2014-00157903-CU-IC

Elaine McDonold vs. Lexington Insurance Company

Nature of Proceeding: Hearing on Demurrer to 2nd Amended Cross-Complaint

Filed By: Keller, Jennifer L.

Oral argument must be requested by Monday April 9 at 4:00 p.m.. If requested, oral argument on this demurrer will take place April 11, 2018 in Department 53 at 2:00 p.m.

Lexington Insurance Company’s (“Lexington”) Demurrer to the 2nd (sic) Amended Cross-Complaint filed November 30, 2017 by Carolina Casualty Insurance Company (“Carolina”) is overruled on as follows:

The most recent cross-complaint is the 3rd amended cross-complaint (TAC) filed November 30th, 2017. Therefore although the demurrer was filed before the 3rd Amended Cross Complaint was filed, the parties have stipulated that this demurrer would apply to the 3rd amended cross-complaint, not the 2nd amended cross-complaint which is referred to in the demurrer.

Carolina’s Request for Judicial Notice is granted.

In this insurance bad faith and legal malpractice action, Plaintiffs brought suit against Lexington, Carolina Casualty Insurance Company [CCIC], Cholakian & Associates, Kevin Cholakian and Jennifer Kung, Lewis, Brisbois, Bisgaard & Smith LLP and Ralph Zappala. Plaintiffs alleged that Defendant Lexington and Carolina and their attorneys breached various duties which resulted in them ultimately being found liable after a jury trial for a $39,588,545.81 personal injury judgment in Sacramento Superior Court case no. 34-2012-00128931 (“Hackett Action”). Present plaintiffs were the insureds of CCIC [primary insurer] and Lexington [excess insurer] during the pendency of the Hackett action.

CCIC’s TAC alleges 14 causes of action: 1st Restitution-Unjust Enrichment-Indemnity,

2nd Equitable Indemnity-Indemnificaiton, 3rd Equitable Contribution-Indemnity, 4th Declaratory Relief, Indemnity, 5th Restitution-Unjust Enrichment-Defense Costs, 6th Equitable Indemnity-Defense Costs, 7th Equitable Contribution-Defense Costs, 8th cause of action Equitable Subrogation, Defense Costs, 9th cause of action Declaratory Relief, Defense Costs, 10th cause of action Declaratory Relief not Joint Tortfeasors, 11th cause of action Restitution Unjust Enrichment-Defense Fees and Costs incurred in coverage action, 12th cause of action Equitable Indemnity-Defense Fees and Costs Incurred in Coverage Action, 13th cause of action Equitable Contribution-Defense Fees and Costs incurred in coverage action, and 14th cause of action-Defense Fees and Costs in Coverage Action.

The Court overruled Lexington’s demurrer to the claims for equitable indemnity in the First Amended Cross-complaint, stating that they were not barred by the Court’s good faith settlement determination. The Court further rejected Lexington’s argument that a primary insurer cannot seek equitable subrogation from an excess insurer. (See Minute Order July 19, 2017)

In the underlying case, Elaine McDonold, an employee of Silva Trucking, Inc., was driving during the course and scope of employment when she became involved in a vehicle accident which injured Debra Hackett and caused injuries (including loss of consortium) to her husband William Hackett. At the time, Silva and McDonold were insured under a $1 million primary liability policy issued by Carolina and a separate $4 million excess liability policy issued by Lexington.

Carolina [primary insurer] alleges that on May 5, 2011, it offered its $1 million policy limits to settle all claims arising out of the Accident. (SACC, ¶14.) The Insureds allege the Hacketts made a policy limits demand of $5 million in December 2011, but that Carolina and Lexington failed to accept the purported policy limits demand. (Bad Faith/Legal Malpractice Complaint, ¶28-30; SACC, ¶26.) In April 2012, Lexington [excess insurer] filed a complaint in interpleader and later deposited its $4 million excess policy limits with the Court. (RJN, Exh. 1.) Carolina responded by filing a cross-complaint in interpleader on June 1, 2012 and depositing its $1 million primary policy limits with the Court. (SACC, ¶19; RJN, Exh. 2.) In July 2012, the Hacketts sued the Insureds (the “Underlying Action”) (See Bad Faith/Legal Malpractice Complaint, ¶34; SACC, ¶20.) In December 2013, the jury awarded nearly $35 million to the Hacketts. (Bad Faith/Legal Malpractice Complaint, 17; SACC, ¶21.) After the trial, in February 2014, Carolina’s policy limits were dispersed through a stipulation and order. (SACC, ¶22; see also id., ¶ 23 & Exh. H.)

