Waller v. Truck Ins. Exchange, Inc.

• Decision Date: 28 August 1995
• Docket Number: No. S042287,S042287
• Court: California Supreme Court
• Parties: , 900 P.2d 619, 95 Cal. Daily Op. Serv. 6832, 95 Daily Journal D.A.R. 11,663 James R. WALLER, Jr., et al., Plaintiffs and Respondents, v. TRUCK INSURANCE EXCHANGE, INC., et al., Defendants and Appellants.

Page 370

44 Cal.Rptr.2d 370

11 Cal.4th 1, 900 P.2d 619, 95 Cal. Daily Op. Serv. 6832,

95 Daily Journal D.A.R. 11,663

James R. WALLER, Jr., et al., Plaintiffs and Respondents, v. TRUCK INSURANCE EXCHANGE, INC., et al., Defendants and Appellants.

No. S042287.

Supreme Court of California.

Aug. 28, 1995.

As Modified on Denial of Rehearing Oct. 26, 1995.

Waldman & Chuang, Carter & Chuang, Craig H. Bell, Horvitz & Levy, Ellis J. Horvitz, David M. Axelrad and Mitchell C. Tilner, for defendants and appellants.

Charles W. Savage, Jody Carr, Michael A. Mathews, Buchalter, Nemer, Fields & Younger, Roxani M. Gillespie, Richard de Saint Phalle, J. Karren Baker, Barbara G. Mikalson, Haight, Brown & Bonesteel, Roy G. Weatherup, Maureen Haight Gee, Sonnenschein, Nath & Rosenthal, Paul E.B. Glad, Thomas Holden, Robie & Matthai, James R. Robie, Michael J. O'Neill, Pamela E. Dunn, Chapman, Popik & White, Susan M. Popik, Kathleen M. Wardlaw, McCormick, Bartsow, Sheppard, Wayte & Carruth, James P. Waggoner, James H. Wilkins, Wendy S. Lloyd, Gregory A. Floyd, Ropers, Majeski, Kohn & Bentley, Mark G. Bonino, Lawrence O. Monin and Allison G. Dobbrow as amici curiae, on behalf of defendants and appellants.

Ford & Pedersen, The Ford Law Firm, William H. Ford III, Neil Pedersen, Claudia J. Serviss, George G. Kim, Michael D. Collins, Paul C. Cook, Osborn & Patton, Osborn, Anderson & Wood, Richard G. Osborn, George F. Robertie, Carol F. Anderson and Susan E. Abitanta, for plaintiffs and respondents.

James T. Linford, Irell & Manella, Thomas W. Johnson, Jr., Steven L. Sloca, Marc S. Maister, Mary-Christine Sungaila, Hill, Wynne, Troop & Meisinger, Kirk A. Pasich, Lori Yankelevits, Thomas & Elliott, Steve Thomas, Jay Elliott, Brobeck, Phleger & Harrison, David M. Halbreich, Latham & Watkins, G. Andrew Lundberg, Paul, Hastings, Janofsky & Walker, Ronald M. Oster, Eve M. Coddon, Heller, Ehrman, White & McAuliffe, David B. Goodwin, Wayne S. Bravemen, Munger, Tolles & Olson and Charles D. Siegal as amici curiae, on behalf of plaintiffs and respondents.

LUCAS, Chief Justice.

We granted review to decide the recurring issue whether a commercial general liability insurer is required to defend a third party action that seeks incidental emotional distress damages caused by the insured's noncovered economic or business torts. The

                [900 P.2d 622] Court of Appeal below concluded that allegations of incidental emotional distress damages flowing from noncovered causes of action fall outside the scope of a commercial (formerly called comprehensive) general liability (CGL) policy and present no potential for coverage under the policy.  Accordingly, the Court of Appeal reasoned, because there is no potential for coverage, there is no duty to defend on the part of the insurer.  (Gray v. Zurich Insurance Co.  (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168 (hereafter Gray ).)   The Court of Appeal also concluded that if the insurer is under no obligation to defend or indemnify the third party action, it cannot be found liable for either statutory bad faith (Ins.Code, § 790.03) or breach of the implied covenant of good faith and fair dealing, for its denial of a defense.  (See e.g., Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1152, 271 Cal.Rptr. 246 [bad faith claim cannot be maintained unless policy benefits are due].)  As we explain, we affirm the Court of Appeal judgment
                

FACTS

In 1985, defendant Truck Insurance Exchange, Inc. (hereafter T.I.E.) issued a CGL policy to plaintiff Marmac, Inc., a California corporation that provides engineering and design services to aerospace, pharmaceutical, and energy industries. The declarations page of the T.I.E. policy identified Marmac as the named insured, and contained an endorsement naming Lester Amey, among others, as a named insured. The policy was renewed in 1986, and was substantially identical (with typographical corrections) to the 1985 policy.

