Austero v. Washington National Ins. Co.

• Citation: 132 Cal.App.3d 408,182 Cal.Rptr. 919
• Parties: Julius S. AUSTERO and Dorothy Austero, Plaintiffs and Respondents, v. WASHINGTON NATIONAL INSURANCE COMPANY, Defendant and Appellant. Civ. 23779.
• Decision Date: 28 May 1982
• Court: California Court of Appeals

Page 919

182 Cal.Rptr. 919

132 Cal.App.3d 408

Julius S. AUSTERO and Dorothy Austero, Plaintiffs and Respondents, v. WASHINGTON NATIONAL INSURANCE COMPANY, Defendant and Appellant.

Civ. 23779.

Court of Appeal, Fourth District, Division 2, California.

May 28, 1982.

Rehearing Denied June 23, 1982.

Hearing Denied Aug. 4, 1982.

[132 Cal.App.3d 410] Rutan & Tucker, Garvin L. Shallenberger, Ira G. Rivin and Patricia L. Stearns, Costa Mesa, for defendant and appellant.

Herbert Hafif and Wayne J. Austero, Newport Beach, for plaintiffs and respondents.

OPINION

KAUFMAN, Justice.

Defendant appeals from a judgment, after retrial, awarding compensatory and punitive damages against it for bad faith failure to pay plaintiffs' claims under two insurance policies. ¹ Defendant does not challenge the damages awarded to compensate plaintiffs for the benefits they should have received under the policies (approximately $24,678), but do claim error in the award of $25,000 to plaintiff Dorothy Austero for emotional distress, $200,000 for attorney's fees, and $200,000 as punitive damages. The award for emotional distress is not supported by substantial evidence; the attorney's fee award is legally erroneous. We shall modify the judgment by striking those two portions and, otherwise, affirm the judgment as modified.

FACTS ²

The dispute involves two insurance policies issued by defendant. One was an occupational total disability policy which was issued to plaintiff Julius Austero in 1958 and lapsed on March 15, 1973 for nonpayment of premiums. The other was a major medical expense policy which was issued to Julius Austero insuring him and his wife, Dorothy Austero, effective May 15, 1973.

Julius Austero's initial notice of claim under the medical policy was made on October 4, 1973, and his first application under the disability policy was made on June 3, 1974. Defendant denied coverage under the medical policy for alleged misrepresentations regarding medical history contained in the application for the medical policy. The claim under the disability policy was denied on the ground that the policy had lapsed prior to Julius Austero's total disability.

ATTORNEY'S FEES

Defendant challenges the award of $200,000 for attorney's fees on numerous grounds. It is contended that the recovery of attorney's fees is not permitted by law in this case, and that, even if fees are recoverable, the award was excessive as a matter of law; ³ there was no substantial evidence to support the award; and the jury was improperly instructed on the issue. The first contention is meritorious and dispositive of the issue. Accordingly we do not reach the other contentions.

The trial court instructed the jury in pertinent part: "[I]f you find that the plaintiffs are entitled to policy benefits under either one of these policies and, further, if you find that it was necessary for plaintiffs to employ the services of an attorney in order to collect the benefits due them under these policies, you shall then award plaintiffs such sums as you find reasonably [sic] to compensate them for attorneys' fees, reasonably required 4 to secure the policy benefits. The plaintiffs, however, are not entitled to attorney's fees that may have been incurred in the recovery of damages, if any, attributable to emotional distress, punitive damages, or any other damages that you find were incurred ...."

The instruction erroneously permitted plaintiffs to recover attorney fees on account of their attorneys' services in initiating and prosecuting this very action. "The Legislature has established that in the absence of an express agreement or statute, each party to a lawsuit is responsible for its own attorney's fees. (Code Civ.Proc., § 1021; ⁴ e.g., Le Fave v. Dimond (1956) 46 Cal.2d 868, 870 [299 P.2d 858, 60 A.L.R.2d 939].) In the present case, there is neither an express contract between the parties [providing for the recovery of attorney's fees] nor any statute authorizing an award of attorney's fees." (Davis v. Air Technical Industries, Inc. (1978) 22 Cal.3d 1, 5, 148 Cal.Rptr. 419, 582 P.2d 1010; accord: International Industries, Inc. v. Olen (1978) 21 Cal.3d 218, 221, 145 Cal.Rptr. 691, 577 P.2d 1031; Viner v. Untrecht (1945) 26 Cal.2d 261, 272, 158 P.2d 3; Pederson v. Kennedy (1982) 128 Cal.App.3d 976, 979, 180 Cal.Rptr. 740; Canal-Randolph Anaheim, Inc. v. Wilkoski (1978) 78 Cal.App.3d 477, 485, 143 Cal.Rptr. 789, 144 Cal.Rptr. 474.)

