Downey Venture v. LMI Ins. Co.

• Decision Date: 01 September 1998
• Docket Number: No. B106304,B106304
• Citation: 78 Cal.Rptr.2d 142,66 Cal.App.4th 478
• Parties: , 98 Cal. Daily Op. Serv. 6916, 98 Daily Journal D.A.R. 9519 Downey VENTURE, et al., Plaintiffs and Appellants, v. LMI INSURANCE COMPANY, Defendant and Appellant.
• Court: California Court of Appeals Court of Appeals

Page 142

78 Cal.Rptr.2d 142

66 Cal.App.4th 478, 98 Cal. Daily Op. Serv. 6916,

98 Daily Journal D.A.R. 9519

Downey VENTURE, et al., Plaintiffs and Appellants, v. LMI INSURANCE COMPANY, Defendant and Appellant.

No. B106304.

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

Sept. 1, 1998.

Rehearing Denied Sept. 17, 1998.

Review Denied Dec. 2, 1998.

Shapiro, Hinds & Mitchell, Carl W. Shapiro, Keith A. Meyer and Cindy F. Forman, Santa Monica, for Plaintiffs and Appellants.

Shernoff, Bidart, Darras & Arkin, William M. Shernoff, Sharon J. Arkin, Claremont; Anderson, Kill & Olick, Jordan S. Stanzler, Deborah M. Mongan, Jordan S. Stanzler, John A. MacDonald, San Francisco; Troop, Meisinger, Steuber & Pasich, Kirk A. Pasich, Lori M. Yankelevits, Los Angeles; Irell & Manella and Thomas W. Johnson Jr., Newport Beach, as Amici Curiae on behalf of Plaintiffs and Appellants.

Selman & Breitman, Alan B. Yuter and Lisa H. Kahn, Los Angeles, for Defendant and Appellant.

Musick, Peeler & Garrett, R. Joseph De Briyn, Harry W.R. Chamberlain, II, Mary Catherine M. Bohen, Cheryl A. Orr, Los Angeles; Barger & Wolen, Richard De Saint Phalle, Ethan A. Miller, San Francisco,; Haight, Brown & Bonesteel, Roy G. Weatherup, John W. Sheller, Michael J. Leahy, Santa Monica; Horvitz & Levy, Barry R. Levy, Mitchell C. Tilner, Encino; Sonnenschein, Nath & Rosenthal, Paul E.B. Glad, San Francisco; Hancock, Rothert & Bunshoft and Deborah A. Pitts, Los Angeles, as Amici Curiae on behalf of Defendant and Appellant.

William W. Palmer, Sacramento, Farmer & Murphy and George E. Murphy, Rancho Cordova, as Amici Curiae, upon the request of the Court of Appeal.

CROSKEY, Associate Justice.

The principal question presented by this case is whether insurance liability coverage for a claim of malicious prosecution, even though expressly promised in the policy, is precluded by the provisions of Insurance Code section 533 which bars indemnity for "wilful acts" of an insured. ¹

Plaintiffs, appellants and cross-respondents, Richard Posell ("Posell"), Mitchell Shapiro and Ruth Shapiro ("Shapiro") and The Downey Venture, a limited partnership ("Downey") (collectively, the "Downey plaintiffs"), seek reversal of a declaratory judgment determining that section 533 bars indemnity for a claim for malicious prosecution which had been asserted against the Downey plaintiffs in the underlying action. Defendant, respondent and cross-appellant, LMI Insurance Company ("LMI"), had issued to Downey a comprehensive general liability policy ² which expressly promised coverage for a claim of malicious prosecution. ³ LMI cross appeals from the trial court's determination that its claim for reimbursement of funds advanced to settle the underlying action may be reduced by an amount found to be allocable to defense costs We conclude that the public policy precluding indemnification coverage for "wilful acts," as expressed in section 533, bars indemnification for any malicious prosecution claim for which an insured is personally liable in California, even though such coverage was expressly promised in the policy; however, such public policy does not preclude a defense and an insurer promising coverage for malicious prosecution is nonetheless liable to provide a defense to such a claim. We therefore affirm the judgment declaring that indemnity is precluded, but we reverse the trial court's order which limited LMI's right to recoup amounts paid to settle claims against the Downey plaintiffs. Any such reduction of the reimbursement right would have the practical consequence of providing a proscribed indemnity benefit and an improper increase in LMI's defense burden.

which LMI "saved" by entering into the settlement.

FACTUAL AND PROCEDURAL BACKGROUND

In 1992, Downey filed suit against Elizabeth O'Grady and Timothy Watson, as trustees of a trust which was the owner and lessor of a shopping center in which Downey was a lessee. Posell and Shapiro were Downey's attorneys of record in that suit and were also its general partners. The litigation arose out of a dispute between Downey and said trustees with respect to the terms of the lease. ⁴ Downey alleged causes of action for (1) breach of contract, (2) intentional and negligent interference with contract and interference with prospective economic advantage and (3) civil RICO violations.

