Combs v. State Farm Fire & Cas. Co.

Decision Date16 October 2006
Docket NumberNo. A111813.,A111813.
Citation49 Cal.Rptr.3d 917,143 Cal.App.4th 1338
CourtCalifornia Court of Appeals Court of Appeals
PartiesJack COMBS, Plaintiff and Appellant, v. STATE FARM FIRE & CASUALTY COMPANY et al., Defendants and Respondents.

Chapman, Popik & White, Mark A. White, Carol D. Quackenbos, San Francisco, for defendants and respondents.


Plaintiff Jack Combs appeals from an adverse summary judgment rejecting his claim against State Farm Fire & Casualty Company and State Farm General Insurance Company1 (collectively, State Farm) for its refusal to reimburse him for the attorney fees he was ordered to pay the prevailing party in an earlier action against him for housing discrimination. Combs does not dispute that Insurance Code section 533 (section 533) prohibits State Farm from indemnifying him for the compensatory and punitive damages for which he was held liable in the discrimination suit. However, he disputes the trial court's ruling that section 533 also precludes reimbursement of the plaintiff's attorney fees for which he was held liable, that were covered by a supplementary payments provision of his insurance policy. We shall affirm.


State Farm provided Combs with a defense, under a reservation of rights, to a complaint filed in federal district court by Fair Housing of Marin (FHOM) charging Combs with racial discrimination in the management of a San Rafael apartment complex in violation of federal and state law.2 In March 1999, the district court entered an order striking Combs' answer and entering his default, based on findings that his "failure to produce documents was not only the `fault' of defendant, but was a willful and bad faith attempt to obfuscate the discovery process and mislead FHOM and the court," that he had "not only failed to produce documents as ordered, but that he misrepresented to both counsel and to the court the very existence of such documents," that his "gamesmanship" had caused prejudice, and that in view of prior warnings no lesser or alternative sanction was appropriate. Following an evidentiary hearing, the court found "direct evidence of racial animus . . . amply present on this record" and "the record on liability" to be "damning," and awarded plaintiff compensatory and punitive damages. Thereafter, following the receipt of a report and recommendation from a magistrate judge, the district court awarded FHOM some $508,000 in attorney fees as the prevailing party pursuant to the provisions of both the underlying federal and state statutes.3 The judgment was affirmed in all respects by the Ninth Circuit Court of Appeals. (Fair Housing of Marin v. Combs (9th Cir.2002) 285 F.3d 899, 900.) Thereafter, the judgment was augmented by attorney fees of an additional $131,000 incurred on appeal and in opposing a petition for a writ of certiorari.

Combs was insured by a State Farm "Apartment Policy" that provided comprehensive business liability coverage for bodily injury, property damage, personal injury and advertising injury as defined in the policy. The policy imposed on State Farm the "right and duty to defend any claim or suit seeking damages payable under this policy," even if groundless. The policy also contained a supplementary payments provision, which provided that "[i]n addition to the Limit of Insurance, we will pay, with respect to any claims or suit we defend: . . . [¶] 5. all costs taxed against the insured in the suit . . . ." Under a full reservation of rights, State Farm underwrote the defense of the action through the denial of certiorari by the United States Supreme Court and the entry of the augmented judgment for costs and attorney fees. At various times during the course of the litigation, Combs demanded that State Farm settle the claims against him but State Farm consistently refused to pay any amount in settlement, maintaining that it was not obligated to provide indemnity for numerous reasons, including the impact of section 533. Following the entry of judgment and State Farm's continuing refusal to pay any portion of the judgment, Combs brought this action for breach of the insurance contract. Combs eventually moved for summary adjudication that State Farm is obligated to pay "the costs taxed against the insured in the [federal action], including the plaintiff's trial and appellate attorney fees" and State Farm filed cross-motions for summary judgment. Following argument, the trial court denied Combs' motion and granted summary judgment to State Farm, concluding that "Combs' adjudicated liability for intentional race discrimination in the FHOM action precludes insurance coverage for the default judgment, including the award of attorneys fees, under section 533." Combs timely appealed from the resulting adverse judgment.


