Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County No. BC386299, Michael L. Stern, Judge.
The Marks Law Firm, Inc., Scott A. Marks and Lindsay Joachim for Plaintiff and Appellant.
Lombardi, Loper & Conant, Ralph A. Lombardi and Lori A. Sebransky for Defendant and Respondent.
CHAVEZ, J.
Plaintiff and appellant Yoshi Sasaguchi (plaintiff) appeals the dismissal of his action against defendant and respondent Commerce West Insurance Company (defendant) after the trial court sustained, without leave to amend, defendant’s demurrer to plaintiff’s complaint for breach of the implied covenant of good faith and fair dealing. We affirm the judgment.
BACKGROUND
On November 29, 2005, plaintiff caused an automobile accident with William Dowdall, who suffered two fractured arms, requiring surgery. Plaintiff was insured under an automobile liability policy issued by defendant, with a per person bodily injury limit of $15,000 and a per occurrence bodily injury limit of $30,000.
Defendant commenced its investigation of the accident no later than December 6, 2005. On that date, defendant’s claims adjuster spoke by telephone with Dowdall, who described his injuries. On that same date, defendant wrote to plaintiff advising him that Dowdall’s bodily injury claim might exceed the policy’s $15,000 per person and $30,000 per occurrence bodily injury limits, that defendant would not be responsible for any amount owed in excess of the policy limits, but that defendant would make every effort to resolve the matter within the policy limits.
Dowdall retained counsel on January 16, 2006. On January 23, 2006, defendant received a letter dated January 18, 2006, from Dowdall’s counsel requesting that defendant tender its policy limits by Friday, January 27. Dowdall’s counsel also demanded that defendant provide an affidavit from plaintiff stating that there was no other insurance that might apply to cover the loss and that plaintiff was not acting in the course and scope of employment or acting as an agent for anyone else at the time of the accident.
On January 23, 2006, the same day that defendant received the settlement demand, defendant wrote to Dowdall’s counsel confirming receipt of the demand letter and advising counsel that defendant needed Dowdall’s medical records to support his injury claim before defendant could address the policy limit demand. In response, Dowdall’s counsel extended the settlement deadline from January 27 to February 3, 2006. On February 7, 2006, defendant tendered the $15,000 policy limit.
Dowdall rejected defendant’s tender and filed a lawsuit against plaintiff. Defendant defended plaintiff in that action, which ultimately settled in November 2007, without any contribution from plaintiff.
Plaintiff filed the instant bad faith action on February 27, 2008, seeking damages for emotional distress and $3,000 in legal expenses incurred as the result of defendant’s failure to settle Dowdall’s claims in a timely manner. On April 10, 2008, defendant demurred to the complaint on the ground that plaintiff failed to state a bad faith claim based on the alleged failure to settle because there was no judgment against plaintiff in excess of the policy limits, the settlement deadline imposed by Dowdall was contrived and unreasonable on its face, and plaintiff failed to allege any independent basis for bad faith liability apart from defendant’s failure to settle the claim within the time demanded.
In his opposition to the demurrer, plaintiff argued that California law does not require an excess judgment in order to state a claim for bad faith failure to settle, and that the reasonableness of Dowdall’s settlement deadline could not be decided as a matter of law. The hearing on the demurrer took place on May 27, 2008. After hearing argument from the parties, the trial court sustained the demurrer without leave to amend. Plaintiff filed a notice of appeal on July 17, 2008. At the direction of this court, plaintiff submitted a judgment of dismissal, which was entered on September 24, 2008.
DISCUSSION
I. Standard of Review
“On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend, the standard of review is well settled. The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. [Citations.] The court does not, however, assume the truth of contentions, deductions or conclusions of law. [Citation.] The judgment must be affirmed ‘if any one of the several grounds of demurrer is well taken. [Citations.]’ [Citation.] However, it is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. [Citation.] And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment. [Citation.]” (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967.) The legal sufficiency of the complaint is reviewed de novo. (Montclair Parkowners Ass’n v. City of Montclair (1999) 76 Cal.App.4th 784, 790.)
II. Bad Faith Refusal to Settle
“From the covenant of good faith and fair dealing implied by law in all contracts, and from the liability insurer’s duty to defend and indemnify covered claims, California courts have derived an implied duty on the part of the insurer to accept reasonable settlement demands on such claims within the policy limits. [Citation.]” (Hamilton v. Md. Casualty Co. (2002) 27 Cal.4th 718, 724 (Hamilton).) “More specifically, the insurer must settle within policy limits when there is a substantial likelihood of recovery in excess of those limits. [Citations.] [¶] 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. [Citation.]” (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 941.) “Thus, in deciding whether or not to settle a claim, the insurer must take into account the interests of the insured, and when there is a great risk of recovery beyond the policy limits, a good faith consideration of the insured’s interests may require the insurer to settle the claim within the policy limits. (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658-661.)” (Safeco Ins. Co. of Am. v. Superior Court (1999) 71 Cal.App.4th 782, 787-788.) An insurer that breaches its implied duty of good faith and fair dealing by unreasonably refusing to accept a settlement offer within policy limits is liable for all the insured’s damages proximately caused by the breach, regardless of policy limits. (Hamilton, supra, at p. 725; Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 401.)
