Gourley v. State Farm Mutual Automobile Insurance

806 P.2d 1342, 53 Cal. 3d 121, 279 Cal. Rptr. 307, 91 Daily Journal DAR 3660, 3 Cal. Rptr. 2d 666, 91 Cal. Daily Op. Serv. 2242, 1991 Cal. LEXIS 1211

• Court: California Supreme Court
• Decided: March 28, 1991
• Docket: S014133
• Status: Published

Opinions

Opinion

LUCAS, C.J.

—We granted review to resolve an issue that has engendered conflicting appellate decisions: whether a plaintiff is entitled to receive prejudgment interest under Civil Code section 3291 (hereafter section 3291) on an award of compensatory and punitive damages for an insurer’s breach of the implied covenant of good faith and fair dealing. Section 3291 allows the plaintiff in “any action brought to recover damages for personal injury sustained by any person resulting from or occasioned by the tort of any other person, corporation, association, or partnership” (italics added) to claim 10 percent interest on the damages awarded if the plaintiff’s offer to compromise pursuant to Code of Civil Procedure section 998 is rejected by defendant and plaintiff obtains a judgment in excess of plaintiff’s Code of Civil Procedure section 998 offer. In the present case, the Court of Appeal affirmed the trial court’s award of section 3291 interest on plaintiff Julie Gourley’s judgment for compensatory and punitive damages against State Farm Mutual Automobile Insurance Company (State Farm), after deciding that an action for bad faith was an action “brought to recover damages for personal injury” under the statute.

As explained below, we hold that section 3291 interest is not available in insurance bad faith actions because such actions are brought primarily to recover economic loss caused by the tortious interference with a property right, and any damages recovered for actual personal injury, including emotional distress, are incidental to the award of economic damages.¹ Accordingly, we conclude that an action for breach of the implied covenant of good faith and fair dealing is not an action “to recover damages for personal injury” under section 3291. We therefore reverse the Court of Appeal decision insofar as it upheld the interest award.

I. Background

In December 1981, Gourley was a passenger in an automobile that was struck by an out-of-control vehicle driven by an uninsured drunk driver. Gourley, who was not wearing a seat belt at the time of the accident, suffered a fractured right shoulder. She made a claim under the uninsured motorist coverage in her automobile policy with defendant, State Farm. Gourley retained counsel and demanded arbitration under the terms of her policy.

State Farm consulted an accident reconstruction expert who advised the insurer that had Gourley been wearing a seat belt, she would have suffered only minor injuries. Based on this information, State Farm offered to settle the uninsured motorist claim for $20,000, an amount State Farm believed equaled the damages Gourley would have suffered had she been wearing a seat belt.

Gourley rejected the offer and demanded the policy limit of $100,000. She provided State Farm with a medical report from a doctor who concluded she had suffered some permanent disability, would probably develop arthritis, and might require surgery in the future. The matter was then submitted to arbitration.

Before the conclusion of arbitration proceedings, Gourley reduced her demand to $60,000 and State Farm responded with a counteroffer of $25,000. The arbitrator concluded Gourley was not negligent in failing to wear a seat belt and awarded her approximately $88,000, which State Farm promptly paid.

Gourley and her husband later sued State Farm for breach of the implied covenant of good faith and fair dealing and violation of Insurance Code section 790.03. They claimed that as a consequence of State Farm’s failure to provide adequate benefits under the policy, they suffered punitive and exemplary damages, and “general damages for mental and emotional distress and other incidental damages within the jurisdiction [of the court].” Gourley also filed a Code of Civil Procedure section 998 motion to compromise the judgment in the amount of $249,099, which State Farm rejected.

After finding that State Farm violated the covenant of good faith and fair dealing as to Mrs. Gourley only, the jury returned a general verdict in her favor for $15,765 in actual damages and $1,576,500 in punitive damages.² The trial court denied State Farm’s motion to strike or reduce the punitive damages and, pursuant to section 3291, awarded $300,000 interest on the total amount of the verdict based on Gourley’s offer to compromise for $249,099 pursuant to Code of Civil Procedure section 998.

In affirming the judgment, the Court of Appeal held that section 3291 interest could accrue in an insurance bad faith action as long as the statutory prerequisites to recovery were met. The court relied on Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809 [169 Cal.Rptr. 691, 620 P.2d 141], and Austero v. National Cas. Co. (1978) 84 Cal.App.3d 1, 29-30 [148 Cal.Rptr. 653], in reasoning that because the primary focus of the action is to vindicate personal interests, it becomes a “personal injury” action within the meaning of section 3291.

As discussed above, we limited our review to the sole issue whether Gourley was entitled to receive prejudgment interest under section 3291 on all or part of the bad faith award.

