City Products Corp. v. Globe Indemnity Co.

• Decision Date: 04 January 1979
• Parties: CITY PRODUCTS CORPORATION, a corporation, Plaintiff and Appellant, v. GLOBE INDEMNITY COMPANY, Defendant and Respondent. Civ. 53603.
• Court: California Court of Appeals Court of Appeals

Page 494

151 Cal.Rptr. 494

88 Cal.App.3d 31

CITY PRODUCTS CORPORATION, a corporation, Plaintiff and Appellant, v. GLOBE INDEMNITY COMPANY, Defendant and Respondent.

Civ. 53603.

Court of Appeal, Second District, Division 3, California.

Jan. 4, 1979.

As Modified on Denial of Rehearing, Jan. 24, 1979.

Hearing Denied Feb. 28, 1979.

Sheppard, Mullin, Richter & Hampton, William A. Masterson, and Ronald P. Kaplan, Los Angeles, for plaintiff and appellant.

Grace, Neumeyer & Otto, Richard A. Neumeyer, and Brian D. Eyres, Los Angeles, for defendant and respondent.

POTTER, Associate Justice.

Plaintiff City Products Corporation appeals from a judgment of dismissal after a demurrer was sustained (without leave to amend) to its complaint seeking recovery from defendant Globe Indemnity Company pursuant to the terms of a general liability policy of insurance. The policy expressly covered "all sums which the insured shall become legally obligated to pay as damages because of injury . . . sustained by any person or organization and arising out of one or more of the following offenses: Group A false arrest, detention or imprisonment, or malicious prosecution."

In a prior action, plaintiff, as defendant, suffered a judgment awarding Stanley Homola damages for malicious prosecution. The verdict in Homola's favor awarded $2,725 compensatory damages and $30,000 in punitive damages against City Products. On appeal, the punitive damages were reduced to $10,000. The appellant opinion in Homola was ordered unpublished by our Supreme Court. It is, however, appropriate and necessary to refer to it to establish the basis upon which City Products was found liable for punitive damages. That basis is stated in the opinion as follows:

"City Products urges the view that it cannot be held responsible in punitive damages because there is no showing that any malicious acts were done by its agents with the knowledge and under the direction of its corporate officers having the power to bind the corporation. Reliance is placed upon Bertero, (13 Cal.3d 43, 118 Cal.Rptr. 184, 529 P.2d 608), Hale v. Farmers Ins. Exch. (1974) 42 Cal.App.3d 681, 117 Cal.Rptr. 146 and Kuchta v. Allied Builders Corp. (1971) 21 Cal.App.3d 541, 98 Cal.Rptr. 588. City Products asserts that, based on the doctrine of these cases, there was no evidence to justify a finding of malice in fact on the part of employees, agents or others, as being authorized by any corporate officer of City Products, and that if malicious acts were committed by agents of City Products without the knowledge or express direction of such superior officers, there must be a showing of ratification by such officers with full knowledge as to the malicious quality of the prior acts.

"In the case at bench, however, the rules stated do not have application since the evidence discloses that Mr. Keenan was the collection manager for not simply one store of Barker Brothers, but for an entire area, made up of a number of retail stores, and, as such, had authority to bind the corporation. City Products, doing business as Barker Brothers, in making assignments of accounts to collection agencies and giving such agencies the authority to collect any way the agencies saw fit, including the filing of lawsuits and pursuing the same through to judgment.

"City Products stresses the point that many of the acts which might have influenced the jury with respect to malice in fact occurred after the institution of the municipal court action by Loan Adjustment Service against plaintiff. City Products points to the evidence showing hostility between Weiss, attorney for Loan Adjustment Service as plaintiff in the municipal court action, and Sigel, as attorney for plaintiff Homola as defendant in the municipal court action, and the hostility between Bales, the president of Loan Adjustment Service, and the plaintiff.

"But the initial assignment of the Brown-Homola account as a two-debtor account by Mr. Keenan on behalf of Barker Brothers, without any reasonable, honest or sincere belief in the validity of Barker Brothers' position that plaintiff Homola was a debtor of Barker Brothers, is in and of itself sufficient to establish the element of lack of probable cause."

Upon affirmance of the judgment, defendant paid plaintiff the amount of the compensatory damage award but refused to pay the $10,000 in punitive damages.

