White v. Western Title Insurance , 40 Cal. 3d 870 ( 1985 )

LUCAS, J., Concurring and Dissenting.

I respectfully dissent from the affirmance of the judgment as to plaintiff insured’s good faith cause of action. Scylla and Charybdis had nothing on my colleagues for making life difficult—if not impossible. An insurer who refuses to pay its insured on a disputed claim is now not only at risk that its refusal will subject it to damages for breach of the covenant of good faith and fair dealing, but must also be conscious that any aspect of its conduct during litigation of the original claim of coverage may be used as significant evidence in an ensuing breach of good faith action. An insurer’s unsuccessful attempts to settle during the course of the initial litigation may now be presented to a second jury, along with all other aspects of its defense. Confronted with such evidence and unfamiliar with the vagaries of litigation the jury will, I submit, in all likelihood regard any settlement attempts as prejudgment admissions of liability, and standard defense tactics as indications of a lack of good faith.¹

The majority resolves the issue of the admissibility of the settlement information as a “matter of principle” by in part placing “trust” in the perspicacity of jurors who “will be aware that parties to a lawsuit are adversaries, and will evaluate the insurer’s conduct in relation to that setting.” (Ante, p. 887.) No guidelines are enunciated for the jury to follow in performing this balancing act. No recognition is given to the fact that “good faith” may significantly differ before and after the filing of a complaint. Moreover, when one considers that in this context “[t]he terms ‘good faith’ and ‘bad faith’ . . . are not meant to connote the absence or presence of positive misconduct of a malicious or immoral nature ...” (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 921, fn. 5 [148 Cal.Rptr. 389, 582 P.2d 980]), the probability that jurors will place heavy reliance on settlement offers as evidence that the insurer did not have the requisite “good faith” in this context is particularly problematic and prejudicial.

When an insurer refuses to settle after a claim has been filed, an insured may seek relief by filing an action alleging a breach of contract or negligence, as was done here. As the majority asserts, the insurer and insured continue to have a contractual relationship despite the filing of such action as long as the period of coverage lasts. My colleagues’ reliance here on this “continuing” duty to act in good faith as to any future aspects of the contractual relationship, is, however, misplaced. The better analysis is one which focuses on the nature of the relationship between the parties as to the particular claim at issue. One who it is asserted has negligently injured another continues thereafter to have a duty to refrain from inflicting new harm upon the victim. Nonetheless, he is still subject to suit and entitled to defend himself on the issue of whether the completed transaction involved negligence on his part.

The effect of a filing of an action for professional malpractice also sheds light on this question. An attorney owes a fiduciary duty to his clients. If a client sues for malpractice, the attorney is not required to handle his defense of the action as though the attorney-client relationship still existed. He is not burdened with a “continuing duty of good faith” which cramps the exercise of his defense to the malpractice claim. Nor does the filing of a suit for malpractice necessarily abrogate any duties the attorney may have regarding his handling of any other matter for the client. That there is a fundamental shift in the nature of the attorney-client relationship when a malpractice suit is filed is further demonstrated by the nullification of the attorney-client privilege which is deemed not to exist “as to a communication relevant to an issue of breach, by the lawyer or by the client, of a duty arising out of the lawyer-client relationship.” (Evid. Code, § 958; compare, § 954 [explaining how the privilege normally applies].)

While the general good faith obligation may remain intact for the term of the insurance contract, of necessity the parties’ duties and relationship alter when a given claim is made by the insured, disputed by the insurer, and suit thereon is commenced. I wonder whether the majority, to be consistent, now intends to impose on others in special relationships, such as attorneys or trustees, the same duty during litigation regarding the performance of their services.

