Brandt v. Superior Court

• Court: United States State Supreme Court (California)
• Citation: 693 P.2d 796,37 Cal.3d 813,210 Cal.Rptr. 211
• Decision Date: 28 January 1985
• Parties: , 693 P.2d 796, 53 USLW 2397 Albert BRANDT, Petitioner, v. The SUPERIOR COURT of San Diego County, Respondent; STANDARD INSURANCE COMPANY, Real Party in Interest. L.A. 31859.

Page 211

210 Cal.Rptr. 211 37 Cal.3d 813, 693 P.2d 796, 53 USLW 2397 Albert BRANDT, Petitioner,
v.
The SUPERIOR COURT of San Diego County, Respondent;
STANDARD INSURANCE COMPANY, Real Party in Interest. L.A. 31859. Supreme Court of California,
In Bank. Jan. 28, 1985.

Page 212

[693 P.2d 797] [37 Cal.3d 815] Neil M. Levy, San Francisco, Gordon S. Churchill and Robert J. Kaplan, San Diego, for petitioner.

No appearance for respondent.

Gibson, Dunn & Crutcher, John H. Scharer, Michael G. Yoder and Eloise S. Hock, Newport Beach, for real party in interest.

Adams, Duque & Hazaltine, James L. Nolan, Martha G. Bannerman, Los Angeles, Rogers, Joseph, O'Donnell & Guinn, Joseph W. Rogers, Jr., and Leo F. Orenstein, San Francisco, as amici curiae on behalf of respondent and real party in interest.

KAUS, Justice.

When an insurer tortiously withholds benefits, are attorney's fees, reasonably incurred to compel payment of the policy benefits, recoverable as an element of the damages resulting from such tortious conduct? ¹ We hold that they are and accordingly issue a writ of mandate directing the trial court to reinstate the portion of the complaint seeking attorney's fees as damages.

According to the complaint real party in interest Standard Insurance Company (Standard) issued a group disability income insurance policy to Vicom Associates, petitioner's employer, under which petitioner was insured. Petitioner[37 Cal.3d 816] sustained a loss covered by the policy when he became totally disabled. He made a timely demand on Standard for benefits, which it unreasonably refused to pay. Petitioner therefore filed an action against Standard for (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, and (3) for violation of the statutory prohibitions against unfair claims practices. (Ins.Code, § 790.03.)

In his causes of action for breach of the duty of good faith and fair dealing and for the statutory violations, petitioner listed attorney's fees incurred in connection with the contract cause of action as part of the [693 P.2d 798] resulting damage. Standard successfully moved to strike the portions of the complaint seeking attorney's fees. Petitioner then filed the present mandate proceeding. ²

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Although we are reluctant to exercise our discretion to review rulings at the pleading stage of a lawsuit, we do so here because of the compelling circumstances presented. (See Babb v. Superior Court (1971) 3 Cal.3d 841, 851, 92 Cal.Rptr. 179, 479 P.2d 379.) The issue is of widespread interest, and the Courts of Appeal are in conflict. Moreover, the trial court's ruling has effectively deprived petitioner of the opportunity to present a substantial portion of his cause of action. Under the circumstances, extraordinary relief is appropriate. (Ibid.; Taylor v. Superior Court (1979) 24 Cal.3d 890, 894, 157 Cal.Rptr. 693, 598 P.2d 854.)

As noted, the Courts of Appeal are in conflict on the question of the recoverability of attorney's fees. The seminal cases on each side are Mustachio v. Ohio Farmers Ins. Co. (1975) 44 Cal.App.3d 358, 118 Cal.Rptr. 581, which allowed recovery and Austero v. Washington National Ins. Co. (1982) 132 Cal.App.3d 408, 182 Cal.Rptr. 919 (hereafter Austero ), which denied it. In Mustachio, attorney's fees incurred in connection with negotiations leading up to settlement of the insured's policy claim were held properly included as an element of damages in the insured's later tort action against the insurer for breach of its duty of good faith and fair dealing. In Austero, a divided court rejected the reasoning of Mustachio and reversed an award of attorney's fees, holding that in a bad faith tort action recovery of attorney's fees incurred to obtain benefits under the policy is precluded by Code of Civil Procedure section 1021. ³ Presiding Justice Morris dissented,[37 Cal.3d 817] arguing that the majority's reliance on section 1021 misinterpreted the nature of the case. We agree and adopt much of Presiding Justice Morris' dissent.

"It is well settled that if an insurer, in discharging its contractual responsibilities, 'fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing.' (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574 [108 Cal.Rptr. 480, 510 P.2d 1032], original italics.) When such a breach occurs, the insurer is 'liable for any damages which are the proximate result of that breach.' (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 925 [148 Cal.Rptr. 389, 582 P.2d 980].)" (Austero, supra, 132 Cal.App.3d at pp. 419-420, 182 Cal.Rptr. 919 [dis. opn. of Morris, P.J.].)

