Brandt v. Superior Court

693 P.2d 796, 37 Cal. 3d 813, 210 Cal. Rptr. 211, 1985 Cal. LEXIS 236

• Court: California Supreme Court
• Decided: January 28, 1985
• Docket: L.A. 31859
• Status: Published

Opinions

Opinion

KAUS, J.

When an insurer tortiously withholds benefits, are attorney’s fees, reasonably incurred to compel payment of the policy benefits, recoverable as an element of the damages resulting from such tortious conduct?¹ We hold that they are and accordingly issue a writ of mandate directing the trial court to reinstate the portion of the complaint seeking attorney’s fees as damages.

According to the complaint real party in interest Standard Insurance Company (Standard) issued a group disability income insurance policy to Vicom Associates, petitioner’s employer, under which petitioner was insured. Petitioner sustained a loss covered by the policy when he became totally disabled. He made a timely demand on Standard for benefits, which it unreasonably refused to pay. Petitioner therefore filed an action against Standard for (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, and (3) for violation of the statutory prohibitions against unfair claims practices. (Ins. Code, § 790.03.)

In his causes of action for breach of the duty of good faith and fair dealing and for the statutory violations, petitioner listed attorney’s fees incurred in connection with the contract cause of action as part of the resulting damage. Standard successfully moved to strike the portions of the complaint seeking attorney’s fees. Petitioner then filed the present mandate proceeding.²

Although we are reluctant to exercise our discretion to review rulings at the pleading stage of a lawsuit, we do so here because of the compelling circumstances presented. (See Babb v. Superior Court (1971) 3 Cal.3d 841, 851 [92 Cal.Rptr. 179, 479 P.2d 379].) The issue is of widespread interest, and the Courts of Appeal are in conflict. Moreover, the trial court’s ruling has effectively deprived petitioner of the opportunity to present a substantial portion of his cause of action. Under the circumstances, extraordinary relief is appropriate. (Ibid.; Taylor v. Superior Court (1979) 24 Cal.3d 890, 894 [157 Cal.Rptr. 693, 598 P.2d 854].)

As noted, the Courts of Appeal are in conflict on the question of the recoverability of attorney’s fees. The seminal cases on each side are Mustachio v. Ohio Farmers Ins. Co. (1975) 44 Cal.App.3d 358 [118 Cal.Rptr. 581], which allowed recovery and Austero v. Washington National Ins. Co. (1982) 132 Cal.App.3d 408 [182 Cal.Rptr. 919] (hereafter Austero), which denied it. In Mustachio, attorney’s fees incurred in connection with negotiations leading up to settlement of the insured’s policy claim were held properly included as an element of damages in the insured’s later tort action against the insurer for breach of its duty of good faith and fair dealing. In Austero, a divided court rejected the reasoning of Mustachio and reversed an award of attorney’s fees, holding that in a bad faith tort action recovery of attorney’s fees incurred to obtain benefits under the policy is precluded by Code of Civil Procedure section 1021.³ Presiding Justice Morris dissented, arguing that the majority’s reliance on section 1021 misinterpreted the nature of the case. We agree and adopt much of Presiding Justice Morris’ dissent.

“It is well settled that if an insurer, in discharging its contractual responsibilities, ‘fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing.’ (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574 [108 Cal.Rptr. 480, 510 P.2d 1032], original italics.) When such a breach occurs, the insurer is ‘liable for any damages which are the proximate result of that breach.’ (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 925 [148 Cal.Rptr. 389, 582 P.2d 980].)” (Austero, supra, 132 Cal.App.3d at pp. 419-420 [dis. opn. of Morris, P. J.].)

When an insurer’s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney’s fees are an economic loss—damages—proximately caused by the tort. (Mustachio v. Ohio Farmers Ins. Co., supra, 44 Cal.App.3d at p. 363.) These fees must be distinguished from recovery of attorney’s fees qua attorney’s fees, such as those attributable to the bringing of the bad faith action itself. What we consider here is attorney’s fees that are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action.

“When a pedestrian is struck by a car, he goes to a physician for treatment of his injuries, and the motorist, if liable in tort, must pay the pedestrian’s medical fees. Similarly, in the present case, an insurance company’s refusal to pay benefits has required the insured to seek the services of an attorney to obtain those benefits, and the insurer, because its conduct was tortious, should pay the insured’s legal fees.” (Austero, supra, at p. 421.)

