Isaacson v. California Ins. Guarantee Assn.

• Decision Date: 07 March 1988
• Citation: 44 Cal.3d 775,244 Cal.Rptr. 655,750 P.2d 297
• Court: California Supreme Court
• Parties: , 750 P.2d 297 Alvin S. ISAACSON et al., Plaintiffs and Appellants, v. CALIFORNIA INSURANCE GUARANTEE ASSOCIATION, Defendant and Respondent. L.A. 32116.

Page 655

244 Cal.Rptr. 655

44 Cal.3d 775, 750 P.2d 297

Alvin S. ISAACSON et al., Plaintiffs and Appellants, v. CALIFORNIA INSURANCE GUARANTEE ASSOCIATION, Defendant and Respondent.

L.A. 32116.

Supreme Court of California In Bank.

March 7, 1988.

As Modified on Denial of Rehearing April 6, 1988.

Walter S. Weiss, Rosenfeld, Meyer & Susman, Beverly Hills, for plaintiffs and appellants.

Kelley K. Beck, Hawkins, Schnabel & Lindahl, Los Angeles, for defendant and respondent.

LUCAS, Chief Justice.

In this case two insureds of an insolvent insurance company seek damages from the California Insurance Guarantee Association CIGA) following settlement of a claim by a third party against the insureds. In 1974, Andrew Ouellette sued Doctors Alvin S. Isaacson and Sidney S. Grant (plaintiffs herein) alleging malpractice in the course of surgery performed on his lower back. Imperial Insurance Company (Imperial), from which plaintiffs and their professional corporation had obtained a liability insurance policy with limits of $1 million, accepted plaintiffs' defense and retained an outside law firm to represent them. In January 1978, Imperial was adjudged insolvent and CIGA assumed the doctors' defense pursuant to Insurance Code section 1063.2. (All further statutory references are to this code unless otherwise indicated.) The malpractice case settled for $500,000. CIGA paid $400,000 (the maximum amount it offered to settle) and plaintiffs, fearing liability beyond CIGA's $500,000 limit if the case proceeded to trial, paid the additional $100,000. Plaintiffs now seek to recover from CIGA reimbursement for the $100,000 they paid to settle, and additional damages based on several tort theories.

We address several primary issues: (1) whether CIGA can be held liable for tort damages for violations of the Unfair Practices Act (§ 790 et seq.), for intentional infliction of emotional distress, or for common law breach of the implied covenant of good faith and fair dealing; (2) if CIGA is not subject to liability for tort damages under these three theories, whether it may nonetheless be subject to liability for reimbursement in the event it fails to fulfill its statutory duties under sections 1063 to 1063.14 ¹ (hereafter referred to as the Guarantee Act); and (3) whether voluntary contribution by an insured in settlement, to supplement CIGA's payment in settlement of less than its statutory maximum, constitutes presumptive proof of the insured's liability for the full amount of the settlement, absent a failure to provide coverage or a refusal to defend by CIGA. We hold that CIGA is immune from liability under the Unfair Practices Act and under the theories of intentional infliction of emotional distress and common law bad faith. ² In so holding, we observe that CIGA nonetheless may be subject to liability for reimbursement to insureds if it breaches its statutory duty under the Guarantee Act to pay and discharge "covered claims," although plaintiffs failed to establish such liability here. We also hold that the insureds' $100,000 settlement contribution does not create a presumption that they are liable, in the amount they paid, on the underlying claim. ³

I. FACTS

A. The Underlying Claim of Negligence

Before April 1973, Ouellette complained of a nagging backache and pain in his left leg. Dr. Isaacson diagnosed Ouellette's symptoms as resulting from deterioration of vertebrae in his lower back. Isaacson informed Ouellette that in his judgment, without surgery, Ouellette would be paralyzed by age 40. Isaacson recommended surgery and Ouellette, then age 27, agreed.

Plaintiffs performed the operation in April 1973. The surgery was not a success--it aggravated Ouellette's condition, and apparently caused new complications. Dr. Isaacson and another doctor performed corrective surgery in June 1973, but this failed to relieve all of Ouellette's disability.

As part of Imperial's investigation of Ouellette's claim, Dr. Thomas Redden, an orthopedist, examined Ouellette and concluded that he was severely crippled. Redden, however, also indicated that nothing in the medical records suggested the surgery itself was performed negligently. Further, he stated, "Dr. Isaacson was within the standard of practice in recommending surgery if he was convinced that the symptomatology he received from [Ouellette] at that time was significant." The doctors' counsel reported to CIGA that they could "put on a strong case that the events of the first and second surgery were well within the standards of practice of orthopedic surgeons." Ouellette's own expert on damages, Dr. Sidney Walker, criticized the surgery as premature, but in his report expressed no opinion as to whether the surgery was performed negligently. In sum, it was not clear whether plaintiffs were negligent.