1st Restitution-Unjust Enrichment-Indemnity, 2nd Equitable Indemnity-Indemnification, 3rd Equitable Contribution-Indemnity, 4th Declaratory Relief, Indemnity

Overruled.

Lexington, as the excess insurer, again contends that the claims for indemnity are barred by the good faith settlement determination, and that a primary insurer cannot seek equitable contribution from an excess insurer, particularly when Carolina is attempting to shift extracontractual bad faith tort liability, which is several and not joint liability for each insurer. Lexington contends that Lexington does not need to be Carolina’s joint tortfeasor to negate liability on Carolina’s equitable indemnity and contribution causes of action because one insurer cannot shift onto another insurer

responsibility for the first insurer’s sole extracontractual bad faith liability.

The equitable indemnity causes of action are not barred by the good faith settlement determination. On July 19, 2017 the Court ruled in pertinent part:

Thus, despite [Lexington’s] allegations that defendants are “joint tortfeasors'” and are jointly liable for the personal injury damages in the underlying action due to their respective breaches of the covenant of good faith and fair dealing, [CCIC and Lexington] are not joint tortfeasors as a matter of law and the court is not required to assume the truth of this conclusory allegation. The good faith determination does not apply to them by the terms of the statute, which only bars claims between joint tortfeasors and co-obligors. The Court did not intend by its ruling of March 24 to indicate that CCIC was arguably barred from bringing any causes of action alleged in its FACC. The Court intended to convey that the first and third causes of action would have been barred if CCIC had been a joint tortfeasor. However, the Court went on to explain that it had found in its ruling on the good faith settlement motion that CCIC and Lexington were not joint tortfeasors or co-obligors for purposes of CCP 877.6. (RJN, Exhibit A, Page 2.)

Minute Order of July 19, 2017.

The Court will not revisit this argument as it was discussed at length in the prior ruling.

The Court also rejects Lexington’s argument that because it is on a different level of coverage than Carolina, Carolina cannot bring its causes of action for equitable contribution and indemnity. Courts have allowed carriers to bring causes of action for equitable indemnity against other carriers on different risk levels. (See Progressive Cas. Ins. Co. v. Peerless. Ins. Co. 2007 WL 1655790 (E.D.
Cal. 2007); Continental Cas. Co. v. St. Paul Surplus Lines. Co. 2014 WL 4661087 (E.D. Cal. 2014).) Carolina is not seeking indemnity for any of its own separate obligations under its policy.

Lexington contends that even if the parties are not joint tortfeasors, Carolina is barred from bringing equitable indemnity and contribution claims against Lexington because they have no joint legal obligation to the insureds.

In Prince v. Pacific Gas c& Electric Co. (2009) 45 Cal.4th 1151, the California Supreme Court held that equitable indemnity is “not available in the absence of a joint legal obligation to the injured party.” (Id. at p. 1158.) In other words, there can be no indemnity without joint and several liability by the prospective indemnitor and indemnitee. (See GEM Developers v. Hallcraft Homes of San Diego, Inc. (1989) 213 Cal.App.3d 419, 430; Amerigas Propane, LP v. Landstar Ranger, Inc. (2010) 184 Cal.App.4th 981, 989; Miller v. Ellis (2002) 103 Cal.App.4th
4 373, 381; Stop Loss Insurance Brokers, Inc. v. Brown & Toland Medical Group
(2006) 143 Cal.App.4th 1036, 1040.

Lexington contends that if Carolina and Lexington are not joint tortfeasors, any damages the Insureds may recover against Carolina are necessarily due to Carolina’s own tortious conduct and would be a several judgment only for damages based on their own wrongdoing. Although Carolina contends it timely tendered its policy limits and therefore cannot be held liable for bad faith, the Complaint alleges that it did commit bad faith. Thus, there is a factual dispute on this point, that cannot be reached on demurrer. Thus, arguably, if the trier of fact finds that Carolina breached its own

covenant of good faith and fair dealing with plaintiff arising from its policy with them, they would be unable to obtain indemnity from Lexington for a several judgment based on its own misconduct. Carolina agrees that it would not be able to seek reimbursement for damages if the trier of fact found that Carolina’s sole misconduct caused plaintiff’s damages. (Opposition, page 12, lines 4-7) An insurer cannot recover equitable indemnity from another insurer for extra-contractual damages arising from its own bad faith conduct. (See United Services Automobile Assn. v. Alaska Ins. Co. (2001) 94 Cal.App.4th 638, 645 [“We have found no case in which an insurer sought, let alone recovered, equitable indemnity from another insurer for money the former paid to settle bad faith claims against itself”]; Occidental Fire & Casualty Co. of North Carolina v. Lumbermens Mutual Casualty Co. 667 F.Supp. 679, 688 (N.D. Cal. 1987) (applying California law) [“[A]n insurer who breaches the implied covenant of good faith and fair dealing by failing to settle a claim may not recover contribution for that portion of the loss that exceeded its policy limits.”].)

