Gourley v. State Farm Mut. Auto. Ins. Co.

• Citation: 822 P.2d 374,53 Cal.3d 121,3 Cal.Rptr.2d 666
• Decision Date: 28 March 1991
• Docket Number: No. S014133,S014133
• Court: United States State Supreme Court (California)
• Parties: , 822 P.2d 374 Julie GOURLEY, Plaintiff and Respondent, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant and Appellant.

Page 666

3 Cal.Rptr.2d 666

53 Cal.3d 121, 822 P.2d 374

Julie GOURLEY, Plaintiff and Respondent, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant and Appellant.

No. S014133.

Supreme Court of California,

In Bank.

March 28, 1991.

As Modified on Denial of

Rehearing May 23, 1991.

Hill, Genson, Even, Crandall & Wade, Horvitz, Levy & Amerian, Horvitz & Levy, Ellis J. Horvitz, David M. Axelrad and Peter Abrahams, Encino, for defendant and appellant.

Wylie A. Aitken and Wayne J. Austero, Santa Ana, for plaintiff and respondent.

Ian Herzog, Santa Monica, Douglas Devries, Sacramento, Leonard Sachs, Encino, Bruce Broillett, David Harney, Los Angeles, Laurence Drivon, Stockton, Robert Steinberg, Los Angeles, Roland Wrinkle, North Hollywood, Harry R. Levine, San Diego, Leonard Esquina, Evan D. Marshall, Corona, and Hugh Hafif as amici curiae on behalf of plaintiff and respondent.

LUCAS, Chief Justice.

We granted review to resolve an issue that has engendered conflicting appellate decisions: whether a plaintiff is entitled to receive prejudgment interest under Civil Code section 3291 (hereafter section 3291) on an award of compensatory and punitive damages for an insurer's breach of the implied covenant of good faith and fair dealing. Section 3291 allows the plaintiff in "any action brought to recover damages for personal injury sustained by any person resulting from or occasioned by the tort of any other person, corporation, association, or partnership" (italics added) to claim 10 percent interest on the damages awarded if the plaintiff's offer to compromise pursuant to Code of Civil Procedure section 998 is rejected by defendant and plaintiff obtains a judgment in excess of plaintiff's section 998 offer. In the present case, the Court of Appeal affirmed the trial court's award of section 3291 interest on plaintiff Julie Gourley's judgment for compensatory and punitive damages against State Farm Mutual Automobile Insurance Company (State Farm), after deciding that an action for bad faith was an action "brought to recover damages for personal injury" under the statute.

As explained below, we hold that section 3291 interest is not available in insurance bad faith actions because such actions are brought primarily to recover economic loss caused by the tortious interference with a property right, and any damages recovered for actual personal injury, including emotional distress, are incidental to the award of economic damages. ¹ Accordingly, we conclude that an action for breach of the implied covenant of good faith and fair dealing is not an action "to recover damages for personal injury" under section 3291. We therefore reverse the Court of Appeal decision insofar as it upheld the interest award.

I. BACKGROUND

In December 1981, Gourley was a passenger in an automobile that was struck by an out-of-control vehicle driven by an uninsured drunk driver. Gourley, who was not wearing a seat belt at the time of the accident, suffered a fractured right shoulder. She made a claim under the uninsured motorist coverage in her automobile policy with defendant, State Farm. Gourley retained counsel and demanded arbitration under the terms of her policy.

State Farm consulted an accident reconstruction expert who advised the insurer that had Gourley been wearing a seat belt, she would have suffered only minor injuries. Based on this information, State Farm offered to settle the uninsured motorist claim for $20,000, an amount State Farm believed equaled the damages Gourley would have suffered had she been wearing a seat belt.

Gourley rejected the offer and demanded the policy limit of $100,000. She provided State Farm with a medical report from a doctor who concluded she had suffered some permanent disability, would probably develop arthritis, and might require surgery in the future. The matter was then submitted to arbitration.

Before the conclusion of arbitration proceedings, Gourley reduced her demand to $60,000 and State Farm responded with a counteroffer of $25,000. The arbitrator concluded Gourley was not negligent in failing to wear a seat belt and awarded her approximately $88,000, which State Farm promptly paid.

Gourley and her husband later sued State Farm for breach of the implied covenant of good faith and fair dealing and violation of Insurance Code section 790.03. They claimed that as a consequence of State Farm's failure to provide adequate benefits under the policy, they suffered punitive and exemplary damages, and "general damages for mental and emotional distress and other incidental damages within the jurisdiction [of the court]." Gourley also filed a Code of Civil Procedure section 998 motion to compromise the judgment in the amount of $249,099, which State Farm rejected.

