Isaacson v. California Ins. Guar. Ass'n

• Decision Date: 09 July 1985
• Citation: 193 Cal.App.3d 93,215 Cal.Rptr. 652
• Court: California Court of Appeals Court of Appeals
• Parties: Previously published at 193 Cal.App.3d 93 193 Cal.App.3d 93 Alvin S. ISAACSON, M.D., etc., et al., Plaintiffs and Appellants, v. CALIFORNIA INSURANCE GUARANTEE ASSOCIATION, Defendant and Respondent. Civ. B005150.

Page 652

215 Cal.Rptr. 652

Previously published at 193 Cal.App.3d 93

193 Cal.App.3d 93

Alvin S. ISAACSON, M.D., etc., et al., Plaintiffs and Appellants, v. CALIFORNIA INSURANCE GUARANTEE ASSOCIATION, Defendant and Respondent.

Civ. B005150.

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

July 9, 1985.

Review Granted Oct. 17, 1985.

Rosenfeld, Meyer & Susman, Walter S. Weiss, Thomas Larry Watts and James Y. Leong, Beverly Hills, for plaintiffs and appellants.

Clausen, Harris & Campbell, Lon Harris, Marie D. Clause and Stanley T. Gilliam, Los Angeles, for defendant and respondent.

LUI, Acting Presiding Justice.

Doctors Alvin S. Isaacson and Sidney S. Grant, as individuals and as professional corporations, appeal from the judgment of nonsuit "and from the whole thereof." The judgment was in favor of defendant and respondent California Insurance Guarantee Association (CIGA), which had replaced Imperial Insurance Company (Imperial), an insolvent company that had insured appellants Grant and Isaacson for claims involved in a medical malpractice action brought against them. That action (the Ouellette litigation) settled for $500,000; $400,000 was paid by CIGA and $100,000 was paid by appellants. ¹ CIGA's refusal to pay the additional $100,000 in settlement is the basis for the instant lawsuit.

PROCEDURAL HISTORY

Appellants' first complaint alleged five causes of action against CIGA and others. Even before an answer was filed, appellants filed a first amended complaint. A demurrer was sustained with leave to amend as to causes of action in the first amended complaint that alleged bad faith and intentional infliction of emotional distress against CIGA. In sustaining the demurrer, the court cited Insurance Code section 1063.12 in its minute order.

In 1979, when the demurrer was sustained, Insurance Code section 1063.12, subdivision (a), ² provided: "The association, its member insurers, and its officers, directors, agents or employees of the association, or its member insurers, shall under no circumstances be liable for any sum in excess of the face amount of any policy of insurance of the insolvent insurer, as defined under subdivision (c) of Section 1063.1 of this article and the costs of administration and the costs of loss adjustment, investigation and defenses relating to claims thereunder." This section was amended by Statutes of 1979, chapter 384, section 4, page 1448, which in part replaced the words "of the face amount of any policy of insurance of the insolvent insurer" with "of the amount of covered claims of the insolvent insurer." Section 1063.1, subdivision (c), referred to in section 1063.12, subdivision (a), in part defines "covered claims" as "the obligations of an insolvent insurer ... (i) imposed by law and arising out of an insurance policy of the insolvent insurer; (ii) which were unpaid by the insolvent insurer...."

Appellants then filed a second amended complaint, as individual plaintiffs and as a professional corporation. The first cause of action sought damages against CIGA and its employee George Orr ³ for the $100,000 paid for the alleged covered claim; this is the cause of action which was eventually the subject of the nonsuit judgment. The complaint alleged that the Ouellette complaint had asserted a "covered claim" against appellant Isaacson that CIGA must pay and discharge to the extent of $500,000 for each covered claim. It was further alleged that Michael Thomas, an attorney in the law firm responsible for preparing appellants' defense in the Ouellette action, told appellants there was a reasonable possibility that a judgment in the Ouellette litigation could substantially exceed $500,000. The first cause of action alleged that "Defendant CIGA had no reasonable grounds for rejecting claimant Ouellette's final settlement demand of Five Hundred Thousand Dollars ($500,000), although such demand constituted a covered claim." Appellants alleged that they were entitled to recover $100,000 from CIGA, which contribution should "rightfully have been made by CIGA pursuant to its obligations under the policy and the Act to pay and discharge covered claims which were the obligation of the insolvent insurer, IMPERIAL."

