Silberg v. California Life Ins. Co.

• Decision Date: 10 May 1974
• Citation: 113 Cal.Rptr. 711,11 Cal.3d 452,521 P.2d 1103
• Court: California Supreme Court
• Parties: , 521 P.2d 1103 Enrique SILBERG, Plaintiff and Appellant, v. CALIFORNIA LIFE INSURANCE COMPANY, Defendant and Appellant. L.A. 30144

Page 711

113 Cal.Rptr. 711

11 Cal.3d 452, 521 P.2d 1103

Enrique SILBERG, Plaintiff and Appellant, v. CALIFORNIA LIFE INSURANCE COMPANY, Defendant and Appellant.

L.A. 30144.

May 10, 1974.

As Modified June 7, 1974.

John C. McCarthy and Young, Henrie & McCarthy, Pomona, for plaintiff and appellant.

Cooley, Godward, Castro, Huddleson & Tatum, Frank D. Tatum, Jr., James A. Richman and Tom E. Pollock, III, San Francisco, for defendant and appellant.

Adams, Duque & Hazeltine, Thomas F. Call, Los Angeles, and Edward L. Lascher, Ventura, as amici curiae on behalf of defendant and appellant.

MOSK, Justice.

We are called upon to interpret the provisions of an insurance policy issued to plaintiff by defendant company and the scope of defendant's duty to make payment thereunder. The policy provided that defendant would pay the cost of hospital care, including surgeon's fees, up to a limit of $5,000, with $100 deductible, and there was an exclusion for losses caused by injuries for which compensation was payable under any workmen's compensation law.

In July 1966, while the policy was in effect, plaintiff was seriously injured and as a result ultimately incurred $6,900 in medical charges. Defendant carrier refused to make any payments under the policy because plaintiff had filed a claim for workmen's compensation benefits on account of the injury. The company insisted there could be no final determination as to its liability under the policy until the workmen's compensation proceeding was concluded. At the same time, the workmen's compensation carrier denied liability because of defendant's questionable employment status. The compensation aspect was ultimately determined on April 30, 1968--nearly two years after the injury--when a compromise and release was approved by the Workmen's Compensation Appeals Board, settling the case for $3,700; of this recovery $1,100 was in payment of hospital bills through a lien filed by one hospital, the balance of $5,800 in hospital bills remaining unpaid. Defendant denied liability under the policy on the ground that the $3,700 paid under the compensation settlement rendered the exclusion applicable.

Plaintiff filed this action, alleging two causes of action: the first sought a declaration that defendant was liable under the policy, and the second sought damages for physical and mental distress. It was alleged that defendant was guilty of fraud, bad faith and malicious and oppressive conduct, and that plaintiff was entitled to both compensatory and punitive damages.

Initially, the trial court, sitting without a jury, determined in the declaratory relief count that the policy was ambiguous and that, therefore, defendant was obligated under the policy to pay $4,900 of plaintiff's medical costs (the policy limits minus the $100 deductible). A jury found for plaintiff on the second cause of action, and awarded $75,000 compensatory damages and $500,000 punitive damages. After judgment on the verdict was rendered, the trial court granted defendant's motion for a new trial on the grounds of insufficiency of the evidence to support the verdict, errors in law, and excessive damages. Plaintiff appeals from the order granting the new trial, and defendant cross-appeals from the judgment. (Cal.Rules of Court, rule 3(c).)

The major issues involved in plaintiff's appeal from the order granting a new trial are whether the trial court abused its discretion in concluding that the evidence was insufficient to support a finding defendant was guilty of bad faith justifying an award of compensatory damages, or of fraud or oppression justifying an award of exemplary damages. We determine that the evidence demonstrates as a matter of law that defendant's failure to pay benefits under the policy constituted bad faith but that the trial court did not abuse its discretion in ruling that the evidence was insufficient to support an award of exemplary damages. In defendant's appeal from the judgment, our inquiry focuses primarily upon whether the trial court properly found in the first cause of action that the policy was ambiguous. We conclude the trial court judgment was correct in this regard.

