Jonathan Neil & Associates, Inc. v. Jones

• Decision Date: 05 August 2004
• Docket Number: No. S107855.,S107855.
• Citation: 16 Cal.Rptr.3d 849,33 Cal.4th 917,94 P.3d 1055
• Court: California Supreme Court
• Parties: JONATHAN NEIL & ASSOCIATES, INC., Plaintiff and Appellant, v. Freddie JONES, Defendant, Cross-complainant and Appellant; Mildred Jones et al., Cross-complainants and Appellants. Cal-Eagle Insurance Company, Cross-defendant and Appellant; Johnsey Insurance Company, Cross-defendant and Respondent.

16 Cal.Rptr.3d 849

94 P.3d 1055

33 Cal.4th 917

JONATHAN NEIL & ASSOCIATES, INC., Plaintiff and Appellant, v. Freddie JONES, Defendant, Cross-complainant and Appellant;

Mildred Jones et al., Cross-complainants and Appellants.

Cal-Eagle Insurance Company, Cross-defendant and Appellant;

Johnsey Insurance Company, Cross-defendant and Respondent.

No. S107855.

Supreme Court of California.

August 5, 2004.

As Modified on Denial of Rehearing October 20, 2004.¹

Fried, Frank, Harris, Shriver & Jacobson, Richard A. Brown, E. Randol Schoenberg, Los Angeles; Greines, Martin, Stein & Richland, Irving H. Greines, Robin Meadow, Tyna Thall Orren, Pasadena, and Peter O. Israel, Los for Plaintiff and Appellant and for Cross-defendant and Appellant.

Sedgwick, Detert, Moran & Arnold, Christina J. Imre and Stephanie Rae Williams, Los Angeles, for Aetna Healthcare of California and Aetna Life Insurance Company as Amici Curiae on behalf of Plaintiff and Appellant and Cross-defendant and Appellant.

Sonnenschein Nath & Rosenthal, Thomas E. McDonald and Sanford Kingsley San Francisco, for California Automobile Assigned Risk Plan as Amicus Curiae on behalf of Plaintiff and Appellant and Cross-defendant and Appellant.

Bill Lockyer, Attorney General, Manuel M. Medeiros, State Solicitor General, David S. Chaney, Assistant Attorney General, and Elisa B. Wolfe-Donato, Deputy Attorney General as Amici Curiae on behalf of Plaintiff and Appellant and Cross-defendant and Appellant.

Deborah J. La Fetra, Sacramento, for Pacific Legal Foundation as Amicus Curiae on behalf of Plaintiff and Appellant.

Sonnenschein Nath & Rosenthal, Paul E.B. Glad, Cheryl Dyer Berg and Sean McEneaney, San Francisco, for California Workers' Compensation Institute, Association of California Insurance Companies and Fireman's Fund Insurance Company as Amici Curiae on behalf of Plaintiff and Appellant.

Horvitz & Levy, Mitchell C. Tilner and S. Thomas Todd, Encino, for State Compensation Insurance Fund as Amicus Curiae on behalf of Cross-defendant and Appellant.

Heller Ehrman White & McAulife, Vanessa Wells, Victoria Collman Brown and Jessica Rossman, Menlo Park, for State Farm Mutual Automobile Insurance Company as Amicus Curiae on behalf of Cross-defendant and Appellant.

McCormick, Barstow, Sheppard, Wayte & Carruth, James P. Wagoner, Wendy S. Lloyd and David W. Burnett, Fresno, for Defendant, Cross-complainant and Appellant and for Cross-complainants and Appellants. Robert S. Gerstein, Santa Monica; Gianelli & Morris, Robert S. Gianelli and Sherril Nell Babcock, Los Angeles, for Consumer Attorneys of California as Amicus Curiae on behalf of Defendant, Cross-complainant and Appellant and Cross-complainants and Appellants.

Emerson Corey & Barsotti and Todd B. Barsotti, Fresno, for Cross-defendant and Respondent.

MORENO, J.

In this case, a trucking company participated in the California Automobile Assigned Risk Plan (the CAARP), a statutorily created program governed by the Insurance Commissioner designed to make automobile liability insurance available to those unable to obtain insurance through ordinary methods. After a premium billing dispute with its insurance company, which was hired by the CAARP, the trucking company defended a collection action and filed a cross-complaint against the company alleging that it had retroactively and knowingly charged it a substantially higher premium than was actually owed, and was therefore liable for tortious breach of the covenant of good faith and fair dealing and for fraud. A jury found in favor of the trucking company.

