Butcher v. Truck Insurance Exchange

• Decision Date: 03 February 2000
• Docket Number: No. B121194.,B121194.
• Citation: 77 Cal.App.4th 1442,92 Cal.Rptr.2d 521
• Court: California Court of Appeals Court of Appeals
• Parties: Dan E. BUTCHER et al., Plaintiffs and Appellants, v. TRUCK INSURANCE EXCHANGE et al., Defendants and Respondents.

92 Cal.Rptr.2d 521

77 Cal.App.4th 1442

Dan E. BUTCHER et al., Plaintiffs and Appellants, v. TRUCK INSURANCE EXCHANGE et al., Defendants and Respondents.

No. B121194.

Court of Appeal, Second District, Division 4.

February 3, 2000.

Review Denied May 10, 2000.

Haight, Brown & Bonesteel, Roy G. Weatherup, Caroline E. Chan, and Mark B. Aldrich, Santa Monica, for Plaintiffs and Appellants.

Cooper, Kardaras & Scharf, Brand L. Cooper, Pasadena, Greines, Martin, Stein & Richland, Irving H. Greines and Feris M. Greenberger, Beverly Hills, for Defendant and Respondent Truck Insurance Exchange.

Hawkins, Schnabel, Lindahl & Beck, Laurence H. Schnabel and Rena Denton Stone, Los Angeles, for Defendant and Respondent Don P. Meyer.

DAU, J.^*

Insureds, facing suit for malicious prosecution, turned to their insurer for a defense having years before instructed the insurer's agent to duplicate the coverage of a policy containing that protection. When the defense was denied, because the coverage was not in the policy that was issued and later renewed, the insureds sued. Insureds produced evidence that the insurer's agent misled them into believing he had delivered a policy duplicating the coverages (including coverage for malicious prosecution) of an insurer whose policy was not being renewed. The trial court granted summary judgment in favor of the insurance company and its agent, on the basis that a prior judgment in an action in federal court between insureds and the insurer issuing the prior policy precluded insureds' claim. This appeal presents three basic issues.

1. What is the preclusive effect in this action of a prior federal court judgment in a coverage action between the insurer whose policy was not being renewed and these insureds? In the prior action a federal district court based its judgment on two grounds: first, the policy's malicious prosecution provision did not cover the malicious prosecution claim against insureds, and second, the offense occurred outside the insureds' policy period. The court of appeals affirmed the judgment, upholding the second ground and declining to address the first. The specific issue presented is whether the federal judgment is conclusive on insureds as to the first ground.

2. Will an action lie for failure to deliver agreed-upon coverage, where an agent misleads the insureds into believing they received the policy requested, and the insureds do not read the policy? Related to this issue is whether the form of the prior policy, providing malicious prosecution coverage, obligates the insurer to defend and indemnify a loss caused by the wilful act of the insured.

3. Where an agent negligently omits to obtain the agreed-upon coverage and delivers a policy in 1986, and insureds do not bring suit until 1993, which is just after they are sued and the insurer refuses to defend, have statutes of limitations run on insureds' claim for reformation and their claims based on negligence?

We discuss these issues in the order set out above and conclude as follows: where a court of first instance makes its judgment on alternative grounds and the reviewing court affirms on only one of those grounds declining to consider the other, the second ground is not conclusively established; there is a triable issue of material fact whether the agent misled the insureds, which precludes summary judgment, and, if the trier of fact finds the insureds were misled by the agent, the form of the prior policy provides coverage for the malicious prosecution claim and would entitle insureds to a defense, but not to indemnity; and the statute of limitation for the negligence claims does not begin to run until the insurer refuses to defend and, for the reformation claim, until insureds discover the facts constituting the mistake. Accordingly, we reverse.

I FACTUAL AND PROCEDURAL BACKGROUND

In 1985 respondent Don P. Meyer, an agent of respondent Truck Insurance Exchange (Truck) contacted appellant Dan E. Butcher (Butcher) to solicit his insurance business. Butcher gave Meyer a copy of his current policies that were not being renewed and instructed Meyer to secure the same coverage but at higher limits.

A policy that Butcher provided to Meyer, issued by West American Insurance Company (West American), included "personal injury" coverage, which the policy defined as injury arising out of, among other things, malicious prosecution.¹ According to Butcher, Meyer said he could obtain the coverage Butcher wanted, and he later came to Butcher's office with the policy he obtained from Truck, indicated it had the same coverage as that provided by the West American policy, and never told Butcher he was unable to get the personal injury coverage.

