Howard v. Am. Nat'l Fire Ins. Co., s. A121569, A123187.

• Citation: 187 Cal.App.4th 498,115 Cal.Rptr.3d 42
• Decision Date: 23 November 2010
• Docket Number: Nos. A121569, A123187.,s. A121569, A123187.
• Court: California Court of Appeals
• Parties: James HOWARD et al., Plaintiffs and Appellants, v. AMERICAN NATIONAL FIRE INS. CO. et al., Defendants and Appellants.

187 Cal.App.4th 498 115 Cal.Rptr.3d 42 James HOWARD et al., Plaintiffs and Appellants, v. AMERICAN NATIONAL FIRE INS. CO. et al., Defendants and Appellants. Nos. A121569, A123187. Court of Appeal, First District, Division 4, California. Aug. 11, 2010. As Modified on Denial of Rehearing Sept. 9, 2010. Review Denied Nov. 23, 2010.

**51 Glaspy & Glaspy, Inc., David M. Glaspy, David M. Glaspy; Clyde & Co. US, Peter J. Whalen, Kathryn C. Ashton, San Francisco, for Appellant.

Law Offices of Tony J. Tanke, Tony J. Tanke; Reinhardt, Wendorf & Blanchfield, Mark A. Wendorf, for Respondents.

**52 SEPULVEDA, J.

James Howard, a young man molested as a child by a Catholic priest, sued the Bishop who retained the priest in the diocese. A jury found the Bishop liable for negligent retention, and the court entered judgment in the amount of $5.5 million: $2.5 million in compensatory damages and $3 million in punitive damages. The Bishop settled with Howard while the case was on appeal, and agreed to join Howard in an action against the Bishop's insurers to recover on the judgment and for bad faith failure to defend, settle, and indemnify the molestation case. This action against one of the defendant insurers, American National Fire Insurance Company (American), was adjudicated in a bench trial. The court found American liable for breach of contract and bad faith failure to defend, settle, and indemnify. The court awarded almost $3 million in damages. American appeals the judgment, and plaintiffs appeal the denial of prejudgment interest. In a separate appeal, American challenges the legal costs awarded to plaintiffs in a postjudgment order. We consolidated the two appeals for purposes of oral argument and decision. As discussed below, we modify the judgment to award prejudgment interest but affirm the judgment in all other respects. We also affirm the postjudgment order awarding costs, with one modification.

I. FACTS

A. The underlying lawsuit and insurance coverage disputes

A Catholic priest, Father Oliver O'Grady, sexually molested many young children over many years and was criminally convicted of child molestation in 1993. In 1994 and 1995, James Howard and his brother Joh Howard sued O'Grady and other defendants for damages suffered from the priest's molestation. The named defendants included the head of the diocese that employed O'Grady, the Roman Catholic Bishop of Stockton (Bishop), who is a corporation sole (a corporation of one person whose successor becomes the corporation on his death or resignation).

In his complaint, James Howard alleged that the Bishop employed O'Grady from approximately 1977 through 1991. James, who was born in June 1975, alleged that he was an active parishioner in the church from the time of his birth and that O'Grady regularly and repeatedly molested him "[b]eginning in approximately 1979" and continuing through about 1988. James Howard's younger brother, Joh Howard (born in August 1978) alleged molestation by O'Grady "[b]eginning in approximately December 1984" through 1991.

The Bishop had several comprehensive general liability policies from different insurers and excess insurance policies as well. American insured the Bishop from November 1, 1978 to November 1, 1979, under a comprehensive general liability policy for all sums he became legally obligated to pay as damages for "bodily injury caused by an occurrence," defined as an "accident" resulting during the policy period in bodily injury "neither expected nor intended from the standpoint of the insured," including bodily injury caused by an employee's battery, up to a limit of $500,000 per occurrence. American also agreed to defend civil lawsuits brought against the Bishop. When the Bishop was sued for negligent retention of a molesting priest, the Bishop sought defense and indemnity from several insurers, including American. A number of insurers defended the Bishop. American did not. American maintained that the molestation was not covered by its policy because the molestation occurred after expiration of American's policy in November 1979, and thus it denied any duty to defend or indemnify. **53 American also denied coverage for Joh Howard's claims, noting that Joh's complaint did not allege molestation prior to 1984.¹ As for James Howard, American's letter denying coverage made no mention of the complaint's allegation that Jameswas molested beginning in about 1979. Instead, American relied upon statements James made during his deposition to conclude that the abuse really began in 1984.

