Waters v. United Services Auto. Assn.

• Decision Date: 10 January 1996
• Docket Number: No. B088208,B088208
• Citation: 48 Cal.Rptr.2d 910,41 Cal.App.4th 1063
• Court: California Court of Appeals Court of Appeals
• Parties: , 96 Cal. Daily Op. Serv. 280, 96 Daily Journal D.A.R. 382 Laughlin E. WATERS et al., Plaintiffs and Appellants, v. UNITED SERVICES AUTOMOBILE ASSOCIATION, Defendant and Appellant.

Page 910

48 Cal.Rptr.2d 910

41 Cal.App.4th 1063, 96 Cal. Daily Op. Serv. 280,

96 Daily Journal D.A.R. 382

Laughlin E. WATERS et al., Plaintiffs and Appellants, v. UNITED SERVICES AUTOMOBILE ASSOCIATION, Defendant and Appellant.

No. B088208.

Court of Appeal, Second District, Division 1, California.

Jan. 10, 1996.

Rehearing Denied Feb. 2, 1996.

Review Denied April 11, 1996.

Shernoff, Bidart & Darras, William M. Shernoff, Frank N. Darras and Sharon J. Arkin, Claremont, for Plaintiffs and Appellants.

Guy O. Kornblum, William A. Cerillo, Samuel M. Zaif, Lisa M. Lacy, San Francisco, Daniels, Baratta & Fine, and Paul R. Fine, Los Angeles, for Defendant and Appellant.

MIRIAM A. VOGEL, Associate Justice.

In this first party insurance bad faith case arising from a dispute about the restoration of the insureds' fire damaged house, United Services Automobile Association (USAA) appeals from a judgment entered on a jury's award of $1,375,000 in emotional distress damages to the insureds, Laughlin E. and Voula D. Waters. USAA contends the judgment must be reversed because the insureds failed to prove they suffered any financial loss of any kind. We agree, and therefore do not reach USAA's other claims of error or the issues raised on the Waters' protective cross-appeal.

FACTS

On December 17, 1990, a fire caused substantial damage to the Waters' elegant Hancock Park home. At that time, the Waters were insured by USAA under a homeowner's policy, with limits of $1,615,000 for the dwelling; $1,615,000 for unscheduled personal property; $323,000 for loss of use or additional living expense (ALE); and additional coverage for clean up and emergency repair expenses. ¹ The fire was immediately reported to USAA, and a USAA claims adjuster (Kevin Bushaw) met the Waters at their house the day of the fire to explain the policy's benefits and to give the Waters a $50,000 check to cover their immediate needs. ² Over the next two days, Mr. Bushaw and other USAA employees spent a substantial amount of time at the Waters' home. The Waters told Bushaw that their son (Laughlin Waters, Jr.) was an experienced commercial building contractor who happened also to be intimately familiar with the house (he grew up in it) and the Waters asked if their son's company (TMLC) could do the restoration work. Although Mr. Waters had no experience in the restoration of fire-damaged residences, USAA agreed.

From January to May 1991, Mr. Bushaw regularly met with, talked to and corresponded with Judge Waters and Mr. Waters about the restoration of the Waters' home. Early on, Mr. Bushaw used a commercially available computer program ("Comp-U-Claim") to prepare his initial reports estimating the scope of the project and the required repairs, and came up with estimates ranging from $116,000 to $161,000. ³ On January 31, in response to USAA's insistence that a bid in some amount had to be submitted by TMLC, Mr. Waters submitted a "worst case" estimate of $605,007. On February 7, Mr. Waters sent in a revised estimate of $390,655 but Mr. Bushaw believed this amount was still too high and, with Judge Waters' permission, USAA retained an experienced fire restoration contractor (Clark-Porche) to inspect the home and prepare an independent bid. To that end, Jeff Krug, Clark-Porche's vice-president, met with Judge Waters and spent several hours touring the damaged house and discussing the restoration claim.

On February 18, Clark-Porche submitted a written bid of $223,859. On February 21, Mr. Waters submitted another revised estimate of $433,408 and, on the same day, Mr. Bushaw met with Judge Waters and Mr. Waters to discuss the bids. On March 11, Mr. Bushaw again met with Judge Waters and Mr. Waters. At that time, Mr. Bushaw presented Clark-Porche's revised bid of $251,407.28 and Mr. Waters lowered his estimate to $402,119.49. Mr. Bushaw then agreed to increase the Clark-Porche bid to $287,589.60 but the parties agreed that TMLC's bid needed further revisions. ⁴

On March 29, Judge Waters wrote to USAA, complaining about its handling of his dwelling restoration claim. In response, a senior claims adjuster from USAA's home office (Bill Hooper) flew to Los Angeles to assist with the claim. Mr. Hooper reviewed the bids, met with Clark-Porche's representatives, and concluded that Clark-Porche's bid was sufficient to restore the home to its pre-fire condition. On April 11, Mr. Hooper and Mr. Bushaw met with the Waters and Mr. Waters. ⁵ To settle the dwelling restoration dispute, Mr. Hooper offered to have Clark-Porche do the repair and restoration work, with a guarantee by USAA that the house would be restored to its pre-fire condition and with Mr. Waters paid to oversee the work to ensure that the house was, in fact, restored to its pre-fire condition.

