George F. Hillenbrand, Inc. v. Ina

• Decision Date: 27 September 2002
• Docket Number: No. C030059.,C030059.
• Citation: 102 Cal.App.4th 584,125 Cal.Rptr.2d 575
• Court: California Court of Appeals Court of Appeals
• Parties: GEORGE F. HILLENBRAND, INC., et al. Plaintiffs and Appellants, v. INSURANCE COMPANY OF NORTH AMERICA et al. Defendants and Appellants.

125 Cal.Rptr.2d 575

102 Cal.App.4th 584

GEORGE F. HILLENBRAND, INC., et al. Plaintiffs and Appellants, v. INSURANCE COMPANY OF NORTH AMERICA et al. Defendants and Appellants.

No. C030059.

Court of Appeal, Third District.

September 27, 2002.

Rehearing Granted October 24, 2002. See 128 Cal.Rptr.2d 586.

Law Offices of Robert W. Drane, Robert W. Drane, Walnut Creek; Sack, Miller & Rosendin and William S. Miller, Oakland, for Plaintiffs and Appellants.

Hinshaw & Culbertson, Robert J. Romero, San Francisco, Paul E. Vallone and Michelle S. Dangler for Defendants and Appellants.

RAYE, J.

A jury found that Aetna Insurance Company maliciously prosecuted two lawsuits against the insureds, George F. Hillenbrand, a framer, and his company, George F. Hillenbrand, Inc. The Insurance Company of North America (INA) handled the investigation and processing of the claim, as well as the prosecution of the lawsuits against Hillenbrand, but the trial court granted INA's motion for a directed verdict, concluding it was not liable as an agent for the insurer pursuant to section 2351 of the Civil Code.¹ Based on evidence the insurer prosecuted the lawsuits despite its knowledge of facts triggering potential coverage and a duty to defend, and of the law prohibiting an insurer from suing its insured during the pendency of the underlying claim, the jury awarded Hillenbrand punitive damages. Hillenbrand accepted the trial court's remittitur of the award. Aetna appeals the judgment for compensatory and punitive damages. Hillenbrand appeals the judgment on a directed verdict in favor of INA and cross-appeals the reduction of punitive damages.

The insurer justifies the prosecution of the two lawsuits against its insured as routine advocacy and sound economics. The jury and several trial judges rejected the insurer's conservative notion of its duty to defend and its expansive notion of its right to fight its own insured. We conclude there is substantial evidence to support the jury's findings. We therefore affirm the judgment for the compensatory and punitive damages and find no abuse of discretion in the reduction of the punitive damages. We reverse, however, the judgment in favor of INA, having concluded that Civil Code section 2351 does not allow a corporation to exonerate itself from liability as an agent by delegating its obligations to its own employees.

FACTS

In 1973 Hillenbrand did the framing, subfloors and decking, and installed siding on various condominium units as one of several subcontractors for Ring Brothers Corporation and Dalehurst Comstock Corporation (Ring Brothers), the general contractor for the Crosswoods condominium project in Citrus Heights. Although the siding needed to be painted or sealed to protect it from delaminating and warping, Hillenbrand was not responsible for that work, nor was he responsible for the necessary periodic repainting or resealing of the siding.

In 1981 Crosswoods Homeowner Association sued Ring Brothers for negligent construction. Hillenbrand knew nothing of the lawsuit. He was not notified of any defects in his work. Customarily, he remedied any alleged problems; as a consequence, he had never been sued. In 1982 he was named Builder of the Year by the Building Industry Association, the same year he served as president of that organization. The award was particularly meaningful because he was the first president of the association who "had ever come up from a carpenter."

In August 1982 Ring Brothers demanded that Hillenbrand defend and indemnify it, pursuant to his subcontract, for all damages resulting from the services he performed on the Crosswoods project. Hillenbrand immediately notified his insurer, Aetna, but after an initial contact with G. John Palmer, a claims supervisor, he heard nothing from Aetna until late 1983. Meanwhile, Aetna sent the claim to INA for assistance in investigation and handling. The claim was assigned to the claims unit manager in the Sacramento regional office, Michael Cerf. Throughout his involvement with the claim, Cerf reported to home office supervisors Perry Huntington and Jane Joiner.