California case authority holds that a cause of action for breach of contract based on an insurer’s failure to settle does not accrue until a judgment in excess of policy limits has been rendered against the insured. (Hamilton, supra, 27 Cal.4th at p. 725; [claimant’s action against insurer for breach of contractual duty to settle “does not mature until a judgment in excess of the policy limits has been entered against the insured”]; Archdale v. American Internat. Specialty Lines Ins. Co. (2007) 154 Cal.App.4th 449, 474 (Archdale); RLI Ins. Co. v. CNA Casualty of California (2006) 141 Cal.App.4th 75, 81-82; Safeco Ins. Co. of Am. v. Superior Court, supra, 71 Cal.App.4th at pp. 787-788; Finkelstein v. 20th Century Ins. Co. (1992) 11 Cal.App.4th 926, 929-930 (Finkelstein); Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883, 891-892 (Doser).) This is because “[a]n essential element of a cause of action for breach of the implied covenant based on the refusal to settle is resulting damages. [Citation.] Damages ordinarily include the entire amount of a judgment after trial, including the amount in excess of policy limits but excluding any punitive damages. [Citations.] [¶]... [¶] Until a judgment has been entered against the insured after a trial, there is no assurance that the insured will suffer any damage from the insurer’s breach of its implied obligation to accept a reasonable settlement offer.” (Wolkowitz v. Redlands Ins. Co. (2003) 112 Cal.App.4th 154, 162-163.) An insurer’s refusal to settle within policy limits while the underlying action is pending “presents only the possibility that a judgment might be rendered in excess of policy limits.” (Archdale, supra, at p. 474; Finkelstein, supra, at p. 929; Doser, supra, at p. 891.) An excess judgment in the underlying action against the insured is necessary to establish the damages for which the insurer may be liable in a subsequent bad faith action. (Croskey et. al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2008) ¶ 12:355, p. 12B-33.)
The reasoning behind the excess judgment rule is basic fairness. An insurer that agrees to defend the underlying action does no harm to its insured by declining to settle and taking its chances with a trial. If the trial results in a defense verdict or in a judgment within the policy limits, the insured is not harmed. If the trial results in a judgment exceeding the policy limits, the insured may then pursue an action against the insurer for bad faith refusal to settle, or assign that cause of action to the underlying plaintiff in exchange for a covenant not to enforce the judgment against the insured. (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, ¶ 12:356, p. 12B-33; Finkelstein, supra, 11 Cal.App.4th at pp. 929-930; Mercado v. Allstate Ins. Co. (9th Cir. 2003) 340 F.3d 824, 827 [applying California law].) Thus, “[a]bsent an excess judgment, there can be no bad faith action based on declining a reasonable offer to settle within policy limits.” (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, ¶12:359, p. 12B-34.)
Notwithstanding the overwhelming weight of authority to the contrary, plaintiff insists, as a matter of law, that an underlying excess judgment is not a prerequisite to an insured’s cause of action against its insurer for breach of the duty to settle. As support for his argument, plaintiff cites Camelot By the Bay Condominium Owners’ Ass’n v. Scottsdale Ins. Co. (1994) 27 Cal.App.4th 33 (Camelot), in which the court stated that “there is no explicit requirement for bad faith liability that an excess judgment is actually suffered by the insured.” (Id. at p. 48.) In that case, however, the appellate court found no bad faith liability as a matter of law because the underlying plaintiff’s demands never exceeded the policy limits, and the insured was never exposed to a potential excess judgment. (Id. at p. 51.) The court’s statement in Camelot that an excess judgment is not a necessary element of a claim for bad faith failure to settle is thus nonbinding dictum. Other cases cited by plaintiff either involved an excess judgment (Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788, 799-800; Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429-432), or precluded a bad faith claim because there was no excess judgment (Dalrymple v. United Servs. Auto. Ass’n (1995) 40 Cal.App.4th 497, 524), and do not support plaintiff’s position.
A stipulated judgment was also entered against the insured in Camelot, but in an amount less than the policy limits. (Camelot, supra, 27 Cal.App.4th at pp. 39, 41.)
