (International) $2 million limit, excess of $1 million; Agricultural Excess and Hubert's injury suit against Kransco was tried to a jury in April 1991 and AES provided the defense. Hubert offered to settle his suit against Kransco for $750,000 during the trial, almost a million dollars less than his pretrial demand. AES rejected the offer and unsuccessfully tried to settle the case for $450,000. The jury returned a verdict against Kransco at over $12.3 million: roughly $2.3 million in compensatory damages and $10 million in punitive damages.
Kransco settled with Hubert while post-verdict motions to reduce the award were pending in June 1991. Kransco paid Hubert $7.5 million and agreed to prosecute this bad faith action against AES and to split equally with Hubert any net proceeds from the insurance litigation (after deduction of litigation expenses and reimbursement of the subrogated excess insurers' cash settlement payments). At Hubert's insistence, Kransco stipulated to entry of judgment against it in the full amount of the jury verdict plus interest, roughly $12.5 million total, but Hubert agreed not to execute on the judgment. AES acquiesced to the settlement and contributed its policy limits of $900,000, but objected to the settlement as unreasonable because, AES believed, the verdict was likely to have been judicially reduced or reversed. The excess insurers International and Agricultural contributed their policy limits of $2 million and $1 million, respectively, and Transco contributed $500,000, half its policy limits. Kransco paid the remaining $3.1 million cash settlement amount from its own funds.
Kransco initiated this bad faith insurance litigation in January 1992, alleging that AES breached the covenant of good faith and fair dealing by failing to accept Hubert's offer to settle his claim within AES policy limits despite a substantial risk of a verdict greatly in excess of those limits. Kransco sought recovery of the full amount of the $12.5 million Hubert judgment and millions in punitive damages, but the trial court dismissed the punitive damages claim in a September 1993 summary adjudication. Kransco also claimed that damages were incurred after the Hubert settlement when an unrelated injury action cost over $2 million in settlement and defense which was paid by Kransco and its excess insurer Transco because otherwise available insurance coverage had been exhausted by the Hubert claim mishandled by AES. The three excess insurers were aligned as plaintiffs with Kransco.
The action was tried over five weeks in early 1995. Upon evidence not challenged on appeal, the jury returned a special verdict finding that AES breached its duty of good faith and fair dealing toward Kransco in its handling of Hubert's injury claim. The jury also concluded that the post-verdict settlement with Hubert was not unreasonable. Compensatory damages were assessed at over $14 million, in apparent acceptance of Kransco's argument that it was entitled to recover damages for the $12.5 million Hubert judgment and the defense and settlement costs incurred in the unrelated injury action following the Hubert settlement.
However, the jury also found that Kransco itself had breached its duty of good faith and fair dealing or failed to exercise ordinary care in its handling of Hubert's claim before the verdict, and attributed fault for the Hubert verdict at 90 percent to Kransco and only 10 percent to AES. The jury's special verdict apportioning fault was founded on AES requested instructions directing the jury to consider Kransco's comparative bad faith (anything done by Kransco that injured AES's rights to receive the benefit of its bargain) and comparative negligence (any failure by Kransco to exercise ordinary care in the preparation and trial of the Hubert case). According to AES, Kransco is itself largely to blame for the Hubert verdict because it angered the jury by initially disclaiming knowledge of prior Slip 'N Slide accidents during pretrial discovery in the Wisconsin action.
The trial court reconsidered its acceptance of AES's theory of comparative fault upon Kransco's motion for judgment notwithstanding the verdict (JNOV). (Code Civ. Proc., § 629.) The court found comparative negligence AES appeals, seeking reinstatement of the jury verdict on fault allocation and exclusion of certain items of damages. Kransco also appeals, seeking reversal of the trial court's summary adjudication order dismissing Kransco's punitive damages claim. The excess insurers oppose AES's appeal but have not joined in Kransco's appeal.
II. DISCUSSION
A. Insurance Bad Faith and Comparative Fault.
1. AES Breached the Covenant of Good Faith and Fair Dealing by Unreasonably Failing to Settle the Underlying Action.
California has long recognized that "[t]here is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement." (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658, 328 P.2d 198.) This principle applies to insurance policies which are, after all, contracts. (Ibid.) In most contexts, breach of the covenant is compensated with contract remedies alone since the covenant is a contract term. (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 684, 254 Cal.Rptr. 211, 765 P.2d 373.) But an insurer's breach of the covenant in insurance policies is also compensable with broader tort remedies to advance the social policy of safeguarding an insured in an inferior bargaining position who contracts for calamity protection, not commercial advantage. (Id. at pp. 684-685, 254 Cal.Rptr. 211, 765 P.2d 373; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819-820, 169 Cal.Rptr. 691, 620 P.2d 141, cert. den. and app. dism. (1980) 445 U.S. 912, 100 S.Ct. 1271, 63 L.Ed.2d 597.)
The scope of the duty of good faith and fair dealing depends upon the purposes of the particular contract because the covenant "is aimed at making effective the agreement's promises." (Foley v. Interactive Data Corp., supra, 47 Cal.3d at pp. 683-684, 254 Cal.Rptr. 211, 765 P.2d 373; Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d at p. 818, 169 Cal.Rptr. 691, 620 P.2d 141.) Therefore, "[t]he terms and conditions of the [insurance] policy define the duties and performance to which the insured is entitled." (Western Polymer Technology, Inc. v. Reliance Ins. Co. (1995) 32 Cal.App.4th 14, 24, 38 Cal.Rptr.2d 78.)
A liability insurance policy's express promise to defend and indemnify the insured against injury claims implies a duty to settle third party claims in an appropriate case. (Commercial Union Assurance Companies v. Safeway Stores, Inc. (1980) 26 Cal.3d 912, 917, 164 Cal.Rptr. 709, 610 P.2d 1038; Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 659, 328 P.2d 198.) "More specifically, the insurer must settle within policy limits when there is substantial likelihood of recovery in excess of those limits. [p] The duty to settle is implied in law to protect the insured from exposure to liability in excess of coverage as a result of the insurer's gamble--on which only the insured might lose...." (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 941, 132 Cal.Rptr. 424, 553 P.2d 584 [citations omitted].) An insurer that breaches its implied duty of good faith and fair dealing by unreasonably refusing to accept a settlement offer within policy limits may be held liable for the full amount of the judgment against the insured in excess of its policy limits. (Commercial Union Assurance Companies v. Safeway Stores, Inc., supra, 26 Cal.3d at pp. 916-917, 164 Cal.Rptr. 709, 610 P.2d 1038.)
Here, the jury concluded that AES breached its duty of good faith and fair dealing by 2. AES Claims Kransco's "Misconduct" During Pretrial Discovery in the Underlying Action Contributed to the Excess Verdict.
Kransco submitted an incorrect interrogatory answer in the underlying Hubert action and AES contends that this act constituted breach of the covenant of good faith and fair dealing or negligence in handling the Hubert action. Early in the case, Hubert served an interrogatory asking Kransco if it knew of any similar injury accidents predating his own injury in 1987. Kransco replied, in July 1990, that it had no notice of any adult cervical injuries from backyard water toys before 1987. The interrogatory answer was wrong.
A Kransco product development vice president knew of two adult cervical injuries on the Slip 'N Slide that had occurred when the water slide was made by another toy manufacturer before Kransco acquired that manufacturer's assets and reintroduced the toy in 1983. One of those injuries resulted in quadriplegia, the other in death. Kransco's general counsel neglected to ask the product development vice president about prior injuries before answering the interrogatory. Kransco's counsel in the Hubert action learned of the vice president's knowledge of prior injuries in preparing him for his December 1990 deposition, and immediately informed Hubert's counsel of the error. Kransco amended its interrogatory answer several months before trial to disclose this information, although the amendment itself was inaccurate because it stated that one of the accidents occurred approximately 30 years earlier when it was really closer to 20 years earlier.
AES was fully informed of the previous Slip 'N Slide injuries well before trial and receipt of Hubert's settlement offer, but complains that the excess verdict is attributable in substantial part to Kransco's pretrial discovery blunders which were exploited by Hubert's counsel at trial. Hubert's counsel argued to the jury that Kransco's original and amended interrogatory responses were an untruth followed by a half-truth and suggested that there may be other Slip 'N Slide accidents never disclosed. Of course, the extended argument to the jury included a great many points unrelated to Kransco's interrogatory answers, including the central claim that Kransco should never have reintroduced an injury-producing toy discontinued by its predecessor and did so without adequate warnings of danger in callous pursuit of $5 million annual gross profit. But AES maintains that the accusation of lying leveled against Kransco was explosive to a jury considering punitive damages, and invokes principles of comparative bad faith and comparative negligence to demand that Kransco's damages be reduced in proportion to its posited fault in causing the excess verdict.