II. Discussion

1. Legislative Overview

Code of Civil Procedure section 998, subdivision (b), provides that “Not less than 10 days prior to commencement of trial, any party may serve an offer in writing upon any other party to the action to allow judgment to be taken in accordance with the terms and conditions stated at that time.”

Section 3291 authorizes prejudgment interest on personal injury damages if the defendant fails to accept an offer to compromise pursuant to Code of Civil Procedure section 998 and the judgment exceeds the amount of the compromise offer. It provides in relevant part: “In any action brought to recover damages for personal injury sustained by any person resulting from or occasioned by the tort of any other person, . . . whether by negligence or by willful intent of the other person, . . . and whether the injury was fatal or otherwise, it is lawful for the plaintiff in the complaint to claim interest on the damages alleged as provided in this section.

“If the plaintiff makes an offer pursuant to Section 998 of the Code of Civil Procedure which the defendant does not accept prior to trial or within 30 days, whichever occurs first, and the plaintiff obtains a more favorable judgment, the judgment shall bear interest at the legal rate of 10 percent per annum calculated from the date of the plaintiff’s first offer pursuant to Section 998 of the Code of Civil Procedure which is exceeded by the judgment, and interest shall accrue until the satisfaction of judgment.”

Section 3291 was part of Senate Bill No. 203, 1981-1982 Regular Session, chapter 150, enacted in April 1982 (Stats. 1982, ch. 150, § 1, p. 493). Chapter 150 also added and amended other statutes by increasing the annual rate of interest accruing on judgments from 7 percent to 10 percent. Although the statute is silent as to its applicability to punitive damage awards, its history indicates the Legislature rejected several proposed amendments expressly providing that prejudgment interest would not accrue to that portion of the judgment representing punitive damages. (Sen. Bill No. 203, proposed amendments Aug. 31, 1981, 16 Assem. Final Hist. (1981-1982 Reg. Sess.) pp. Ill, 116.)³

As noted above, section 3291 provides that a judgment on a personal injury damage award shall bear interest when a plaintiff’s settlement offer is refused and the plaintiff recovers a more favorable judgment. Courts generally agree that the purpose of section 3291 is to provide a statutory incentive to settle personal injury litigation where plaintiff has been physically as well as economically impaired, and thus it has been considered inapplicable to contractual disputes, business-tort losses and arbitration proceedings. (See Morin v. ABA Recovery Service, Inc. (1987) 195 Cal.App.3d 200, 206-207, fn. 1 [240 Cal.Rptr. 509]; accord, Woodard v. Southern Cal. Permanente Medical Group (1985) 171 Cal.App.3d 656, 665-668 [217 Cal.Rptr. 514]; see also Ops. Cal. Legis. Counsel, No. 17984 (Nov. 2, 1982) Judgment and Prejudgment Interest [§ 3291 prejudgment interest imposed because of refusal to accept settlement offer, not because of refusal to pay sum owed].) With this background in mind, we now address whether section 3291 should apply in an insurance bad faith action.

2. Section 3291 and Insurance Bad Faith

We first discuss the nature of an insurance bad faith action to determine whether it falls within the ambit of section 3291 as an “action . . . for personal injury.” As sated above, the Court of Appeal found section 3291 applicable to actions based on breach of the implied covenant because it believed the gist of a bad faith action is to compensate the insured for the “anxiety” caused by the insurer’s willful failure to pay for a loss pursuant to policy terms. Gourley agrees with the court’s interpretation and further claims that because we allow recovery in tort for breach of the implied covenant of good faith and fair dealing, the nature of the harm suffered is personal injury. She relies on Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566 [108 Cal.Rptr. 480, 510 P.2d 1032] (Gruenberg), and Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425 [58 Cal.Rptr. 13, 426 P.2d 173] (Crisci), to support her assertion that section 3291 interest is available in this case.

It is true that Crisci, supra, 66 Cal.2d 425, and Gruenberg, supra, 9 Cal. 3d 566, allow an insured to recover in tort for damages flowing from the breach. Nonetheless, as State Farm observes, those same cases directly contravene the assertion of both Gourley and the Court of Appeal that the nature or gist of the tort action is recovery for personal injury. As we explain below, both Crisci and Gruenberg emphasize that the nature of an insurance bad faith action is one seeking recovery of a property right, not personal injury.

We have long recognized that an implied covenant of good faith and fair dealing exists to assure prompt payment of claims made by the insured. (Crisci, supra, 66 Cal.2d at p.429.) In third party cases, where liability insurance is involved, an insurer’s allegedly tortious refusal to accept the third party’s offer to settle a claim against the insured may expose the insurer to liability in the full amount of the third party judgment as well as mental distress which constitutes an aggravation of damages when it ensues from the breach. (Id. at p. 433; see also Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658 [328 P.2d 198, 68 A.L.R.2d 883].) The covenant in third party matters is based on the principle that “neither party will do anything which will injure the right of the other to receive the benefits of the agreement.” (Crisci, supra, at p. 429; accord, Comunale, supra, 50 Cal.2d at p. 658.)

