MacGregor Yacht Corp. v. State Comp. Ins. Fund

• Decision Date: 06 April 1998
• Docket Number: No. B095395,B095395
• Citation: 74 Cal.Rptr.2d 473,63 Cal.App.4th 448
• Court: California Court of Appeals Court of Appeals
• Parties: , 63 Cal. Comp. Cases 398, 98 Cal. Daily Op. Serv. 3027, 98 Daily Journal D.A.R. 3231, 98 Daily Journal D.A.R. 4119, 98 Daily Journal D.A.R. 4451 MacGREGOR YACHT CORPORATION, Plaintiff and Respondent, v. STATE COMPENSATION INSURANCE FUND, Defendant and Appellant.

Page 473

74 Cal.Rptr.2d 473

63 Cal.App.4th 448, 63 Cal. Comp. Cases 398,

98 Cal. Daily Op. Serv. 3027,

98 Daily Journal D.A.R. 3231,

98 Daily Journal D.A.R. 4119,

98 Daily Journal D.A.R. 4451

MacGREGOR YACHT CORPORATION, Plaintiff and Respondent, v. STATE COMPENSATION INSURANCE FUND, Defendant and Appellant.

No. B095395.

Court of Appeal, Second District, Division 2, California.

April 6, 1998.

As Modified on Denial of Rehearing April 29, 1998.

Review Denied July 29, 1998.

Horvitz & Levy, Christina J. Imre, Julie L. Woods, Encino, Christine A. Pagac, Los Angeles, Sheppard, Mullin, Richter & Hampton, Finley L. Taylor, Justine M. Casey, Cindy T. Archer, Costa Mesa, Richard A. Krimen, Charles W. Savage, Berkeley, and Jody A. Carr, San Francisco, for Defendant and Appellant.

Roxborough, Pomerance & Gallegos LLP, Nicholas P. Roxborough, Drew E. Pomerance and Esteban G. Gallegos, Los Angeles, for Plaintiff and Respondent.

BOREN, Presiding Justice.

MacGregor Yacht Corporation (MacGregor) sued its workers' compensation insurer, State Compensation Insurance Fund (SCIF), to recover in tort and in breach of express and implied contract for damages resulting from the insurer's failure to investigate, defend and settle claims reasonably and from its overestimate of the amounts necessary for claims reserves. The trial court dismissed SCIF appeals from the $300,000 judgment against it on the contract claims. ¹

the tort cause of action as barred by the statute of limitations. Following a nonjury trial on the breach of contract claims, the court found that SCIF breached the express terms of the contract, based on SCIF's failure to conduct any follow-up investigation into many of the workers' compensation claims and its failure in some instances to deny the claims within the statutory 60-day period. The court also found SCIF breached the implied covenant of good faith and fair dealing by refusing to permit the insured access to claim files or other relevant claims data, refusing or failing to settle claims reasonably, setting unreasonably high reserves, modifying and concealing its reserving practices which maximized receipts at the expense of its insureds, and setting reserves at a "maximum probable potential" exposure rather than at the most probable result of the case.

FACTS

MacGregor is a family-owned business which manufactures engine-powered sailing boats made of fiberglass. The company is wholly owned by Roger MacGregor and his wife. The company employs between 100 and 150 people, depending upon the manufacturing season. Most of the employees are unskilled laborers making minimum wage. Many are immigrants who often do not hold valid green cards. The manufacturing facility is set up in such a way that unskilled labor is all that is required to build the boats.

MacGregor purchased from SCIF five consecutive one-year workers' compensation insurance policies. The first policy began on December 31, 1986, and the last policy expired on December 30, 1991. During the five-year period of the policy, MacGregor's employees filed 75 disability claims, a rate of over 10 percent of the workforce per year.

MacGregor believed many of the claims had been filed because workers were angry about being periodically laid off or fired, and that the claims were retaliatory or fraudulent. Many of the claims were filed after employees were terminated and were stress claims. MacGregor alleged that a number of the claims were filed by the same attorney, and that many of the stress claims had carbon copy symptoms and were mirror images of numerous other claims.

MacGregor's experience modification factor, which is used to set its insurance premiums, was higher than the industry average. MacGregor blamed its high experience modification factor, and thus its high premiums, on SCIF's improper overestimates of the amounts necessary for claims reserves and on SCIF's inefficient and substandard handling of claims. MacGregor's complaint alleged, inter alia, breach of contract, tortious breach of the implied covenant of good faith and fair dealing, and negligence. After the trial court dismissed the tort causes of action on the basis of the statute of limitations, it permitted MacGregor to amend its complaint to include a contractual claim for breach of the implied covenant of good faith and fair dealing. The parties then proceeded to a nonjury trial on the two contract claims, breach of express contract and breach of the implied covenant.

