Melton v. Industrial Indemnity Co.
| Decision Date | 16 January 2001 |
| Docket Number | No. F018487.,F018487. |
| Citation | 103 Cal.Rptr.2d 222,86 Cal.App.4th 222 |
| Court | California Court of Appeals Court of Appeals |
| Parties | Keith MELTON, Plaintiff and Respondent, v. INDUSTRIAL INDEMNITY COMPANY, Defendant and Appellant. |
McCormick, Barstow, Sheppard, Wayte & Carruth and James P. Wagoner, Fresno, for Defendant and Appellant.
Georgeson and Belardinelli and Richard A. Belardinelli, Fresno, for Plaintiff and Respondent.
Industrial Indemnity Company (Industrial) appeals from a judgment holding it liable for insurance bad faith on the ground it mishandled a "courtesy defense" and refused to indemnify its insured, Keith Melton. In the underlying action, Melton was found by the Workers' Compensation Appeals Board (WCAB or the Board) to have fired an injured employee, Edward Martin, in violation of Labor Code1 section 132a (section 132a or simply 132a) because Martin expressed an intention to file a workers' compensation claim.
The duty of good faith and fair dealing assertedly arose under any one of several theories advanced by Melton. He maintained his liability was covered, or was at least potentially covered, under his workers' compensation and employers' liability policy with Industrial. Alternatively, he argued Industrial had waived its coverage defenses, or was estopped to assert them, because it provided the defense without a reservation of rights. Finally, Melton contended the duty of good faith and fair dealing attached irrespective of the policy's application once Industrial undertook to provide a defense. The trial court ruled there was no coverage, no potential for coverage, and no estoppel to deny coverage, but it permitted the case to go to the jury on the theories of implied waiver and a duty undertaken. The jury returned a verdict for Melton and awarded him compensatory and punitive damages totalling $650,000.
In the published portion of this decision, we will conclude Melton's liability was covered under the workers' compensation portion of his policy notwithstanding the fact the firing was an intentional act. We will hold in particular that, given the nature of the workers' compensation system in California, neither the language in the policy limiting coverage to "accidents," nor the general public policy against furnishing insurance for willful acts, relieved Industrial of its responsibility to defend and indemnify Melton. We will hold further that Industrial was estopped to deny coverage on the ground Melton fired Martin after the policy expired.
In the unpublished portion of the decision, we will conclude the evidence fails to support the jury's award of compensatory damages with respect to certain of the economic losses Melton claimed to have suffered as a result of Industrial's bad faith. We will reject Industrial's objection to the jury's punitive damages award, as well as its numerous other contentions challenging the judgment on several additional grounds. Accordingly, we will affirm the judgment of liability but vacate the award of compensatory damages and remand the matter for a new trial on that issue alone unless Melton consents to a reduction of the award.
This case began in April of 1984 when Edward Martin fell off a ladder while working for Sierra Signs, a small sign company in Visalia owned by Keith Melton.2 A few months later Martin suffered disabling back pains that he attributed to the fall, and that caused him to miss several weeks of work. By the time Martin was able to return to his job, Melton had replaced him with someone else.
Martin subsequently filed an injury claim with Industrial, Melton's workers' compensation carrier. Melton disputed the claim, arguing Martin's fall was not the cause of his back problems, and Industrial denied the claim for this reason. Martin then filed an "Application for Adjudication of Claim" with the WCAB. After a brief investigation, Industrial offered to settle Martin's claim for $4,200. With this offer still pending, the matter was set for a hearing on August 27, 1985.
On August 14, nearly a year after he was discharged and two weeks before the hearing on the "normal issues" (issues involving injury and disability), Martin filed a petition with the WCAB alleging Melton had fired him in violation of section 132a for having made known his intention to file a workers' compensation claim. Discrimination of this sort, if proved, entitles a worker to recover additional compensation equal to one-half his or her injury award, as well as to job reinstatement and lost wages. In response to the petition, Melton denied any discriminatory intent, instead asserting he had replaced Martin because he was an undependable worker.
