Edward Carey Constr. Co. v. State Comp. Ins. Fund

• Decision Date: 13 July 2011
• Docket Number: No. A128047.,A128047.
• Court: California Court of Appeals Court of Appeals
• Parties: EDWARD CAREY CONSTRUCTION COMPANY, Plaintiff and Appellant, v. STATE COMPENSATION INSURANCE FUND, Defendant and Respondent.

194 Cal.App.4th 657

122 Cal.Rptr.3d 892

76 Cal. Comp. Cases 299

11 Cal. Daily Op. Serv. 4655

2011 Daily Journal D.A.R. 5581

EDWARD CAREY CONSTRUCTION COMPANY, Plaintiff and Appellant,

v.STATE COMPENSATION INSURANCE FUND, Defendant and Respondent.

No. A128047.

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

March 25, 2011.

Review Denied July 13, 2011.

Law Offices of Eric M. Safire and Eric M. Safire, San Francisco, for Plaintiff and Appellant.

Judith D. Sapper, James E. Armstrong, and Jamie Katz, for Respondent and Defendant.

BANKE, J.

I. Introduction

Appellant Edward Carey Construction Co. (CCC) appeals from a judgment of dismissal, entered after the trial court sustained the demurrer of State Compensation Insurance Fund (SCIF) without leave to amend. CCC sued SCIF for breach of contract and breach of the implied covenant of good faith and fair dealing after SCIF denied CCC had a valid workers' compensation insurance policy and CCC was forced to pursue legal action to obtain benefits under its policy. The trial court ruled CCC's breach of contract and breach of the implied covenant claims were barred by workers' compensation “exclusivity.” We reverse.

II. Factual and Procedural Background

On August 25, 2009, CCC filed a complaint for breach of contract and breach of the implied covenant of good faith and fair dealing. CCC alleged as follows: It is a domestic corporation, organized and existing under the laws of California. It obtained a workers' compensation insurance policy from SCIF for the period May 20, 2005 to May 20, 2006. During the policy period, its employee, Edward Carey, sustained a work-related injury. When CCC notified SCIF of the injury, SCIF asserted the policy “had been cancelled and was not in effect.” Because SCIF denied the existence of a valid policy, CCC was required to pay for Carey's medical treatment not covered by Carey's health care insurance. CCC has incurred damages for employee wages and medical expenses of at least $250,000. CCC also was required to retain counsel to obtain benefits under the policy, and on October 17, 2008, through binding arbitration, was successful in obtaining a ruling that its insurance policy with SCIF was in full force and effect at the time of Carey's injury. CCC has demanded SCIF reimburse it for the attorney fees CCC incurred, but SCIF has refused to do so. SCIF also has continued to refuse to pay the full amount of benefits owed under the policy. CCC sought compensatory and punitive damages, as well as attorney fees and costs of suit.

SCIF filed a demurrer on the ground the Workers' Compensation Appeals Board (WCAB) has exclusive jurisdiction over the claims alleged in the complaint (i.e., workers' compensation “exclusivity”). “Plaintiff's alleged damages clearly arise from Mr. Carey's work-related injury, and as such worker's compensation is Plaintiff's exclusive remedy and the WCAB has exclusive jurisdiction to hear this dispute.” SCIF additionally filed a request for judicial notice of an “Application for Adjudication of Claim” that included both claims for coverage, indemnity, and reimbursement.

CCC argued in opposition that workers' compensation exclusivity applies to the claims of an injured employee, not first party claims by an insured employer for breach of contract and breach of the implied covenant of good faith and fair dealing. CCC noted the language of the insurance contract, itself, provided the insured could bring a civil action for failure to perform under the contract. CCC filed a request for judicial notice of the arbitration award confirming the existence of the disability insurance policy on the date of Carey's injury and the disputed insurance policy.

In its reply, SCIF focused on the fact Carey is the owner of CCC. “[T]his civil action is nothing more than Mr. Carey's (wearing a ‘different hat’) attempt to circumvent the workers' compensation system.” SCIF asserted all claims were within WCAB's jurisdiction, and to the extent CCC voluntarily paid benefits to Carey, its remedy was to request a credit under Labor Code section 4909. SCIF filed a second request for judicial notice of WCAB hearing minutes concerning a settlement as to Carey's claims to the date of the settlement, a check to Carey for retroactive temporary disability pursuant to that settlement, a declaration of readiness to proceed to expedited hearing, and a FAX communication from Carey's attorney.

SCIF's demurrer was heard December 9, 2009, and on January 4, 2010, the trial court issued a written order sustaining the demurrer without leave to amend. The court ordered the case dismissed on February 24, 2010, and on March 24, 2010, CCC filed a timely appeal.