The majority contends that a distinction drawn between pre- and postinitiation of litigation² settlement offers “would encourage insurers to induce the early filing of suits, and to delay serious investigation and negotiation until after suit was filed when its conduct would be unencumbered by any duty to deal fairly and in good faith.” (Ante, p. 886.) I strongly question whether any insurer not acting in good faith will ever be interested in encouraging early action by plaintiffs.³ Actions asserting a breach of the duty of good faith are generally based on a claim that the insurer has wrongfully delayed or denied payment. Anything that encourages early suits and early resolution of the question of coverage would, I contend, have a beneficial effect on the very policies that the majority purports to promote. Moreover, if it were indeed the intent of insurers “to delay serious investigation until after suit was filed,” then it seems to me that promotion of early filing of suits is definitely to be preferred. Earlier filing will force earlier serious investigation and may therefore lead to earlier payment of benefits to the insured. Of course, any failure reasonably to investigate or attempt to settle before suit is filed will still subject the insurer to potential liability for breach of the covenant of good faith.

The majority also, while finding Evidence Code section 1152 does not apply to bar introduction of evidence of settlement offers made in the course of the first action, gives no real consideration to the policies underlying that section. The motivation behind the prohibition is encouragement of settlement. The Law Revision Commission comment to the enactment of section 1152 expressly states “[t]he rule excluding offers is based upon the public policy in favor of settlement of disputes without litigation. The same public policy requires that admissions made during settlement negotiations also be excluded.” The language of the section is sweeping as well: “(a) Evidence that a person has, in compromise or from humanitarian motives, furnished or offered or promised to furnish money or any other thing, act, or service to another who has sustained or will sustain or claims that he has sustained or will sustain loss or damage, as well as any conduct or statements made in negotiation thereof, is inadmissible to prove his liability for the loss or damage or any part of it.”

In Fletcher v. Western National Life Ins. Co. (1970) 10 Cal.App.3d 376 [89 Cal.Rptr. 78, 47 A.L.R.3d 286], upon which the majority relies, the offers of settlement which the court found admissible were made prior to the filing of an action against the insurer and were found relevant as part of the plaintiff’s “proof of the instrumentality of the tort” alleged, namely intentional infliction of emotional distress. The Fletcher court had no occasion to consider whether the making of settlement offers or other conduct following commencement of trial should be admitted despite section 1152’s bar.

My colleagues’ wholesale acceptance, adoption and extension of the Fletcher approach is undertaken with only an empty nod at the policy behind section 1152. If offers of settlement, even offers made pursuant to Code of Civil Procedure section 998, are admissible in later actions, settlement negotiations will become dangerous engagements. An unaccepted offer of settlement is likely to serve as powerful evidence for plaintiffs to argue that the insurer knew its liability but failed to act accordingly. Free-wheeling settlement negotiations and exploratory offers will, I suspect, become things of the past as insurers balance present and future liabilities and interests. The effect may well redound to the disadvantage of plaintiffs who will find it harder to negotiate with constrained insurers.

Another more fundamental problem with the majority’s approach is its complete failure meaningfully to consider or accord any weight to the right of a defendant to defend itself. Nothing in the majority opinion limits introduction of evidence regarding tactics during the earlier trial to attempts to settle. Any aspect of the defendant’s “conduct” during the first trial will now be fair game. A plaintiff may argue that an answer filed by a defendant, or a defendant’s motion for extension of time, or request for interrogatories, or any other action taken by a defendant in the course of defending the original litigation involving coverage is relevant to the issue of the defendant’s good faith.⁴ Thus anything the insurer does to defend in a coverage action in which it is ultimately unsuccessful, no matter how pro forma a part of the litigation process, may arguably under this approach be considered conduct in violation of the insurer’s duty “to refrain from doing anything to injure the right of the other to receive the benefits of the agreement. . . .” (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818 [169 Cal.Rptr. 691, 620 P.2d 141].)