The Waters rejected this offer and, at the same April 11 meeting, submitted a newly revised bid from TMLC for $535,000. Although no agreement was reached, Mr. Bushaw gave the Waters a check for $91,429.24 for ALE coverage and emergency repairs done shortly after the fire. As of April 11, therefore, USAA had paid the Waters $141,429.24, and the parties agreed to continue to negotiate the restoration bids, with TMLC's $402,000 bid (from March 11) as the starting point. On May 14, Mr. Bushaw again met with Mr. Waters and considered another revised estimate from TMLC, this time for $442,633.35. After that meeting, Mr. Bushaw met with Clark-Porche's representatives and, based on upgrades requested by Mr. Bushaw, Clark-Porche's estimate was increased to $301,019.38.

On May 30, USAA sent the Waters a written offer to settle their dwelling restoration claim for $419,963.71, enclosing a check in the amount of $269,454.48 (the undisputed portion of the claim). Although the Waters rejected the offer, they retained and cashed the check and thus had in hand, as of that date, the $50,000 paid the day after the fire, the $91,429.24 paid on April 11, and the $269,454.48 paid on May 30, a total of $410,883.72. ⁶

On June 20, the Waters formally rejected USAA's May 30 offer and, on July 5, they sued USAA in federal court. Shortly thereafter, USAA increased its $419,963.71 offer and agreed to have TMLC perform the repairs on a "cost plus-guaranteed maximum basis" for an amount not to exceed $424,633.35. In other words, USAA accepted the amount of TMLC's May 14 bid, less $18,000 resolved in the interim. On August 21, the Waters accepted this offer and, as agreed by the parties, USAA deposited the money to its lawyer's trust account. As the work was done, USAA's lawyer was to review it and could, if appropriate, challenge specific expenditures. The work was thereafter completed within the agreed cost, in a reasonable time and to the Waters' complete satisfaction.

The payment for the dwelling restoration work was without prejudice to the Waters' right to pursue their bad faith claim, and they did so (but in state court, not federal court, after USAA had the federal action dismissed on the ground diversity was lacking). ⁷ At trial to a jury, the Waters and USAA presented detailed evidence of most of the facts summarized above. ⁸ In addition, the Waters put on evidence of their extreme emotional distress and outrage. Mrs. Waters testified that, based on USAA's conduct, she had twice collapsed and been hospitalized as the result of high blood pressure episodes and Judge Waters testified at length about his anguish and distress. But the Waters did not put on any evidence of any kind of financial loss--no medical or hospital bills paid (or even incurred), no attorneys' fees, no interest paid on borrowed funds, no interest lost because personal funds had to be advanced to cover restoration or other fire-related expenses, no loss of an investment opportunity because personal capital was committed to the restoration effort--in short, nothing to suggest the Waters spent a penny of their own (or lost income they would have otherwise received) as a result of USAA's delay in paying the amounts claimed under the policy.

The jury returned its verdict for the Waters, awarding $1 million to Judge Waters for his emotional distress and $500,000 to Mrs. Waters for her emotional distress (reduced to $375,000 by the jury's allocation of 25 percent of fault to Mrs. Waters). USAA's motion for judgment notwithstanding the verdict (on the ground that the emotional distress award could not stand absent proof of financial loss) was denied and USAA now appeals.

DISCUSSION

USAA contends the judgment must be reversed because the Waters failed to prove any financial loss. The Waters concede they presented no proof of financial loss but claim it wasn't necessary because, in a "first party case," the "denial of, or delay in payment of, benefits is ... sufficient." As we will explain, the decisions of the California Supreme Court do not support the Waters' position. Although there is ambiguous language in one Court of Appeal decision and arguably misleading comments in two treatises, the bottom line is that emotional distress damages are recoverable in first and third party bad faith cases only when the insureds have suffered a financial loss.

A.

We begin by defining our terms.

"First party" insurance policies provide coverage for loss or damage sustained by the insured (e.g., life, disability, health, fire, theft and casualty insurance). "Third party" insurance policies provide coverage for liability of the insured to another (e.g., comprehensive general liability, directors and officers liability and errors and omissions insurance). (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 399, fn. 2, 257 Cal.Rptr. 292, 770 P.2d 704.)

"First party bad faith lawsuits" involve an insured's claims against the insurer under coverages written for the insured's direct benefit under a first party policy. (E.g., Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818-819, 169 Cal.Rptr 691, 620 P.2d 141.) The gravamen of a first party lawsuit is a...