Section 533 provides that "[a]n insurer is not liable for a loss caused by the wilful act of the insured . . ."4 This provision is "`an implied exclusionary clause which by statute is to be read into all insurance policies.'" (J. C. Penney Casualty Ins. Co. v. M.K. (1991) 52 Cal.3d 1009, 1019, 278 Cal.Rptr. 64, 804 P.2d 689.) "As a result, the parties to an insurance policy cannot contract for such coverage." (Downey Venture v. LMI Ins. Co. (1998) 66 Cal.App.4th 478, 500, 78 Cal.Rptr.2d 142 (Downey).) The section "is subject to the rules of statutory construction, not to the rules governing contract interpretation, and must be construed in order to effect its purpose." (California Casualty Management Co. v. Martocchio (1992) 11 Cal.App.4th 1527, 1531, 15 Cal.Rptr.2d 277 (Martocchio).) "One enunciated purpose of . . . section 533 is to discourage willful torts, by denying coverage for willful wrongs." (Martocchio, supra, at pp. 1531-1532, 15 Cal.Rptr.2d 277.)

There is no doubt that intentional discrimination, such as the district court found Combs to have committed, is willful conduct for which section 533 precludes indemnification. (Melugin v. Zurich Canada (1996) 50 Cal.App.4th 658, 664-665, 57 Cal.Rptr.2d 781; Coit Drapery Cleaners, Inc. v. Sequoia Ins. Co. (1993) 14 Cal. App.4th 1595, 1603-1604, 18 Cal.Rptr.2d 692.) Combs does not pursue a claim to be indemnified for the compensatory and punitive damages for which he was held liable, implicitly acknowledging that coverage for such liability is barred by section 533. And State Farm provided Combs a defense to the claim against him, and makes no contention here that it was not obligated to do so. (Compare Melugin v. Zurich Canada, supra, at pp. 665-666, 57 Cal.Rptr.2d 781 with B & E Convalescent Center v. State Compensation Ins. Fund (1992) 8 Cal.App.4th 78, 99-102, 9 Cal. Rptr.2d 894.) Combs asserts that since State Farm did defend the action, the supplementary payments provision of his policy requires it to reimburse him for the attorney fees that were taxed against him as costs of the action.

The trial court agreed with State Farm that there are two reasons for which section 533 bars it from paying these fees. The second of these reasons relied on Martocchio, supra, 11 Cal.App.4th 1527, 15 Cal.Rptr.2d 277, which held that section 533 precludes coverage for monetary sanctions imposed for bad faith litigation misconduct. The trial court concluded that "section 533 also and independently bars coverage for the attorneys fees portion of the FHOM default judgment by reason of the terminating sanction imposed for Combs' deliberate discovery abuse and obstruction." The court felt that "although the attorneys fees awarded against Combs were not directly imposed as a monetary sanction for his litigation abuse, they were the direct and judicially intended result of the more drastic sanction that was imposed, namely the striking of Combs' answer to the complaint and entry of his default." We have some misgivings about this rationale, since the sanction that the district court imposed was only the striking of Combs' answer and the entry of a default. The court determined from the well-pled allegations of the complaint and evidence in the record that FHOM was entitled to prevail on the merits of its claim and under both the controlling state and federal statutes this determination entitled FHOM to its attorney fees. While unlikely, the district court might have found, despite the entry of Combs' default, that there was no basis for FHOM's claim of housing discrimination, in which case no attorney fees would have been awarded. Thus, it is doubtful that the attorney fees can be regarded as the "intended result" of the discovery sanction. Combs became liable for the attorney fees because he was found, albeit without a defense, to have engaged in willful racial discrimination.

"Combs' adjudicated liability for intentional race discrimination in the FHOM action" is the first reason for which the trial court held that section 533 precludes indemnification of the attorney fee award, and we agree fully with this conclusion. Relying in large part on the seminal decision of Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 277-278, 54 Cal.Rptr. 104, 419 P.2d 168, Combs argues that section 533 precludes only indemnification of damages awarded against an insured for willful misconduct, but does not eliminate an insurer's commitment to provide a defense against such accusations. Further, he argues, "the payment of costs taxed against the insured `is a function of the insurer's defense obligation, not its indemnity obligation,'" for which proposition he cites Prichard v. Liberty Mutual Ins. Co. (2000) 84 Cal.App.4th 890, 911-912, 101 Cal.Rptr.2d 298 and other cases which so hold. (San Diego Housing Com. v. Industrial Indemnity Co. (2002) 95 Cal.App.4th 669, 691-693, 116 Cal.Rptr.2d 103; Insurance Co. of North America v. National American Ins. Co. (1995) 37 Cal.App.4th 195, 206-207, 43 Cal.Rptr.2d 518; Cutler-Orosi Unified School Dist. v. Tulare County School...

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