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

James R. WALLER, Jr., et al., Plaintiffs and Respondents, v. TRUCK INSURANCE EXCHANGE et al., Defendants and Appellants.

No. D015864.

Decided: August 11, 1994

Waldman & Chuang, Los Angeles, Horvitz & Levy, Ellis J. Horvitz, David M. Axelrad and Mitchell C. Tilner, Encino, for defendants and appellants. Ford & Pedersen, William H. Ford III and Neil Pedersen, Los Angeles, for plaintiff and respondent James R. Waller, Jr. Osborn & Patton, Richard G. Osborn, George F. Robertie and Carol F. Anderson, Los Angeles, for plaintiff and respondent Marmac.

Truck Insurance Exchange (Truck) and Farmers Insurance Exchange (Farmers) appeal from a judgment totaling $58,100,115.05 in three consolidated actions for breach of an insurance contract and breach of the implied covenant of good faith and fair dealing.

Truck issued a commercial liability policy to Marmac, a California corporation that provides engineering and design services to the aerospace, pharmaceutical and energy industries.   Truck and its claims adjuster, Farmers, were sued by Marmac and five shareholders, officers and/or directors of Marmac (James R. Waller, Jr., Michael G. Hendrix, Arthur A. Akers, Charles Petersen and Robert T. Hepple) after Truck denied their tender of the defense of a third-party lawsuit by a former Marmac officer and director.

On appeal, Truck and Farmers raise a plethora of arguments attacking the judgment.1  Because we find the Truck policy did not require Truck to defend plaintiffs against the underlying third-party lawsuit, that is, there was no coverage under the policy, we need not reach any other issue.


In July 1985, Hendrix, Marmac's controller, discussed purchasing a comprehensive general liability policy for the corporation with Ron Robertson, an independent agent representing Truck.   Hendrix testified he asked for coverage that mirrored that which had been provided under a Great American Insurance Company policy that had just expired;  Robertson testified Hendrix did not make such a request.   The Great American policy included broad form personal injury coverage, including humiliation and emotional distress.   Robertson suggested a Truck Sentinel policy.   Robertson provided Hendrix with a brochure on the Truck policy, which, combined with representations made by Robertson, led Hendrix to believe that Marmac would be covered for “all business hazards.”

When Robertson asked Hendrix who should be listed as the named insureds under the policy, Hendrix gave him an endorsement to the expired Great American policy entitled “Named Insured.”   Hendrix instructed Robertson to retain certain of the listed persons and entities as named insureds under the Truck policy and to delete others.   Robertson told Hendrix the policy would list the named insureds on an ET–2 endorsement.   Robertson did not tell Hendrix the Truck policy—unlike the Great American policy—included an exclusion 15 that precluded coverage for any insured for bodily injury to a named insured.

On August 9, 1985, Robertson presented Hendrix with Truck's quotation and proposal for coverage, and Hendrix gave Robertson a down payment to secure the policy.   Truck issued Sentinel Policy No. 1488–26–75, effective from August 9, 1985 to August 9, 1986.   Later, Robertson personally delivered the policy to Hendrix.   The policy language included the following:

“The company agrees to pay all damages which the insured becomes legally obligated to pay because of ․ bodily injury to any person and ․ damage to property ․ to which this insurance applies, caused by an occurrence.”

“ ‘Occurrence’ means an event, or series of events, including injurious exposure to conditions, proximately caused by an act or omission of the insured regardless of the number of persons, vehicles or objects affected by the act or omission which results, during the policy period, in bodily injury or property damage, neither expected nor intended from the standpoint of the insured.”

The declarations page identified “MARMAC ETAL” as the named insured.   It also stated “[t]he named insured is individual unless otherwise stated,” followed by check-off boxes.   The box labeled “Corp.” was marked.   Among various endorsements listed on the declarations page was an ET–2 endorsement.   The ET–2 endorsement included the name Lester H. Amey, among other individuals and entities, all followed with the language “all as their interest may appear.”   The ET–2 endorsement included pre-printed language at the bottom of the page, stating:  “[T]his endorsement, when countersigned, becomes part of the above numbered policy issued by the Company designated in the Declarations․”

In about July 1986, Truck agent Marta Rodriguez, who had assumed responsibility for the Marmac account, telephoned Hendrix to determine if he wanted to make any changes in the policy upon its automatic renewal.   Hendrix requested some minor changes and the policy was renewed on August 9, 1986.   The declarations page of the 1986 policy identified the named insured as “MARMAC ETAL” and indicated the named insured was a corporation, as did the declarations page of the 1985 policy.   The ET–2 endorsement for the new policy listed the same names and entities as the 1985 endorsement but instead of being denominated “ET–2” as was the 1985 version, the 1986 version had the typed words “NAMED INSUREDS” on top.   No one from Truck or Farmers offered any explanation or information to Marmac as to why the 1986 endorsement was different.   According to testimony offered by Truck, the words “NAMED INSUREDS” had been inadvertently omitted from the ET–2 endorsement to the 1985 policy;  when the 1986 policy was prepared, the typist corrected the omission by adding the words “NAMED INSUREDS” to the endorsement.   Also, the 1986 endorsement was unsigned even though the form had the pre-printed language requiring an authorized signature to effectuate the endorsement.

