Dalrymple v. United Services Auto. Assn.

• Citation: 40 Cal.App.4th 497,46 Cal.Rptr.2d 845
• Decision Date: 16 November 1995
• Docket Number: No. D017779,D017779
• Court: California Court of Appeals
• Parties: , 64 USLW 2367, 95 Cal. Daily Op. Serv. 8814, 95 Cal. Daily Op. Serv. 9814, 95 Daily Journal D.A.R. 15,249 Ann DALRYMPLE, Plaintiff and Respondent, v. UNITED SERVICES AUTOMOBILE ASSOCIATION, Defendant and Appellant.

Page 845

46 Cal.Rptr.2d 845

40 Cal.App.4th 497, 64 USLW 2367, 95 Cal. Daily Op. Serv. 8814,

95 Cal. Daily Op. Serv. 9814,

95 Daily Journal D.A.R. 15,249

Ann DALRYMPLE, Plaintiff and Respondent, v. UNITED SERVICES AUTOMOBILE ASSOCIATION, Defendant and Appellant.

No. D017779.

Court of Appeal, Fourth District, Division 1, California.

Nov. 16, 1995.

As Modified Dec. 13, 1995.

Review Denied March 14, 1996.

Daniels, Baratta & Fine, Paul R. Fine and Lance Orloff, Los Angeles, for Defendant and Appellant.

Robert G. Dyer, San Diego, for Plaintiff and Respondent.

HALLER, Associate Justice.

In this appeal, we are required to determine if the trial court or the jury should decide the issue of whether an insurer had "proper cause" to pursue a declaratory relief action in which it disputed insurance coverage. (Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1151-1152, 271 Cal.Rptr. 246.) This question arises in the context of an insured's cross-action for damages for breach of the implied covenant of good faith and fair dealing, filed in response to the insurer's declaratory relief complaint seeking a determination that no coverage existed. The trial court severed for trial the declaratory relief action from the "bad faith" cross-action, tried the declaratory relief action first, and entered judgment that coverage existed. The subsequent trial on the cross-complaint resulted in a jury verdict for the insured.

United Services Automobile Association (USAA) appeals the judgment entered on this jury verdict awarding its insured, cross-complainant Ann Dalrymple, $44,164.50 as bad faith damages, representing the full amount of attorney fees incurred by Dalrymple's counsel in defense of the declaratory relief complaint brought by USAA to determine its rights and duties under a renter's protection policy providing personal liability coverage. USAA argues it was error for the trial court to deny its successive motions for judgment on the pleadings, nonsuit, and a directed verdict on Dalrymple's cross-complaint, all brought on the theory that it had not breached its insurance contract and accordingly could not have breached that contract's implied covenant of good faith and fair dealing. Dalrymple has cross-appealed to seek additional prejudgment interest and additional compensatory and punitive damages on her cross-complaint.

By analogy to the law of malicious prosecution, we shall explain that the proper cause determination is one for the trial court if the material facts are undisputed. We further determine that the question of an insurer's bad faith liability may be decided as a matter of law where the material facts are undisputed. Because we conclude that on this record

the trial court should have granted the requested nonsuit or directed verdict as to the implied covenant cause of action, we reverse the judgment with directions to enter a different judgment in favor of USAA. Dalrymple's cross-appeal has become moot.

FACTUAL AND PROCEDURAL BACKGROUND

Dalrymple's cross-complaint on bad faith insurance theories and USAA's declaratory relief complaint both arose out of an incident in which Dalrymple, USAA's insured under a renter's protection policy, shot a "SWAT" team officer when he entered her quarters at the San Diego Naval Station, where she had barricaded herself. Dalrymple, a Navy neurosurgeon, had been experiencing mental problems for some time and the Navy was attempting to hospitalize her for psychiatric treatment. On September 24, 1987, Navy psychiatrist Captain James Fowler went to her room to escort her to the hospital. As he attempted to open her door, she shot him in the finger with a handgun. Security was alerted and her room secured; negotiators attempted for several hours to obtain her surrender. The San Diego Police Department SWAT Team was called in for assistance. Ultimately, it fired tear gas into her quarters, deployed a flash-bang grenade and sent in a team dog. Dalrymple fired shots at the dog. Thereafter, an entry team which included Officer Edward Verduzco entered her quarters; Dalrymple shot Verduzco once in his left leg. His team member fired his shotgun and Dalrymple returned fire until she ran out of ammunition. She then surrendered approximately 15 minutes after the tear gas operation began.

