California Dredging Co. v. Insurance Co. of North America

• Decision Date: 31 August 1993
• Docket Number: No. A057201,A057201
• Citation: 22 Cal.Rptr.2d 461,18 Cal.App.4th 572
• Parties: Previously published at 18 Cal.App.4th 572, 23 Cal.App.4th 591, 28 Cal.App.4th 1618 18 Cal.App.4th 572, 23 Cal.App.4th 591, 28 Cal.App.4th 1618 CALIFORNIA DREDGING COMPANY et al., Plaintiff/Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant/Respondent.
• Court: California Court of Appeals Court of Appeals

Page 461

22 Cal.Rptr.2d 461

Previously published at 18 Cal.App.4th 572, 23 Cal.App.4th 591, 28 Cal.App.4th 1618

18 Cal.App.4th 572, 23 Cal.App.4th 591, 28 Cal.App.4th 1618

CALIFORNIA DREDGING COMPANY et al., Plaintiff/Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant/Respondent.

No. A057201.

Court of Appeal, First District, Division 5, California.

Aug. 31, 1993.

Review Granted Dec. 2, 1993.

Review Dismissed and Cause Remanded to the Court of Appeal Oct. 27, 1994.

Alvin H. Goldstein, Jr., Mark L. Musto, Goldstein & Phillips, San Francisco, for plaintiff/appellant.

Martin S. Checov, David P. Bell, Karen Beth Barr, O'Melveny & Myers, San Francisco, for defendant/respondent.

PETERSON, Presiding Justice.

This is a dispute over attorney fees. Appellants California Dredging Company (CDC) and Reliance Insurance Company (Reliance) claim that respondent Insurance Company of North America (INA) must pay the attorney fees they spent litigating a prior federal court action, because INA allegedly misrepresented the amount of insurance available to settle that prior suit. The trial court ruled INA's alleged misrepresentations were privileged within the meaning of Civil Code section 47, subdivision (b) (section 47(b)) and sustained INA's demurrer without leave to amend. CDC and Reliance appeal. We affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

Since this is an appeal from a judgment entered after the trial court sustained a demurrer, we set forth the facts as pleaded in appellants' complaint.

In 1984, CDC, a dredging contractor, filed a complaint in federal court against Pipe Systems, Incorporated (PSI), the distributor of allegedly defective plastic pipe. CDC claimed it had been damaged when it used PSI's pipe on a dredging project in the Petaluma River channel. In 1985, CDC added several additional defendants to its complaint including Portco, the entity which had manufactured the pipe. Portco was insured by INA, and INA retained counsel to defend Portco in the federal suit. In August 1985, all the defendants in the federal action, including Portco, filed for bankruptcy; however, in December 1985, the bankruptcy court lifted the stay when CDC agreed to limit its recovery "to [the] proceeds of applicable insurance policies, if any...."

CDC then initiated discovery against Portco; and in formal and informal responses, Portco said it had only a single $100,000 primary policy, issued by INA, available to settle CDC's claim. Portco made similar representations to the various parties in settlement discussions conducted with the court. In fact, Portco had renewed its INA policy twice and another carrier had issued Portco a $5 million excess policy. INA concealed the existence of these additional policies from the attorneys it had hired to defend Portco so it could avoid liability on the renewal policies, and so it would not be liable for a gap in coverage which existed between the primary and excess policies. Those attorneys then relayed the misrepresentations to the various parties to the litigation. Unaware of the additional policies, CDC agreed to settle its claim against Portco for $100,000 in February 1987.

Shortly thereafter, CDC learned of the renewal and excess policies, and it promptly rescinded the settlement agreement with Portco. A new round of negotiations began, and the dispute was again settled for a sum which included the $300,000 cumulative limits of the three INA policies, plus an additional sum from the excess carrier.

Several months later, CDC, together with Reliance, its surety on the dredging project, filed the present complaint against INA in the San Francisco Superior Court. Although containing several causes of action, the complaint alleged, in essence, that INA had fraudulently concealed the existence of the renewal and excess policies in the underlying federal action. Accordingly, CDC and Reliance sought as damages the excess attorney fees they spent litigating the federal action. In response, INA filed a cross-complaint against Portco and Reliance seeking, among other things, a declaration of its rights and obligations under the policies it had allegedly concealed.

After several years of discovery, INA filed a motion for judgment on the pleadings, claiming it was entitled to prevail because all of appellants' claims were based on statements made in the context of litigation and, thus, were barred by the absolute litigation privilege set forth in section 47(b). The trial court granted the motion, but gave CDC and Reliance a chance to amend their complaint. They did so, but INA then filed a demurrer arguing section 47(b) was still applicable. The trial court agreed and entered an order sustaining the demurrer without leave to amend. After the trial court entered a judgment in favor of INA, CDC and Reliance filed the present appeal. Shortly thereafter, INA filed a protective cross-appeal seeking review of a prior order which limited the scope of the cross-complaint.

