Security Officers Service, Inc. v. State Compensation Ins. Fund

• Decision Date: 04 August 1993
• Docket Number: No. B,B
• Citation: 21 Cal.Rptr.2d 653,17 Cal.App.4th 887
• Court: California Court of Appeals Court of Appeals
• Parties: SECURITY OFFICERS SERVICE, INC., Plaintiff and Appellant, v. STATE COMPENSATION INSURANCE FUND, Defendant and Respondent. 067478.

Page 653

21 Cal.Rptr.2d 653

17 Cal.App.4th 887

SECURITY OFFICERS SERVICE, INC., Plaintiff and Appellant, v. STATE COMPENSATION INSURANCE FUND, Defendant and Respondent.

No. B 067478.

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

Aug. 4, 1993.

Review Denied Oct. 21, 1993.

Roxborough & Associates, Nicholas P. Roxborough and Esteban G. Gallegos, Los Angeles, for plaintiff and appellant.

Sheppard, Mullin, Richter & Hampton, Pierce T. Selwood, Andre J. Cronthall, William J. Arzbaecher III, Los Angeles, Richard A. Krimen, Charles W. Savage, San Francisco, and Jody A. Carr, Walnut Creek, for defendant and respondent.

FUKUTO, Associate Justice.

Does the implied covenant of good faith and fair dealing require a workers' compensation insurer to defend and resolve claims with due regard to the impact of outstanding claims and reserves on the premiums the insured will be assessed and on policy dividends it may receive? Alleging it had been damaged by defendant State Compensation Insurance Fund's (SCIF) systematic failure to process claims diligently, and its unreasonable inflation of the reserves assigned to them, plaintiff Security Officers Service, Inc., brought this action for breach of contract and implied covenant, as well as fraud and negligence.

The trial court sustained without leave to amend a demurrer to plaintiff's second amended complaint, apparently accepting SCIF's contentions that its alleged conduct did not constitute a breach of contractual duty, and that SCIF was immune from suit in tort.

The immunity contention having been soundly discredited by two recent decisions in similar cases, we confront the primary issue of liability they did not reach. We hold that under an insurance regime in which the insured's annual claims experience inexorably influences its premiums, the insurer may be liable if it processes claims and sets reserves without good faith regard for their impact on the insured's premiums and potential dividends. We therefore reverse the dismissal and direct that plaintiff be allowed to proceed with a new amended complaint.

FACTUAL STATEMENT

We summarize the allegations of plaintiff's second amended complaint, as supplemented by matters of which judicial notice is mandatory under Evidence Code sections 451, subdivisions (a), (b), and 459, subdivision (a)(2). (These include the Workers' Compensation Insurance Rating Bureau of California (rating bureau) manual, rating plan, and statistical plan, of which SCIF has requested judicial notice.)

Defendant SCIF is a public workers' compensation insurance enterprise, governed under Insurance Code sections 11770-11881. In December 1986, plaintiff entered into three insurance contracts with SCIF (collectively the policy), affording workers' compensation insurance for the period December 1, 1986 to December 1, 1988. Under the policy, SCIF agreed to "pay promptly when due to those eligible under this policy the benefits required of [plaintiff] by the workers' compensation law." The policy also obligated SCIF to defend claims, stating in relevant part: "We have the right and duty to defend at our expense any claim, proceeding or suit against you for benefits payable by this insurance. We have the right to investigate and settle these claims, proceedings or suits."

Part Five of the policy provided that premiums would be determined by the rating bureau's manuals of rules, rates, rating plans, and classifications, and that plaintiff would accept any increased premiums or rates which might be promulgated under an Insurance Commissioner-approved rating plan. Part Six provided that plaintiff would "be entitled to participate in any dividend plan applicable to this policy which may be approved for distribution by [SCIF's] Board of Directors if the final premium determined at the end of the policy period is more than the minimum premium.... [p] ... Your participation will be according to the rules adopted by our Board of Directors."

Plaintiff's policy premiums are determined by the rating bureau, as a function of the "manual rate" for the industry in question (prescribed by Cal.Code Regs., tit. 10, § 2350), the employer's annual payroll, and its loss "experience rating," as modified with regard to the number of claims outstanding at the end of the year, and the amount of reserves SCIF has established for those unresolved claims. (See Cal.Code Regs., tit. 10, § 2353 [rating bureau experience rating plan].) Not only does this "experience modification" affect plaintiff's premiums, the claims history also affects its entitlement to dividends.