If, on the other hand, there is a joint and several judgment at trial, Carolina is entitled to seek indemnity for damages arising from Lexington’s misconduct. It is not known at this time what will occur at trial, including what type of judgment will be entered, if any. Plaintiffs are alleging joint and several liability. The Court will allow the indemnity claims to stand in the event there is a joint and several judgment against the insurers.

5th cause of action Restitution Defense Costs, 6th cause of action Equitable Indemnity Defense Costs, 7th cause of action Equitable Contribution Defense Costs, 9th cause of action Declaratory Relief, Defense Costs

Overruled.

Lexington contends these causes of action are barred by the applicable two year statute of limitations.

Lexington contends that the statute began running on June 1, 2012 when it paid its policy limits into the court via interpleader or alternatively on February 26, 2014 when a stipulation regarding a partial release of the interplead funds was filed. Lexington contends that the causes of action are barred by the 2 year statute of limitations under Century Indemnity Co. v Superior Court (1996) 50 Cal.App.4th 1115. However, on the face of the TACC the claim is not barred. Claims for indemnity accrue when a defendant finally pays an amount for which it is entitled to indemnity, i.e. its liability has been finally fixed and ascertained. See FNB Mortg. Corp. v Pacific General Group (1999) 76 Cal.App.4th 1116, 1128. Lexington contends that Carolina made “voluntary” payments under its policy after Carolina paid its policy limits and that those voluntary payments cannot extend the statute of limitations. However, courts disagree with this rule when a carrier tenders its

limits via interpleader because withdrawing from the defense under these circumstances would be leaving its insured to “dangle on his own for whatever amount the excess amount of the judgment may be.” (Jenkins v. Insurance Co. of North America (1990) 220 Cal.App.3d 1481, 1490.) The Court rejects the argument that the payments were “voluntary” as a matter of law, because a payment is not “voluntary” if there is even potential liability under the policy. See Employers Mut. Liab. Ins. Co. of Wis. v Pacific Indem. Co (1959) 167 Cal.App.2d 369, 380.

Moreover, the cause of action does not accrue until a defendant finally pays an amount for which it is entitled to indemnity. (See FNB Mortg. Corp. v. Pacific General

Group (1999) 76 CaI.App.4th 1116, 1128; People ex rel Dept.

of Transportation v. Superior Court (1980) 26 Cal.3d 744, 751-752.) In other words, the statute of limitations period for indemnity and reimbursement does not begin to run until the indemnitee’s liability has become finally fixed and ascertained. (General Brewing Corp. v. Clark(1968) 264 Cal.App.2d 518, 520.)
Carolina contends its liability has not become finally fixed and ascertained, as it continues to incur defense costs due to the ongoing appeal in the underlying Hackett case. These factual disputes cannot be determined at this stage.

8th cause of action for Equitable Subrogation

Overruled.

Lexington contends this cause of action is barred because Carolina cannot “step into the shoes” of the insureds to seek subrogation from Lexington because Lexington settled with the insureds and were released from all claims. The Court previously sustained the demurrer to this cause of action, with leave to amend because Carolina had not addressed the demurrer to this cause of action on this ground.

Generally, subrogation is an equitable doctrine that allows a person or entity which pays the loss or satisfies the claim of another under a legally cognizable obligation or interest to step into the shoes of the other person and assert that person’s rights. The right to subrogation does not depend on contractual relationships, as its purpose is to work out an equitable adjustment between the parties by securing the ultimate discharge of a debt by the person who, in equity and in good conscience, ought to pay it.