3. Comparative Bad Faith.
The "duty of good faith and fair dealing in an insurance policy is a two-way street, running from the insured to his insurer as well as vice versa." (Commercial Union Assurance Companies v. Safeway Stores, Inc., supra, 26 Cal.3d at p. 918, 164 Cal.Rptr. 709, 610 P.2d 1038.) However, the scope of the insured's duty of good faith and fair dealing and the remedies available for a breach of that duty are not fully resolved.
a. An Insured's "Comparative Bad Faith" is Not a Valid Affirmative Defense.
One possible remedy, and the one AES urges here, is to permit an insurer sued for bad faith to allege the insured's comparative bad faith as an affirmative defense. (California Casualty Gen. Ins. Co. v. Superior Court (1985) 173 Cal.App.3d 274, 276-284, 218 Cal.Rptr. 817; see generally Pryor, Comparative Fault and Insurance Bad Faith (1994) 72
The California Casualty court's recognition of the tort inspired comparative bad faith defense does not survive close analysis, especially in light of recent judicial clarifications that the covenant of good faith and fair dealing is fundamentally contractual. (Foley v. Interactive Data Corp., supra, 47 Cal.3d at pp. 683-684, 254 Cal.Rptr. 211, 765 P.2d 373.) In California Casualty, the court reasoned that the comparative fault tort doctrine should apply to insurance bad faith cases because breach of the covenant is a tort: "While the duty of good faith and fair dealing arises out of a contractual relationship between the parties, breach of the duty and ensuing damages are governed by tort principles." (California Casualty Gen. Ins. Co. v. Superior Court, supra, 173 Cal.App.3d at p. 283, 218 Cal.Rptr. 817.) In fact, it is an insurer's breach of the covenant of good faith that is governed by tort principles, at least as concerns damages. (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574, 108 Cal.Rptr. 480, 510 P.2d 1032.) An insured's breach of the covenant is not a tort. (California Fair Plan Assn. v. Politi (1990) 220 Cal.App.3d 1612, 1618, 270 Cal.Rptr. 243.) An insurer's tort liability is predicated upon special factors inapplicable to the insured. (Id. at pp. 1618-1619, 270 Cal.Rptr. 243; see Foley, supra, at pp. 684-685, 254 Cal.Rptr. 211, 765 P.2d 373 [insurer tort liability based on special relationship with insured].)
The doctrine of comparative bad faith thus sets an insurer's tortious breach of the covenant against the insured's contractual breach of the covenant, even though contractual breaches do not implicate fault and are generally excluded from comparative fault allocations. (See 12 West's U. Laws Ann. (1996) Uniform Comparative Fault Act, § 1, com. at p. 128 [comparative fault inapplicable to "actions that are fully contractual in their gravamen"].) This distinction between tort and contract convinced the Montana Supreme Court to reject comparative bad faith: "the [insurer's] tort cannot be offset comparatively Our Supreme Court has itself suggested that an insurer's breach of the covenant of good faith and fair dealing is not comparable with the insured's contractual breach. (Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d at p. 578, 108 Cal.Rptr. 480, 510 P.2d 1032.) In Gruenberg, the court concluded that an insured's alleged contractual breach of the policy's cooperation clause by failing to submit to an examination and produce requested documents did not excuse the insurer's duty of good faith and fair dealing. (Id. at pp. 576-578, 108 Cal.Rptr. 480, 510 P.2d 1032.) "[T]he insurer's duty is unconditional and independent of the performance of [the insured's] contractual obligations." (Id. at p. 578, 108 Cal.Rptr. 480, 510 P.2d 1032, emphasis added.)
One could argue that Gruenberg provides only that the insured's breach of an express contractual clause is no defense to an insurance bad faith action and does not foreclose the defense of comparative bad faith which is founded on the insured's breach of the implied covenant of good faith and fair dealing. Respected commentators have proposed this distinction as a possible reconciliation of Gruenberg and California Casualty. (Croskey, Cal. Practice Guide: Insurance Litigation p 12.1174, p. 12D-16.) But that proposal is accompanied with a cautionary note recognizing that the distinction may be undermined by our Supreme Court's recent emphasis upon the contractual nature of the covenant of good faith and fair dealing. (Id. at p 12.1175, p. 12D-16, citing Foley v. Interactive Data Corp., supra, 47 Cal.3d at p. 687, 254 Cal.Rptr. 211, 765 P.2d 373.) Caution is well advised. The scope of an insured's duty of good faith and fair dealing is shaped by the express contractual provisions of the policy. (Western Polymer Technology, Inc. v. Reliance Ins. Co., supra, 32 Cal.App.4th at p. 24, 38 Cal.Rptr.2d 78.) Indeed, the California Casualty court relied upon the insured's express duty to cooperate in delineating the insured's implied duty of good faith. (California Casualty Gen. Ins. Co. v. Superior Court, supra, 173 Cal.App.3d at p. 283, 218 Cal.Rptr. 817.) We see little logic in declaring that an insured's contractual breach of an express policy provision is no defense to insurer bad faith but that an insured's contractual breach of an implied policy provision based on those express policy terms is a defense.
Rejection of comparative bad faith does not leave the insurer without redress for an insured's misconduct. An insured's misconduct may disprove the insurer's liability for bad faith, or may provide grounds for contractual and equitable defenses. (Blake v. Aetna Life Ins. Co. (1979) 99 Cal.App.3d 901, 918-924, 160 Cal.Rptr. 528 [no insurer liability]; Campbell v. Allstate Ins. Co. (1963) 60 Cal.2d 303, 305, 32 Cal.Rptr. 827, 384 P.2d 155 [breach of cooperation clause]; see Pryor, Comparative Fault and Insurance Bad Faith, supra, 72 Tex. L.Rev. at pp. 1522-1525 [discussing contract defenses]; see also Colbert v. Home Indemnity Company (1970) 35 A.D.2d 326, 315 N.Y.S.2d 949, 951-952 [estoppel]; but see Cain v. State Farm Mut. Auto. Ins. Co. (1975) 47 Cal.App.3d 783, 797, 121 Cal.Rptr. 200 [insurer's absolute duty of good faith precluded estoppel defense].) The insured's breach of the covenant of good faith and fair dealing is also actionable as a contract claim. (California Fair Plan Assn. v. Politi, supra, 220 Cal.App.3d at p. 1614, 270 Cal.Rptr. 243.) These remedies protect an insurer from insured misconduct without creating the logical inconsistencies and troublesome complexities of a defense of comparative bad faith.
The Ninth Circuit has formulated yet another approach in a case not concerning insurance. (Los Angeles Memorial Coliseum Com'n v. NFL (9th Cir.1986) 791 F.2d 1356, 1361-1363, cert. den. (1987) 484 U.S. 826, 108 S.Ct. 92, 98 L.Ed.2d 53.) The federal court, applying California law, ruled that mutual breaches of the implied good faith obligation on the same matter extinguish one another, but stated it might have hesitated to apply that rule if public interests were implicated. (Ibid.)
California State Auto. Assn. Inter-Ins. Bureau v. Bales (1990) 221 Cal.App.3d 227, 270 Cal.Rptr. 421 decided by Division Three of this court recognized that comparative fault could be raised as a defense in a bad faith action. In Bales the insurer was sued by a third party claimant for bad faith and violation of Insurance Code section 790.03. The insurer then cross-complained against Bales, the third party's attorney, for implied equitable indemnity alleging that Bales was either partially or completely responsible for the delays in settling the claim. In rejecting the insurer's cross-complaint, the court noted, albeit without analysis, that the insurer still had an affirmative defense. "Our conclusion does not deprive CSAA of a defense based on Bale's conduct. CSAA may assert Bale's negligence as an affirmative defense to liability and has in fact done so in the main action." (California State Auto. Assn. Inter-Ins. Bureau v. Bales, supra, 221 Cal.App.3d at p. 231, 270 Cal.Rptr. 421.)