Plaintiff's Appeal

At the time of the accident, plaintiff was 38 years old and the father of two minor children. He owned and operated a dry cleaning business, and earned a monthly income of $500. Plaintiff's landlord owned a laundromat adjacent to the dry cleaning premises. Although not entirely clear from the record, plaintiff apparently agreed with his landlord that, in return for a reduction in rent, he would perform incidental services in connection with the laundromat operation. On July 17, 1966, plaintiff noticed smoke in the laundromat area, and in order to locate its source he climbed onto a washing machine. The glass in the lid of the machine broke; plaintiff's right foot fell into the machine, which was in operation at the time. His foot was severed at the ankle but was surgically restored later that day.

Upon his admission plaintiff advised the hospital that he was insured by defendant, and he notified defendant of the accident within a few days. Defendant immediately sent a routine inquiry to an investigative bureau to determine whether plaintiff had ever previously sought insurance benefits. In the claim forms subsequently filed by plaintiff, he declared that he was self-employed and that he had instituted proceedings to obtain workmen's compensation benefits. Medical bills for the first hospitalization were received by defendant by early September.

Plaintiff developed an infection in his foot, and further surgery was required. On October 3 he entered another hospital. In his testimony at the trial he claimed that he was unable to return to the hospital where the prior surgery had been performed because its bill remained unpaid. Upon the second admission plaintiff again named defendant as his insurer, and the charges for hospital and surgical services were sent to defendant.

Defendant initially failed to explain to either plaintiff or the hospitals the cause of the delay in making payment, but wrote an adjuster in Los Angeles, requesting him to determine whether plaintiff was covered by workmen's compensation. The letter conceded that workmen's compensation coverage was questionable because plaintiff was the owner-operator of a cleaning plant. The adjuster was also instructed that, in the event workmen's compensation did not cover the injury, he should review plaintiff's medical history for the 10 years prior to the injury. Defendant explained that the purpose of the exhaustive inquiry was to determine if plaintiff might have been uninsurable at the time of the injury. That is, in the event plaintiff had falsified his application in any respect or omitted to mention that he had some prior serious illness such as heart trouble or cancer, defendant could, on the basis of the misrepresentation, rescind the policy, even though such illnesses were not involved in plaintiff's claim.

The adjuster replied in mid-November that the workmen's compensation carrier denied coverage on the ground plaintiff was not an employee at the time of the injury, and that a hearing would be held by the Workmen's Compensation Appeals Board in December to determine the issue. The December hearing was continued to February 1967.

Throughout this period, plaintiff and a representative of the insurance agency through which he had purchased the policy made persistent inquiries regarding his claim, and the hospitals at which he had been treated also expressed impatience with the delay in receiving payment. In November and December defendant informed plaintiff as well as the hospitals that there was a question whether plaintiff was covered by workmen's compensation at the time of the injury, and that until the matter was resolved his benefits under the policy would be withheld.

In April 1967, defendant forwarded its claim file to the Workmen's Compensation Appeals Board in response to a subpoena duces tecum. No further action was taken by defendant until April 1968, when plaintiff's attorney wrote defendant that the workmen's compensation proceeding had been settled by compromise and release because the evidence was in conflict as to whether plaintiff's injury occurred in the course of employment. The attorney stated that since no formal findings of workmen's compensation coverage had been made by the board, defendant was liable under the policy. Defendant denied liability on the ground that the exclusion was applicable because plaintiff had received payment under the workmen's compensation law. It offered to settle the claim for $200 'to avoid litigation.' The offer was rejected.

Plaintiff's condition continued to deteriorate after his second hospitalization. In June 1967 he had a third operation, which was performed at the same hospital as the second surgery. The hospital refused to admit him unless he paid $500 of his previous bill. A fourth operation was performed in April 1968, this time at another hospital, since the hospital at which the second and third operations had been performed refused to accept plaintiff as a patient. Plaintiff was also compelled to engage a different surgeon because the surgeon who had previously operated on him had not been paid. In order to obtain the needed surgery plaintiff resorted to a ruse. He entered the hospital on a Saturday, the operation to be performed on Sunday, so that the hosital administrators would not be able to discover over the weekend whether insurance coverage existed. Plaintiff again named defendant as his insurer. ¹

Shortly after his injury defendant borrowed $2,000 to pay business expenses. Ultimately, he lost his business and could not borrow additional funds because unpaid hospital and medical bills established him to be a poor credit risk. He was compelled to change the place of his residence five times during this period because of lack of funds to pay...