Shafer v. Berger, Kahn, Shafton, Moss

• Decision Date: 18 March 2003
• Docket Number: No. B151730.,B151730.
• Citation: 131 Cal.Rptr.2d 777,107 Cal.App.4th 54
• Court: California Court of Appeals Court of Appeals
• Parties: John Norman SHAFER et al., Plaintiffs and Appellants, v. BERGER, KAHN, SHAFTON, MOSS, FIGLER, SIMON & GLADSTONE et al., Defendants and Respondents.

131 Cal.Rptr.2d 777

107 Cal.App.4th 54

John Norman SHAFER et al., Plaintiffs and Appellants, v. BERGER, KAHN, SHAFTON, MOSS, FIGLER, SIMON & GLADSTONE et al., Defendants and Respondents.

No. B151730.

Court of Appeal, Second District, Division 1.

March 18, 2003.

As Modified on Denial of Rehearing April 8, 2003.

Review Denied July 16, 2003.^*

[107 Cal.App.4th 154]

Hunt Ortmann Blasco Palffy & Rossell, Inc., Craig N. Rossell and Regan A. Molatore, Pasadena, for Plaintiffs and Appellants.

Ropers, Majeski, Kohn & Bentley, Susan H. Handelman and Gregory K. Storey, Santa Clara, for Defendants and Respondents.

MALLANO, J.

This appeal presents the question of whether an attorney, who is retained by an insurance company to provide coverage advice in a lawsuit against its insured, may be held liable to the plaintiff in that lawsuit for making a fraudulent statement about coverage. We answer that question in the affirmative because deceit undermines the administration of justice.

I BACKGROUND

For purposes of our review, we must accept as true the following allegations of the complaint. (See Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.) With that in mind, we rarely use "alleged" in discussing the factual assertions in the complaint.

John and June Shafer are homeowners in Los Angeles County. In the early 1990's, they contracted with Tri County Builders, a general contractor, to remodel their home and build an addition to it. Tri County Builders, a partnership, was run by Jay DeMay and Perry Hanstad. The construction contract apparently required that any disputes between the parties be resolved by binding arbitration before the American Arbitration Association (AAA).

As a result of numerous problems with the construction, in December 1991, the Shafers filed a demand for arbitration against Tri County Builders, DeMay, and Hanstad. The demand set forth claims for breach of contract, negligence, fraud, and intentional infliction of emotional distress, among others, and sought an award of damages, including punitive damages. DeMay tendered the defense of the action to Truck Insurance Exchange, which had issued a comprehensive general liability policy to him doing business as Tri County Builders.¹

By letter dated May 18, 1992, Truck agreed to defend Tri County Builders, De-May, and Hanstad, subject to a reservation of rights. The letter consisted of four single-spaced pages that quoted and discussed several provisions in the insurance policy. It pointed out that coverage was dependent upon an "occurrence," which, according to the letter, was defined in the policy as "an event, or a series of events . . . which results during the policy period, in bodily injury or property damage, neither expected nor intended from the standpoint of the insured."

The letter continued: "[Y]our policy does not afford coverage for exemplary or punitive damages. . . . Additionally, intentional acts are not covered under any policy of insurance as provided under Insurance Code Section 533, as this is against public policy for insurers to provide coverage for such causes of action.² A definition of `occurrence,' as well as Section 533 of the California Insurance Code and Section 1668 of the California Civil Code, may exclude coverage for damages resulting from such intentional and/or willful acts."³

In response to Truck's letter, DeMay requested that Truck pay for counsel of his own choosing. Because the Shafers' arbitration demand asserted claims of negligent and willful wrongdoing, DeMay was concerned that an attorney selected by Truck would have a conflict of interest given that a finding of liability based on willful acts would negate Truck's obligation to pay indemnity while a finding of negligence would entitle DeMay to indemnification. (See Civ.Code, § 2860; San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 208 Cal.Rptr. 494 (Cumis).)

For advice on coverage issues, Truck retained Lance LaBelle, Esq., of Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone. On June 9, 1992, LaBelle discussed coverage with Chris Lundblad, an employee of Truck. On June 11, 1992, LaBelle sent Lundblad a confirming letter, stating:

"This will confirm our telephone conference of June 9, 1992, wherein authority was extended for our office to modify Truck's May 18, 1992 reservation of rights [letter] with respect to the plaintiffs' claim as it relates to `bodily injury' under the policy. Specifically, we discussed affording coverage for `bodily injury,' i.e., physical manifestation of injury alleged in the complaint, which claim relates to both the intentional and negligence based causes of action in the complaint.