The doctrine of comparative bad faith is marked by inconsistencies and complexities in application because it is founded on the faulty premise that the obligations of insurer and insured--and thus their bad There is no better proof of the inconsistencies and complexities attending the doctrine of comparative bad faith than our able colleague's dissenting opinion which struggles mightily to produce workable standards, only to conclude that the defense should be available in the undefined "appropriate case" with jury instructions on the "amorphous concept" of bad faith sketched case-by-case. (Dis. opn., post, pp. 553-555.) Our dissenting colleague does propose an outer limit for comparative bad faith, declaring that the insured's bad faith must amount to "an unreasonable, conscious and deliberate act" that is a material and prejudicial breach of the insured's contractual duty. (Dis. opn., post, pp. 554-555.). We agree with the dissenting opinion that such conduct by an insured provides a defense to the insurer--a complete defense that eliminates the need for a partial one. (Campbell v. Allstate Ins. Co., supra, 60 Cal.2d at pp. 305-306, 32 Cal.Rptr. 827, 384 P.2d 155.) In digging deep to lay a foundation for comparative bad faith, the dissenting opinion has demonstrated that rock bottom truly rests with existing contractual and equitable defenses that protect insurers from an insured's misconduct.
In short, we respectfully disagree with the California Casualty court's extension of tort comparative fault principles to an insured's contractual breach of the covenant of good faith and fair dealing. We therefore reject AES's argument that the trial court erred in granting Kransco JNOV. But while the trial court faulted the comparative bad faith instruction as overbroad, we conclude that the jury should not have been charged with considering comparative bad faith at all.
b. Any Consideration of the Insured Kransco's Comparative Bad Faith Was Properly Limited to Determining Whether Kransco Contributed to AES's Failure to Settle by Impairing its Assessment of the Likelihood of an Excess Judgment.
Even if comparative bad faith in a third party case is a proper defense, we agree with the trial court that the jury instruction here misstated the scope of Kransco's duty of good faith and fair dealing. The jury was referred to the court's instructions on the insurer's obligation of good faith, told that the implied covenant of good faith and fair dealing applies to both insurer and insured, and then instructed that "Kransco had a duty to [AES] not to do anything that would injure [AES's] rights to receive the benefits of their agreement. To do so would constitute bad faith on Kransco's part." The instruction correctly states a broad principle of law: "[t]here is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement." (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 658, 328 P.2d 198.)
However, the comparative bad faith instruction is flawed in several respects. The broad instruction fails to meaningfully guide the jury's assessment of an insured's good faith obligation. The instruction also invites the jury to apply insurer standards of conduct inapplicable to insureds. An insured's reciprocal duty of good faith and fair dealing does not necessitate reciprocal conduct. (E.g., Commercial Union Assurance Companies v. Safeway Stores, Inc., supra, 26 Cal.3d at pp. 917-921, 164 Cal.Rptr. 709, 610 P.2d 1038 [insurer may be obligated to accept a settlement offer to protect its insured from The scope of the covenant of good faith and fair dealing is dependent upon "the nature of the bargain struck between the insurer and the insured and the legitimate expectations of the parties which arise from the contract." (Commercial Union Assurance Companies v. Safeway Stores, Inc., supra, 26 Cal.3d at p. 918, 164 Cal.Rptr. 709, 610 P.2d 1038.) Just as "[t]he terms and conditions of the [insurance] policy define the duties and performance to which the insured is entitled" (Western Polymer Technology, Inc. v. Reliance Ins. Co., supra, 32 Cal.App.4th at p. 24, 38 Cal.Rptr.2d 78), so too do the terms and conditions of the insurance policy define the duties and performance to which the insurer is entitled.
A liability insurer, like AES, expressly promises to defend and indemnify the insured against injury claims and that promise implies a duty to settle third party claims in an appropriate case. (Commercial Union Assurance Companies v. Safeway Stores, Inc., supra, 26 Cal.3d at p. 917, 164 Cal.Rptr. 709, 610 P.2d 1038; Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 659, 328 P.2d 198.) These obligations, to have any meaning, must extend to insureds who are less than perfect litigants. An insured's known weaknesses as a litigant should inform the insurer's assessment of the likelihood of an excess judgment, not diminish the insurer's obligation to reasonably accept settlement offers within policy limits. (See Kinder v. Western Pioneer Ins. Co. (1965) 231 Cal.App.2d 894, 898, 903, 42 Cal.Rptr. 394 [insured's weakness as a trial witness due to contradictory pretrial statements and low intelligence provided additional reason to settle case].) An insurer legitimately expects its insured's cooperation in defending third party injury claims but cooperation does not demand flawless discovery responses.
AES argues that Kransco was not just a flawed litigant, but a lying litigant, punished for its lies and not for its crippling toy. The argument is wholly speculative. The Hubert verdict is neither an express nor implicit determination that Kransco lied in its interrogatory responses. AES argues that the size of the punitive damage award alone suggests that Kransco was punished for its litigation conduct, not its product, because Wisconsin juries are historically conservative in assessing damages. But punitive damages were awarded at twice Kransco's gross annual profit from the Slip 'N Slide and may simply reflect the jury's finding that Kransco should surrender its profits from a dangerous product. Obviously, we cannot know the basis of the Hubert punitive damages award and it is both inappropriate and futile to speculate on the matter. Where, as here, an insurer acts in bad faith by failing to reasonably settle a case within policy limits, the insured should not be subjected to roving suppositions about the basis for the excess verdict. In any event, an insurer is not released from its duty to settle claims within policy limits even if the risk of an excess judgment has been elevated by the insured's litigation misconduct. An insurer's evaluation of settlement offers requires that it "give the interests of the insured at least as much consideration as it gives to its own interests[,]" and a consideration in good faith of the insured's interest requires the insurer to settle the case when there is a great risk of a recovery in excess of policy limits. (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429, 58 Cal.Rptr. 13, 426 P.2d 173.) An insured's interests are in avoiding an excess judgment whether the judgment rests upon the insured's activities as a manufacturer or a litigant.
Our dissenting colleague seemingly endorses hindsight speculations on the basis for an excess verdict when assessing an insured's bad faith, and would admit evidence of misconduct never presented in the underlying action and thus having no influence on the jury's verdict. Manifestly, an insurer's proof that an insured's errors caused a jury to return an excess verdict cannot rely upon evidence of errors never presented to that jury. The dissent violates this causation principle by relying upon extraneous evidence to suggest that Kransco's general counsel knew of a prior accident at the time he answered interrogatories denying prior Slip 'N Slide accidents. (Dis. opn., post, p. 554.) The general counsel was not a witness in the underlying action, and no evidence was presented there that he had been advised of a prior accident before answering the interrogatories.
The courts in Texas have rejected comparative bad faith, but that rejection must be considered in the context of the state's Deceptive Trade Practices Act and the statutory restrictions imposed on comparative fault defenses which existed at the time many of the Texas cases were decided. In Texas Farmers Ins. Co. v. Soriano (Tex.App.1992) 844 S.W.2d 808 an insured sued its insurer for bad faith and the insurer sought contribution or indemnity from counsel for the insured in the underlying lawsuit. The issue of comparative bad faith was not before the court, but one Justice in a footnote to a concurring opinion noted: "Since our original opinion of July 22, 1992, a relatively new concept has been proposed which, had it been applied here, may have ameliorated some of the 'hard facts make bad law' aspects of this case. Although not argued by Farmers, and therefore not applicable, the emerging idea of 'comparative bad faith' is a logical extension of the notion that the factfinder, in its search for truth, should be able to look at the whole forest and not just a few of the trees. This should include a view of the insured's conduct as well as the insurer's cause of action. See James Wm. Walker, Comparative Bad Faith--Its Time Has Come in Texas, 55 Tex.B.J. 792 (1992)." (Id., at p. 832, fn. 2.)
However, we again emphasize that an insurer is not without protection from an insured's misconduct. As noted by the trial court, the insurer may conclude that the insured's litigation conduct is a substantial breach of the cooperation clause or covenant of good faith and fair dealing that excuses its further performance of its obligation to defend the insured, or may treat the insured's conduct as a minor breach entitling the insurer to maintain a later claim for damages. But an insurer remains bound by its duty to reasonably settle the case as long as it continues to defend the insured. An insurer may not, as AES did here, fail to settle a case within policy limits when there is a substantial risk of an excess judgment and then later fault the insured's litigation conduct for contributing to the amount of the verdict.
The California Casualty court itself focused the issue of comparative bad faith on whether the insured contributed to the insurer's failure to timely pay her claim, and did not sanction an expansive exploration of whether the insured did anything at all that contributed to her damages. (California Casualty Gen. Ins. Co. v. Superior Court, supra, 173 Cal.App.3d at pp. 282-283, 218 Cal.Rptr. 817.) If comparative bad faith has any place here, its place is properly limited to determining whether the insured's conduct contributed to the insurer's failure to settle, not whether the insured's conduct contributed to the excess verdict.