These litigation strategies and tactics will be offered up to juries who, with the benefit of hindsight, and without the benefit of extensive exposure to litigation practices and techniques, will second guess the defendant’s rationales for taking a particular course. Moreover, they may be introduced without a showing of bad intent or malice on the insurer’s part or of unusual tactics or delay. In so permitting wholesale introduction of such evidence, the majority reaches a result not only inconsistent with the right to defend, but also arguably unnecessary because the trial court itself will be able during the initial action to assure that defendants do not act improperly.⁵

Recently, in In re Marriage of Flaherty (1982) 31 Cal.3d 637 [183 Cal.Rptr. 508, 646 P.2d 179], we had occasion to consider guidelines for determining whether an appeal is frivolous and warrants imposition of sanctions. We observed that a balance must be struck between avoiding improper conduct and assuring that attorneys are free actively to assert their clients’ interests. To this end we reiterated the principle that “ ‘Free access to the courts is an important and valuable aspect of an effective system of jurisprudence, and a party possessing a colorable claim must be allowed to assert it without fear of suffering a penalty more severe than that typically imposed on defeated parties.’ (Young v. Redman (1976) 55 Cal.App.3d 827, 838 [128 Cal.Rptr. 86].)” (31 Cal.3d at p. 648.) The majority’s holding in this case imposes just such a restraint upon an insurer’s right to present a defense.

Similarly, in Bertero v. National General Corp. (1974) 13 Cal.3d 43 [118 Cal.Rptr. 184, 529 P.2d 608, 65 A.L.R.3d 878], we stressed the importance of the right to assert a defense. We held in Bertero that a claim asserted in a cross-pleading could give rise to an action for malicious prosecution and rejected the argument that the cross-pleading had been only defensive. In so concluding, however, we observed that courts in a line of cases starting with Eastin v. Bank of Stockton (1884) 66 Cal. 123 [4 P. 1106], had “refused to recognize a tort of malicious defense” and announced that “[w]e do not propose to establish such a tort by our holding here.” (13 Cal.3d at p. 52.) Eastin and its progeny serve to “protect the right of a defendant, involuntarily haled into court, to conduct a vigorous defense.” (Ibid.)

The majority here does not give any reasoned consideration to this fundamental and recognized right to defend. Nonetheless, its opinion effectively establishes potential tort liability based on a failure to “defend in good faith.” Such liability extends far beyond that which could be based on even the thus far disallowed tort of “malicious defense.”* ****⁶ As we have often reiterated, a breach of the covenant of good faith and fair dealing requires no showing of malice or immoral intent on the part of the insurer. (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d at pp. 921-933, fn. 5.) The prospect of defendants automatically being sued for malicious defense or subject to an easy standard for determining if an appeal is frivolous has previously raised substantial concerns about the potential chilling effect on the right of a defendant to present its case. As a result, courts have exercised extreme caution in these areas. (Cf. In re Marriage of Flaherty, supra, 31 Cal.3d at p. 650 [“Counsel and their clients have a right to present issues that are arguably correct, even if it is extremely unlikely that they will win on appeal [or at trial]. An appeal [or defense] that is simply without merit is not by definition frivolous and should not incur sanctions. Counsel should not be deterred from filing such appeals out of a fear of reprisals”].) Unfortunately, the majority ignores this traditional approach without a second glance.

The initiation of litigation places the parties in an entirely new arena. Whereas before filing of a suit, an insurer may feel freer to act with impunity in improperly pressuring insureds or delaying proceedings, once an action is brought in court, the plaintiff may appeal to the trial judge for relief from improper conduct on the defendant’s part. If the insurer’s defense is totally meritless, a motion for summary judgment can speed things along. If the insurer improperly drags its feet in preparing for trial, the trial judge has a range of options extending from imposition of monetary sanctions to striking the answer and entering judgment for the plaintiff. On the one side is the importance of affording defendants an opportunity to defend (especially where there is not even a preliminary showing of any malicious intent on the defendant’s part) and the potential for prejudice to them if their trial “conduct” may be second-guessed in a subsequent action. On the other is the necessity to admit the information here at issue into evidence. I conclude that without more showing the former interests must prevail.* **⁷

The tunnel vision exhibited by the majority here is further emphasized by its differing treatment of the various settlement offers which were in fact made during this litigation. To review briefly, the complaint filed in October 1979 alleged a breach of the insurance contract and negligence in the preparation of the preliminary title reports. In May 1980, seven months later, the insurer offered to settle for $3,000 based on an appraisal it had ordered. That offer was rejected. The next month, the insurer served a written offer to compromise in the sum of $5,000 pursuant to the terms of Code of Civil Procedure section 998. This offer was also rejected by the insured who then successfully amended the complaint to include a cause of action for breach of the covenant of good faith and fair dealing.