“The essential elements of an insurer’s cause of action for equitable subrogation are . . . (e) the insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer.” (Transcontinental Ins. Co. v. Ins. Co. of State of Pennsylvania (2007) 148 Cal.App.4th 1296, 1305-1306.) “The right of subrogation is purely derivative. An insurer entitled to subrogation is

in the same position as an assignee of the insured’s claim, and succeeds only to the rights of the insured.” (Id. at pp. 1305-1306.) “The subrogated insurer is said to ‘stand in the shoes’ of its insured, because it has no greater rights than the insured and is subject to the same defenses assertable against the insured.” (Id. at p. 1306; see also United Services Auto. Ass’n v. Alaska Ins. Co., supra, 94 Cal.App.4th at p. 845 [“[S] ubrogation rights are purely derivative, [and] an

insurer cannot acquire anything by subrogation to which the insured has no right and can claim no right the insured does not have.”]; RLI Ins. Co. v. CAN Cas. of California (2006) 141 Cal. App.4th 75, 80; Fireman’s Fund 1994, supra, 21 Cal.App.4th at p.

1599.)

Lexington contends that since the Insureds have already settled their claims against Lexington, and the Court has already determined that settlement to be in good faith, the instant subrogation claim is barred. The settlement agreement between the Insureds and Lexington includes an exhaustive mutual release of all claims relating to the bad faith case, and a provision binding the agreement to all assigns of the parties and therefore there are no more claims the Insureds can bring against Lexington relating to this case. Thus, it is reasoned, since the insureds (Plaintiffs) have no possible claim against Lexington, there are no shoes for Carolina to step in to.

Carolina contends that an exception to the general rule of subrogation applies here. In amending this cause of action, Carolina added the following language:

“. . . because Lexington had knowledge that Carolina Casualty had indemnified its insureds when it settled with plaintiffs insureds [sic].” (SACC, 182, p. 18, lines 7-9.)

There is an exception to the general rule that an indemnitee must step into the shoes of the insured “where the tortfeasor settles with the insured with knowledge that the insured has been indemnified by an insurer.” (Allstate Ins. Co. v. Mel Rapton, Inc. (2000) 77 Cal.App.4th 901, 911-912 ; Hodge v. Kirkpatrick Dev. Inc. (2005) 130 Cal.App.4th 540, 553-554) In discussing principles of subrogation, Allstate and Hodge recognized the general rule that the “insurer stands in the shoes of its insured; if an action by the insured is barred, so is the action of the insurer,” but also stated a limited exception to the rule “where the tortfeasor settles with the insured with knowledge that the insured has been indemnified by an insurer.” (Allstate, supra, 77 Cal.App.4th at pp. 911-912; Hodge, supra, 130 Cal.App.4th at p. 553-554.)

Carolina alleges that since Lexington knew that Carolina had been paying defense costs for defending the underlying action and this action before the settlement, it is entitled to the exception to the general rule that the insurer stands in the shoes of the insured.

Lexington contends these cases are not on point because the cases relied on by Carolina arose in the context of insureds suing third party tortfeasors for construction defects and or property damage. For its part, Carolina contends it has a subrogation right based on the fact that after it paid its policy limits, it continued to defend its insureds after Lexington failed to accept the policy limits demand. Had Lexington accepted the policy limits demand, Carolina would not have had to defend its insureds any longer.

Lexington has not adequately explained why the exception to the general rule should not apply to a case where one insurer seeks equitable subrogation from another insurer based on the alleged indemnitee’s continuing to provide a defense in an action after the alleged indemnitor’s failure to offer its policy limits.

10th cause of action Declaratory Relief “Not Joint Tortfeasors”

Overruled.

Lexington contends that this cause of action is unnecessary and improper because in either case, the causes of action are barred, and that this determination will be made in this action, rendering the declaratory relief claim unnecessary. The Court will allow the claim to stand.

11th cause of action Restitution Unjust Enrichment-Defense Fees and Costs incurred in coverage action, 12th cause of action Equitable Indemnity-Defense Fees and Costs Incurred in Coverage Action, 13th cause of action Equitable Contribution-Defense Fees and Costs incurred in coverage action, and 14th cause of action-Defense Fees and Costs in Coverage Action.

Overruled.

Lexington contends that Carolina improperly attempts to shift its attorneys fees and costs from defending this bad faith action on to Lexington.

“California follows what is commonly referred to as the American rule, which provides that each party to a lawsuit must ordinarily pay his own attorney fees.” (Trope v. Katz (1995) 21 Cal.4th 274, 278; see also Code Civ. Proc, § 1021; Davis v. Air Technical Industries, Inc. (1978) 22 Cal.3d 1, 5; Mega RVCorp v. HWH Corp (2014) 225 Cal.App.4th 1318, 1337 [“Ordinarily, pursuant to the American rule, a party must pay for its own attorney fees unless a contract or statute provides authority for recovery of attorney fees from a litigant opponent.”].)

