California Shoppers, Inc. v. Royal Globe Ins. Co.

• Decision Date: 26 November 1985
• Citation: 221 Cal.Rptr. 171,175 Cal.App.3d 1
• Court: California Court of Appeals Court of Appeals
• Parties: CALIFORNIA SHOPPERS, INC., Plaintiff, Respondent, and Cross-Appellant, v. ROYAL GLOBE INS. CO., Defendant, Appellant, and Cross-Respondent. Civ. 27339, Civ. 27496. E000351.

Page 171

221 Cal.Rptr. 171

175 Cal.App.3d 1

CALIFORNIA SHOPPERS, INC., Plaintiff, Respondent, and Cross-Appellant, v. ROYAL GLOBE INS. CO., Defendant, Appellant, and Cross-Respondent.

Civ. 27339, Civ. 27496.

E000351.

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

Nov. 26, 1985.

Certified for Partial Publication ^*.

Grace, Neumeyer & Otto, Inc., Richard A. Neumeyer, Eric M. Taira, Los Angeles, Mercer & Gallagher, and Hugh J. Gallagher, III, Santa Ana, for defendant, appellant, and cross-respondent

Herbert Hafif and Wayne J. Austero, Newport Beach, for plaintiff, respondent and cross-appellant.

OPINION

McDANIEL, Associate Justice.

The appeal here is from a money judgment based upon six specific jury awards, including both contract damages for breach of an insurance contract and tort damages for breach of the implied covenant of good faith and fair dealing. The cross-appeal is from the trial court's post-judgment order striking the award of punitive (exemplary) damages.

The underlying action was brought by California Shoppers, Inc., (California Shoppers or the insured) and four of its shareholders against its insurance carrier, Royal Globe Insurance Company (Royal Globe or the insurer) to recover damages allegedly resulting from the breaches of two duties arising under the policy. One such breach was the refusal to indemnify the insured for a judgment awarded against it in a third-party action (the Uneedus action) brought by a competitor. The other was the failure to defend the Uneedus action. The main action also included a count for willful breach of the implied covenant of good faith and fair dealing allegedly occurring in connection with the failure to defend, as well as a count for fraud allegedly occurring at the time the insurance was purchased.

In the course of the jury trial, the individual shareholder plaintiffs were nonsuited with reference to the counts noted as well as those for negligent and intentional infliction of emotional distress. ¹

The trial resulted in a verdict awarding itemized damages of: (1) expenses of $86,500 incurred by California Shoppers in satisfying the judgment awarded against it in the Uneedus action; (2) expenses of $39,000 incurred by California Shoppers in the defense of the Uneedus action; (3) so-called past inflation loss of $50,000; (4) attorney's fees of $59,493 necessarily expended (by California Shoppers in the litigation here) to procure benefits due under the policy; (5) damages for economic or business loss, $3 million; (6) punitive (exemplary) damages of $2 million; (7) prejudgment interest of $21,963.

Royal Globe moved: (1) for a new trial; and (2) for judgment notwithstanding the verdict. The first was denied, and the second was granted only as to the exemplary damages. In ruling on the latter motion, the court recited that "the evidence considered in its entirety is legally insufficient to justify or support an award of punitive damages against the defendant Royal Globe. There is no showing that the defendant was guilty of oppression, fraud or malice, or that the defendant acted with intent to vex, injure or annoy, or that it acted with a conscious disregard of plaintiff's rights." The court ordered that the award of exemplary damages be stricken, and, "as to the claim and cause of action of plaintiff for punitive damages, that judgment be entered in favor of defendant ... and against the plaintiff." (Emphasis added.)

Royal Globe appealed from the judgment, from the order denying its motion for judgment notwithstanding the verdict as to the issues other than exemplary damages (a non-appealable order), and from the order denying its motion to tax costs. ² California Shoppers, for its part, cross-appealed from the post-judgment order which struck the exemplary damage award, and from "all other appellable [sic] adverse rulings, orders and judgments including but not limited to evidentiary rulings," and two specific orders. ³

Based on interpretation of the policy, particularly the so-called shield clause, we shall affirm the award of contract damages for the refusal to indemnify. For reasons recited infra, we shall also affirm the contract damages for failure to defend.

Otherwise, the undisputed evidence does not support any permissible inferences of tortious behavior necessary to uphold the award of compensatory damages for so-called bad faith. Additionally, because of its speculative nature, the evidence offered to prove tort damages was insufficient, and certain of the instructions given on bad faith were erroneous. On these three grounds, alternatively, the award of tort damages for the alleged economic loss will be stricken. The absence of evidence establishing tort liability also eliminates the basis for awarding attorney's fees. Finally, with no evidence to support the compensatory damages in tort, a fortiori the exemplary damages were properly stricken by the trial court.