"[W]hile the vast majority of damages would not constitute `property damage' under your policy . . ., we discussed the potential that resulting property damage to the flooring might constitute covered `property damage'. . . . In an effort to modify the reservation of rights so as to not trigger the Cumis obligation . . ., we have enclosed the modified reservation of rights [letter] which we furnished to your insured pursuant to your authority. Please note that the definition of `occurrence' has been deleted from the reservation of rights along with any reference to Insurance Code Section 533 and Civil Code Section 1668."

LaBelle sent the superseding reservation of rights letter to DeMay's attorney on June 10, 1992. It consisted of 10 single-spaced pages that quoted and discussed the policy provisions as to which Truck reserved its rights. The letter did not define "occurrence" nor did it refer to Insurance Code section 533 or Civil Code section 1668. There was no reservation of rights as to willful or intentional acts, though coverage for punitive damages was expressly excluded. The letter stated in part: "Our firm has been retained by Truck Insurance Exchange (Truck) with respect to the coverage aspects of the [Shafer/Tri County Builders] matter. Please be advised that Truck has elected to replace and supersede its previously communicated May 18, 1992 reservation of rights with [this] reservation of rights." The letter to DeMay's attorney concluded: "Truck has made arrangements for your clients' defense to be handled by the law firm of Bodkin, McCarthy, Sargent & Smith. You will soon be contacted by [a Bodkin attorney] to make arrangements for transfer of the file. . . . Obviously, to the extent that Mr. DeMay also wishes to retain . . . your professional services, he is free to do so at his own expense."

The superseding reservation of rights letter, when read in context with the first reservation of rights letter and LaBelle's June 11, 1992 letter to Lundblad, implicitly acknowledged that, while an insurance policy cannot provide indemnity for willful acts (see Ins.Code, § 533), an insurer may agree to pay indemnity after an insured has committed a willful act. If the insurer so agrees, the insured (DeMay) is entitled to indemnification if he relies on that agreement to his detriment, for example by discharging his own counsel in order to be represented by counsel chosen by the insurer. (See Tomerlin v. Canadian Indemnity Co. (1964) 61 Cal.2d 638, 643-649, 39 Cal.Rptr. 731, 394 P.2d 571; Downey Venture v. LMI Ins. Co. (1998) 66 Cal. App.4th 478, 506-511, 78 Cal.Rptr.2d 142 [discussing Tomerlin]; Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2002) ¶¶ 7:327, 7:745 to 7:751, pp. 7A-86.2, 7B-64.1 to 7B-64.3 [same].)

The arbitration commenced on March 1, 1993, before a three-member panel. There were 20 days of evidentiary hearings, one day of site inspection, and one day of closing arguments. The parties produced 20 witnesses and numerous exhibits.

On July 26, 1993, the panel unanimously found in favor of the Shafers, awarding them $153,732 in general damages, $85,166 in attorneys' fees and costs, $40,513 in pre-award interest, $31,891.31 to cover AAA administrative fees and the arbitrators' compensation, and $25,000 in punitive damages against DeMay, totaling $336,302.31.

In the arbitration award, which referred to Tri-County Builders, DeMay, and Hanstad collectively as "respondents," the arbitrators found that "respondents failed to accurately cost the project from the outset, and never adequately scheduled the job. Respondents failed to properly supervise, and failed to properly man the job. Respondents failed to complete the job as scheduled after repeated assurances and revisions of completion dates. Respondents provided poor workmanship."

The arbitrators also found that "[respondent DeMay committed a fraudulent act at the time he entered into the [Construction] Agreement, that he never intended to complete the project within the times repeatedly promised, and ignored the . . . Agreement with absolute impunity. Respondent DeMay repeatedly extracted payment of additional monies in advance of work performed while promising to complete the project with new extended completion dates. The Panel further finds that Respondent DeMay committed other acts of fraud. . . .

"The Panel finds that there was a scheme and design by Respondent DeMay commencing at a time before signing the original contract with [the Shafers], designed to extract profits from items through change orders which should have been included within the scope of the original contract. . . .

"Moreover, Respondents' estimated cost had gross deficiencies which were part of the misrepresentation and fraud. . . . [¶] . . .

"The failure to properly price the electrical service was a sham. . . .

"Respondent DeMay failed to thoroughly inspect the existing house before he authorized signing the initial construction contract, notwithstanding the fact this was the largest project DeMay had entered into to date.

"The Panel finds that these events collectively are more than breach of contract and negligence. They evidence a scheme and design that Respondent DeMay never intended to...