Carolina seeks reimbursement of defense fees as damages under the “Tort of Another” doctrine. That doctrine provides that “A person who, through the tort of another, has been required to act in the protection of his interests by bringing or defending an action against a third person, is entitled to recover compensation for the reasonably necessary loss of time, attorney’s fees, and other expenditures thereby suffered or incurred.” (Prentice v. North Amer. Title Guar. Corp. (1963) 59 Cal.2d 618, 620 [Prentice].) Lexington contends that the “tort of another” exception does not apply “in cases where the indemnitee incurred attorney’s fees solely in defense of his own alleged wrongdoing,” relying on Davis v. Air Technical Industries, Inc. (1978) 22 Cal.3d 1, 5. In Davis, the Supreme Court held that since Davis “defended exclusively against allegations of his own negligence, he [was] not entitled to recover attorney’s fees” from a co-defendant. (See id. at pp. 6-7) However, as explained in the opposition, the Davis case was overruled by the statute upon which Carolina is now relying to bring its claims for defense reimbursement, CCP 1021.6. Specifically, in 1979, one year after the Davis decision, the California Legislature adopted CCP. § 1021.6, which states:

Upon motion, a court after reviewing the evidence in the principal case may

award attorney’s fees to a person who prevails on a claim for implied indemnity if the court finds (a) that the indemnitee through the tort of the indemnitor has been required to act in the protection of the indemnitee’s interest by bringing an action against or defending an action by a third person and (b) if that indemnitor was properly notified of the demand to bring the action or provide the defense and did not avail itself of the opportunity to do so, and (c) that the trier of fact determined that the indemnitee was without fault in the principal case which is the basis for the action in indemnity or that the indemnitee had a final judgment entered in his or her favor granting a summary judgment, a nonsuit, or a directed verdict.

CCP 1021.6.

Thus, CCP 1021.6 permits a court, upon motion and after reviewing the evidence in the principal case, to award attorney’s fees to a person who prevails on a claim for implied indemnity. Before the court can make such an award, however, it must find that: (1) the indemnitee, in protection of its own interest, was required to bring or defend an action against a third party due to a tort of the indemnitor; (2) the indemnitor was properly notified of the demand to bring the action or to provide the defense and did not avail itself of the opportunity to act; and (3) the trier of fact determined the indemnitee was without fault in the principal case that serves as the basis for the indemnity action or that the indemnitee had a final judgment entered in his or her favor granting a summary judgment, a nonsuit, or a directed verdict. Uniroyal Chemical Co. v. American Vanguard Corp.(1988) 203 Cal.App.3d 285, 289.

The purpose of section 1021.6 was to codify Prentice and overrule Davis. As stated by the court in Uniroyal :

Amvac makes a number of contentions which, if valid, would leave Helena unreimbursed for its attorney’s fees in spite of the fact this case would then end with the precise result section 1021.6 sought to correct after the decision in Davis v. Air Technical Industries, Inc (1978) 22 Cal.3d 1, 148 Cal.Rptr. 419, 582 P.2d 1010. The Davis decision limited the more equitable result enunciated in Prentice v. North Amer. Title Guar. Corp. (1963) 59 Cal.2d 618, 30 Cal.Rptr. 821, 381P.2d 645. Chief Justice Bird in Davis held that a retailer in an ordinary products liability case could not recover attorney’s fees where he defended solely against alleged wrongdoing on his own part. (Davis v. Air Technical Industries, Inc.,supra, 22 Cal.3d at pp. 4-6, 148 Cal.Rptr. 419, 582 P.2d 1010.) The legislative history of section 1021.6 shows the only reason for its enactment was to correct the injustice created by the Davis decision. Amvac’s effort to revive Davis and nullify section 1021.6 on the ground Helena defended only against its own alleged wrongdoing must fail.

Uniroyal Chemical Company, supra at 297.

The Court therefore overrules the causes of action that seek damages based on the tort of another doctrine.

The separate demurrer to the Declaratory Relief claims and Unjust Enrichment Claims on the ground that no cause of action is stated because the relief can be obtained as part of the main action, or that the cause of action does not exist or is repetitive and derivative is overruled.

Answer to the Third Amended Cross-complaint to be filed on or before April 30, 2018.