On October 15, 1992, a summary judgment was entered against Downey and in favor of the trustees. ⁵ On December 10, 1992, O'Grady filed suit against the Downey plaintiffs on claims for breach of contract, declaratory relief, abuse of process and malicious prosecution. The Downey plaintiffs filed an answer denying that they had liability on any of the alleged claims. Defense of the action was tendered to LMI.

On March 12, 1993, LMI wrote to Shapiro advising that there was coverage under the "personal injury" provisions of Downey's policy for the malicious prosecution claim, but not for the breach of contract, declaratory relief or abuse of process claims. ⁶ Nonetheless, LMI agreed to provide a full defense and expressly stated that "we are not reserving our rights in this case." ⁷ However, before LMI could assume the defense, Downey successfully demurred to the malicious prosecution cause of action on the ground that there was a pending appeal from the summary judgment granted in favor of O'Grady in the prior action. Thus, O'Grady could not truthfully allege a termination of the prior action in her favor.

Once that appeal was resolved by an affirmance of the summary judgment, O'Grady amended her complaint to reallege the malicious prosecution claim. Defense of the action was then re-tendered to LMI. For reasons not made clear by the record, LMI requested a coverage opinion from its counsel before responding to this new tender. LMI claims that upon receipt of that opinion, it first became aware that section 533 precluded indemnification. Therefore, on April 12, 1994, it agreed to provide the Downey plaintiffs with a defense of the O'Grady complaint, ⁸ but this time LMI fully reserved its rights to dispute coverage and to seek reimbursement of any defense costs incurred or amounts paid by LMI on any settlement or judgment entered. ⁹

Prior to the date that letter was sent, Watson (the other trustee of the trust) had filed (on February 9, 1994) his own action against the Downey plaintiffs, also alleging breach of contract, declaratory relief, abuse of process and malicious prosecution claims. This action was likewise tendered to LMI and the April 12 reservation of rights letter was expressly intended to apply to it as well.

Before the O'Grady and Watson actions came to trial, the trial court made two important rulings which affected both the nature and timing of the outcome of that litigation. Pursuant to Civil Code section 3295, subdivision (c), the trial court entered an order allowing pre-trial discovery of Downey's financial condition. ¹⁰ In addition, the court granted O'Grady's motion in limine (based upon the factors articulated in Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863, 254 Cal.Rptr. 336, 765 P.2d 498) ("Sheldon Appel ") that the Downey plaintiffs had filed their action against O'Grady without probable cause. ¹¹

Within a week after these rulings, the O'Grady case settled. As a result of the rulings, the only issue which had remained to be litigated was the question of whether the Downey plaintiffs had acted with malice. ¹² Because of the exposure to liability and the risk of punitive damages, the Downey plaintiffs had demanded that LMI settle both cases. LMI agreed to do so. The O'Grady case was settled on April 5, 1995, for $600,000, to which LMI contributed $350,000. ¹³

                One week later, on April 12, 1995, the Downey plaintiffs filed this action against LMI for breach of contract, breach of the implied covenant of good faith, and fraud.  Shortly thereafter, the Watson case was settled.  LMI's contribution to this settlement was $100,000. 14  LMI answered the complaint filed by the Downey plaintiffs and filed a cross-complaint for declaratory relief and reimbursement. 15
                

In its cross-complaint, LMI alleged that it had conditioned its settlement of the O'Grady and Watson claims upon its right to seek reimbursement of any amounts paid in settlement and the Downey plaintiffs, having insisted those cases be settled, accepted that condition and were now liable to reimburse LMI for those sums. LMI also sought a declaratory judgment determining that it had no duty to defend or indemnify the Downey plaintiffs for the O'Grady and Watson claims, and that it was entitled to reimbursement of the settlement sums it paid to resolve both actions.

On November 20, 1995, the Downey plaintiffs filed a motion for summary adjudication of the issue as to whether LMI had a duty to defend the O'Grady and Watson suits. While the motion did not specifically request a ruling on the duty to indemnify, the trial court reached that issue as well. It ruled that section 533 prohibited LMI from indemnifying for damages caused by malicious prosecution irrespective of express language to the contrary in the insurance policy. However, despite finding that there could never be an obligation to indemnify, the court stated that there was a distinction between the duty to defend and the duty to indemnify and found that "Section 533 does not prevent LMI from fulfilling its obligation to defend plaintiffs in accordance with the express provisions of its policy." ¹⁶

LMI then made its own motion for summary adjudication of issues seeking reimbursement of settlement amounts paid in the O'Grady and Watson actions. LMI based this motion on the court's prior ruling that section 533 prevented it from indemnifying for malicious prosecution and on its continual reservation of its right to seek reimbursement of its settlement contributions. While the court found that LMI was entitled to obtain reimbursement, it also found that LMI could not recover the...