The absence of an excess judgment in the underlying lawsuit therefore precludes plaintiff’s bad faith action premised on defendant’s failure to settle the underlying action within policy limits.
III. Other Bases for Bad Faith Liability
Although the absence of an excess judgment in the underlying lawsuit precludes a subsequent bad faith action for failure to settle within policy limits, the insurer’s refusal to settle may be actionable on some other basis. (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, ¶12:359, p. 12B-34.) There are circumstances in which an insurer’s misconduct or delay in paying an underlying claim causes special harm to the insured, even though the underlying claim is ultimately settled. In such cases, courts have allowed the insured to pursue an insurance bad faith claim, even though the insured suffered no underlying excess judgment. (See, e.g., J.B. Aguerre, Inc. v. American Guarantee & Liability Ins. Co. (1997) 59 Cal.App.4th 6, 13-14 (Aguerre); Bodenhamer v. Superior Court (1987) 192 Cal.App.3d 1472, 1478-1479 (Bodenhamer); Larraburu Bros., Inc. v. Royal Indem. Co. (9th Cir. 1979) 604 F.2d 1208 (Larraburu); Barney v. Aetna Casualty & Sur. Co. (1986) 185 Cal.App.3d 966 (Barney).) These cases have certain common factual underpinnings, however, that are absent here -- either misconduct by the insurer different from the failure to settle itself; or damages suffered by the insured different from exposure to an excess judgment.
The insurer in Aguerre, for example, used the insured’s fear of punitive damages to coerce the insured to contribute to a settlement fund. The court in Aguerre expressly noted that the insurer’s unreasonable conduct caused its insured to suffer harm different from exposure to excess liability: “Aguerre does not complain of exposure to a compensatory damage judgment exceeding the policy’s dollar limits. Rather, Aguerre contends Zurich used Aguerre’s fear of punitive damages to unreasonably force Aguerre’s contribution to a settlement.” (Aguerre, supra, 59 Cal.App.4th at p. 14.) The insured’s bad faith claim was thus premised on its forced contribution toward settlement, and not the potential exposure to an excess judgment.
In Bodenhamer,an insured jewelry store sought coverage for losses sustained when a burglar stole property belonging to 23 customers. Although the policy covered the stolen property, the insurer delayed paying the customers’ claims for more than a year, alienating the customers such that they chose to do business with other jewelers. The court concluded that the insurer’s unreasonable settlement conduct had harmed the insured by damaging its business goodwill. (Bodenhamer, supra, 192 Cal.App.3d at pp. 1477-1478.) As in Aguerre, the harm suffered by the insured in Bodenhamer -- lost customer goodwill -- was different from exposure to excess liability.
Larraburu also involved damage to the insured that was wholly separate from the exposure to an excess judgment. In that case, the insurer refused a policy limit demand to settle an underlying claim against the insured. When the insured’s creditors learned of the insured’s potential exposure, they declined to extend further credit to the insured unless the insurer agreed to guarantee payment of any excess judgment that might be entered against the insured. The insurer refused to provide the guarantee, and the creditors stopped extending credit to the insured, forcing the insured into bankruptcy. An excess verdict was subsequently rendered against the insured, and the insurer paid the verdict before judgment was entered. In the subsequent bad faith action, the insurer argued that its payment of the verdict before a final judgment was entered precluded the insured’s bad faith claim. The Ninth Circuit disagreed and permitted the insured to state a bad faith claim, although no excess judgment had been entered. The court stated: “[T]he insurer cannot avoid liability by eventually paying the excess of the judgment before it becomes final, if damages in addition to the excess have been caused proximately by the failure to effect settlement in a reasonable manner.” (Larraburu, supra, 604 F.2d at p. 1215.)
Barney did not involve the failure to settle, but other bad faith conduct by the insurer. The insurer in that case settled the underlying claim, but without the insured’s knowledge or consent, thereby precluding the insured from asserting a counter-claim against the underlying plaintiff. The court in Barney held that the insured stated a bad faith claim based on the insurer’s alleged breach of the duty to avoid using its discretionary power under the policy to settle underlying claims against its insured “in a manner injurious of [the insured’s] rights.” (Barney, supra, 185 Cal.App.3d at p. 978.)
Plaintiff does not argue that defendant engaged in any bad faith conduct apart from the failure to settle. In order to maintain a bad faith action based on defendant’s unreasonable delay in settling the underlying lawsuit, plaintiff must therefore allege facts showing that such delay caused him to suffer harm different from the potential exposure to an excess judgment. (Aguerre, supra, 59 Cal.App.4th at pp. 13-14.) Plaintiff contends the complaint satisfies this requirement because it alleges that he suffered “[g]eneral damages... for emotional distress” and “[s]pecial damages... for litigation costs and attorney fees incurred by being forced by defendant’s conduct to retain private counsel at his own expense.”