Code of Civil Procedure section 1021 does not preclude an award of attorney’s fees under these circumstances. “Section 1021 leaves to the agreement of the parties ‘the measure and mode of compensation of attorneys. ’ However, here, as in the third party tort situation, ‘we are not dealing with “the measure and mode of compensation of attorneys” but with damages wrongfully caused by defendant’s improper actions.’ (Prentice v. North Amer. Title Guar. Corp. (1963) 59 Cal.2d 618, 621 [30 Cal.Rptr. , 381 P.2d 645].)”⁴ (Austero, supra, at p. 420.) In such cases there is no recovery of attorney’s fees qua attorney’s fees.⁵ This is also true in actions for false arrest and malicious prosecution, where damages may include attorney’s fees incurred to obtain release from confinement or dismissal of the unjustified charges (Nelson v. Kellogg (1912) 162 Cal. 621 [123 P. 1115]) or to defend the prior suit (Bertero v. National General Corp. (1974) 13 Cal.3d 43, 59 [118 Cal.Rptr. 184, 529 P.2d 608, 65 A.L.R.3d 878]).

The fact that—here as well as in Austero—the fees claimed as damages are incurred in the very lawsuit in which their recovery is sought, does not in itself violate section 1021’s general requirement that parties bear their own costs of legal representation, though it may make the identification of allowable fees more sophisticated. If the insured were to recover benefits under the policy in a separate action before suing on the tort, the distinction between fees incurred in the policy action, recoverable as damages, and those incurred in the tort action, nonrecoverable, would be unmistakable. As pointed out in Prentice v. North Amer. Title Guar. Corp., supra, 59 Cal.2d at page 621, “[i]n the usual case, the attorney’s fees will have been incurred in connection with a prior action; but there is no reason why recovery of such fees should be denied simply because the two causes . . . are tried in the same court at the same time. [Citation.] [f] There was no disadvantage to defendant in the fact that the causes, although separate, were concurrently tried.”

The dual nature of the present action distinguishes this case from Lowell v. Maryland Casualty Co. (1966) 65 Cal.2d 298 [54 Cal.Rptr. 116, 419 P.2d 180], Patterson v. Insurance Co. of North America (1970) 6 Cal.App.3d 310 [85 Cal.Rptr. 665], and Carroll v. Hanover Insurance Co. (1968) 266 Cal.App.2d 47 [71 Cal.Rptr. 868]. “Lowell, Patterson, and Carroll were not bad faith cases. The plaintiffs’ entire actions there were comparable only to the first part of the present action, i.e., for benefits due under insurance policies. In none of those cases was any allegation of bad faith made, which is the gravamen of the second part of the present action. Thus [the] plaintiffs in Lowell, Patterson, and Carroll sought attorney’s fees in an action for prosecution of that very action, or . . . attorney’s fees qua attorney’s fees. Plaintiff[] here, however, seek[s] recovery of attorney’s fees as damages, like any other damages, proximately caused by defendant’s breach of its duty to deal in good faith.” (Austero, supra, 132 Cal.App.3d at pp. 421-422 [dis. opn. by Morris, P. J.].)

The Austero majority’s reliance on Lowell, Patterson, and Carroll blurred the distinction between bad faith conduct and nontortious but erroneous withholding of benefits. “[A]n erroneous interpretation of an insurance contract by an insurer does not necessarily make the insurer liable in tort for violating the covenant of good faith and fair dealing; to be liable in tort, the insurer’s conduct must also have been unreasonable. [Citations.] When no bad faith has been alleged and proved, Lowell, Patterson, and Carroll preclude the award of attorney’s fees incurred in obtaining benefits that the insurer erroneously, but in good faith, withheld from the insured. However, when the insurer’s conduct is unreasonable, a plaintiff is allowed to recover for all detriment proximately resulting from the insurer’s bad faith, which detriment Mustachio has correctly held includes those attorney’s fees that were incurred to obtain the policy benefits and that would not have been incurred but for the insurer’s tortious conduct.”⁶ (Austero, supra, at p. 422.) The fees recoverable, however, may not exceed the amount attributable to the attorney’s efforts to obtain the rejected payment due on the insurance contract. Fees attributable to obtaining any portion of the plaintiff’s award which exceeds the amount due under the policy are not recoverable.