Against this backdrop, plaintiff alleges the following contractual violations, in overlapping causes of action for breach of contract and "contractual breach of the implied covenant of good faith and fair dealing." First, SCIF breached its policy duty to pay benefits promptly, by unjustifiably allowing claims against plaintiff to remain open. For example, using its own hired consultant, plaintiff was able to resolve within three months several of the oldest such claims, some of which had been open for as long as three years. These claims were closed "for payments of approximately $7,500," whereas SCIF had assigned them reserves in excess of $100,000, in violation of an implied standard of reasonableness in allotting reserves. SCIF also ignored plaintiff's offer to provide investigators to expedite processing outstanding Plaintiff further alleges that by its sloth in resolving claims, SCIF breached its duty to defend and resolve them in requisitely diligent fashion, and thereby similarly adversely affected plaintiff's experience modification rating and consequent premiums. Moreover, by the described acts and omissions--not promptly paying claims when due, not diligently defending claims, and not reasonably reserving them--SCIF breached its policy obligations to plaintiff in respect of dividends. This breach also derived from a failure to "follow the rules and conditions for the declaration of a dividend." On information and belief, plaintiff would have received such dividends had SCIF complied with its duties.

claims. In consequence of SCIF's conduct, plaintiff's experience modification rating increased, causing plaintiff's premiums to rise to unwarranted levels.

Plaintiff's third cause of action, denominated "fraudulent claims practice," alleges several particular instances in which SCIF's personnel delayed resolution of claims against plaintiff, for periods in excess of three and one-half years. On information and belief, plaintiff alleges that the reserves for these claims, totalling in excess of $250,000, were deliberately inflated by SCIF with the intent to raise plaintiff's experience modification rate, after plaintiff announced it intended to terminate the policy. SCIF orally assured plaintiff these claims were being handled diligently, with appropriate reserves, and plaintiff justifiably relied on those assurances. When plaintiff subsequently discovered improprieties in claims handling, SCIF refused plaintiff's request for a claims audit.

In a final cause of action, for "negligent misrepresentation," plaintiff alleges that in December 1988 SCIF negligently understated plaintiff's payroll to the rating bureau, by reporting a nine-month payroll as being a full year's, thereby improperly increasing plaintiff's attributed percentage of claims to payroll. This miscalculation, together with SCIF's negligent evaluation of claims, and consequent imposition and reporting of inflated reserves, once more inflated plaintiff's experience modification rating and enhanced its premiums. (The "false" report also is alleged to have constituted a further breach of the implied covenant of good faith and fair dealing.) Plaintiff alleges it suffered actual damages of in excess of $250,000 on each cause of action, and prays for punitive damages on the third.

SCIF demurred to each cause of action, alleging failure to state a cause of action and that SCIF was immune from tort liability. Concurrently, SCIF moved to strike the punitive damages allegations. The court sustained the demurrer without leave to amend and ruled the motion to strike moot. Plaintiff appeals from the ensuing judgment of dismissal.

DISCUSSION

1. The Immunity Issue.

The parties again join issue on SCIF's two general grounds of demurrer below: affirmative failure to state a cause of action and immunity from suit in tort. The latter may be disposed of compactly, so we treat it first.

SCIF's contention that it may not be sued in tort has only limited potential significance, because, as pled, plaintiff's claims sound principally in contract. In any event, the asserted immunity does not appear. SCIF grounds its claim principally on provisions of the California Tort Claims Act (Gov.Code, § 810 et seq.), together with an antecedent decision, Rauschan v. State Comp. Ins. Fund (1927) 80 Cal.App. 754, 253 P. 173 (Rauschan ). We need not rehearse SCIF's arguments in detail, because they have already been satisfactorily laid to rest.

In Courtesy Ambulance Service v. Superior Court (1992) 8 Cal.App.4th 1504, 11 Cal.Rptr.2d 161, a case involving allegations against SCIF very much like those here, the court rejected SCIF's contention that it is subject to the California Tort Claims Act, upon extensive analysis of the language and history of Insurance Code section 11873, which excepts SCIF from most provisions of the Government Code. More recently, in Maxon Industries, Inc. v.

State Compensation Insurance Fund (1993) 16 Cal.App.4th 1387, 20 Cal.Rptr.2d 730--yet another case involving similar allegations--Division Four of this court also rejected SCIF's immunity contention, essentially embracing the reasoning of Courtesy Ambulance, and further explaining that Rauschan, supra, 80 Cal.App. 754, 253 P. 173, had long ago been disapproved by the Supreme Court. Upon independent consideration, we agree with the analyses and holdings of Courtesy Ambulance...