The trial court's JNOV ruling therefore properly limited the issue of Kransco's alleged breach of the covenant of good faith and fair dealing to determining whether Kransco contributed to AES's failure to settle by impairing its assessment of the likelihood of an excess judgment. The trial court also properly found no substantial evidence that Kransco's failure to include the prior Slip 'N Slide accidents in its initial interrogatory response or otherwise earlier advise AES of those prior accidents contributed to AES's failure to recognize the substantial likelihood of an excess judgment. AES was fully informed of the prior accidents before receiving the settlement offer and had every opportunity to assess the impact of Kransco's discovery mistakes at trial. In finding AES liable for bad faith, the jury was expressly charged with considering whether Kransco caused AES's rejection of Hubert's settlement offer by misleading AES as to the facts and implicitly found that Kransco had not misled AES.
Aside from Kransco's incorrect interrogatory answers, the only other conduct which AES claims impaired its assessment of the risk of an excess judgment was the Kransco general counsel's pretrial insistence that the case be tried rather than settled. But Kransco's general counsel testified that he told AES to settle the case during trial when the Hubert settlement offer was pending and it is undisputed that Kransco tendered its self-insured retention to AES during trial, leaving the decision to settle with the insurer. Nothing in Kransco's pretrial resolve to try the case impaired AES's assessment of the risk of an excess judgment at the time the settlement offer was made.
4. Comparative Negligence is Inapplicable.
AES argues that the jury was properly instructed to compare Kransco's negligent conduct in the preparation and trial of Hubert with AES's bad faith failure to reasonably settle the case and to allocate responsibility for the excess judgment among the insured and insurer. We disagree, and AES's argument rests entirely upon Patrick v. Maryland Casualty Co. (1990) 217 Cal.App.3d 1566, 267 Cal.Rptr. 24. In Patrick, the insured sued his insurer for bad faith delay in paying his homeowners insurance claim for a storm-damaged roof. (Id. at pp. 1568-1569, 267 Cal.Rptr. 24.) The insured included as damages his personal injuries suffered when he fell off the roof after tiring of the insurer's delay and undertaking the repairs himself. (Id. at pp. 1569-1570, 267 Cal.Rptr. 24.) Division Two of this district found that the insured's negligence in walking backward on a roof while pulling a heavy plywood plank warranted jury instructions on comparative fault and held that the trial court erred in refusing the insurer's requested instructions on the issue. (Id. at pp. 1570-1575, 267 Cal.Rptr. 24.) The court rejected the insured's argument that his negligence should not be compared with the bad faith of the insurer. (Id. at p. 1572, 267 Cal.Rptr. 24.)
We note that the insurer could have argued, with some force, that its delay in handling a claim for roof damage was not a proximate cause of the insured's personal injuries. It is not clear if the insurer tried to avail itself of this more established avenue for limiting liability.
Gruenberg was decided prior to the adoption of the doctrine of comparative fault.
We need not address the Patrick court's extension of comparative negligence principles to bad faith insurance cases because the case is factually distinguishable. (Patrick v. Maryland Casualty Co., supra, 217 Cal.App.3d at pp. 1570-1575, 267 Cal.Rptr. 24.) Patrick concerned an insured's negligent acts following an insurer's bad faith failure to pay a claim where the insured's acts were outside the contractual relationship of the parties. (See id. at pp. 1569-1570, 267 Cal.Rptr. 24.) Here, the contractual relationship of the parties vested AES with a continuing duty to reasonably settle the Hubert case so long as it was defending Kransco, as discussed above. While the insurer in Patrick had no duty to protect its insured during the insured's roof repairs, AES did have a duty to protect Kransco during the Hubert litigation. AES was duty-bound under the insurance policy to protect Kransco from an excess judgment, whether that judgment be the result of Kransco's negligence in marketing the Slip 'N Slide or in handling the resulting injury claim. The trial court properly ruled that Patrick does not shield an insurer from full responsibility for its bad faith failure to settle a case even if the insured's mishandling of the claim may have inflated the size of the verdict.
B. Damages.
AES raises the independent claim that certain elements of damages were improperly awarded. As noted above, compensatory damages were assessed at over $14 million, in apparent acceptance of Kransco's argument that it was entitled to recover damages for the $12.5 million Hubert judgment and the defense and settlement costs incurred in the unrelated injury action following the Hubert settlement.
AES claims that the Hubert judgment's $10 million in punitive damages is not recoverable because California public policy prohibits indemnification of punitive damages. AES also argues that the Hubert cash settlement amount is the proper measure of Kransco's damages, not the stipulated judgment. Finally, AES asserts that recovery of the defense and settlement costs of the unrelated injury claim following Hubert constitutes an improper double recovery to Kransco's subrogated excess insurers because the excess insurers would have had to pay those costs even if the Hubert case had been settled within the primary insurance policy limits.
1. Punitive Damages.
AES promised to pay "all sums" which Kransco became legally obligated to pay with no exclusion of punitive damages. But "[t]here is a sharp split of authority nationwide as to whether insurance may validly cover liability for punitive damages." (City Products Corp. v. Globe Indemnity Co. (1979) 88 Cal.App.3d 31, 39, 151 Cal.Rptr. 494; see Annot., Liability Insurance Coverage as Extending to Liability for Punitive or Exemplary Damages (1982) 16 A.L.R.4th 11, § 2(a).) The majority of states permit the However, the precise issue here is not indemnification of punitive damages. Instead, the question is whether consequential damages for an insurer's bad faith failure to settle may include punitive damages imposed against the insured in the underlying action without offending public policy. That question is currently pending in our Supreme Court. (PPG Industries, Inc. v. Transamerica Ins. Co. (1996) 49 Cal.App.4th 1120, 1131-1133, 56 Cal.Rptr.2d 889, review granted Dec. 18, 1996 (S056618).) AES urges a negative response to the question, insisting that punitive damages imposed against an insured may not be paid by the insurer under any circumstances, neither through indemnification nor recovery of consequential damages. AES thus claims that Kransco is not entitled to recover as consequential damages the $10 million awarded as punitive damages in Hubert, the underlying Wisconsin action. But AES's argument fails even if we assume that California's public policy against indemnification of punitive damages extends to preclude an insured's recovery of punitive damages assessed against it as consequential damages for the insurer's bad faith failure to settle. The flaw in AES's argument is its exclusive reliance on California public policy when this case does not concern California law alone.
There is a conflict of laws between California and Wisconsin on the insurability of punitive damages. Wisconsin permits the indemnification of punitive damages, finding that shifting payment to the insurer does not wholly dilute the deterrent effect of such awards and thus provides no overriding reason to abrogate freedom of contract. (Brown v. Maxey (1985) 124 Wis.2d 426, 369 N.W.2d 677, 686-688.) The contrast between California and Wisconsin law on the indemnification of punitive damages represents a true conflict of laws that must be resolved by considering the interests of the litigants and both states. (Stonewall Surplus Lines Ins. Co. v. Johnson Controls, Inc. (1993) 14 Cal.App.4th 637, 642-649, 17 Cal.Rptr.2d 713.)
In Stonewall Surplus Lines Ins. Co., liability insurers filed a declaratory relief action alleging they were not required to indemnify their insured for punitive damages imposed against it. (Stonewall Surplus Lines Ins. Co. v. Johnson Controls, Inc., supra, 14 Cal.App.4th at pp. 639-640, 17 Cal.Rptr.2d 713.) The operative facts of the case are a mirror-image of the situation here: Stonewall Surplus Lines Ins. Co. involved punitive damages imposed in California on a Wisconsin manufacturer whereas we are concerned with punitive damages imposed in Wisconsin on a California manufacturer. (Id. at pp. 639-641, 17 Cal.Rptr.2d 713.) The underlying action in Stonewall Surplus Lines Ins. Co. had been brought by a California resident injured by an exploding car battery made and sold in California by the Wisconsin insured. (Id. at p. 640, 17 Cal.Rptr.2d 713.) As in this case, the insurance policies had no choice of law provision. (Id. at p. 645, 17 Cal.Rptr.2d 713.) The court determined that California's rule prohibiting indemnification of punitive damages applied because California was the location of the insured event and application of the California rule was consistent with the interests of both states. (Id. at p. 649, 17 Cal.Rptr.2d 713.) Parties to a multiple-risk casualty insurance contract generally expect coverage of those several risks to be controlled by the law of the principal location of the risk involved. (Id. at pp. 646-648, 17 Cal.Rptr.2d 713; see Rest.2d, Conf. of Laws, § 193.)