The parties stipulated to bifurcating the action in order to avoid increased litigation costs should the court find no liability under the original causes of action. In August 1981, the court rendered an interlocutory judgment following a nonjury trial which had been held in January of the same year. It found that the insurer was liable for breach of contract and negligence. The insurer then filed a new Code of Civil Procedure section 998 offer to compromise for $15,000. Following rejection of this offer, the parties went to trial before a jury in February 1982.

This proceeding was also divided. In the first portion, the jury was asked to determine what damages to the value of their property the insured had suffered by virtue of the insurer’s negligence and breach of the insurance contract. The jury awarded $8,400. That sum was (1) approximately $54,000 less than the insureds had been demanding, and (2) only $3,400 more than the June 1980 offer to compromise.

After the jury had awarded those damages, it was asked to decide whether the insurer had violated its duty of good faith and fair dealing. The court allowed the insured to offer evidence of the settlement offers and surrounding negotiations for the first two offers made in 1980 but refused to allow introduction of the offer to compromise for $15,000 made after liability had been determined. Thus, as far as the jury knew in February 1982, the insurer had last offered to settle 20 months before and had made no further offers even after liability had been determined.

The $15,000 payment was intended to settle claims arising out of both the initial breach of contract cause of action as well as the claim relating to the insurer’s asserted breach of the duty of good faith and fair dealing. At the time it was made, damages had not been fixed on the former claim and the latter claim was certainly a debatable one. Moreover, the $15,000 offer was made before plaintiff incurred additional attorney fees and other costs of litigation for prosecution of the damages claim on the first cause of action as well as in pursuit of the entire claim regarding good faith. The eventual total damages award was $28,400. Since, as I will argue, the jurors might well have considered the apparent failure of the insurer to make additional settlement offers a material factor once they had learned of the earlier lower offers, it is difficult to assess how the settlement offer truly related to the damages awarded. Nonetheless, even taking into account the fact that the partial information presented to the jury might well have inflated the damages awarded for breach of good faith, the offer was well within the realm of reasonable, good faith offers when measured against the final total award and in the context of the time at which it was made.

The majority disposes of the insurer’s claim of error on this point by announcing that “Once the court had determined liability, defendant’s willingness to make a reasonable settlement offer has little tendency to prove that defendant has been acting fairly and in good faith toward its insured.” (Ante, p. 889, fn. 12.) The opposite is true: The apparent continued unwillingness to make a reasonable settlement offer during this period may well have influenced the jury in its determination that the insurer was not acting in good faith. The jury found only unreasonableness, and not malice or bad intent, as indicated by its refusal to award punitive damages. If such evidence is generally to be admitted, I would argue that the exclusion of this information regarding settlement negotiations in the six months between the determination of liability and the award of damages was at least as relevant as the settlement offers which the majority allows.

I have grave doubts overall whether a sufficient showing was made of a breach of the covenant of the duty of good faith and fair dealing. I have no doubts, however, that prejudicial and improper information was offered and argued to the jury in the form of evidence relating to matters occurring during the original litigation in this action. When insurance companies abuse the rights of their insured and breach their contracts and obligations thereunder, they should be subject to the full scope of appropriate punishments under law. In the rush to punish, however, the majority has lost sight of fundamental principles of due process and fairness. The right to defend is basic to our system. Without any real showing of a need to do so, my colleagues have cavalierly hobbled that right for a class of defendants. I cannot join them in this unwarranted and unfair exercise.

I would reverse the good faith judgment and remand for further proceedings in which evidence of the insurer’s conduct during litigation could not be introduced.

1 This possibility is exacerbated by the majority’s holding that only the settlements offered here before liability was determined could be introduced. As I will discuss, the illogic of the majority’s approach is well demonstrated by its refusal to find as error the exclusion of defendant’s $15,000 offer made in the six months between interlocutory judgment of liability and the jury’s award of only $8,400 in damages.