Since the attorney’s fees are recoverable as damages, the determination of the recoverable fees must be made by the trier of fact unless the parties stipulate otherwise. (See Dinkins v. American National Ins. Co. (1979) 92 Cal.App.3d 222, 234 [154 Cal.Rptr. 775].) A stipulation for a postjudgment allocation and award by the trial court would normally be preferable since the determination then would be made after completion of the legal services (see Beneficial Standard Properties, Inc. v. Scharps (1977) 67 Cal.App.3d [136 Cal.Rptr. 549]), and proof that otherwise would have been presented to the jury could be simplified because of the court’s expertise in evaluating legal services. (Fed-Mart Corp. v. Pell Enterprises, Inc. (1980) 111 Cal.App.3d 215, 227 [168 Cal.Rptr. 525]; Melnyk v. Robledo (1976) 64 Cal.App.3d 618, 623 [134 Cal.Rptr. 602],)⁷ If, however, the matter is to be presented to the jury, the court should instruct along the following lines: “If you find (1) that the plaintiff is entitled to recover on his cause of action for breach of the implied covenant of good faith and fair dealing, and (2) that because of such breach it was reasonably necessary for the plaintiff to employ the services of an attorney to collect the benefits due under the policy, then and only then is the plaintiff entitled to an award for attorney’s fees incurred to obtain the policy benefits, which award must not include attorney’s fees incurred to recover any other portion of the verdict.”⁸

The alternative writ is discharged. Let a peremptory writ of mandate issue, commanding the trial court to vacate its order striking portions of petitioner’s complaint.

Bird, C. J., Broussard, J., Reynoso, J., and Grodin, J., concurred.

1 We do not decide when it is reasonable to incur such attorney’s fees. The posture of the present case requires us to assume that the fees are reasonably incurred.

2 Although petitioner seeks reversal of the entire order, we confine our review to the question of the recoverability of attorney’s fees under his second cause of action—for breach of the covenant of good faith and fair dealing. Since the parties do not argue attorney’s fees as damages for the statutory violations, we do not reach the question of attorney’s fees under the third cause of action.

3 Section 1021 provides: “Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties; but parties to actions or proceedings are entitled to costs and disbursements, as hereinafter provided.”

4 Davis v. Air Technical Industries, Inc. (1978) 22 Cal.3d 1 [148 Cal.Rptr. 419, 582 P.2d 1010], relied upon by Standard as supporting an extremely narrow interpretation of the third party tort rationale, was itself given a very narrow interpretation in Gray v. Don Miller & Associates, Inc. (1984) 35 Cal.3d 498, 507-509 [198 Cal.Rptr. 551, 674 P.2d 253], where we confined the Davis limitations to products liability litigation. In Gray, we allowed recovery of attorney’s fees under the third party tort rationale in an action by a prospective buyer against a real estate broker for fraud. We rejected the notion that recovery under this theory required exceptional circumstances.

5 It is for this reason that Standard’s reliance on Insurance Code section 1619 is misplaced. That section, enacted in 1949, allows specified attorney’s fees awards against nonadmitted foreign or alien insurers in actions on an insurance contract. We fail to see how the Legislature could have intended a 1949 statute to affect a tort that was not established until 1958. (See Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429 [58 Cal.Rptr. 13, 426 P.2d 173]; Communale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658-659 [328 P.2d 198, 68 A.L.R.2d 883].)

6 The facts of Mustachio illustrate the difference between a good faith legal dispute and attorney’s fees triggered by a tortious refusal to honor policy obligations: the case involved a fire loss. The insurer first suspected arson, but investigation by an expert negatived that possibility. Nevertheless, when Mustachio was dissatisfied with the insurer’s settlement offer, the latter—instead of offering to sit down to resolve the differences—insinuated that Mustachio was criminally responsible for the fire. The implied threat of criminal prosecution so unsettled the insured that he sought the protection of counsel.

7 Rule 2-111 (A)(4)(c) of the Rules of Professional Conduct provides a specific exception from the lawyer-witness provisions for testimony regarding the nature and value of legal services rendered.

8 The instruction which triggered the award of attorneys’ fees in Austero simply required the jury to find that “it was necessary for plaintiff to employ the services of an attorney to collect the benefits due them under these policies ....’’ The opinion makes nothing of it, but that instruction was clearly deficient, since it did not require a causal relation between the defendant’s tortious breach of the covenant of good faith and the employment of counsel.