Here, punitive damages were imposed in an underlying action where a Wisconsin resident was injured in that state by a product marketed there. The principle location of the risk was Wisconsin and the insured event 2. Measure of Damages.
AES argues that the Hubert cash settlement amount is the proper measure of Kransco's damages, not the stipulated judgment. As detailed above, the Hubert jury returned a verdict against Kransco at over $12.3 million and Kransco settled with Hubert while post-verdict motions to reduce the award were pending. Kransco paid Hubert $7.5 million and agreed to prosecute this bad faith action against AES and to split equally with Hubert any net proceeds from the insurance litigation. At Hubert's insistence, Kransco stipulated to entry of judgment against it in the full amount of the jury verdict plus interest, roughly $12.5 million total, but Hubert agreed not to execute on the judgment. In this bad faith insurance litigation, Kransco's compensatory damages were assessed at over $14 million in apparent acceptance of its argument that it was entitled to recover damages for the $12.5 million Hubert judgment and the defense and settlement costs incurred in an unrelated injury action following the Hubert settlement.
AES argues that an insured's damages are limited by its settlement and maintains that Kransco will make an "unconscionable profit" if we affirm the jury's calculation of damages upon the $12.5 million Hubert judgment rather than the $7.5 million Hubert cash settlement because Kransco will gain about $2.5 million as its half-share of the net proceeds of the insurance litigation in addition to recovering the money it actually spent in settling Hubert. The argument has deceptive force that is powered by AES's characterization of the cash settlement amount as the settlement. In fact, the settlement included not just the cash outlay of $7.5 million but also Kransco's promise to prosecute this bad faith action against AES and to split the net proceeds equally with Hubert. The settlement also included entry of a stipulated judgment of $12.5 million for the full amount of the jury's verdict, plus interest. AES's argument cannot succeed unless we disregard the terms of the settlement agreement and the stipulated judgment.
As for the terms of the settlement agreement, the validity of such "two-tiered" or conditional settlements has been recognized by some courts. For example, the Third Circuit rejected an insurer's claim that it was not liable for a roughly $7 million settlement where the insured paid the injured party $2.15 million and promised to pay an additional $4.8 million only if the insured was successful in its bad faith suit against its insurer. (Trustees of Univ. of Pa. v. Lexington Ins. Co. (3d Cir.1987) 815 F.2d 890, 900-902 (Trustees ); accord, Greater New York Mut. Ins. v. North River Ins. Co. (3d Cir.1996) 85 F.3d 1088, 1090-1092 [full settlement amount recoverable even though paid only a portion of amount coupled with promise to share proceeds of bad faith action].) The insurer in the federal case unsuccessfully argued that it was not liable for damages beyond the amount of the cash settlement because its policy applied only to losses "which the Insured shall become legally obligated to pay." (Trustees, supra, at p. 900.) AES makes the same argument, although it bases its claim on the statutory provision limiting recovery to actual detriment rather than its policy's identically worded "legally obligated to pay" provision. (Civ.Code, § 3333.) Whether based on statutory or policy provisions, the argument demands an overly strict interpretation that would limit legal obligations to pay or actual detriment to cash payments alone, without regard to the effect of an adverse judgment and a binding duty to prosecute an action for the full amount of the judgment.
The judgment itself constitutes legal injury to the insured. (Brown v. Guarantee Ins. While the judgment here was entered by stipulation, it was founded on a jury verdict following a full adjudication of liability and damages. We recognize that a stipulated judgment coupled with a covenant not to execute against the insured carries "a high potential for fraud or collusion," but that potential is lessened where, as here, there is "significant judicial participation" which protects against those evils. (Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 518, 42 Cal.Rptr.2d 295.) AES has presented no evidence of fraud or collusion between Kransco and Hubert in structuring the settlement, and the jury determined the settlement to be reasonable. Hubert's covenant not to execute on the judgment does not, as AES argues, make the judgment a " 'phantom' claim." A covenant not to execute does not extinguish the judgment nor nullify its adverse effects on the insured's credit and reputation. (Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788, 803, 41 Cal.Rptr. 401 [disapproved on another point in Crisci v. Security Ins. Co., supra, 66 Cal.2d at p. 433, 58 Cal.Rptr. 13, 426 P.2d 173]; Ivy v. Pacific Automobile Ins. Co. (1958) 156 Cal.App.2d 652, 662, 320 P.2d 140; Consolidated Am. Ins. v. Mike Soper Marine (9th Cir.1991) 951 F.2d 186, 190-191 [applying California law].) We conclude that an insured's damages for an insurer's bad faith failure to settle may be measured by the amount of a stipulated judgment founded on an excess verdict where the stipulation and other terms of the settlement agreement are reasonable and perfected without fraud or collusion.
Our determination bears the unpleasant consequence that Kransco exits this long course of litigation with a financial benefit, despite being the tortfeasor in the underlying action. But a contrary determination would benefit AES, the tortfeasor in this action. More importantly, a contrary determination would impede settlements and the expeditious compensation of injured parties. An insured may not be able to afford a full cash settlement. If the insured is not permitted to offer less cash with a promise to pursue a bad faith action against the insurer and split the proceeds, the insured may be compelled to refuse the settlement offer--delaying compensation to the injured party and exposing the insured to greater personal liability. (Trustees, supra, 815 F.2d at pp. 901-902.) There was testimony here that post-judgment interest on the verdict could have reached $15 million had Kransco refused the settlement offer and then failed on appeal. It should also be noted that Kransco's financial gain is not really a function of its wrongful conduct as a toy manufacturer adjudicated in the underlying action but a function of its successful vindication of rights as an insured in this action where it shouldered the effort, costs and risks of proving AES's bad faith.
3. Excess Insurer Subrogation.
Kransco's consequential damages included defense and settlement costs incurred in an unrelated injury action following the Hubert settlement. In that action, Kransco had been sued by Robert Chighisola for injuries while using a Kransco Styrofoam float board in 1987 during the same policy period as Hubert's accident. Kransco, which had exhausted almost all of its insurance limits on the Hubert settlement, defended itself in the case for over three years and finally settled it for $2 million. Kransco paid $1.5 million and its excess insurer Transco paid $500,000. Kransco also spent over $400,000 in attorney fees. Kransco proved at trial that AES was responsible for those defense and settlement AES seeks a $2.4 million reduction in Kransco's damages, arguing that recovery of the Chighisola defense and settlement costs constitutes an improper double recovery to Kransco's subrogated excess insurers. AES complains that Kransco's excess insurers will be reimbursed for the full $3.5 million paid in Hubert after AES's failure to settle while paying nothing in Chighisola when they would have had to cover those $2.4 million in costs if AES had settled Hubert.
Initially, we observe that AES's argument is flawed in positing a Hubert settlement at AES policy limits when the settlement offer was actually below policy limits, and in treating all excess insurers as an undifferentiated group even though Transco's coverage would not have been reached in Chighisola if Hubert had been settled by AES. We will disregard this imprecision and address the argument on the terms presented. We will also assume that the issue of the excess insurers' purported double recovery is properly before us even though AES never raised it in the trial court.
There is no improper double recovery. It is true, as Kransco acknowledges, that International and Agricultural might have been responsible for defense and settlement costs of Chighisola had AES not acted in bad faith and refused the Hubert settlement offer. But it is also true that any responsibility for defense and indemnification of the Chighisola claim would have been accompanied by the right to investigate, negotiate and settle the claim. AES's bad faith failure to settle Hubert within the primary policy limits during trial meant not only that the $3 million collective policy limits of International and Agricultural were exhausted by the post-verdict settlement, but also that International and Agricultural had no control over the Chighisola claim. We will not deny full reimbursement to the excess insurers for the Hubert settlement in a serpentine effort to force them to pay the costs of a claim they had no responsibility to defend or indemnify, and no opportunity to settle on their own terms.
C. Cross Appeal: Pretrial Dismissal of Punitive Damages Claim.
Kransco claims AES was despicable and acted in conscious disregard of Kransco's rights in failing to settle Hubert, and thus challenges the trial court's summary adjudication order denying Kransco's entitlement to punitive damages and denial of its motion for reconsideration of that order at trial. (Civ.Code, § 3294, subds. (a), (c)(1).) Nothing in the record supports Kransco's claim. To be despicable, a wrongdoer's conduct must be base, vile or contemptible. (College Hospital Inc. v. Superior Court (1994) 8 Cal.4th 704, 725, 34 Cal.Rptr.2d 898, 882 P.2d 894.) Kransco may be right that AES was "stingy" in setting reserves and "buried its head in the sand" by not softening its settlement posture after unfavorable trial developments, but such conduct is not despicable. At most, AES's stubborn refusal to adjust its settlement posture constituted a willful and conscious disregard of Kransco's interests. But malice under the punitive damages standard "requires more than a 'willful and conscious' disregard of the plaintiffs' interests. The additional component of 'despicable conduct' must be found." (Ibid.) "Despicable" is a powerful term that denotes conduct which is so "vile", "base", "contemptible", "miserable", "wretched" or "loathsome" that it would be "looked down upon and despised by ordinary decent people." (BAJI No. 14.72.1; See also College Hospital Inc. v. Superior Court, supra, 8 Cal.4th at p. 725.) The trial court properly found that AES's bad faith conduct does not approach this standard.