Plaintiff's second amended complaint, which set forth the above facts, alleged as damages its payment to Homola of the punitive damage award. Defendant demurred on the ground that the complaint failed to state facts sufficient to constitute a cause of action. In support of said ground, defendant contends that recovery under the policy is prohibited (1) by section 533 of the Insurance Code, ¹ and (2) by the policy of this state to award punitive damages "for the sake of example and by way of punishing the defendant." (Civ.Code, § 3294.) ² Plaintiff contends to the contrary that (1) recovery is not prohibited by Insurance Code section 533 because plaintiff was held vicariously liable for the act of its employee, not for its own willful act, and (2) an indemnity against punitive damages does not violate the public policy of this state.

Careful examination of the opinion of Division Four of this court affirming the award of punitive damages against plaintiff demonstrates that the basis of such award was the willful act of plaintiff, not vicarious responsibility for the acts of its employee. Recovery from defendant under the policy of insurance is therefore prohibited by Insurance Code section 533. In any event, the policy of this state that punitive damages may be recovered only "for the sake of example and by way of punishing the defendant" precludes passing them on to an insurer. The demurrer was therefore properly sustained.

The Basis of the Punitive Damage Award Was Plaintiff's Own Willful Act

Plaintiff's argument that its liability was "based upon an allegedly malicious prosecution instituted by one of City's low-level employees" and that the punitive damage award was "based upon a theory of Respondeat superior " is contrary to the record. Plaintiff was not held liable merely as principal of the collection agency which brought the action against Homola. This is apparent from the opinion of Division Four of this court which states that the evidence gave rise to a "reasonable inference that the municipal court action against plaintiff (Homola) was commenced at the direction of defendant City Products, . . ." Nor was such liability for punitive damages imposed upon plaintiff vicariously for the tort of its collection manager acting in a manner not authorized but within the scope of his authority. The opinion on appeal makes it abundantly clear that the collection manager was deemed one of plaintiff's "corporate officers having the power to bind the corporation," making his acts the equivalent of the "knowledge or express direction of such superior officers."

Comparable language appears in Bertero v. National General Corp. (1974) 13 Cal.3d 43, 67, 118 Cal.Rptr. 184, 201, 529 P.2d 608, 625: "(A) corporation may be liable for punitive damages only for malicious acts done by its agents and with the knowledge or under the direction of its corporate officials having the power to bind the corporation . . . ." To explain these terms, Lowe v. Yolo County etc. Water Co. (1910) 157 Cal. 503, 108 P. 297, is cited. There the court said (Id., at pp. 510-511, 108 P. at p. 300): "It is not disputed, of course, that a corporation may be held guilty of malice or oppression by reason of acts of those whom it has placed in charge of its affairs and who 'constitute, to all purposes of dealing with others, the corporation.' (See Maynard v. F.F. Ins. Co., 34 Cal. 54, 91 Am.Dec. 672.)"

It is apparent from the foregoing that under California law the imposition of punitive damages upon a corporation is based upon its own fault. It is not imposed vicariously by virtue of the fault of others. The "malice in fact," which was the foundation of the punitive award against plaintiff, was malice of plaintiff acting through its corporate official "having the power to bind the corporation" who, in contemplation of the law, constituted plaintiff itself.

Coverage Is Prohibited by Insurance Code Section 533

As above held, plaintiff was assessed punitive damages on account of its own willful tort. An element of that tort was "malice in fact". This is clear from the appellate opinion in which the court states that (1) "(t)he 'malice, express or implied,' referred to in Civil Code section 3294, 'has long been interpreted to mean that malice in fact, as opposed to malice implied by law, is required. (Citations.)' (Bertero, supra, 13 Cal.3d 43, at p. 66, 118 Cal.Rptr. 184, at 200, 529 P.2d 608, at 624.)," (2) "(m)alice in fact may be proved by reasonable inferences drawn from the proof of want of probable cause," and (3) defendant's "corporate officers having the power to bind the corporation" had acted "without any reasonable, honest or sincere belief in the validity of Barker Brothers' position." ³

In Maxon v. Security Ins. Co. (1963) 214 Cal.App.2d 603, 29 Cal.Rptr. 586, an insurer was held without obligation to defend a malicious prosecution claim against the insured, though the loss was held to come within the terms of the policy. In so doing, the court said (Id., at pp. 615-616, 29 Cal.Rptr. at pp. 592-593):

"The terminology of the policy would appear to require the respondent insurance company to indemnify the appellant from such liability. However, while the appellant might be legally obligated to pay damages for malicious prosecution, the respondent insurer cannot under the public policy of this state indemnify the insured against liability for his own willful wrong. That policy is a part of every insurance contract and is expressed in section 533 of the Insurance Code, which codifies the general rule that an insurance policy...