2 I speak here of actions initiated by the insured. Declaratory relief actions brought by the insurer may give rise to different considerations.

3 Of course, “inducing” litigation, early or late, is not a problem where the insurer has already paid up without dispute.

4 The jury in the good faith portion of the action here heard evidence regarding not only the settlement offers per se, but also regarding the negotiations and conduct of the parties’ attorneys in regard to the offers. In closing argument, the insured’s counsel told the jury “The other aspect of this case is that you have a situation where they have delayed the case, you’ve seen the files that we’ve been dragging around .... [OJnce a suit is filed then every movement from one side produces an equal and opposite movement in the other direction, and you end up with these numerous briefs. Briefs on that, briefs on this, research depositions, there were eight or nine depositions taken in this case. Most of which were unnecessary but once somebody takes some information you’ve got to do the same thing to prepare for trial.” There was no argument that the particular tactics used were in and of themselves improper; rather the implicit claim was that the normal delays of litigation themselves amounted to evidence of a lack of good faith.

5 Justice Grodin’s concurrence further illustrates the difficulty of extending the duty of good faith following commencement of litigation. He speaks of finding no basis for concluding evidence of settlement offers should not be admitted as relevant evidence regarding the insurer’s asserted bad faith following the commencement of litigation. He then observes that the evidence regarding the defendant’s settlement offers here were only “weakly” supportive of plaintiff’s good faith claim. Nowhere does he explain how the offers made here and the other actions relied on by plaintiff’s counsel (see, ante, fn. 4) were anything other than part and parcel of the insurer’s “right to defend itself in court against claims it believe[d] to be without merit” (ante, p. 891), nor how or by whom a distinction is to be drawn between normal litigation tactics and actual conduct involving “bad faith.” While utilizing the point that litigation is commenced as the cutoff may not be an ideal rule and may in a few instances result in wrongful conduct by the insurer which will not be reachable and curable by the court before which the litigation is proceeding, I nonetheless believe that such a rule is necessary in order not to chill the insurer’s fundamental right to defend itself.

6 Even those who argue that a tort of “malicious defense” should be allowed do not go so far as the majority here in loosely permitting liability to be premised on the mere defense of an action filed against one. (See Van Patten & Willard, The Limits of Advocacy: A Proposal for the Tort of Malicious Defense in Civil Litigation (1984) 35 Hastings L.J. 891.) They at least require an adapted version of the requirements for asserting “malicious prosecution,” including “Assertion of a defense, which the defendant knows or should know is without credible basis, for the purpose of delay ...” {id. at p. 936) and the fundamental requirement of malice (id. at p. 931). Since the elements of a cause of action for a breach of the duty of good faith and fair dealing do not echo those required by an action alleging malicious prosecution (or defense), it is clear that the majority has taken a giant leap forward beyond that contemplated even by those advocating recognition of a general new tort based on improper defensive conduct.

7 Without explanation, the majority vaguely suggests that the trial court’s authority to exclude evidence as more prejudicial than probative pursuant to Evidence Code section 352 will prevent juries from “misunderstand[ing] the function of various litigation tactics.” (Ante, p. 886, fn. 9.) My colleagues offer no guidelines for that determination. Moreover, in view of their approval of the trial court’s exclusion of the $15,000 settlement offer (see ante, p. 889, fn. 12 and post at p. 898), it appears that this approach may in fact work to the further detriment of insurers.

In any event, the majority fails to explain how permitting a trial court to exercise discretion cures the fundamental problems. Insurers are still left uncertain as to whether any action they take with regard to litigation on an underlying breach of contract claim may be used against them. There is no lessening of the basic constraints on a defendant’s right to defend by virtue of a rule which says the trial court has discretion to decide what may be introduced. Moreover, in this case no flagrant misconduct was alleged and plaintiff’s argument regarding defendant’s litigation conduct can be characterized as asserting only that litigation generally caused delay. The majority nevertheless approves the trial court’s admission of the $3,000 and $5,000 offers without even an attempt to apply section 352. As a result, it is difficult to see when a trial court will ever exclude such evidence following this decision.