III. DISPOSITION
The judgment is affirmed.
DOSSEE, J., concurs.
SWAGER, Associate Justice, dissenting.
I respectfully dissent from that portion of the opinion that concludes principles of comparative bad faith cannot be asserted by an insurer in an action against it for bad faith. In an appropriate case the affirmative defense of comparative bad faith has not only been recognized as available to insurers in bad faith actions, but is also compatible with Despite the number of reported cases involving insurance bad faith that have been decided, there has been a dearth of case law in California directly analyzing the viability of comparative fault in the context of this type of litigation. Shortly after the concept of comparative fault was pronounced in Li v. Yellow Cab Co. (1975) 13 Cal.3d 804, 119 Cal.Rptr. 858, 532 P.2d 1226, our Supreme Court appeared to recognize the potential for a comparative fault defense in Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, 123 Cal.Rptr. 288, 538 P.2d 744. In Johansen the insurer unreasonably failed to settle within policy limits, but claimed that at least part of the judgment in excess of policy limits was caused by the conduct of the insureds. The court stated: "Although defendant's final argument is drawn from various legal theories including the doctrines of proximate cause, mitigation of damages, failure of consideration and prevention of performance, at the heart of all these hypotheses lies the contention that the excess judgment in this case was caused by the insureds' failure to deal in good faith with their insurer. Although we recognize that the implied covenant of good faith and fair dealing inures to the benefit of both parties to a contract and thus requires that 'neither party will do anything which will injure the right of the other to receive the benefits of the agreement' ... (Comunale v. Traders & General Ins. Co. [ (1958) ] 50 Cal.2d [654,] 658 [328 P.2d 198]; accord Crisci v. Security Ins. Co. [ (1967) ] 66 Cal.2d [425,] 429 [58 Cal.Rptr. 13, 426 P.2d 173]), we do not believe that the record supports defendant's contention that the excess judgment can be attributed to their insureds' conduct." (Id., at pp. 19-20, 123 Cal.Rptr. 288, 538 P.2d 744, emphasis changed by this court.) The court thoroughly examined the evidence offered by the defendant of the insureds' bad faith, but concluded that "the excess judgment in this case must be attributed solely to defendant's failure to compromise the claim against its insured." (Id., at p. 22, 123 Cal.Rptr. 288, 538 P.2d 744.) The comparative bad faith defense was thus implicitly recognized but found factually unsupported.
The first reported case to explicitly mention comparative bad faith is Fleming v. Safeco Ins. Co. (1984) 160 Cal.App.3d 31, 206 Cal.Rptr. 313. In Fleming the jury returned a special verdict finding that both the plaintiff and Safeco had engaged in conduct amounting to bad faith and apportioned damages on a comparative basis. Since the special verdict was agreed to by the parties, the court did not examine the validity of a comparative bad faith defense, and there is little in the case describing the conduct of the insured that led to the jury's finding.
Two cases since Fleming, supra, 160 Cal.App.3d 31, 206 Cal.Rptr. 313, have directly confronted the concept of comparative fault in bad faith litigation and have both adopted it without reservation. (Patrick v. Maryland Casualty Co. (1990) 217 Cal.App.3d 1566, 267 Cal.Rptr. 24; California Casualty Gen. Ins. Co. v. Superior Court (1985) 173 Cal.App.3d 274, 218 Cal.Rptr. 817.) The majority opinion considers the reasoning of California Casualty flawed, and rejects Patrick as "factually distinguishable." I find the analysis of comparative fault undertaken in both cases persuasive, and discern no reason to depart from it in resolving the particular dispute presented to us in this appeal.
California Casualty, supra, was the first case in California which squarely presented the issue of "the substantive viability of ... 'comparative bad faith,' " as a "novel" defense. (173 Cal.App.3d at pp. 280-281, 218 Cal.Rptr. 817.) Upon examination of the reciprocal obligations of good faith imposed upon both the insurer and insured by the contract of insurance, and the comparative fault doctrine enunciated in Li v. Yellow Cab Co., supra, 13 Cal.3d 804, 119 Cal.Rptr. 858, 532 P.2d 1226, the court concluded "that in an appropriate case, an insured's breach of the implied duty of good faith and fair dealing which contributes to an insurer's failure to pursue or delay in pursuing the investigation and payment of a claim may constitute at least a partial defense to the plaintiff's damage action for the insurer's breach of its duty of good faith and fair dealing...." (California Casualty, supra, 173 Cal.App.3d
1In Patrick, supra, the bad faith of the appellant insurer consisted of delaying and mishandling a claim under a homeowner's insurance policy for damage to the respondent insured's roof. Frustrated with the delay, the insured apparently took it upon himself to undertake repairs, and in doing so negligently lost his balance and was injured in a fall from his roof. (217 Cal.App.3d at p. 1569, 267 Cal.Rptr. 24.) The court agreed with "California Casualty that comparative fault principles should be applied in bad faith actions," (id., at p. 1572, 267 Cal.Rptr. 24) and found prejudicial error in the trial court's refusal to instruct the jury as requested by the insurer "to assess the fault of the parties by comparing the bad faith of appellant with the negligence of respondent." (Id., at p. 1570, 267 Cal.Rptr. 24, emphasis added.) The court concluded that the expanding "scope of comparative fault principles into new areas of tort law" justified the availability of "comparative negligence" as "an affirmative defense in an action for bad faith." (Id., at pp. 1574-1575, 267 Cal.Rptr. 24.) 2
The existence of comparative bad faith as an affirmative defense in California Casualty, supra, 173 Cal.App.3d 274, 218 Cal.Rptr. 817 has remained essentially unchallenged until today's majority opinion. The majority notes that the weight of authority is against it. However, of the two cases cited, Stephens v. Safeco Ins. Co. of America (1993) 258 Mont. 142, 852 P.2d 565, contains only a brief analysis of the doctrine without reference to the comparative fault system applicable in Montana, and Nationwide Property & Cas. Ins. Co. v. King (Fla.App.1990) 568 So.2d 990, provides no analysis of the doctrine. The Florida court's pronouncement in King that comparative bad faith is not recognized in Florida is also open to some question in view of a subsequent case, U.S. Fire Ins. v. Morrison Assur. (Fla.App.1992) 600 So.2d 1147. In that case, the court found it unnecessary to consider the applicability of the defense of comparative bad faith based on the evidence before the trial court. If Florida's rejection of comparative bad faith was absolute as suggested in King, there would have been no need for the court to state that the evidence was "not susceptible to the applicability of such defense, even if available." (U.S. Fire Ins. v. Morrison Assur., supra, 600 So.2d at p. 1153.) 3 According to the majority, the comparative bad faith defense is contrary to recent judicial pronouncements on the nature of the implied covenant of good faith and fair dealing, particularly the characterization of the insurer's duty as "unconditional and independent" of the performance of the insured's contractual obligations. (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 578, 108 Cal.Rptr. 480, 510 P.2d 1032.) 4 Thus, the insurer's bad faith is not excused by the failure of the insured to comply with contractual provisions in an insurance policy. (Id., at pp. 577-578, 108 Cal.Rptr. 480, 510 P.2d 1032.) The "absolute" nature of the respective duties and obligations associated with the implied covenant of good faith and fair dealing means that "the nonperformance by one party of its contractual duties cannot excuse a breach of the duty of good faith and fair dealing by the other party while the contract between them is in effect and not rescinded." (Id., at p. 578, 108 Cal.Rptr. 480, 510 P.2d 1032; see also Mock v. Michigan Millers Mutual Ins. Co. (1992) 4 Cal.App.4th 306, 324, 5 Cal.Rptr.2d 594; McCormick v. Sentinel Life Ins. Co. (1984) 153 Cal.App.3d 1030, 1044, 200 Cal.Rptr. 732.)