SCIF on appeal complains at various points about the purported misapplication of facts and disputes the significance of some of the facts adduced at trial, and MacGregor replies that substantial evidence supports the judgment. Nonetheless, as SCIF essentially raises legal issues and does not specifically contend on appeal that the judgment is not supported by substantial evidence (except as to one aspect discussed hereinafter), a detailed recitation of witness testimony and other evidence is unnecessary.

It is thus sufficient to quote the following from the trial court's findings and reasoning in its statement of decision: "Plaintiff has

established by a preponderance of the evidence that the defendant breached its contract with him by the way in which certain claims were handled during the term of his insurance contracts. In some of the instances, the reserves were set unreasonably high. In some cases, reserves were set at high amounts after the cases had been settled for substantially lessor [sic ] amounts or after the defendant knew or should have known that the cost of the case would not merit the high amount of the reserve. Investigation of some of the claims was poorly done. There was no follow up investigation on many of the claims. Many of the claims were 'post-termination' claims where an employee never made any complaint of injury while employed but after having been laid off or fired claims various workers compensation injuries. These cases were eventually either abandoned by the employee claimant or settled for very small amounts of money by the defendant SCIF. Nevertheless, very [63 Cal.App.4th 454] high reserves were maintained for these claims. [p] It is apparent that certain of the employees of SCIF felt that Mr. MacGregor did not run a good shop. The defense expert testified that in her opinion Mr. MacGregor's plant was not a safe place to work and that Mr. MacGregor took advantage of his employees. In any event, it is apparent that the fund did not have confidence in plaintiff, its insured, and conducted his files accordingly. [p] Both testifying experts and the witnesses who were employees of SCIF testified that reserves should be set on a case-by-case basis based on the most likely outcome of the claim. However, starting in June, 1989 the defendant changed its policy and amended its claims manual to state that reserves should be set at the 'maximum probable potential' cost of the claim. Although defendant's employees and expert witness deny that this amended standard would lead to the setting of unreasonably high reserves, the court finds their denials unpersuasive. The court further finds that the evidence establishes an inference that SCIF intentionally built up reserves because of what it perceived as an unreasonably liberal attitude by the Workers Compensation Appeals Board and the compensation system. The express policy of the Fund was to set reserves at a maximum possible potential exposure, which was violative of the implied covenant of good faith and fair dealing in that the correct practice was to set the reserves at the most probable result of the case. [p] In some instances, the fund neglected to deny the claims within the statutory 60 days of Lab. C. 5402, which had the effect of shifting the burden of proof on the issue of compensable injury from the claimant to the defendant. Claims people acknowledged this error in writing in the files, and paid higher settlements and set excessive reserves because of those errors. [p] Plaintiff's expert Mr. Oaklee Van Slyke expressed the opinion that the plaintiff was damaged in the sum of $367,359.00 because of miscoding and overstatements of reserves. With interest, he felt the plaintiff's damages was $433,983.00. It is true that Mr. Van Slyke did not go through a determination of the exact system or method by which his calculations were done. He testified, however, that his calculations were based on the conclusions of plaintiff's liability expert, Mr. Smith, on a case by case basis. [p] The issue of 'medical-legal' costs is not before this Court as it is an issue now pending before an administrative tribunal. [p] Defendant admitted no error in its claims handling or reserving practices. The opinion advanced by their liability expert, Ms. Jacqueline Secia[,] was that she believed that all of the claims practices were correct, there was no questionable decision made, and all the work was of high quality. Even though she conceded that some claims were not denied in time, she opined that that was an immaterial omission that merely resulted in a rebuttable shift of the burden of proof. [T]he court finds that her opinion is not credible. [p] The defendant declined to present any testimony or evidence as to damages and declined to present any evidence on the question of the relationship between the x-mod [experience modification factor] and the premiums charged the plaintiff."

DISCUSSION

Breach of Express Contract

SCIF contends that its failure to investigate, defend or settle claims properly cannot as a matter of law support a theory of SCIF's entire argument rests upon the following out-of-context sentence from this court's opinion in Security Officers Service, Inc. v. State Compensation Ins. Fund (1993) 17 Cal.App.4th 887, 894, 21 Cal.Rptr.2d 653: "Because the policy language granting and imposing these rights [to defend, investigate and settle] and duty [to defend claims] says no more about how they are to be carried out, SCIF...