We are asked to decide two questions. The first is whether the trucking company was required to exhaust the administrative remedies available to those participating in the CAARP before bringing a lawsuit in which the central issue was the determination of the proper premium to be charged, a matter governed by the CAARP's and the Insurance Commissioner's internal regulations. We conclude that exhaustion of remedies was not required but that, as the Court of Appeal alternately held, the doctrine of primary jurisdiction required the trial court to stay proceedings and refer the premium billing dispute to the Department of Insurance (DOI) and the Insurance Commissioner. Its failure to do so required reversal of the judgment in the trucking company's favor.

The second question concerns our understanding of when tort damages will be available for an insurance company's breach of the implied covenant of good faith and fair dealing. The remedy for breach of that covenant is generally limited to contract damages, but we have recognized an exception to this rule when the breach occurs in the context of an insurance company's failure to properly settle a claim against an insured, or to resolve a claim asserted by the insured. (See Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683-684, 254 Cal.Rptr. 211, 765 P.2d 373 (Foley).) The question presented by this case is whether an insurance company's breach of the covenant sounds in tort when it retroactively overcharges a premium it knows is not owed. The trial court concluded that tort remedies were available but the Court of Appeal disagreed and reversed. We conclude, for reasons explained below, that the Court of Appeal is correct.

I. FACTS

The factual underpinnings of this case are lengthy and complex. For purposes of this case the following summary, taken in part from the Court of Appeal opinion, will suffice. Freddie and Mildred Jones owned a trucking company, known as Jones Trucking (henceforth sometimes referred to collectively as the Joneses). In 1991, after the Joneses's private insurance company went out of business, they applied for and obtained, at their insurance broker's recommendation, an insurance policy through the CAARP. An understanding of this program and one of the rules promulgated by the program is necessary for comprehending the facts of this case.

A. The CAARP and Rule 23

The CAARP was established under section 11620 of the Insurance Code, requiring the Insurance Commissioner to "approve or issue a reasonable plan" to provide liability insurance for those "who are in good faith entitled to but are unable to procure that insurance through ordinary methods." In general, the plan assigns such insureds to the various companies who write insurance in California and regulates the premiums that can be charged to such insureds. This assigned risk insurance is generally issued at the minimal levels required by the financial responsibility law. (See Ins.Code, § 11622.) The program is administered through the so-called CAARP committee, which is advisory to the Insurance Commissioner (see id., § 11623, subd. (a)). The committee "with the approval of the commissioner shall appoint a manager to carry out the purposes of this article, employ sufficient personnel to provide services necessary to the operation of the plan, and contract for the provision of statistical and actuarial services." (Ibid.) The CAARP committee is, by statute, composed of eight employees of insurance companies that write assigned risk policies, four public members, two representatives of insurance agencies, and the Insurance Commissioner or his or her designee. (Ibid.)

There are certain classes of vehicle users whose financial exposure (and potential danger to the public) is much greater than is contemplated by the ordinary assigned risk placement. Among these is the class of commercial truckers. In order to accommodate these higher risk vehicle users, the Insurance Commissioner in 1978 promulgated (by regulation at Cal.Code Regs., tit. 10, § 2432 et seq.) the Commercial Automobile Insurance Procedure (CAIP). The assigned risk plan for truckers is also administered by the CAARP committee, of which there is a separate CAIP subcommittee that handles policy issues arising from truckers insurance.

CAARP hires two "servicing carriers" (Cal.Code Regs., tit. 10, § 2432, subd. (e)), who provide all of the insurance policies issued under the CAIP. These carriers have a contract with the CAARP by which they are paid a percentage of the premium as a fee for their services. They turn all premiums over to CAARP and charge all claims to the CAARP, which then distributes the charges among automobile liability carriers in California. Thus, the servicing carriers are not typical insurance companies in the sense of a company putting its own assets at risk through its underwriting and premium practices. Instead, risk is borne by the insurance industry at large, underwriting and premium practices are specified by the CAARP and the DOI, and the servicing carrier is paid a commission for implementing and administering the program, based on premiums billed. Cal-Eagle Insurance Company (Cal-Eagle) became one of the servicing carriers in 1991.

The CAARP is run according to rules promulgated by the DOI and contained in the California Automobile Assigned Risk Plan Manual of Rules and Rates. (See Cal.Code Regs., tit. 10, § 2498.5.) Of particular relevance is rule 23 of the manual (rule 23), which governs the premiums assessed to truckers for their use of independent truckers, or subhaulers. In general, insured truckers premiums are determined by the number of trucks they own and operate. But the California Public Utilities Commission (PUC), which at the time this controversy arose regulated truckers such as the Joneses,² required these subhaulers to have their own PUC certificates of authority and their own liability insurance. The Joneses made extensive use of subhaulers, paying out over half their annual gross receipts to them.

The testimony indicated that California was somewhat unique in issuing PUC certificates directly to subhaulers, with the attendant requirement that the subhauler have its own insurance. In other states, according to the testimony, only the primary trucking company had insurance and the hired carriers were covered under that insurance. In its original form,...