Assuming Ouellette could prove the doctors were negligent, the amount of potential damages remained uncertain. First, Ouellette's work record was sporadic even before the April 1973 operation. Second, despite estimates by doctors for both parties that Ouellette had a 50 percent chance of returning to work if he underwent further corrective surgery, Ouellette refused to submit to another operation. His refusal was contrary to the advice of all the physicians Ouellette consulted after his second operation. In addition, Dr. Redden indicated that if Ouellette underwent a fusion operation, "there was a 60% favorable chance of eliminating most of his disability with such a surgery" if it were performed using the dorsal approach, and "a 95% chance of success" if it were performed using the frontal approach. Redden definitely recommended surgery. Nonetheless, throughout the course of settlement negotiations, Ouellette refused to have corrective surgery.

B. The Settlement With Ouellette

While Imperial was still solvent, plaintiffs' counsel estimated that if a jury found Ouellette was totally disabled, the verdict could be "in the neighborhood of $750,000." Counsel informed Imperial that if the jury found that Ouellette was only partially disabled, then the verdict range would be near $375,000. Ouellette requested $1 million--the full extent of Imperial's coverage--to settle the case.

After Imperial was adjudged insolvent, and CIGA assumed plaintiffs' defense, CIGA retained the same law firm Imperial had already hired to defend plaintiffs against Ouellette's claim. Ouellette dropped his settlement demand to $500,000, the statutory limit of CIGA's coverage. (§ 1063.1, subd. (c)(6) [" 'Covered claims' shall not include that portion of any claim, other than a claim for workers' compensation benefits, which is in excess of five hundred thousand dollars ($500,000)"].)

After deposing most of Ouellette's expert witnesses, plaintiffs' counsel informed CIGA, "it is still [my] opinion that this case is a 50-50 proposition. The verdict value is approximately $750,000 in the event of an adverse verdict. It could go higher and it could come in for less. Because there is a substantial risk of an adverse verdict in excess of the [$500,000] policy limits that you have asserted, we must recommend and request that you tender your total coverage to [Ouellette] to settle this action."

CIGA's claim administrator replied, "I agree with your evaluation, as does the file, that the liability is no worse than 50-50. I also agree that the verdict could reach a $750,000 figure if we disregard our defensive possibilities. On that basis, a reasonable settlement value would not be more than $350,000." (Italics added.)

Plaintiffs then retained new counsel who demanded that CIGA tender its $500,000 limit to meet Ouellette's settlement demand. CIGA refused to pay more than $400,000. Finally, at the mandatory settlement conference, plaintiffs, at the suggestion of the settlement judge, and with CIGA's knowledge, agreed to pay $100,000 in addition to CIGA's $400,000 and thus ensure a settlement. Plaintiffs then sued CIGA, seeking reimbursement for the amount they paid Ouellette, as well as compensatory and punitive damages for CIGA's alleged bad faith.

C. The Action Against CIGA

Plaintiffs' second amended complaint purported to state three causes of action against CIGA. First, they sought to recover $100,000 on the theory that the entire settlement amount of $500,000 constituted a "covered claim" which CIGA was required to pay under the Guarantee Act. In the remaining causes of action they sought both compensatory and punitive damages for "bad faith" (apparently based on breach of the implied covenant of good faith and fair dealing) and intentional infliction of emotional distress. CIGA demurred to the causes of action for "bad faith" and intentional infliction of emotional distress. The trial court sustained the demurrer without leave to amend. The court relied on the absence of contractual privity between plaintiffs and CIGA for its ruling on the "bad faith" claim, and on plaintiffs' insufficient allegation of outrageous conduct on the emotional distress claim. For both causes of action it also cited section 1063.12, which limits CIGA's liability. ⁴ Plaintiffs later moved to amend their complaint to add an express cause of action for breach of the Unfair Practices Act. The trial court denied the motion, on the ground that the issue of CIGA's liability for bad faith had already been decided against plaintiffs. ⁵ On the claim for reimbursement of the $100,000 paid by plaintiffs, the court ultimately granted a nonsuit in favor of CIGA.

The Court of Appeal reversed. 215 Cal.Rptr. 652. It held the trial court had erred in disallowing the cause of action based on violation of the Unfair Practices Act, and in granting the judgment of nonsuit on the reimbursement claim. It also concluded CIGA was subject to liability for damages for intentional infliction of emotional distress, although it held plaintiffs had abandoned that claim. We reverse the judgment of the Court of Appeal.

II. DISCUSSION

A. CIGA's Immunity...