III. Discussion

A. Standard of Review

“The task of this court is to determine whether the complaint states a cause of action. All facts alleged in the complaint are deemed admitted, and we give the complaint a reasonable interpretation by reading it as a whole and all of its parts in their context. ( Fisher v. City of Berkeley (1984) 37 Cal.3d 644, 679, fn. 31 [209 Cal.Rptr. 682, 693 P.2d 261]¹ ...; Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125 [271 Cal.Rptr. 146, 793 P.2d 479] ) We are not concerned with [the] plaintiff's possible inability to prove the claims made in the complaint, the allegations of which are accepted as true and liberally construed with a view toward attaining substantial justice. ( King v. Central Bank (1977) 18 Cal.3d 840, 843 [135 Cal.Rptr. 771, 558 P.2d 857];Parada v. City of Colton (1994) 24 Cal.App.4th 356, 362 )” ( Lance Camper Manufacturing Corp. v. Republic Indemnity Company of America (1996) 44 Cal.App.4th 194, 198, 51 Cal.Rptr.2d 622( Lance Camper ).) We also “ ‘are not bound by the determination of the trial court, but are required to render our independent judgment on whether a cause of action has been stated.’ ( Hoffman v. State Farm Fire & Casualty Co. (1993) 16 Cal.App.4th 184, 189 )” ( Ibid.)

B. Sufficiency of the Complaint

CCC contends the law is well established that an employer can sue its workers' compensation insurance carrier for breach of contract and the implied covenant of good faith and fair dealing, where the carrier has failed to provide benefits under the policy and has done so in bad faith. CCC relies on Security Officers Service, Inc. v. State Compensation Insurance Fund (1993) 17 Cal.App.4th 887, 21 Cal.Rptr.2d 653( Security Officers ), and its progeny, including MacGregor Yacht Corporation v. State Compensation Insurance Fund (1998) 63 Cal.App.4th 448, 74 Cal.Rptr.2d 473( MacGregor Yacht ).

SCIF contends these cases are inapplicable. It points out none involved a situation where the employee receiving workers' compensation benefits was a principal or owner of the insured company, as is the case here. It further points out the breach of contract and bad faith claims in these cases were based on the mishandling of numerous worker compensation claims, and the damages sought were for losses due to unjustifiably high premiums and lost dividends.

SCIF reads Security Officers and its progeny too narrowly. While the particular facts of these cases are different in some respects than those alleged here, the fundamental legal principles articulated in these cases are entirely apposite. Under those principles, CCC's allegations are sufficient to state claims for breach of contract and the implied covenant of good faith and fair dealing.

In Security Officers, the employer alleged its workers' compensation carrier, SCIF, failed to process claims diligently and unreasonably inflated the reserves assigned to them. ( Security Officers, supra, 17 Cal.App.4th at pp. 891–892, 21 Cal.Rptr.2d 653.) This conduct adversely affected the employer's experience rating, resulting in increased premiums and decreased dividends. ( Ibid.) The trial court sustained SCIF's demurrer without leave to amend. The Court of Appeal reversed. ( Id. at pp. 892, 900, 21 Cal.Rptr.2d 653.)

SCIF first argued it was “immune from suit in tort” under the Tort Claims Act. ( Security Officers, supra, 17 Cal.App.4th at pp. 890, 892, 21 Cal.Rptr.2d 653.) The court rejected this argument, following the reasoning in Courtesy Ambulance Service v. Superior Court (1992) 8 Cal.App.4th 1504, 11 Cal.Rptr.2d 161, and Maxon Industries, Inc. v. State Compensation Ins. Fund (1993) 16 Cal.App.4th 1387, 20 Cal.Rptr.2d 730.( Security Officers, supra, at pp. 892–893, 21 Cal.Rptr.2d 653.)

SCIF next argued no breach of express or implied contractual obligations had been alleged. ( Security Officers, supra, 17 Cal.App.4th at pp. 893–894, 21 Cal.Rptr.2d 653.) While the court agreed the policy language pertaining to SCIF's defense, investigation and settling of claims did not specify “how” it was to perform those tasks—i.e., the policy language did not “ ‘require [SCIF] to handle claims “properly” or “expediently” or in any manner’ ” ( id. at p. 894, 21 Cal.Rptr.2d 653)—that did not end the analysis. SCIF's conduct also had to be “tested against the policy's implied covenant of good faith and fair dealing.” ( Ibid.) The court then summarized the law on the implied covenant of good faith and fair dealing which had become well explicated in the context of insurance policies generally. ( Id. at pp. 894–895, 21 Cal.Rptr.2d 653.) In light of this legal backdrop, the court rejected SCIF's assertion that “so long as it defend[ed] and pa[id] claims against” its insured, the employer “received the benefits of SCIF's obligations in respect of defense and payment” and could not complain about how the insurer defended against and paid the claims. ( Id. at pp. 895–896, 21 Cal.Rptr.2d 653.)

The court also rejected SCIF's assertion that damages based on impacted premiums and dividends conflicted with the insured's contractual agreement to accept any rate increase approved by the Insurance Commissioner. This was not, explained the court, an agreement to accept “any” premium demanded by the insurer,...