After finding that State Farm violated the covenant of good faith and fair dealing as to Mrs. Gourley only, the jury returned a general verdict in her favor for $15,765 in actual damages and $1,576,500 in punitive damages. ² The trial court denied State Farm's motion to strike or reduce the punitive damages and, pursuant to section 3291, awarded $300,000 interest on the total amount of the verdict based on Gourley's offer to compromise for $249,099 pursuant to Code of Civil Procedure section 998.

In affirming the judgment, the Court of Appeal held that section 3291 interest could accrue in an insurance bad faith action as long as the statutory prerequisites to recovery were met. The court relied on Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 169 Cal.Rptr. 691, 620 P.2d 141, and Austero v. National Cas. Co. (1978) 84 Cal.App.3d 1, 29-30, 148 Cal.Rptr. 653, in reasoning that because the primary focus of the action is to vindicate personal interests, it becomes a "personal injury" action within the meaning of section 3291.

As discussed above, we limited our review to the sole issue whether Gourley was entitled to receive prejudgment interest under section 3291 on all or part of the bad faith award.

II. DISCUSSION

1. Legislative Overview

Code of Civil Procedure section 998, subdivision (b), provides that "Not less than 10 days prior to commencement of trial, any party may serve an offer in writing upon any other party to the action to allow judgment to be taken in accordance with the terms and conditions stated at that time."

Section 3291 authorizes prejudgment interest on personal injury damages if the defendant fails to accept an offer to compromise pursuant to Code of Civil Procedure section 998 and the judgment exceeds the amount of the compromise offer. It provides in relevant part: "In any action brought to recover damages for personal injury sustained by any person resulting from or occasioned by the tort of any other person, ... whether by negligence or by willful intent of the other person, ... and whether the injury was fatal or otherwise, it is lawful for the plaintiff in the complaint to claim interest on the damages alleged as provided in this section.

"If the plaintiff makes an offer pursuant to Section 998 of the Code of Civil Procedure which the defendant does not accept prior to trial or within 30 days, whichever occurs first, and the plaintiff obtains a more favorablejudgment, the judgment shall bear interest at the legal rate of 10 percent per annum calculated from the date of the plaintiff's first offer pursuant to Section 998 of the Code of Civil Procedure which is exceeded by the judgment, and interest shall accrue until the satisfaction of judgment."

Section 3291 was part of Senate Bill No. 203, 1981-1982 Regular Session, chapter 150, enacted in April 1982 (Stats.1982, ch. 150, § 1, p. 493). Chapter 150 also added and amended other statutes by increasing the annual rate of interest accruing on judgments from 7 percent to 10 percent. Although the statute is silent as to its applicability to punitive damage awards, its history indicates the Legislature rejected several proposed amendments expressly providing that prejudgment interest would not accrue to that portion of the judgment representing punitive damages. (Sen. Bill No. 203, proposed amendments Aug. 31, 1981, 16 Assem. Final Hist. (1981-1982 Reg.Sess.) pp. 111, 116.) ³

As noted above, section 3291 provides that a judgment on a personal injury damage award shall bear interest when a plaintiff's settlement offer is refused and the plaintiff recovers a more favorable judgment. Courts generally agree that the purpose of section 3291 is to provide a statutory incentive to settle personal injury litigation where plaintiff has been physically as well as economically impaired, and thus it has been considered inapplicable to contractual disputes, business-tort losses and arbitration proceedings. (See Morin v. ABA Recovery Service, Inc. (1987) 195 Cal.App.3d 200, 206-207, at fn. 1, 240 Cal.Rptr. 509; accord, Woodard v. Southern Cal. Permanente Medical Group (1985) 171 Cal.App.3d 656, 665-668, 217 Cal.Rptr. 514; see also Ops.Cal.Legis.Counsel, No. 17984 (Nov. 2, 1982) Judgment and Prejudgment Interest [§ 3291 prejudgment interest imposed because of refusal to accept settlement offer, not because of refusal to pay sum owed].) With this background in mind, we now address whether section 3291 should apply in an insurance bad faith action.

2. Section 3291 and Insurance Bad Faith

We first discuss the nature of an insurance bad faith action to determine whether it falls within the ambit of section 3291 as an "action ... for personal injury." As stated above, the Court of Appeal found section 3291 applicable to actions based on breach of the implied covenant because it believed the gist of a bad faith action is to compensate the insuredfor the "anxiety" caused by the insurer's willful failure to pay for a loss pursuant to policy terms. Gourley agrees with the court's interpretation and further claims that because we allow recovery in tort for breach of the implied covenant of good faith and fair dealing, the nature of the harm suffered is...