Meyer's description about how he procured and presented the Truck policy differs substantially from Butcher's, although he agreed that Butcher said he wanted to duplicate his existing coverage. Meyer was aware that Truck's underwriting practice was not to provide personal injury coverage to contractors, such as Butcher, and he presented the policies Butcher had provided to Truck's underwriter, Robert White, for review. Meyer asked White whether he would make an exception in the Butchers' case and duplicate the West American coverage. White declined to write personal injury coverage for the Butchers, and Meyer so informed Butcher.

Meyer delivered Truck's policy, naming the Butchers (Mr. and Mrs.) as insureds, in May 1986. The policy period was October 1, 1985 to October 1, 1986. Butcher put the Truck policy away without reading it; it does not contain personal injury coverage.² When asked why he did not read the policy, Butcher said: "Because I don't understand them. I figure Mr. Meyer would do the job as well as anybody, so I didn't read it, no." Truck continued to renew Butcher's policies until November 6, 1992.

In 1977 Butcher contracted to sell real property to James Hennefer and Robert Klein. After the parties modified the agreement, Butcher cancelled the escrow. Hennefer and Klein sued Butcher for specific performance and ultimately obtained final judgment in their favor in 1986. From late 1986 until early 1990 either or both of the Butchers pursued four lawsuits against Hennefer and others, each with the objective of avoiding execution and delivery of a deed to the property as required by the specific performance judgment. In each of these actions, the defendants obtained judgment in their favor. Based on these four actions, in 1992 Hennefer and others filed a malicious prosecution action against the Butchers, their son-in-law, and one of their former attorneys; the case is entitled Hennefer v. Butcher, Los Angeles Superior Court No. SWC 113245 (the Hennefer action).

The Butchers sought, from Truck and their former insurers (West American, American Home Assurance Company [American Home], and Continental Insurance Company [Continental]), a defense and indemnification in connection with the Hennefer action. When Truck declined to defend, the Butchers hired their own attorneys. In December 1995 plaintiffs in the Hennefer action obtained judgment against the Butchers in the amount of $16,811,200 plus punitive damages against Butcher individually in the amount of $3,000,000. The Butchers claim they settled this action while it was on appeal.

In 1994 Continental sued the Butchers in federal district court (the federal action), seeking a declaration that it had no duty to defend or indemnify them in the Hennefer action. In the federal action, entitled Continental Ins. Co. v. Hennefer, CD. Cal. No. 94-5613, the Butchers filed a third-party complaint against Truck, Meyer, American Home, and West American. The district court dismissed the Butchers' action against American Home for failure to state a cause of action. Continental and West American obtained summary judgment in 1995 that no defense or indemnity was owed the Butchers. The district court ruled in favor of West American on two grounds: (1) the Hennefer action arose from a contractual obligation (the property sale contract between Butcher, on the one hand, and Hennefer and Klein, on the other) that was not met, and the policy covered tort injuries, but not injuries arising out of contractual obligations, and (2) the causes of action in the Hennefer action were based on events outside the policy period, i.e., the policy expired in 1985, and the first of the lawsuits, on which the malicious prosecution claim was based, was filed in late 1986. The Ninth Circuit affirmed the judgment in favor of West American on the ground that the claims being asserted were outside its policy period and refused to consider the first ground. (Continental Ins. Co. v. Hennefer (9th Cir. July 1, 1997, No. 96-55241) 1997 WL 362151.) With Continental, American Home, and West American out of the case, the district court dismissed the Butchers' third-party complaint against Truck and Meyer, citing an absence of diversity jurisdiction between the remaining parties.

The Butchers filed this action against Truck and Meyer in February 1996 and alleged, as policyholders, they were owed a defense and indemnity in the Hennefer action. Appellants' complaint contains causes of action against Truck for breach of the insurance contract, breach of the implied covenant of good faith and fair dealing (bad faith), declaratory relief, and reformation of the insurance contract, causes of action against Truck and Meyer for negligent misrepresentation and negligent failure to procure adequate liability insurance coverage, and a cause of action against Meyer for breach of contract to procure insurance.

Truck and Meyer moved for summary judgment. Truck argued: (1) the conduct alleged in the Hennefer action was not an "occurrence," as defined in the Truck policy, and did not seek compensation for "bodily injury" or "property damage";³ (2) there can be no claim for bad faith in the absence of a breach of contract; (3) the final judgment in the federal action,...