The triggering event leading to the litigation here was Royal Globe's failure to provide a defense for the Uneedus action brought against California Shoppers. Such failure was solely the consequence of Royal Globe's mistaken belief, contributed to by California Shoppers, according to uncontradicted testimony, that defense of the Uneedus action had been tendered not by California Shoppers but by another corporate entity (Adco), one actually not even named as a defendant in the Uneedus action.

In attempting to uphold on appeal that portion of the judgment awarding compensatory tort damages, California Shoppers continues in this court an effort it successfully pursued in the trial court, where it characterized Royal Globe as having grossly violated some vaguely defined duty of good faith and fair dealing, and where it urged the jury in polemic if not inflammatory terms that Royal Globe should be punished for that behavior in the form of a sufficiently large compensatory award to justify a commensurately large award of exemplary damages. That vagueness fails in this court to obscure the manifold prejudicial errors which abound in this record.

As observed in this vein by Justice Kaufman in Merlo v. Standard Life & Acc. Ins. Co., 59 Cal.App.3d 5, 130 Cal.Rptr. 416, "Nevertheless, ' "[w]hen the award as a matter of law appears excessive, or where the recovery is so grossly disproportionate as to raise a presumption that it is the result of passion or prejudice, the duty is then imposed upon the reviewing court to act." ' (Cunningham v. Simpson, 1 Cal.3d 301, 308-309 [81 Cal.Rptr. 855, 461 P.2d 39]; accord: Bertero v. National General Corp., supra, 13 Cal.3d at p. 64 [118 Cal.Rptr. 184, 529 P.2d 608]; Forte v. Nolfi, supra, 25 Cal.App.3d at p 688 .)" (Id., at p. 17, 130 Cal.Rptr. 416, emphasis added.)

On the tort liability issue, even accepting the failure to defend as having been a breach of contract, an insurer's responsibility to act fairly and in good faith in handling an insured's claim "is not the requirement mandated by the terms of the policy itself--to defend, settle, or pay. It is the obligation ... under which the insurer must act fairly and in good faith in discharging its contractual responsibilities." (Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 573, 108 Cal.Rptr. 480, 510 P.2d 1032, emphasis added.) In other words, per Gruenberg, the elements of the tort cannot be defined by the terms of the policy; for there to be a breach of the implied covenant, the failure to bestow benefits must have been under circumstances or for reasons which the law defines as tortious. As confirmed in Hanson v. The Prudential Ins. Co. of America, 772 F.2d 580 (9th Cir.), "[t]he mere denial of benefits, however, does not demonstrate bad faith." (Id., at p. 584.) On this record, with reference to alleged bad faith, all that is shown is a denial of benefits in the form of a failure to defend because of a mistake induced by the insured.

Finally, there was no showing whatsoever of any entitlement to what California Shoppers characterized as damages for "past inflation loss," and so they too will be stricken.

SYNOPSIS OF THE FACTS

As noted, there was no dispute in the direct (Evid. Code, § 410) evidence presented at the trial; here is what it shows. Adco Advertising, Inc. (Adco), not a party to these proceedings, was the publisher of the "Pennysaver," a very successful "give-away" type, advertising newspaper published and distributed in Orange County. Some of the principals of Adco decided to launch a similar venture in Riverside County, and, with that objective, they invested $35,000 in the venture and caused California Shoppers to be organized as a corporation, with the result that certain of these Adco principals were also principals of California Shoppers. In any event, in this mode, California Shoppers commenced publication and distribution of the "California Shopper" in Riverside County.

Royal Globe, which, through the Jay and Renfro agency in Newport Beach, had written Adco's business liability insurance coverage otherwise for several years, upon overtures from California Shoppers, issued a similar insurance policy (the policy) to California Shoppers, also through that same agency, with an effective date of March 1, 1975. That policy, the one here sued upon, recited in pertinent part:

"1. PERSONAL INJURY AND ADVERTISING OFFENSE LIABILITY COVERAGE

"(A) The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of personal injury or advertising offense sustained by any person or organization and arising out of the conduct of the named insured's business ... and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such injury or even if any of the allegations of the suit are groundless, false or fraudulent ...

"(B) This insurance does not apply: ...

"(2) to personal injury or advertising offense arising out of the wilful violation of a...