On June 30, 1983, Ring Brothers cross-complained against Hillenbrand and other subcontractors for indemnity and contribution, alleging that the homeowners' alleged damages were caused by Hillenbrand's and the other subcontractors `"fail[ure] ... to perform their work on Crosswoods ... in a workmanlike manner" and "[furnishing of] all ... materials ... for the ... siding" in a "negligent" manner. The insurer later admitted that Ring Brothers's amended complaint alleged potential damage to property other than Hillenbrand's work product as a result of Hillenbrand's work on the siding. Hillenbrand tendered the cross-complaint to Aetna under two separate broad form comprehensive general liability (CGL) insurance policies.

Aetna's CGL policies provided for the following coverage: "[Aetna] will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of [¶] ... property damage [¶] to which this insurance applies, caused by an occurrence, and [Aetna] shall have the right and duty to defend any suit against the insured seeking damages on account of such . . . property damage, even if any of the allegations of the suit are groundless, false or fraudulent.... [¶] ... [¶] `[O]ccurrence' means an accident, including continuous or repeated exposure to conditions, which results in .. . property damage neither expected nor intended from the standpoint of the insured[.]" The policies did not apply "to that particular part of any property, not on premises owned by or rented to the insured, [¶] ... [¶] (iii) the restoration, repair or replacement of which has been made or is necessary by reason of faulty workmanship thereon by or on behalf of the insured[.]"

The policies, therefore, covered: (1) damage to the siding if it was due to some cause other than Hillenbrand's own faulty workmanship, such as improper maintenance by others, defective materials, or design; and (2) damage to property other than the siding caused by Hillenbrand's faulty workmanship.

Aetna agreed to defend Hillenbrand, but only under a full reservation of rights, citing the faulty workmanship exclusion in its CGL policies. Aetna hired the law firm of Porter, Scott, Weiberg & Delehant to represent Hillenbrand.

Attorney Russell G. Porter advised Cerf that he had reviewed an April 1982 report from Scott Whitten, Inc., wherein Whitten concluded the major siding problem was buckling and loose siding sheets. Anthony S. Warburg, another lawyer from the Porter firm, advised Cerf in March 1984 that Hillenbrand had driven through the project and concluded: "[T]he great majority of the present complaints concerning the siding (were) the result of poor maintenance as opposed to faulty workmanship. Apparently the units have never been repainted and this type of plywood siding needs to be repainted periodically to protect it from water intrusion and weathering."

Again, in April 1984, Warburg reported to Cerf that the siding problems were due to poor maintenance and not to faulty workmanship. "Discussions at our meeting evinced three major problems with the project, namely, improper tile decking, improper roofing, and improper siding. The siding problems break down into three areas, including, warping, improper nailing and improper backing. Also, some of the Z-bar flashing is missing which has caused interior water damage to some of the units. Although approximately 80 units have siding problems, we do not know which units in which phase have the particular problems mentioned above. Also, of the problems mentioned, we are uncertain which were caused by improper installation, improper maintenance, or both."

On June 11, 1984, Warburg told Cerf that the homeowner association's experts estimated it would cost $963,140 to fix the defective siding work. But Cerf considered the insured's exposure grossly inflated, as he explained in his deposition testimony: "Well, in this type of litigation, construction defect litigation, the experts are always real high up in that range, where in reality, what happens in these cases is they settle for cents on the dollar in the long run. The carriers are aware of that. At the time you get to the settlement conference a nine hundred thousand dollar demand is settled for 25 thousand bucks so everybody knows that." On June 13, Cerf wrote to Hillenbrand, informing him that Aetna had no duty to defend because there was no potential coverage under the policy, and consequently, Aetna continued to assert its reservation of rights. Cerf told Warburg that Aetna/INA's "primary concern [was] effective management of the [litigation] expenses."

Cerf provided the INA home office an extensive report on the Hillenbrand litigation on July 9, 1984, concluding that it was not necessary to refer the case to outside counsel for a legal opinion as to coverage. He recommended INA not to file a declaratory relief action and sent the actual file and all original documents to the home office. He did not, however, mention either the potential maintenance problems or the potential damage to other property from the defective siding.

Within three weeks, Cerf changed his mind. On July 23 he warned Hillenbrand that "it may be necessary" to file a declaratory relief action to obtain a judicial determination whether INA/Aetna was obligated to indemnify him in the Crosswoods action. Because INA/Aetna would seek reimbursement of defense costs, Cerf advised Hillenbrand to hire his own lawyer to defend the declaratory relief action. It was not until the following day that he inquired about Hillenbrand's actual involvement in the construction project.

In August, Warburg apprised Cerf that his investigation of the causes of the damages to the condominium units was incomplete. He was particularly interested in the slope discrepancies on the second floor decking, which...