II. DISCUSSION

A. General Principles

The issue on appeal is whether California's absolute litigation privilege bars a third party claimant, in litigation against an insured, from bringing a subsequent direct action against its insurer, based on misrepresentations the insurer allegedly made during the underlying litigation. The privilege at issue is set forth in section 47(b). It states: "A privileged publication or broadcast is one made: [p] ... [p] (b) In any ... judicial proceeding...." Cases interpreting this wording have consistently held the privilege it describes applicable to any communication (1) made in judicial or quasi-judicial proceedings, (2) by litigants or other participants authorized by law, (3) to achieve the objects of the litigation, (4) that have some connection or logical relation to the action. (Silberg v. Anderson (1990) 50 Cal.3d 205, 212, 50 Cal.3d 343A, 266 Cal.Rptr. 638, 786 P.2d 365.)

The question here is whether INA's alleged misrepresentations are privileged within the meaning of section 47(b). To resolve that issue, we apply the four part test set forth above.

1. Were the Misrepresentations Made in a Judicial Proceeding?

The first issue is whether INA's misrepresentations were made in a judicial proceeding. Here, INA allegedly told the attorneys it had hired to defend Portco that Portco had only one policy available to settle CDC's claim. Those attorneys then relayed that information to CDC in both formal and informal discovery responses. INA also made similar representations in various formal and informal settlement discussions. Each of these allegations clearly involves communications made in the context of a judicial proceeding.

CDC and Reliance claim INA's communications were not privileged because they were made "in the exchange of and coordination of ... settlement positions with co-defendants, their counsel and claims personnel." However, the litigation privilege is not limited to communications in legal pleadings or statements made in court. (Albertson v. Raboff (1956) 46 Cal.2d 375, 380-381, 295 P.2d 405.) Numerous cases have held it applicable to statements made during settlement discussions. (See, e.g., AroChem Intern., Inc. v. Buirkle (2d Cir.1992) 968 F.2d 266, 270-272 [applying California law]; Abraham v. Lancaster Community Hospital (1990) 217 Cal.App.3d 796, 823, 266 Cal.Rptr. 360; Asia Investment Co. v. Borowski (1982) 133 Cal.App.3d 832, 843, 184 Cal.Rptr. 317.)

2. Were the Misrepresentations Made by a Participant Authorized by Law?

The second issue is whether the INA's misrepresentations were made by a participant who was authorized by law. Basically, we must determine whether INA, as the insurer for Portco in the underlying federal suit, is entitled to the protection afforded by section 47(b). This precise issue was discussed in two recent cases: Doctors' Co. Ins. Services v. Superior Court (1990) 225 Cal.App.3d 1284, 275 Cal.Rptr. 674 and Kupiec v. American Internat. Adjustment Co. (1991) 235 Cal.App.3d 1326, 1 Cal.Rptr.2d 371.

In Doctors', the plaintiffs had brought a malpractice action against their doctor which the doctor's insurer defended and ultimately settled. The plaintiffs then sued the doctor's insurer directly, alleging it had instructed the doctor " 'to not tell the truth in his deposition.' " (Doctors' Co. Ins. Services v. Superior Court, supra, 225 Cal.App.3d at p. 1289, 275 Cal.Rptr. 674, emphasis in original.) On appeal, the Doctors' court found these allegations were protected, rejecting the argument that "insurers of litigants are not 'participants authorized by law' to whom the privilege applies." (P. 1295, 275 Cal.Rptr. 674.) The court reasoned that, because of the unique relationship between an insurer and its insured, insurers "are entitled to the protections of the privilege when they communicate with other participants in the litigation." (Id. at p. 1296, 275 Cal.Rptr. 674.)

The holding in Doctors' was then cited with approval and followed in Kupiec, where the court held an insurer's alleged concealment of evidence in prior litigation was privileged. (235 Cal.App.3d at pp. 1332-1333, 1 Cal.Rptr.2d 371.)

From Doctors' and Kupiec, we conclude that INA, as the insurer for Portco, is entitled to the protection afforded by section 47(b). An insurer is a participant authorized by law within the meaning of that section.

CDC and Reliance claim the conclusion reached in Doctors' and Kupiec was aberrational and urge us to follow an older decision from this district, Bradley v. Hartford Acc. & Indem. Co. (1973) 30 Cal.App.3d 818, 106 Cal.Rptr. 718. In Bradley attorneys of record in a prior personal injury lawsuit brought a defamation action against an insurer which apparently insured a party in the prior action. The complaint alleged the insurer had manufactured evidence and suborned perjury by inducing a third party falsely to charge the attorneys with colluding to dismiss another defendant in the personal injury suit in exchange...