I do not think any articulated facet of the implied covenant of good faith and fair dealing is incompatible with the defense of comparative bad faith. In my opinion, the denotation of the duties arising from the covenant as unconditional, absolute and reciprocal supports rather than defeats recognition of the comparative bad faith defense. The implied covenant is a "two-way street, running from the insured to his insurer as well as vice versa," binding upon both parties. (Commercial Union Assurance Companies v. Safeway Stores, Inc. (1980) 26 Cal.3d 912, 918, 164 Cal.Rptr. 709, 610 P.2d 1038; see also Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 240, 178 Cal.Rptr. 343, 636 P.2d 32; Center Foundation v. Chicago Ins. Co. (1991) 227 Cal.App.3d 547, 560, 278 Cal.Rptr. 13; California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 55, 221 Cal.Rptr. 171.) It "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.' [Citations.]" (Gourley v. State Farm Mut. Auto. Ins. Co. (1991) 53 Cal.3d 121, 127, 3 Cal.Rptr.2d 666, 822 P.2d 374.)
If the insured's breach of the insurance contract does not excuse the insurer from bad faith, neither should the insurer's bad faith totally absolve the insured of the duty to perform according to the provisions of the policy. The independent character of the duties does not mean that the conduct of the insured can be ignored. (McCormick v. Sentinel Life Ins. Co., supra, 153 Cal.App.3d at p. 1046, 200 Cal.Rptr. 732.) Material breach of policy provisions by the insured relieves the insurer of liability upon a showing of prejudice. (Collin v. American Empire Ins. Co. (1994) 21 Cal.App.4th 787, 819, 26 Cal.Rptr.2d 391; Liberty Mut. Ins. Co. v. Altfillisch Constr. Co. (1977) 70 Cal.App.3d 789, 139 Cal.Rptr. 91; Hall v. Travelers Ins. Companies (1971) 15 Cal.App.3d 304, 93 Cal.Rptr. 159.)
If the duties of the parties to act in good faith are mutual and endure despite breach of the contract by one of them, then the performance of both the insurer and insured must be evaluated to determine an appropriate manner of assessing damages between them. "This reciprocal duty has been deemed sufficient in an appropriate case to support the insurer's affirmative defense of comparative bad faith in an action brought by the insured. (California Casualty Gen. Ins. Co. v. Superior Court, supra, 173 Cal.App.3d at pp. 283-284 [218 Cal.Rptr. 817].)" (Orient Handel v. United States Fid. & Guar. Co. (1987) 192 Cal.App.3d 684, 697, 237 Cal.Rptr. 667.)
Nor, in my opinion, are the contractual underpinnings of the duty of the insured pursuant to the implied covenant of good Moreover, the implied covenant of good faith and fair dealing has already resulted in a fusion of tort and contract principles. Liability for breach of the duty imposed by the implied covenant of good faith and fair dealing is in tort, even if its genesis is in the underlying contract of insurance. (Gourley v. State Farm Mut. Auto. Ins. Co., supra, 53 Cal.3d at pp. 128-129, 3 Cal.Rptr.2d 666, 822 P.2d 374; Campbell v. Superior Court (1996) 44 Cal.App.4th 1308, 1319, 52 Cal.Rptr.2d 385; Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1147, 271 Cal.Rptr. 246.) Once the contractual nature of the relationship between the insurer and insured has been extended to encompass principles of tort liability, as it has under the implied covenant of good faith and fair dealing, we do no injustice to it by superimposing a scheme of comparative fault. (California Casualty, supra, 173 Cal.App.3d at p. 283, 218 Cal.Rptr. 817.)
A comparative bad faith defense in an appropriate case furthers the fundamental objective of the comprehensive California scheme for allocation of responsibility for loss to avoid the potential injustice of a crude all-or-nothing concept and equitably apportion damages according to the relative culpability of the parties. (See American Motorcycle Assn. v. Superior Court (1978) 20 Cal.3d 578, 598, 146 Cal.Rptr. 182, 578 P.2d 899; Li v. Yellow Cab Co., supra, 13 Cal.3d at p. 829, 119 Cal.Rptr. 858, 532 P.2d 1226.) Our high court has stressed that loss should be equitably allocated even if not founded on traditional concepts of fault. (Daly v. General Motors Corp. (1978) 20 Cal.3d 725, 737, 144 Cal.Rptr. 380, 575 P.2d 1162.) "If a more just result follows from the expansion of comparative principles, we have no hesitancy in seeking it, mindful always that the fundamental and underlying purpose of Li [v. Yellow Cab Co., supra, 13 Cal.3d 804, 119 Cal.Rptr. 858, 532 P.2d 1226] was to promote the equitable allocation of loss among all parties legally responsible in proportion to their fault." (Ibid.)
The comparative fault doctrine "is designed to permit the trier of fact to consider all relevant criteria in apportioning liability. The doctrine 'is a flexible, commonsense concept, under which a jury properly may consider and evaluate the relative responsibility of various parties for an injury (whether their responsibility for the injury rests on negligence, strict liability, or other theories of responsibility), in order to arrive at an "equitable apportionment or allocation of loss." ' (Knight v. Jewett (1992) 3 Cal.4th 296, 314 [11 Cal.Rptr.2d 2, 834 P.2d 696].)" (Rosh v. Cave Imaging Systems, Inc. (1994) 26 Cal.App.4th 1225, 1233, 32 Cal.Rptr.2d 136.) Our high court has recognized that "juries are 'fully competent to apply comparative fault principles....' (Safeway Stores, Inc. v. Nest-Kart, [ (1978) ] 21 Cal.3d 322, 331 [146 Cal.Rptr. 550, 579 P.2d 441].)" (Ibid.) Thus, the doctrine of comparative fault has been expanded to cover a vast array of cases, even those in which the parties' conduct under comparison is distinguishable in kind and degree. "American Motorcycle applied comparative equitable indemnity between multiple negligent tortfeasors. (20 Cal.3d at p. 608 [146 Cal.Rptr. 182, 578 P.2d 899].) Subsequent cases have allowed its application to multiple strictly liable defendants and among negligent defendants and strictly liable defendants. (Safeway Stores, Inc. v. Nest-Kart (1978) 21 Cal.3d 322, 328 [146 Cal.Rptr. 550, 579 P.2d 441].) Furthermore, the comparative principles apply when one party is negligent and the other is guilty of wilful misconduct. (Allen v. Sundean (1982) 137 Cal.App.3d 216, 225 [186 Cal.Rptr. 863]; Sorensen v. Allred (1980) 112 Cal.App.3d 717, 726 [169 Cal.Rptr. 441, 10 A.L.R.4th 937].) And the doctrine has been applied to allow a negligent defendant to shift the loss to an intentional tortfeasor. (Weidenfeller v. Star & Garter (1991) 1 Cal.App.4th 1 [2 Cal.Rptr.2d 14]. See also Gardner v. Murphy (1975) 54 Cal.App.3d 164 [126 Cal.Rptr. 302].)" (Baird v. Jones (1993) 21 Cal.App.4th 684, 690, 27 Cal.Rptr.2d 232.) Implied contractual indemnity has even been made available under comparative fault principles to a party in breach of contract against a party in tortious breach of a duty of care for losses related to the contractual transaction. (Considine Co. v. Shadle, Hunt & Hagar (1986) 187 Cal.App.3d 760, 771, 232 Cal.Rptr. 250.)
The courts should have no difficulty or reticence then in undertaking a comparative fault analysis despite the ill-defined contractual and tort aspects of the implied covenant of good faith and fair dealing. The court in Patrick rejected the notion that a comparison of respective fault in bad faith cases "constitutes an improper attempt to compare ' "apples and oranges," ' " citing the directive in Daly v. General Motors Corp. (1978) that: " 'Fixed semantic consistency at this point is less important than the attainment of a just and equitable result.' (20 Cal.3d at pp. 735-737 [144 Cal.Rptr. 380, 575 P.2d 1162].)" (Patrick, supra, 217 Cal.App.3d at p. 1574, 267 Cal.Rptr. 24.) The court added: "[W]henever the Supreme Court or the courts of appeal have been presented with a case affording an opportunity to expand the scope of comparative fault principles into new areas of tort law, the courts have done so. The reason is not far to seek; it arises from the internal dynamics of a system of comparative fault. Such a system cannot be 'applied in the interest of justice' (Li v. Yellow Cab Co., supra, 13 Cal.3d at p. 829 [119 Cal.Rptr. 858, 532 P.2d 1226]) and cannot achieve 'a more just result' (Daly v. General Motors Corp., supra, 20 Cal.3d at p. 737 [144 Cal.Rptr. 380, 575 P.2d 1162]) if parties are allowed to avoid the consequences of their comparative faults by manipulating their claims so as to avoid reference to negligence." (Ibid.)