Industrial's position with regard to 132a petitions, as set out in its internal claims manual, was that an employer's liability for discriminatory acts was not covered by the standard workers' compensation policy. Nonetheless, the company customarily provided the employer with a "courtesy defense" in 132a cases in conjunction with its defense of the normal issues. Usually the two matters were resolved together; Industrial would agree to pay a little more than it otherwise might to settle the normal issues, in exchange for the employee's agreement to dismiss the petition.
In advance of providing a courtesy defense, Industrial's internal manual directed its claims department to send the employer a standardized "132a letter" setting out the company's no-coverage position but offering "as a service to you" to pay for an attorney selected by the employer (usually from a list of two or three attorneys suggested in the letter). In this instance however, Industrial neglected to send the 132a letter. Whether or not Melton was made aware of Industrial's position in some other way, and when, would become the primary factual issues in this case.
Up to this time, Melton and Industrial had been jointly represented on the normal issues by Industrial's Fresno staff counsel, Timothy Lickness. But Lickness was unable to attend the August 27 hearing and so referred the defense to Richard Yrulegui, an attorney with the firm of Emerson, Yrulegui and Igoa, who often handled workers' compensation cases for Industrial.3 Soon after he received Melton's file, Yrulegui got a phone call from Mark Deutinger, Martin's attorney, accepting Industrial's outstanding $4,200 settlement offer. Accordingly, the matter was taken off calendar and, after some further negotiations, the normal issues were settled by way of a compromise and release approved by the workers' compensation judge (WCJ).
In a departure from Industrial's usual practice, the 132a was not resolved with the normal issues. Nor did Lickness or Yrulegui consult with Melton about the compromise and release, or discuss its future effect on his 132a liability (and possibly on his insurance premiums). Moreover, the settlement left unresolved the question of whether Martin had suffered, in workers' compensation parlance, an injury "arising out of and in the course of the employment" (AOE/COE). (See § 3600.) For all these reasons and more, the manner in which the normal issues were handled would become important later on in the controversy over the 132a.
Two disputed telephone conversations during this same period, both allegedly made to Melton on August 26, 1985, underlie Industrial's claim he was aware from the outset of the case that any 132a liability he might incur would not be covered under his policy. One of the calls came from Valerie Souza, the Industrial claims representative assigned to Melton's file at the time, and the other came from Richard Yrulegui. Both Souza and Yrulegui testified they explained to Melton, and he seemed to understand, that he would be personally responsible for any 132a award. Melton, on the other hand, asserted he was not told anything of the sort until more than two and a half years later.
Although Yrulegui was aware of the discrimination claim at this point, Industrial had retained him for the normal issues only. During these same two disputed telephone conversations, Melton reportedly agreed to hire Yrulegui for the 132a as well. Yrulegui asked Souza for written confirmation. But Souza was transferred to a different caseload the same day and never followed up on the request. Nor did her replacement, who closed the Melton file in October once settlement of the normal issues was complete. Yrulegui also closed his file. As a result, several months went by during which no one represented Melton on the 132a. He assumed, by his account, that it had been resolved along with the injury claim.
Industrial's oversight became apparent in January of 1986 when Martin's attorney, Deutinger, contacted Yrulegui and Industrial to arrange for Melton's deposition. With Melton's approval, or at least with his acquiescence, Yrulegui was then hired to defend the 132a claim. Just who Yrulegui was representing—Melton or Industrial, or both—was a matter of considerable confusion during the remainder of the proceedings. There were several reasons for this uncertainty: Industrial was named as a defendant in most of the pleadings; Yrulegui often identified himself as Industrial's representative in pleadings and correspondence, and before the WCAB; he regularly shared information about the case with Industrial, sometimes to the exclusion of Melton; and without consulting Melton, Yrulegui made settlement offers to Martin on Industrial's behalf.
The situation grew even murkier late in 1986. In November, Yrulegui attended a workers' compensation seminar where he learned for the first time of a legal argument in favor of coverage for an employer's 132a liability. On this basis, Yrulegui recommended to Industrial that it pay for Cumis counsel (San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 208...
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