James and Joh Howard made several pretrial settlement demands. In July 1997, they demanded $2.75 million each to settle. James reduced his demand to $2.3 million in October 1997 and to $1.85 million in April 1998. American did not offer any contribution toward settlement and refused to attend mediation sessions until the April 1998 mediation, where the lowest settlement demand was made. During that mediation, American said that it would contribute only "a minimal amount toward the settlement" and "no firm figure was given." Internal documents show that American's counsel had no authority to pay above $50,000 in settlement at the April 1998 mediation. The case did not settle.

Trial began in May 1998. The case was tried to a jury against a single defendant, the Bishop, and on a single cause of action, negligent retention or supervision. The jury found the Bishop negligent in the James and Joh Howard cases and assessed both compensatory and punitive damages. The jury found compensatory damages to be $3.05 million for James Howard and $3.3 million for Joh Howard. The jury also awarded punitive damages of $12 million for each plaintiff.

The trial judge reduced the awards in September 1998 on posttrial motions. Compensatory damages were reduced pursuant to Proposition 51, which limits liability for noneconomic damages in proportion to a defendant's percentage of fault. (Civ.Code, § 1431.1 et seq.) Here, the jury in the underlying case found the Bishop to be eighty percent at fault in the negligent retention of O'Grady and the court applied that percentage to reduce the amount of the compensatory damages assessed by the jury. The trial judge also found the punitive damages to be excessive and granted a remittitur of punitive damages from $12 million to $3 million for each plaintiff.

The final judgment, following postverdict motions, awarded compensatory damages of $2.5 million to James Howard and $2.75 million to Joh Howard. The Howards' punitive damages were $3 million each. Both the Howards and the Bishop appealed the judgment. The Howards maintained that the trial court improperly applied Proposition 51 to reduce the amount of compensatory damages awarded by the jury and sought reinstatement of all punitive damages. The Bishop sought an entirely new trial.

B. Settlement and partial satisfaction of the underlying judgment

The Bishop had difficulty providing the collateral necessary for an appeal bond. In November 1998, the Bishop paid $1 million toward satisfaction ofthe punitive damages component of the judgment, to be credited equally between plaintiffs, in exchange for a stay of execution until January 1999. The Bishop felt that the assets of the diocese were at risk and, in early 1999, the Bishop negotiated with the Howards and various insurers to settle the litigation.

**54 Two of those insurers, Century Indemnity Company and related entities (CIGNA) and St. Paul Fire & Marine Insurance Company (St. Paul), had contributed to the Bishop's defense while reserving their rights to contest coverage under their policies. In February 1999, CIGNA agreed to pay the Bishop its remaining policy limits of $956,342.12, plus interest on that amount from the date of judgment and CIGNA's share of costs taxed against the Bishop, in partial satisfaction of the judgment. Likewise, in March 1999, St. Paul agreed to pay the Bishop its remaining policy limits of $2.339 million plus interest and costs in partial satisfaction of the judgment.² Both insurers gave the Bishop permission to allocate the payment to either of the two Howards and among any claims, except punitive damages.

In May 1999, the Bishop finalized a settlement agreement with the Howards. At the time, the Howards had a judgment awarding James $5.5 million and Joh $5.75 million. Against that combined total of $11.25 million, the Bishop had already paid $1 million. The settlement agreement provided for an additional, immediate cash payment of $6,655,442.³ That payment was funded by the CIGNA and St. Paul payments of their policy limits, described above, combined with the Bishop's payment of $3,067,397. The Howards equally divided the $6,655,442 cash payment between themselves. Each received $3,327,721.⁴

All sums paid under the agreement were said "to compensate plaintiffs for their physical injuries and sickness caused by the events underlying" their lawsuit against the Bishop for negligent retention of O'Grady. The parties agreed that the Howards "may allocate any and all payments received bythem under this agreement among their respective claims and interests as they, in their sole discretion, see fit." The Bishop also agreed to prosecute litigation against his insurers and to pay the Howards the proceeds from that litigation. In exchange for the Bishop's payments and promises, the Howards released him from all claims. The parties dismissed their appeals, rendering the judgment final.

C. Initiation of this lawsuit by the Bishop as insured and the Howards as judgment creditors

In October 1999, the Howards filed a complaint against the Bishop's insurers as judgment creditors seeking to collect on their judgment and claiming bad faith refusal to pay the judgment. The Bishop filed a separate complaint against the same insurers for breach of contract and bad faith breach of the insurance contracts **55 in failing to defend, settle, and indemnify the Howards' claims against him. The complaints were...