A similar implied covenant exists to assure the insurer makes prompt payment of claims to the insured. The substance of a bad faith action in these first party matters is the insurer’s unreasonable refusal to pay benefits under the policy. (Gruenberg, supra, 9 Cal.3d 566, 575.) In both the first and third party contexts, however, we have observed that “the obligations of the insurer ‘are merely two different aspects of the same duty.’ ” (Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal. 3d 809, 818, quoting from Gruenberg, supra, 9 Cal.3d at p. 573; accord, Austero v. National Cal. Co., supra, 84 Cal.App.3d 1, 26-31.)

Based on these principles, we have allowed the insured to recover in tort for emotional distress damages flowing from the insurer’s breach. In so doing, however, we recognized that the bad faith action is not a suit for personal injury, but rather “relates to financial damage.” (Crisci, supra, 66 Cal.2d at p. 432) Nonetheless, we determined that “mental suffering constitutes an aggravation of damages when it naturally ensues from the act complained of.” (Id. at p. 433.) We emphasized that “[such awards are not confined to cases where the mental suffering award was in addition to an award for personal injuries; damages for mental distress have also been awarded in cases where the tortious conduct was an interference with property rights without any personal injuries apart from the mental distress.” (Ibid.)

In Gruenberg, supra, we further explained the nature of a bad faith action—i.e., that it is an action for the interference with property rights, not personal injury. (9 Cal. 3d at p. 580.) We observed that damages for emotional distress are compensable as incidental damages flowing from the initial breach, not as a separate cause of action: “[Because] we are concerned with mental distress resulting from a substantial invasion of property interests of the insured and not with the independent tort of intentional infliction of emotional distress, we deem [the requirements of outrageous conduct and severe emotional distress] to be inapplicable.” (Ibid.) Thus, once the threshold requirement of economic loss is met, the insured need not show additional loss or injury to recover damages for his mental distress as long as such damages were proximately caused by his insurer’s breach of the implied covenant. (See Sprague v. Equifax, Inc. (1985) 166 Cal.App.3d 1012, 1029-1031 [213 Cal.Rptr. 69].)

Whether an action for the tortious breach of the covenant of good faith and fair dealing is an action for personal injury was also addressed in Richardson v. Allstate Ins. Co. (1981) 117 Cal.App.3d 8, 12-13 [172 Cal.Rptr. 423]. In Richardson, an 18-year-old woman sued her automobile insurer under several causes of action, including breach of the implied covenant of good faith and fair dealing. She sought recovery for economic loss and emotional distress because her insurer had refused to pay for surgical expenses incurred by her after she was injured in an accident at the age of 15. The trial court had ruled the bad faith action was barred by the one-year statute of limitations which applies to infringements of personal rights. (Code Civ. Proc., § 340, subd. (3).)

The Richardson v. Allstate Ins. Co. court (supra, 117 Cal.App.3d 8) reversed the trial court’s decision and held that a cause of action for an insurer’s breach of the implied covenant is subject to the two-year statute of limitations set forth in Code of Civil Procedure section 339, subdivision 1, because such an action is based on the infringement of property rights, not personal injury, notwithstanding the fact that plaintiff there had alleged a cause of action for emotional distress resulting from the insurer’s bad faith. Relying on Gruenberg, supra, 9 Cal.3d 566, the court noted that an “action against an insurer for bad faith is conceptually similar to an action for interference with contractual relations, for in both actions the primary interest of the plaintiff which is invaded by the defendant’s wrongful conduct is the plaintiff’s right to receive performance under an existing contract.” (Richardson, supra, 117 Cal.App.3d at pp. 11-12.) The court also observed that it is the nature of the right sued upon, not the form of the action or relief demanded, that controls what statute of limitations applies. (Id. at p. 12.)

In conclusion, the Richardson v. Allstate Ins. Co. court reasoned it would be erroneous to find “a tort action against an insurer for bad faith is based upon an alleged interference with a personal right merely because mental distress is alleged. Breach of the implied covenant of good faith is actionable because such conduct causes financial loss to the insured, and it is the financial loss or risk of financial loss which defines the cause of action. Mental distress is compensable as an aggravation of the financial damages, not as a separate cause of action.” (117 Cal.App.3d at p. 13, fn. omitted.)

The present Court of Appeal rejected the Richardson v. Allstate Ins. Co. rationale that a breach of the implied covenant action is based on the infringement of property rights, not personal injury. The court attempted to distinguish Richardson on the ground that it concerned a statute of limitations defense rather than the applicability of section 3291 to bad faith actions. In our view, the court overlooked an important observation made by the Richardson court—the substantive requirements for recovery of emotional distress damages in an action for breach of the implied covenant of good faith and fair dealing. We agree with Richardson’s discussion of the nature of a bad faith action as an action for the interference with a property right, and will not dismiss its reasoning simply because it was concerned with a statute of limitations defense.