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. (Mustachio v. Ohio Farmers Ins. Co., supra, 44 Cal.App.3d at p. 363, 118 Cal.Rptr. 581.) These fees must be distinguished from recovery of attorney's fees qua attorney's fees, such as those attributable to the bringing of the bad faith action itself. What we consider here is attorney's fees that are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action.

[693 P.2d 799] "When a pedestrian is struck by a car, he goes to a physician for treatment of his injuries, and the motorist, if liable in tort, must pay the pedestrian's medical fees. Similarly, in the present case, an insurance company's refusal to pay benefits has required the insured to seek the services of

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an attorney to obtain those benefits, and the insurer, because its conduct was tortious, should pay the insured's legal fees." (Austero, supra, 132 Cal.App.3d at p. 421, 182 Cal.Rptr. 919.)

Code of Civil Procedure section 1021 does not preclude an award of attorney's fees under these circumstances. "Section 1021 leaves to the agreement of the parties 'the measure and mode of compensation of attorneys.' However, here, as in the third party tort situation, 'we are not dealing with "the measure and mode of compensation of attorneys" but with damages wrongfully caused by defendant's improper actions.' (Prentice v. North Amer. Title Guar. Corp. (1963) 59 Cal.2d 618, 621 [30 Cal.Rptr. [37 Cal.3d 818] 821, 381 P.2d 645].)" ⁴ (Austero, supra, 132 Cal.App.3d at p. 420, 182 Cal.Rptr. 919.) In such cases there is no recovery of attorney's fees qua attorney's fees. ⁵ This is also true in actions for false arrest and malicious prosecution, where damages may include attorney's fees incurred to obtain release from confinement or dismissal of the unjustified charges (Nelson v. Kellogg (1912) 162 Cal. 621, 123 P. 1115) or to defend the prior suit (Bertero v. National General Corp. (1974) 13 Cal.3d 43, 59, 118 Cal.Rptr. 186, 529 P.2d 608).

The fact that--here as well as in Austero --the fees claimed as damages are incurred in the very lawsuit in which their recovery is sought, does not in itself violate section 1021's general requirement that parties bear their own costs of legal representation, though it may make the identification of allowable fees more sophisticated. If the insured were to recover benefits under the policy in a separate action before suing on the tort, the distinction between fees incurred in the policy action, recoverable as damages, and those incurred in the tort action, nonrecoverable, would be unmistakable. As pointed out in Prentice v. North Amer. Title Guar. Corp., supra, 59 Cal.2d at page 621, 30 Cal.Rptr. 821, 381 P.2d 645, "[i]n the usual case, the attorney's fees will have been incurred in connection with a prior action; but there is no reason why recovery of such fees should be denied simply because the two causes ... are tried in the same court at the same time. [Citation.] [p] There was no disadvantage to defendant in the fact that the causes, although separate, were concurrently tried."

The dual nature of the present action distinguishes this case from Lowell v. Maryland Casualty Co. (1966) 65 Cal.2d 298, 54 Cal.Rptr. 116, 419 P.2d 180, Patterson v. Insurance Co. of North America (1970) 6 Cal.App.3d 310, 85 Cal.Rptr. 665, and Carroll v. Hanover Insurance Co. (1968) 266 Cal.App.2d 47, 71 Cal.Rptr. 868. "Lowell, Patterson, and Carroll were not bad faith cases. The plaintiffs' entire actions there were [37 Cal.3d 819] comparable only to the first part of the present action, i.e., for [693 P.2d 800] benefits due under insurance policies. In none of those cases was any allegation of bad faith made, which is the gravamen of the second part of the present action. Thus [the] plaintiffs in Lowell, Patterson, and Carroll sought attorney's fees in an action for prosecution of that very action,

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or ... attorney's fees qua attorney's fees. Plaintiff[ ] here, however, seek[s] recovery of attorney's fees as damages, like any other damages, proximately caused by defendant's breach of its duty to deal in good faith." (Austero, supra, 132 Cal.App.3d at pp. 421-422, 182 Cal.Rptr. 919 [dis. opn. by Morris, P.J.].)

The Austero majority's reliance on Lowell, Patterson, and Carroll blurred the distinction between bad faith conduct and nontortious but erroneous withholding of benefits. "[A]n erroneous interpretation of an insurance contract by an insurer does not necessarily make the insurer liable in tort for violating the covenant of good faith and fair dealing; to be liable in tort, the insurer's conduct must also have been unreasonable. [Citations.] When no bad faith has been alleged and proved, Lowell, Patterson, and Carroll preclude the award of attorney's fees incurred in obtaining benefits that the insurer erroneously,...