The majority summarily dismisses the persuasiveness of Patrick, supra, by branding it as "factually distinguishable" because the negligence of the insured followed rather than was concurrent with or antecedent to the bad faith of the insurer. I think the case before us presents a more compelling one for application of comparative bad faith principles. Here, the misconduct of both the insurer and insured occurred during the course of the same litigation that resulted in the damages sought to be apportioned. Hence, there is a greater degree of correlation between the conduct and the damages, making an assessment of comparative fault both more easily accomplished and fitting, in my view. I disagree with the conclusion in Patrick, supra, that the "negligence" of the insured may be compared with the bad faith of the insurer. (Id., at pp. 1574-1575, 267 Cal.Rptr. 24.) Comparative fault in a bad faith case must be based upon the bad faith of the insured, not negligence.
The court in California Casualty, supra, perceived "no sound reason, nor is any suggested, why the doctrine of comparative fault enunciated and applied to negligent conduct by the California Supreme Court in Li v. Yellow Cab Co. (1975) 13 Cal.3d 804 [119 Cal.Rptr. 858, 532 P.2d 1226, 78 A.L.R.3d 393], and later applied as between a strictly liable defendant and a negligent plaintiff (Daly v. General Motors Corp. (1978) 20 Cal.3d 725 [144 Cal.Rptr. 380, 575 P.2d 1162] ) and as between two tortfeasors one of whose liability was based on strict products liability and the other on negligence (Safeway Stores, Inc. v. Nest-Kart (1978) 21 Cal.3d 322 [146 Cal.Rptr. 550, 579 P.2d 441] ) The logic of a rule whereby evidence of the insured's misconduct may be offered to entirely "disprove" the insurer's bad faith or relieve the insurer of liability, but may not mitigate it on a comparative fault basis, escapes me. If a defendant who has been declared negligently or otherwise tortiously responsible to the plaintiff may still obtain relief from full liability to the extent the plaintiff or others have been comparatively at fault for the damages, so too may an insurer have damages reduced by allocation according to fault where appropriate, despite a finding of liability in tort for breach of the implied covenant of good faith and fair dealing.
We have embraced and expanded a comparative fault system which includes the entire breadth of possible apportionments, from a total shift of loss to no right to contribution for damages suffered. (Far West Financial Corp. v. D & S Co. (1988) 46 Cal.3d 796, 808, 251 Cal.Rptr. 202, 760 P.2d 399; Baird v. Jones, supra, 21 Cal.App.4th at p. 689, 27 Cal.Rptr.2d 232.) We have eschewed the harsh, archaic all-or-nothing approach in favor of an equitable allocation of loss according to relative culpability, even in the area of employer liability, where "[c]onsiderations peculiar to the workers' compensation system" and the fiduciary relationship between employer and employee have otherwise, as with insurer liability cases, "caused the development of special rules." (See Richards v. Owens-Illinois, Inc. (1997) 14 Cal.4th 985, 994-995, 60 Cal.Rptr.2d 103, 928 P.2d 1181.) To conclude that the insured's misconduct may be considered only as evidence to totally negate, but not to diminish the loss attributable to the insurer's bad faith, is an unjustified departure from the comparative fault scheme. The interests of judicial economy are also disserved by relegating the insurer to a separate action for breach of obligations by the insured rather than eliminating outdated categorizations of fault and determining ultimate liability in a single, streamlined procedure. (See Sorensen v. Allred (1980) 112 Cal.App.3d 717, 725, 169 Cal.Rptr. 441.)
Finally, when limited in application to suitable cases the comparative fault doctrine does not, in my view, contravene the fundamental objectives underlying the implied covenant of good faith and fair dealing to encourage settlements and promote fairness in the insurer-insured relationship by protecting the reasonable expectations of the insured. Comparative bad faith merely allocates loss in proportion to fault; it does not deprive the insured of the benefit of the insurance bargain. The insured has the expectation of coverage and a defense, but not to the extent that its own breach of the policy provisions has caused the loss. (Hall v. Travelers Ins. Companies, supra, 15 Cal.App.3d at pp. 308-309, 93 Cal.Rptr. 159.) The insured does not insure against its own bad faith failure to abide by the terms of the insurance policy. And, if the unequal bargaining position of the parties or the circumstances presented are such that an allocation of loss would frustrate the reasonable expectations of the insured or compromise the implied covenant of good faith and fair dealing owed by the insurer under the contract, the insurer may then be denied the benefits of the comparative bad faith doctrine. Only in an "appropriate case" may the bad faith of the insurer and insured be compared to allocate loss. (Travelers Ins. Co. v. Lesher, supra, 187 Cal.App.3d at p. 192, 231 Cal.Rptr. 791; California Casualty, supra, 173 Cal.App.3d at pp. 282-283, 218 Cal.Rptr. 817.)
The record before us convinces me that this is an appropriate case for the application of comparative bad faith. This is not a dispute between unsophisticated parties who are on unequal footing in coping with the esoteric nuances of insurance law and litigation. This case arose in a commercial context with the insured taking an active role in managing the Hubert claim. Stuart Schneck, Kransco's general counsel, selected Despite Kransco's written policy and its duty to cooperate, its responses to written interrogatories proved to be less than accurate. Originally Mr. Schneck responded in sworn answers on behalf of Kransco that it had no notice before May 1987 of cervical injuries to adults using any kind of backyard water toy. Mr. Schneck also stated that he had made a due and diligent inquiry of Kransco employees in order to fully answer the interrogatories. The answers were not accurate. There had been at least two prior serious injuries. In one case, the injured adult was left a quadriplegic and settled the case for $1.5 million. The other case involved a death caused by the product and resulted in a reported opinion. There was evidence that prior to filing the answers to interrogatories Mr. Schneck was specifically advised by an attorney for Mr. Hubert that plaintiffs were aware of at least one of these cases. Mr. Lieb discovered that the answers were not accurate when he was preparing another Kransco employee for his deposition.
The primary basis of appellant's comparative bad faith defense was predicated on these erroneous answers to interrogatories. A review of the record before us convinces me that the incorrect answers played a significant role in the Hubert verdict. Hubert's attorney argued to the jury that Kransco not only distorted the number of accidents but also distorted what happened in the accidents. There can be little doubt that a jury verdict can be dramatically affected if the jurors believe that there was an attempt to hide or distort evidence particularly given the seriousness of the injuries in the prior cases. It was a question for the jury to determine if these answers were the product of negligence or constituted a breach of the implied covenant.
In short, I find the case before us is an eminently appropriate one for loss allocation between the insurer and insured under comparative bad faith principles. I agree with the majority, however, that the trial court's comparative bad faith instruction was impermissibly broad. The jury was essentially advised that "anything" done by Kransco that interfered with the rights of AES to "receive the benefits of their agreement ... would constitute bad faith...." The comparative bad faith of the insured cannot be so broadly defined. " '[B]reach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself,' and it has been held that ' "[b]ad faith implies unfair dealing rather than mistaken judgment...." [Citation.]' (California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 54, 55 [221 Cal.Rptr. 171].)" (Congleton v. National Union Fire Ins. Co. (1987) 189 Cal.App.3d 51, 59, 234 Cal.Rptr. 218.)
Only by breach of a duty specified or implied in the contract of insurance, primarily to provide notice and cooperate in presentation of the defense of the underlying action, does the insured act in bad faith. (See Samson v. Transamerica Ins. Co., supra, 30 Cal.3d at p. 238, 178 Cal.Rptr. 343, 636 P.2d 32; Rockwell Internat. Corp. v. Superior Court (1994) 26 Cal.App.4th 1255, 1262, 32 Cal.Rptr.2d 153; United Services Automobile Assn. v. Martin (1981) 120 Cal.App.3d 963, 965, 174 Cal.Rptr. 835.) The breach of duty under the implied covenant must also be material, must be prejudicial to the insurer, and under bad faith principles must be an unreasonable, conscious and deliberate act of unfair dealing rather than mere mistaken judgment or negligence. (United Services Automobile Assn. v. Martin, supra, at p. 965, In instructing the jury on comparative fault in bad faith cases, the trial court must carefully define the limits of the insured's obligations under the policy and circumstances presented by each case. Given the erroneous instruction, which I conclude must have contributed to the allocation of damages by the jury, the verdict cannot stand.
Accordingly, I would reverse the trial court's entry of judgment notwithstanding the verdict and remand the case to the trial court for a new trial.