Indeed, we believe the same principles apply in the present case. Breach of the implied covenant is actionable in the insurance context because such conduct causes financial loss to the insured, and it is that loss which defines the cause of action. Had the Legislature intended to apply section 3291 to such an action for interference with property rights, including a breach of the implied covenant of good faith and fair dealing, it could have expressly so provided. Indeed, the language of the statute reveals that the Legislature was seeking to restrict prejudgment interest in a particular type of award, ostensibly to encourage early settlement and to compensate injured plaintiffs for the unfair withholding of insurance proceeds. We cannot agree with either the present Court of Appeal or plaintiff that all actions for breach of the implied covenant of good faith and fair dealing involving a claim for emotional distress damages, no matter how incidental to the cause of action or how small the amount, are entitled to the special prejudgment interest award accorded by the statute. The absence of any language indicating section 3291 was intended to be applicable to incidental damages flowing from such a breach, including emotional distress damages, convinces us the Legislature did not intend to include such damages within the ambit of the statute.

Finally, although we have found no out-of-state case that poses the issue before us, we have found that other states generally do not award prejudgment interest in analogous cases relating to a tortious interference with economic rights. For example, in Wainauskis v. Howard Johnson Co. (1985) 339 Pa. Super. 266 [488 A.2d 1117, 1125], plaintiff sought prejudgment interest in a malicious prosecution action under a Pennsylvania statute which provided, “ ‘[I]n an action seeking monetary relief for bodily injury, death, or property damage, or any combination thereof, the court. . . shall (1) add to the amount of compensatory damages ... in the verdict of the jury . . . damages for delay at ten (10) percent per annum, not compounded, which shall become part of the . . . verdict.’ ” (488 A.2d at p. 1124, fn. 4.) Although the court observed that damages for malicious prosecution “ ‘may include compensation for mental anguish, humiliation, and injury to feelings’ ” (Id. at p. 1125), it rejected the claim for prejudgment interest after determining that a malicious prosecution action is based on financial loss rather than personal injury as required by the statute. (See also, Temporaries, Inc. v. Krane (1984) 325 Pa. Super. 103 [472 A.2d 668] [no recovery of prejudgment interest under same statute in action for tortious interference with contractual relations]; Sade v. Northern Natural Gas Company (10th Cir. 1974) 501 F.2d 1003 [no prejudgment interest in action for fraud and deceit under Oklahoma statute providing for prejudgment interest in actions for damages for personal injuries].)

III. Conclusion

Based on the principles discussed above, we conclude that section 3291 prejudgment interest is unavailable in insurance bad faith actions because such actions are not “brought to recover damages for personal injury.” Accordingly, we reverse the Court of Appeal with directions to vacate the award of prejudgment interest.

Shortly before the filing of our decision, the United States Supreme Court filed a decision on the constitutionality of punitive damage awards. (Pacific Mut. Life Ins. Co. v. Haslip (1991) 499 U.S. _ [113 L.Ed.2d 1, 111 S.Ct. 1032].) The court set forth several considerations for determining whether a state’s system for awarding punitive damages is constitutionally sufficient. Although we limited our reveiw in this case to the issue of prejudgment interest, we believe fairness to State Farm weighs in favor of allowing it to have its constitutional challenge to the punitive damages award considered in light of Haslip. Therefore, on remand we direct the Court of Appeal to reconsider its decision in light of Haslip.

Panelli, J., Kennard, J., Arabian, J., and Baxter, J., concurred.

1 We emphasize that our opinion is limited to insurance bad faith actions and in no way affects a plaintiff’s right to recover section 3291 interest in a personal injury action where plaintiff also seeks to recover separate property damages.

2 The jury’s findings made no determination whether State Farm violated Insurance Code section 790.03. Because the parties did not request special findings, we cannot determine what portion of the $15,765 compensatory damage award reflects monetary damages and what portion reflects emotional distress damages, if any. Even if the parties had requested special findings so that the amount of emotional distress damages were known, we would find section 3291 interest inapplicable under our holding that the statute does not apply to actions for breach of the implied covenant of good faith and fair dealing.

3 Of course, the Legislature’s rejection of the proposed punitive damage amendments is inconclusive as to legislative intent. (Dyna-Med, Inc. v. Fair Employment & Housing Com. (1987) 43 Cal.3d 1379, 1396 [241 Cal.Rptr. 67, 743 P.2d 1323].) In any event, because we find section 3291 does not apply to insurance bad faith awards, we need not address whether prejudgment interest is available on punitive damages awards in personal injury cases.