Progressive West Ins. Co. v. Yolo County

• Decision Date: 28 December 2005
• Docket Number: No. C050149.,C050149.
• Court: California Court of Appeals Court of Appeals
• Parties: PROGRESSIVE WEST INSURANCE COMPANY, Petitioner, v. YOLO COUNTY SUPERIOR COURT, Respondent; Simon H. Preciado, Real Party in Interest.

37 Cal.Rptr.3d 434

135 Cal.App.4th 263

PROGRESSIVE WEST INSURANCE COMPANY, Petitioner, v. YOLO COUNTY SUPERIOR COURT, Respondent;

Simon H. Preciado, Real Party in Interest.

No. C050149.

Court of Appeal, Third District.

December 28, 2005.

Farmer, Murphy, Smith & Alliston, Craig E. Farmer and Suzanne M. Nicholson, Sacramento, for Petitioner.

Pillsbury Winthrop Shaw Pittman, Kevin M. Fong, San Francisco, Benjamin L. Webster and Michael J. Daponde, Sacramento, for Federation of California as amicus curiae on behalf of Petitioner.

No appearance for Respondent.

Hayes, Davis, Ellingson, McLay & Scott, Stephen M. Hayes, Redwood Shores, and Robert S. McLay, Sacramento, for Real Party in Interest.

ROBIE, J.

Progressive West Insurance Company filed an action against Simon H. Preciado to recover money it paid to Preciado under a first-party medical payments provision of his automobile insurance policy. In response Preciado filed a cross-complaint against Progressive for breach of the insurance contract, breach of the covenant of good faith and fair dealing, and unfair business practices. Generally, Preciado alleges that because Progressive may have been restricted from recovering some or all of the money from Preciado based on two common-law rules, its bad faith efforts to recover the funds without engaging in any investigation gives rise to Progressive's liability under the above three theories. Further, Preciado alleges Progressive made unreasonable and bad faith misrepresentations by asserting its right to recover 100 percent of the payments. Preciado further alleges that this is not an isolated instance but that Progressive has a pattern and practice of seeking 100 percent recovery from all of its policyholders regardless of its entitlement. The trial court overruled Progressive's demurrer. Petitioners filed a petition for writ of mandate and we issued an alternative writ.

As to Preciado's specific claims related to his insurance contract, we shall reverse the trial court's order overruling the demurrer as to the causes of action for breach of contract and breach of the covenant of good faith and fair dealing and direct the court to sustain the demurrer as to those causes of action without leave to amend. On Preciado's broader claims related to Progressive's handling of this issue generally, we shall affirm the court's order overruling the demurrer as to the cause of action for unfair business practices.

FACTUAL AND PROCEDURAL BACKGROUND

Our review of the trial court's ruling on the demurrer is governed by well-settled principles. A general demurrer challenges only the legal sufficiency of a complaint, not the truth or the accuracy of its factual allegations or the plaintiff's ability to prove those allegations. (Ball v. GTE Mobilnet of California (2000) 81 Cal.App.4th 529, 534-535, 96 Cal.Rptr.2d 801.) "`"We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed." [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.]'" (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126, 119 Cal.Rptr.2d 709, 45 P.3d 1171.) Our review of the legal sufficiency of the complaint is de novo, "i.e., we exercise our independent judgment about whether the complaint states a cause of action as a matter of law. [Citation.]" (Montclair Parkowners Assn. v. City of Montclair (1999) 76 Cal.App.4th 784, 790, 90 Cal.Rptr.2d 598.)

Here, Progressive sued Preciado for reimbursement of Progressive's payment of medical payments to Preciado after Preciado recovered damages from the person who injured him in a car accident. In response, Preciado filed a cross-complaint against Progressive asserting causes of action for breach of the insurance contract, tortious breach of the covenant of good faith and fair dealing, and unfair business practices.

Preciado's cross-complaint alleges as follows:

Progressive issued a automobile insurance policy to Preciado.¹ That policy provided for medical payment coverage (med-pay coverage). Med-pay coverage is first-party coverage which pays reasonable and necessary medical expenses incurred due to an automobile accident. (See Nager v. Allstate Ins. Co. (2000) 83 Cal.App.4th 284, 289-290, 99 Cal.Rptr.2d 348.) "Automobile med-pay insurance provides first-party coverage on a no-fault basis for relatively low policy limits (generally ranging from $5,000 to $10,000) at relatively low premiums. [Citations.] The coverage is primarily designed to provide an additional source of funds for medical expenses for injured automobile occupants without all the burdens of a fault-based payment system." (Ibid.) Progressive's policy also provides that when the insurer makes a payment under the med-pay provision, it retains the right of reimbursement.