"There are a limited number of exceptions to the general rule precluding recovery of fees, in addition to the two exceptions set forth in Code of Civil Procedure section 1021 [contract or statutory authority]. Three exceptions, labeled as the 'Common Fund Theory,' the 'Substantial Benefit Theory,' and the ' "private attorney general" theory,' are discussed in Serrano v. Priest (Serrano III) (1977) 20 Cal.3d 25, 35-48 [141 Cal.Rptr. 315, 569 P.2d 1303]. None is applicable to this case." (Pederson v. Kennedy, supra, 128 Cal.App.3d at p. 979, 180 Cal.Rptr. 740.)

There is another situation, sometimes referred to as the "third party tort exception," in which recovery of attorney fees expended in litigation with a third person is permitted but it likewise is wholly inapplicable to this case. Perhaps the best statement of the "third party tort" rule is found in subsection (2) of section 914 of the Restatement Second of Torts: "One who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover reasonable compensation for ... attorney fees and other expenditures thereby suffered or incurred in the earlier action." (Accord: Prentice v. North Amer. Title Guar. Corp. (1963) 59 Cal.2d 618, 620, 30 Cal.Rptr. 821, 381 P.2d 645; Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co. (1977) 66 Cal.App.3d 101, 149, 135 Cal.Rptr. 802; see Pederson v. Kennedy, supra, 128 Cal.App.3d at pp. 979-980, 180 Cal.Rptr. 740.) However, the so-called "third party tort exception" to the general rule is not really an exception at all. The theory of recovery is that the attorney fees incurred in litigating with the third person are recoverable as damages, like any other damages, in the action against the wrongdoer. (See Prentice v. North Amer. Title Guar. Corp., supra, 59 Cal.2d at pp. 620-621 30 Cal.Rptr. 821, 381 P.2d 645; Pederson v. Kennedy, supra ; Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co., supra.) In such cases there is no recovery of attorney fees qua attorney fees.

Illustrative of the distinction and bearing rather directly on the problem at hand are the numerous cases disallowing the recovery of attorney fees for the prosecution of an action by an insured against the insurer for damages for the insurer's wrongful failure to defend the insured against a claim of liability as provided in the policy. While the attorney fees incurred by the insured is defending the earlier action are recoverable as damages in the subsequent action by the insured against the insurer, attorney fees incurred by the insured in prosecuting the action against the insurer are not recoverable. As the court stated in Lowell v. Maryland Casualty Co. (1966) 65 Cal.2d 298, 302, 54 Cal.Rptr. 116, 419 P.2d 180: "[W]e find no merit in plaintiff's claim for recovery of attorney's fees incurred in the instant suit. Although, as we have explained, plaintiff is entitled to reimbursement for his attorney's fees, costs and expenses sustained in the [earlier] action, the expenditures for vindication of that right must be borne by plaintiff. We see no more reason for allowing plaintiff to recover attorney's fees in this case than in actions for enforcement of other kinds of rights." (Accord: e.g., Patterson v. Insurance Co. of North America (1970) 6 Cal.App.3d 310, 317-318, 85 Cal.Rptr. 665; Carroll v. Hanover Insurance Co. (1968) 266 Cal.App.2d 47, 50-51, 71 Cal.Rptr. 868, and cases there cited; cf. Jarchow v. Transamerica Title Ins. Co. (1975) 48 Cal.App.3d 917, 938, 951, 122 Cal.Rptr. 470.)

Indeed, it was that line of cases upon which the court relied in Twentieth Century-Fox Film Corp. v. Harbor Ins. Co. (1978) 85 Cal.App.3d 105, 114-115, 149 Cal.Rptr. 313, a third party bad faith case, in holding that although the insurer was liable for a judgment in excess of its policy limits, an award of $45,000 on account of plaintiff's attorney fees in prosecuting the bad faith action was improper. Said the court: "If the attorneys' fees incurred in remedying a breach of the basic obligation of indemnity in an insurance policy are not recoverable, then, by analogy, those incurred in a separate action of the insured against the insurer to recover damages for the breach of the implied covenant of good faith and fair dealing should not be." (Id., at pp. 114-115, 149 Cal.Rptr. 313.) The logic is irrefutable; the conclusion is inescapable.

Plaintiffs, of course, rely on Mustachio v. Ohio Farmers Ins. Co. (1975) 44 Cal.App.3d 358, 118 Cal.Rptr. 581, and Dinkins v. American National Ins. Co. (1979) 92 Cal.App.3d 222, 154 Cal.Rptr. 775, and several federal court decisions based thereon. It must be conceded that Mustachio and Dinkins tend to support the propriety of a recovery of attorney fees in a bad faith action for that portion of the plaintiff's attorney's services necessary to recover the benefits due under the policy but not for those services directed toward recovery of damages for emotional distress or punitive damages. To the extent they do so, however, they were respectively misapplied and incorrectly decided on the attorney's fee issue.

In "providing guidance" to the court on retrial, the Dinkins court concluded that, if successful, the plaintiff could recover attorney fees for the services of his attorney in recovering for the fire loss as opposed to punitive damages or damages for emotional distress. However, the Dinkins decision was based entirely upon...