In pertinent part, the T.I.E. policy provided liability coverage for: "all damages which the insured becomes legally obligated to pay because of ... bodily injury to any person, and ... damage to property ... to which this insurance applies, caused by an occurrence." The policy did not provide personal injury coverage to Marmac directors and officers and specifically excluded coverage for any insured for bodily injury to a named insured. The policy defined an "occurrence" "as an event, or series of events, including injurious exposure to conditions, proximately caused by an act or omission of the insured regardless of the number of persons, vehicles or objects affected by the act or omission which results, during the policy period, in bodily injury or property damage, neither expected nor intended from the standpoint of the insured." Defendant Farmers Insurance Exchange (Farmers), as T.I.E.'s adjuster, was responsible for handling claims filed by T.I.E. insureds.

Prior to August 29, 1986, plaintiff Waller, Marmac's president, owned 60 percent of Marmac stock. Amey, Marmac's executive vice-president, owned 40 percent. On August 29, 1986, Waller sold his stock in equal proportions to employees Hendrix, Akers, Petersen, and Hepple. Thereafter, Waller resigned from Marmac's board, and Hendrix and Hepple were elected to the board, with Amey remaining as the third member. Akers subsequently became president of the company, and Hendrix, Hepple and Petersen became vice-presidents. Amey was thereafter demoted.

Amey sued Marmac, Waller, and the four Marmac officers under eleven causes of action: Involuntary dissolution (Corp.Code, § 1800, subd. (b)(4) & (5)); breach of fiduciary duty; breach of statutory duty of good faith (id., § 309); interference with prospective economic advantage; breach of contract; breach of the implied covenant of good faith and fair dealing; breach of duty of good faith and fair dealing; inducing breach of contract; conspiracy; intentional infliction of emotional distress; and injunctive relief. The first amended complaint included allegations that Marmac's board of directors was "guilty of or have knowingly countenanced acts of persistent and pervasive fraud, mismanagement or abuse of authority and persistent unfairness toward Amey," and that they excluded "Amey from any voice in the management [of Marmac]" to deprive him of a controlling block of stock in the corporation and in order to "gain a controlling interest in and to freeze Amey, a minority shareholder, out of the corporation." Amey also accused the management of Marmac of "self-dealing in voting themselves substantial increases in salary, and causing [Marmac] to enter into Amey also accused Waller of disregarding and breaching his fiduciary duties to Amey, failing "to exercise good faith and due care so as to avoid unfairness to [Amey] by entering into a transaction to dispose of his dominant or control block of stock in [Marmac] without the slightest regard to the wishes and interests, and without prior knowledge of [Amey], and for the purpose of gaining an unfair advantage in the sale or transfer of said controlling block of shares."

[900 P.2d 623] an unreasonable or sham contract of employment with [Waller]."

Amey's tenth cause of action alleged intentional infliction of emotional distress against Waller and the Marmac officers, and claimed that because of their conduct, Amey "suffered humiliation, mental anguish, and emotional and physical distress." Amey alleged that as fiduciaries, Waller and the Marmac officers' conduct leading up to the involuntary dissolution and wrongful termination as alleged in the complaint "was outrageous, went beyond all reasonable bounds of decency, was intentional and malicious and was done for the purpose of causing [Amey] to suffer humiliation, mental anguish, and emotional and physical distress." In making these allegations, Amey did not include Marmac as a named defendant, but nonetheless incorporated all allegations of corporate misconduct and financial detriment into the cause of action.

One week after the Amey suit was filed, Robert Kull, Marmac's corporate attorney, wrote T.I.E. at its home office requesting the insurer defend the Amey lawsuit on behalf of all defendants. About three weeks later, the letter was forwarded to Farmers' regional liability claims manager in Santa Ana. The claims manager sought an in-house coverage opinion, but did not act on the defense question. That issue was forwarded to Farmers' Anaheim branch claims office. Richard Neisser, manager of the Anaheim office, tentatively concluded that the complaint alleged a noncovered business dispute. He discussed the matter with William Vaughter, a claims representative, and instructed Vaughter to investigate the loss and to verify whether the Amey complaint had been served. Vaughter told Hendrix around December 10 or 11, 1986, that he was going to process the claim for payment. According to Hendrix, Vaughter then asked whether he was pleased with his counsel because Farmers could provide counsel if he was not.

On December 29, 1986, the insureds forwarded to Vaughter the total billing (in the amount of $54,000) for attorneys fees incurred in defending the Amey lawsuit. Neisser directed Vaughter to (1) "transmit to [in house counsel] after you have called and discussed, among other things, whether the insurer owes a defense and whether there is an obligation under [San Diego Federal Credit Union v. Cumis Insurance Society (1984) 162 Cal.App.3d 358, 364, 208 Cal.Rptr. 494], (2) send a reservation of rights letter and (3) make up an office file." Neisser concluded, based on the allegations of the complaint, that the policy did not provide coverage for Amey's claims. Neisser then instructed Vaughter to contact in-house counsel, who advised Vaughter to deny the claim. Neisser prepared an evaluation recommending "no coverage."

The regional claims manager (Eastman) concurred in Neisser's decision that the CGL policy did not provide coverage under...