Plaintiff cannot recover damages for emotional distress, however, unless he can also establish economic loss proximately caused by defendant’s conduct. “[A] claim for emotional distress in a bad faith action cannot stand alone, but must be accompanied by some showing of economic loss.” (Continental Ins. Co. v. Superior Court (1995)37 Cal.App.4th 69, 85.) “‘The substance of a bad faith action... is the insurer’s unreasonable refusal to pay benefits under the policy,’ and in such an action ‘damages for emotional distress are compensable as incidental damages flowing from the initial breach, not as a separate cause of action....’ [Citation.] Such claims of emotional distress must be incidental to ‘“a substantial invasion of property interests.”’ [Citation.]” (Major v. Western Home Ins. Co. (2009) 169 Cal.App.4th 1197, 1214, quoting Gourley v. State Farm Mut. Auto Ins. Co. (1991) 53 Cal.3d 121, 127-128.) “Thus, emotional distress damages must be tied to actual, not merely potential, economic loss. [Citations.] [¶] Further, while unreasonable delay in paying benefits is actionable as bad faith, ‘a delay in paying policy benefits, even if in an unreasonable manner, does not in itself establish economic loss to the plaintiff’ so as to justify emotional distress damages. [Citation.]” (Gourley, supra, at p. 1214.)
“[T]he requirement of economic loss for recovery of emotional distress damages may be satisfied where the insured has paid legal fees and court costs to enforce his or her claim under the policy. [Citation.]” (Major v. Western Home Ins. Co., supra, 169 Cal.App.4that p. 1214.) “When an insurer’s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney’s fees are an economic loss -- damages -- proximately caused by the tort. [Citation.]” (Brandt v. Superior Court (1985) 37 Cal.3d 813, 817.)
The complaint in the instant case does not allege that plaintiff was compelled to retain counsel and incur attorney fees in order to obtain policy benefits, nor does it allege facts to support such an allegation. Rather, the complaint establishes that defendant provided plaintiff with a complete defense in the underlying action and ultimately paid the entirety of a settlement on his behalf. Attorney fees incurred by the insured are recoverable in a bad faith action only if the insured was obligated to pay those fees. (See, e.g., Emerald Bay Community Assn. v. Golden Eagle Ins. Corp. (2005) 130 Cal.App.4th 1078, 1096 [insured who received a complete defense of an underlying third party action by an insurer who ultimately settled that action could not recover attorney fees incurred against a second non-defending insurer as damages in a bad faith action against the second insurer].) Here, plaintiff received the benefits of a complete defense and total indemnity of the underlying lawsuit. There was no reasonable basis for plaintiff to retain separate counsel and to incur attorney fees, and he accordingly has no claim against defendant for recovery of those fees. (Emerald Bay, supra, at p. 1096.) Plaintiff alleges no economic loss other than attorney fees. He therefore has no basis for recovering emotional distress damages against defendant. (Continental Ins. Co. v. Superior Court, supra, 37 Cal.App.4th at p. 85.)
The complaint alleges that plaintiff “was compelled to retain a private attorney to represent his interests after Defendant... breached its settlement duty.”
The complaint alleges that after the underlying personal injury action was filed against plaintiff, “Defendant... selected defense counsel of its own choosing to represent [plaintiff] in the litigation.” The complaint further alleges that the underlying lawsuit “settled in or about November 2007 after [defendant] agreed to pay [the underlying third party plaintiff] a sum of money well in excess of [the] applicable $15,000 bodily injury policy limits.”
To maintain an action for breach of the implied covenant of good faith and fair dealing, plaintiff needed to establish damages, an essential element of a bad faith claim. (Wolkowitz v. Redland Ins. Co., supra, 112 Cal.App.4th at p. 162; see also Waters v. United Servs. Auto. Ass’n (1996) 41 Cal.App.4th 1063, 1078.) Plaintiff failed to do so. The trial court did not err by sustaining the demurrer to plaintiff’s complaint for breach of the implied covenant of good faith and fair dealing.
In view of our holding, we need not address the parties’ arguments as to whether the reasonableness of the underlying plaintiff’s settlement demands could be determined as a matter of law.
Plaintiff has not indicated how he would have amended his complaint to support his bad faith action. The record discloses no abuse of discretion by the trial court in denying plaintiff an opportunity to amend the complaint. (Hendy v. Losse (1991) 54 Cal.3d 723, 742.)
DISPOSITION
The judgment is affirmed. Each side to bear their own costs.
We concur: DOI TODD, Acting P. J., ASHMANN-GERST, J.