McLaughlin v. National Union Fire Ins. Co.

• Decision Date: 25 March 1994
• Docket Number: No. A051115,A051115
• Citation: 29 Cal.Rptr.2d 559,23 Cal.App.4th 1132
• Court: California Court of Appeals Court of Appeals
• Parties: Grace McLAUGHLIN et al., Plaintiffs and Respondents, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant and Appellant.

Page 559

29 Cal.Rptr.2d 559

23 Cal.App.4th 1132

Grace McLAUGHLIN et al., Plaintiffs and Respondents, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant and Appellant.

No. A051115.

Court of Appeal, First District, Division 4, California.

March 25, 1994.

Review Denied June 30, 1994.

Pettit & Martin, D. Wayne Jeffries, Saul D. Bercovitch, San Francisco, Stroock & Stroock & Lavan, Michael F. Perlis, Los Angeles, Robinson & Wood, Inc., Archie S. Robinson, Thomas R. Fellows, San Jose, and Horvitz & Levy, Ellis J. Horvitz, Peter Abrahams, and Stephen E. Norris, Encino, for defendant and appellant.

Cotchett, Illston & Pitre, Joseph W. Cotchett, Susan Illston, Marie Seth Weiner, Burlingame, Crosby, Heafey, Roach & May, Ronald L. Murov, Howard A. Janssen, Oakland, Morgan, Ruby, Schofield, Franich & Fredkin, Allen J. Ruby, Lexie D. Schroeder, San Jose, and Thomas Anderson & Assoc., Thomas T. Anderson and Samuel Trussell, Indio, for plaintiffs and respondents.

ANDERSON, Presiding Justice.

This is an appeal from a multi-million dollar judgment in a bad faith action brought by 13 investors in Technical Equities Corporation (Technical Equities) against the company's primary insurance carrier, National Union Fire Insurance Company of Pittsburgh, Pa. (National Union). Technical Equities, a diversified investment services company, financially collapsed in February 1986. Finding their investments substantially worthless after the company's demise, hundreds of investors successfully sued the officers and directors of Technical Equities for fraud, negligent misrepresentation, breach of fiduciary duty and negligence.

National Union insured Technical Equities under a directors and officers liability policy (D & O policy) as well as a comprehensive general liability policy (CGL policy). From the inception of the investor litigation, National Union took the position that (1) there was coverage only for the second year of the three-year D & O Policy, and (2) the policy itself was a wasting asset so that defense costs were included within the annual policy limits. Certain plaintiff investors filed a test case for declaratory relief to challenge this interpretation. Similarly, a second declaratory relief action was brought to resolve whether there was coverage under the CGL policy for their damages stemming from the wrongful acts of Technical Equities and its officers and directors.

The trial court entered declaratory judgments favoring broad coverage under both policies; these judgments paved the way for resounding victories by respondents ¹ on five causes of action in this bad faith suit. Meanwhile, National Union appealed both declaratory judgments. In Chatton v. National Union Fire Ins. Co. ² and Helfand v. National Union Fire Ins. Co. ³ we, respectively, overturned and substantially overturned these judgments, 21 Cal.App.4th 486, 26 Cal.Rptr.2d 520. Now comes National Union a third time asking us to overturn the massive judgments handed down in the face of erroneous instructions concerning coverage under the policies.

We reverse the judgments on all causes of action and direct entry of judgment in favor of National Union on three of them. ⁴

I. BACKGROUND

In the summer of 1986, the scores of individual investor suits were coordinated in order to try common issues of fact and law. The coordination judge set seven actions brought by 13 investors as a "test case" for trial. These test cases were known as the McLaughlin actions. Plaintiffs therein are the same plaintiffs as in this insurance bad faith appeal. In August 1988, after a jury trial, these Plaintiffs obtained judgment against the inside directors of Technical Equities for approximately $4.25 million in economic damages, $300,000 for emotional distress and $147 million in punitive damages. The next month more judgments were forthcoming: (1) the outside directors stipulated to judgments totalling $104 million in compensatory damages in favor of all plaintiffs in the coordinated litigation and, (2) pursuant to an abbreviated court trial, 482 nontest-case plaintiffs obtained judgment totalling the same amount ($104 million) against inside directors.

Thereafter, numerous clusters of plaintiffs filed bad faith actions against National Union in the coordinated proceeding. Again, the court used the test case procedure and our same McLaughlin Plaintiffs went to trial in February 1990.