In his cross-complaint, Preciado alleges that Progressive's right of reimbursement is limited by two common-law doctrines: the made-whole rule and the common-fund doctrine. Under the made-whole rule, Preciado alleges the insurer is not entitled to recover any of the payments made to its insured under the policy until the insured is made whole from the tortfeasor who caused the underlying injuries. He also alleges that Progressive failed to perform any analysis of whether he had been made whole. If it had engaged in that analysis, it would have discovered that he had not been made whole and thus Progressive was not entitled to recover any reimbursement from him.

Under the common-fund doctrine, Preciado alleges an insurance company that does not participate in the litigation to recover damages from the third party who caused its insured's injuries must pay a pro rata share of the attorney fees incurred by the insured to recover those funds when it seeks reimbursement. Thus, the insurance company's reimbursement must be reduced by the amount of attorney fees attributable to the recovery of the funds subject to the insurance company's right of reimbursement.

Preciado alleges he retained an attorney to recover funds and therefore Progressive "must acknowledge the common fund doctrine and deduct from the amount claimed a pro-rata reduction of attorney's fees and costs." "[C]ontrary to California law, PROGRESSIVE is seeking the full amount paid to PRECIADO under the relevant med-pay provision..... [T]his attempt to recoup all monies paid is a blatant attempt to seize funds to which Progressive is not lawfully entitled, and amounts to fraud." Preciado pled in his first cause of action that Progressive's conduct regarding the made-whole rule and the common-fund doctrine breached the insurance contract.

He further pled Progressive breached the covenant of good faith and fair dealing "by engaging in the conduct alleged hereinabove including, without limitation, the following: a) unreasonably and in bad faith failing to investigate PRECIADO's claim properly; b) unreasonably and in bad faith failing and refusing to acknowledge the controlling law as it relates to insurance reimbursement in general, and med-pay reimbursement in particular; c) unreasonably and in bad [faith] failing and refusing to provide adequate, and informed communication as between an insurer and an insured/med-pay recipient; d) unreasonably and in bad faith failing and refusing to promptly and adequately explain the policy coverages; e) unreasonably and in bad faith misleading PRECIADO regarding his true obligations owed, if any to PROGRESSIVE; f) unreasonably and in bad faith misrepresenting to PRECIADO material facts concerning his claims and the valid and proper amount of benefits due under the Policy; g) unreasonably and in bad faith attempting to collect, through intimidation and coercion, amounts to which PROGRESSIVE is not entitled; and h) unreasonably and in bad faith failing and refusing to provide timely and full and complete benefits to PRECIADO." Based on this conduct, Preciado alleges he "has suffered, and will continue to suffer in the future, economic and consequential damages" in an amount according to proof. Preciado also seeks punitive damages on his claim for breach of the covenant of good faith and fair dealing.

Finally, in an unfair business practice cause of action, Preciado alleges that Progressive's conduct violates Business and Professions Code[²] section 17200 as an unlawful, unfair or fraudulent business practice. The cross-complaint alleges Progressive has a "pattern and practice of seeking med-pay reimbursement even though it never engaged in any discussion, analysis or conclusion that the injured party has in fact been made whole" and "continues to seek[] sums it is not entitled to as a matter of law to further its unlawful scheme." Further, Preciado alleges that Progressive has a "pattern and practice of ignoring California law by seeking 100% reimbursement for the amounts paid under its med-pay provision. This systematic scheme is contrary to law, and is nothing more than a sharp, illicit business practice." Based on these key allegations, Preciado alleges Progressive fails to investigate claims, fails to properly explain policy benefits, misled Preciado and misrepresented material facts pertaining to his claim, imposes unacceptably high reimbursement amounts, and forced Preciado to retain attorneys and incur economic damages to receive proper benefits under the policy.

Progressive filed a general demurrer to the cross-complaint. The trial court overruled Progressive's demurrer to these three causes of action. Progressive filed a petition for writ of mandate. We issued an alternative writ.

DISCUSSION

I

The Made-Whole Rule And The Common-Fund Doctrine

A Made-Whole Rule

When an insurance company pays out a claim on a first-party insurance policy to its insured, the insurance company is subrogated to the rights of its insured against any tortfeasor...