The USAA renter's protection policy provided to the insured personal liability coverage with a limit of $100,000, "for damages because of bodily injury ... caused by an occurrence.... [p] ... [p] 'Occurrence' means an accident ... which results, during the policy period, in: bodily injury...." The policy excludes liability for bodily injury or property damage "which is expected or intended by the insured." Approximately one month after the SWAT team incident, an attorney representing Officer Verduzco called USAA to inquire about Dalrymple's insurance coverage. Verduzco had not yet filed an action for damages, and would not do so until September 1988, approximately one year after the shooting. However, three months after the shooting, USAA retained an adjustment company to investigate Verduzco's claim under a reservation of rights. Dalrymple refused to cooperate with the adjuster, advising USAA that it was not authorized to investigate the matter or release a copy of the policy, and she did not intend to make any payments to Verduzco or his attorney. Nevertheless, on December 30, 1987, USAA retained insurance defense counsel, John Wingert, to represent her interests. Dalrymple then retained Cumis counsel. (San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 208 Cal.Rptr. 494 [Cumis ].)

In the course of dealing with Verduzco's claim against the policy and potential litigation, insurance defense counsel Wingert raised the possibility with USAA that the firefighter's rule might apply, ¹ thus giving Dalrymple a potential defense against an action by Verduzco. Wingert was familiar with Navy psychiatric testimony obtained at court-martial proceedings for Dalrymple, showing there were questions as to her state of mind at the time of the incident and whether she was then mentally capable of an In May 1988, USAA obtained a coverage analysis from attorney Kenneth Goates, who opined that the shooting was not accidental, and that "[t]he definition of 'accidental' does not require a determination of the insured's state of mind or mental competency at the time of the act as does the intentional acts exclusion." (Ins.Code, § 533.) Goates noted that it was then unknown if Dalyrymple intended to shoot the two persons, and it was unclear if she would be raising the issue of her mental competence at the time of the incident, due to potential damage to her medical career. This coverage opinion focused on the question of whether there was coverage for an "occurrence," based on analysis of existing case law, and concluded the lack of an "accident" precluded the potential of coverage. However, Goates recommended that USAA continue to defend Dalrymple while pursuing a resolution of the coverage issue through a declaratory relief action.

intentional act to inflict injuries. Ultimately, the Navy concluded that at the time of the shooting incident Dalrymple suffered from a severe mental disease and that, [40 Cal.App.4th 506] as a result, she was unable to appreciate the nature and quality or wrongfulness of her conduct.

In August 1988, Dalrymple advised USAA she wanted a new insurance defense attorney and she had fired her Cumis counsel. During Wingert's eight months' representation of Dalrymple, Verduzco was demanding a policy limits settlement of the claim, even though he had not yet filed suit. Wingert believed this demand was excessive and that the case would have a damages value of $50,000.

On September 23, 1988, Verduzco filed his complaint for damages against Dalrymple, alleging both intentional tort and negligence theories. (Verduzco v. Dalrymple (Super.Ct. San Diego County, 1988, No. 604075).) In October 1988, USAA retained attorney Debra Hurst as Dalrymple's new insurance defense counsel. By December 1988, Dalrymple had hired Robert G. Dyer as her new Cumis counsel. On October 25, 1988, USAA filed the declaratory relief action regarding its rights and duties under the renter's protection policy. (Code Civ.Proc., § 1060.) Thereafter, Dalrymple filed her cross-complaint on bad faith theories; trial on the cross-complaint was deferred until after the declaratory relief action was resolved.

In August 1989, almost a year before the declaratory relief judgment, Judge Gamer held a settlement conference in the Verduzco matter, which both the Verduzco parties and the declaratory relief parties were required to attend. Judge Gamer expressed the opinion that coverage existed for Verduzco's claims, and encouraged USAA to settle the matter. No settlement was reached.

Trial in USAA's declaratory relief action was set before trial of the Verduzco action, and although USAA sought to delay trial of the declaratory relief claims until after the Verduzco action was tried, the attorneys for Verduzco and Dalrymple opposed such a stay and it was denied. Attorney Hurst's opposition to the stay was based on the statement that Verduzco would dismiss his action if there were no insurance, so judicial economy might be served if the stay motion were denied.

Dalrymple prevailed in the declaratory relief action. The trial court determined Dalrymple lacked the ability to recognize her conduct was wrongful, and found the policy terms "occurrence" and "accident" were ambiguous because they did not address circumstances in which the insured suffered from severe mental disease. The court thus concluded USAA had a duty to defend and indemnify Dalrymple for Verduzco's claims. Attorney fees were awarded, as explained post. Judgment determining coverage was entered on June 8, 1990.

Shortly before the trial in the Verduzco action, attorney Hurst stipulated to liability in exchange for a covenant...