The second cause of action alleged bad faith against CIGA and Orr. It alleged that the defense attorney had advised CIGA and Orr to offer the full amount under the policy and the Act to effectuate settlement of the Ouellette litigation; that CIGA and Orr failed and refused to enter into settlement negotiations on behalf of appellants, at one time refusing to send an authorized representative to participate in a scheduled mandatory settlement conference; and, in later negotiations, raised its offer of settlement from $350,000 to $400,000 but would not pay the $500,000 demanded in settlement. The second cause of action alleged that "[t]he conduct of CIGA and ORR in failing diligently and honestly to evaluate the extreme personal financial risk to plaintiffs, and each of them, from failure to settle, and in failing and refusing to participate at all or in any meaningful way in negotiations to settle the Ouellette litigation and in failing to settle said litigation within the available limits of the covered claim for plaintiff ISAACSON, was willful, deliberate, and malicious, and constituted substantial breaches of said covenant of good faith and fair dealing."

The third cause of action, for intentional infliction of emotional distress against Orr and CIGA, in addition to the above allegations, further incorporated a letter from Orr to Attorney Thomas regarding tactics in the Ouellette litigation. In addition to recommending a reasonable settlement value of no more than $350,000, Orr was concerned that Ouellette's attorney might convince the doctors that they should stipulate to a judgment "to force CIGA into an unwarranted settlement amount." Orr continued: "This kind of activity is beginning to become standard operational procedure of plaintiff's attorneys and can not succeed without the cooperation of the defendant who will succumb to such pressure at his own peril. [p] Please keep us closely advised in this matter as CIGA intends to take a firm stand at this time in order to quash this sort of activity before it becomes too prevalent. An insured should not join in any adventure that might turn a possible victory into a defeat before the battle begins. This would be repugnant to fair dealing persons." The fourth and fifth causes of action in the second amended complaint did not involve respondent.

On March 12, 1980, the trial court sustained demurrers by CIGA to the second and third causes of action. The minute order read as follows: "Cause of action 2 sustained without leave to amend. No contractual relation between moving party and plaintiffs. Insurance Code Section 1063.12. Cause of action 3 sustained without leave to amend. Insufficient allegation of outrageous conduct. Insurance Code Section 1063.12."

The case went forward on the first cause of action. Discovery proceeded. In its second set of requests for admissions and interrogatories, CIGA asked appellants to admit either that they were not negligent or that they were negligent in caring for Ouellette. Appellants objected to this request for admission on the grounds that whether or not they were legally negligent "is not relevant for purposes of this action." CIGA filed a motion for order requiring further answers, to which appellants filed opposition. The trial court denied CIGA's motion on grounds of relevancy. In its minute order, the court stated: "The central issue in this case does not involve the negligence of the doctors (plaintiffs) in the underlying case. The issue is whether there is a 'covered claim'. Resolution of that issue does not depend upon the negligence of the plaintiffs in the underlying case, but upon the conduct of the defendants (alleged) in the instant case."

Thereafter, appellants' motion to add a cause of action for breach of the Unfair Practice Act (Insurance Code sections 790 et seq.) was denied. The court decided that the issue had been previously adjudicated on a demurrer and a petition for a writ to review the prior demurrer had been denied by the Court of Appeal.

When this matter was called for trial in November 1983, the trial court stated that it believed the issue presented in the case at bench must be resolved in the trial of the underlying medical malpractice action. If upon trial of the malpractice action the verdict was more than $400,000, CIGA would be liable for that excess up to $100,000 and possibly interest and attorneys' fees. If the verdict was $400,000 or less, the court believed appellants would lose on the complaint.

Appellants' trial counsel felt that the trial court was wrong and that its approach would force the doctors to prove that they were "butchers" in order to prevail against CIGA. During the discussion, counsel for CIGA conceded that at no time was CIGA alleging this was not a "covered claim." Rather, counsel stated "[i]t was just the amount of the claim and how you determine it that has been the issue." The trial court agreed to rule that it is a covered claim but would not find that CIGA is obligated to pay the $100,000 in part because there had been no breach of contract by denying coverage or refusing to defend.

Appellants argued that there is a duty "where there is an excess situation, to insulate an insured from that type of a catastrophe. And the failure to do it in this case subjects the carrier--and I suggest CIGA is a carrier--subjects them to this exposure over and above the limits, whether they are statutory or contractual." The court stated that it agreed with Judge Hayden, who had sustained the demurrer to the second and third causes of action alleged in the second amended complaint, that this is not a case for application of the bad faith doctrine because CIGA was not the party with whom the doctors contracted. He also...