That same month the trial court entered significant rulings in the declaratory relief actions. It determined that the CGL policy provided coverage for investor claims against the officers and directors of Technical Equities under the bodily injury clause, inasmuch as the definition of bodily injury includes emotional distress. Implicitly it found that the wrongful activities of Technical Equities, through its officers and directors, were "occurrences" within the meaning of the policy. The court also resolved that the CGL availed $1 million in coverage per occurrence, with no limit on the aggregate number of occurrences.

Finally, the court declared that advertising injury stemming from unfair competition as defined in the Unfair Business Practices Act (Bus. & Prof.Code, § 17200 et seq., hereafter the Act) was covered under the advertising injury liability provisions of the policy, which afforded an aggregate limit of $1 million. (Chatton, supra, 10 Cal.App.4th at p. 851, 13 Cal.Rptr.2d 318.)

With respect to the D & O policy, the trial court ruled that (1) defense costs do not deplete the limits of liability available under the policy to pay for claims; (2) the policy limits were available for claims for all three years; and (3) a compromise agreement between Technical Equities and National Union whereby National Union would cancel the third policy year and issue a new policy covering postbankruptcy acts of its directors and officers was not binding on the Helfand plaintiffs or the officers and directors, notwithstanding bankruptcy court approval. (Helfand, supra, 10 Cal.App.4th at pp. 879, 884, 894, 13 Cal.Rptr.2d 295.)

Having resolved the Chatton and Helfand coverage issues, the trial court then instructed the McLaughlin jury on the basis of those coverage determinations. In particular, it instructed that (1) the D & O policy limits were $30 million; (2) defense costs were payable in addition to these limits; (3) cancellation of the third year of the D & O policy was invalid, "a bankruptcy order to the contrary notwithstanding"; (4) the bodily injury limits under the CGL policy were $1 million per occurrence with no limit on the number of occurrences; (5) the definition of "occurrence" under that policy "includes negligent misrepresentation"; (6) emotional distress is included in the CGL definition of bodily injury; and (7) the CGL policy provided coverage for advertising injuries, with an aggregate limit of $1 million.

The court submitted five causes of action to the jury. Four were assigned to Plaintiffs by the outside directors of Technical Equities in exchange for releases and covenants not to execute on the stipulated judgments entered against them in the investment fraud cases. The final was a direct cause of action against National Union for violation of Insurance Code section 790.03(h). Following general jury verdicts in favor of Plaintiffs, the court entered judgment against National Union in this test case for $5,943,165 in compensatory damages and $43 million in punitive damages. This McLaughlin case served as an audition on liability; the pertinent jury findings were then applied to claims of hundreds of other injured investors who obtained favorable judgments in Abelson v. National Union Fire Ins. Co., now on appeal to this court (A053939).

Meanwhile, National Union filed appeals in Chatton and Helfand. Long after the McLaughlin and Abelson judgments were entered, we rendered decisions which conclusively established there was no coverage for the investor claims under the CGL policy and the D & O policy limits were $20 million (not $30 million) less defense costs.

II. THE JUDGMENTS ON THE FOUR ASSIGNED CAUSES OF ACTION MUST BE REVERSED

A. First Cause of Action: Breach of Covenant/Refusal to Accept Settlement Offer

National Union first urges that we reverse the cause of action for breach of the implied covenant of good faith and fair dealing. We agree.

In their first assigned cause of action Plaintiffs contended that National Union breached the implied covenant by failing to accept the $24 million settlement offer ⁵ of the plaintiffs' litigation group (PLG) ⁶ in the underlying suit against the directors and officers. The trial court specifically instructed the jury that to prove a violation of the defendant's duty of good faith and fair dealing under the insurance contract, plaintiffs have the burden of proving: "1. That there was an underlying claim or action against an insured; [p] 2. That the underlying claim or action asked for damages that were actually or potentially within the coverage of the policy. [p] 3. That defendant National Union learned of this lawsuit. [p] 4. That there was an offer to defendant National Union of a settlement of the underlying claim or action. [p] 5. That this settlement offer was for an amount within the policy limits. [p] 6. That this settlement offer was a reasonable offer. [p] 7. That defendant National Union failed to accept this offer."

The erroneous instructions on coverage mandate reversal with directions to enter judgment for National Union on this cause of action. Plaintiffs cannot prove a pivotal element of their case--namely, a settlement offer within policy limits--because Chatton and Helfand conclusively establish there was a $20 million coverage cap, less defense costs. The $24 million settlement exceeds available coverage. On the other hand, the jury for all practical purposes had no choice but to find bad faith liability, having been instructed there was $30 million plus defense costs available...