Prior to August 29, 1986, Waller, Marmac's president owned 60 percent of Marmac Stock.   Amey, Marmac's executive vice-president, owned 40 percent.   On August 29, 1986, Waller sold his stock in equal portions to Hendrix, Akers, Petersen and Hepple.   Thereafter, Waller resigned from Marmac's board of directors and Hendrix and Hepple were elected to the board, with Amey remaining as the third director.   Akers became president of Marmac and Hendrix, Hepple and Peterson became vice-presidents.   Amey subsequently was demoted.

On September 29, 1986, Amey sued Marmac, Waller, Hendrix, Hepple, Akers and Petersen for, among other things, involuntary dissolution, breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty, conspiracy, intentional infliction of emotional distress and interference with prospective economic advantage.2

On October 3, 1986, Robert F. Kull, Marmac's corporate attorney, wrote Truck at its home office requesting the insurer defend the defendants named in Amey's lawsuit.3  Twenty days later, Kull's letter was forwarded to Howard E. Sullivan, Farmers' regional liability claims manager in Santa Ana.   Sullivan sought a preliminary coverage opinion from an in-house attorney for Farmers, but did not further act on the tender request.   Responsibility for investigation of the underlying facts of the claim was with the branch claims office.

On November 14, 1986, Farmers's Anaheim branch claims office received the Amey complaint and a request to defend.   Richard Neisser, manager of the Anaheim office, had authority to pay defense fees up to $3,500, but if the fees exceeded $3,500 he was required to submit the file to the regional office with his recommendation;  Neisser had no authority to deny a defense;  only the regional office could deny a defense.   After reviewing the complaint, Neisser assigned investigation of the claim to William Vaughter, a claims representative.   Neisser testified his initial tentative conclusion was the Amey complaint alleged a business dispute for which there would not be coverage.   Neisser told Vaughter to “get loss report and begin liability issue” and to verify whether the Amey suit had been served.   On December 1, 1986, Neisser and Vaughter discussed the Marmac claim for five or 10 minutes.   On December 8, 1986, Neisser and Vaughter discussed the claim again.   The first activity entered in the log in Vaughter's field file was a December 8, 1986 entry that stated:  “Per Rick, get extension on complaint and find out who our insured [i]s, and he will do transmittal with D.R.A.”;   D.R.A. stands for declaratory relief action.   On December 8 and 9, Vaughter placed telephone calls to one of the attorneys for the insureds and to Amey's attorney, respectively.   Vaughter also consulted with in-house counsel.   On December 10, Vaughter spoke with Amey's attorney, who confirmed the Amey complaint had been answered.   Hendrix talked to Vaughter on December 10 and 11, having being referred to Vaughter by Rodriguez.   Hendrix testified Vaughter told him he was going to process the claim for payment and asked whether he was pleased with his attorneys because Farmers could provide counsel if he was not.

On December 29, 1986, Vaughter received the billings for the attorney fees the insureds had incurred up to that time;  the total exceeded $54,000.   Neisser wrote the December 30, 1986, entry in Vaughter's investigation log, directing Vaughter to (1) “transmit to [in-house counsel] after you have called and discussed,” among other things, whether the insurer owes a defense and whether there is an obligation under San Diego Federal Credit Union v. Cumis Ins. Security, Inc. (1984) 162 Cal.App.3d 358, 208 Cal.Rptr. 494, (2) send a reservation of rights letter and (3) make up an office file.   Neisser, however, testified that by December 30, 1986, he had concluded the policy did not cover the claims alleged in Amey's complaint.   He testified he based his conclusions on the allegations of the complaint, the result of Vaughter's investigation and the insurance policy.   He said the amount of the attorneys' fees Marmac had incurred was not a factor.   Neisser instructed Vaughter to again contact the in-house attorneys, as well as individuals at Farmers' home office.   The in-house attorneys advised Vaughter to proceed by denying the claim.   On December 31, 1986, Neisser prepared a written evaluation of the claim for submission to Fred Eastman, who had just succeeded Sullivan as regional liability claims manager;  the evaluation recommended “no coverage.”

On January 6, 1987, Neisser transmitted to Eastman the attorneys' bills recently received from Hendrix.   The cover memo stated:  “These Attorney bills are from [Marmac's] personal attorney.   If you decide that [C]umis applies to this case, then these bills will have to be paid.”   Eastman reviewed the claim on January 6, 1987, and concurred with the no coverage evaluation.   Eastman testified he based his decision on the following considerations:  (1) Amey's complaint did not involve an “occurrence” within the meaning of the policy's coverage clause because Amey was not claiming bodily injury or property damage and any injuries to Amey were expected or intended by the insureds;  (2) the ET–2 endorsement listed Amey as a named insured and the policy expressly excluded coverage for liability to named insureds;  (3) Amey was a Marmac employee and the policy excluded coverage for bodily injury suffered by Marmac employees arising out of and in the course of employment.   Eastman testified the amount of attorneys fees Marmac had incurred was not a factor.

On January 7, 1987, Eastman directed Neisser:  “Please deny the insured's request with an appropriate response outlining specifically that since no coverage is available under the policy contract, nothing can be considered as far as any payment is concerned.”   Neisser instructed Vaughter to draft a letter to Marmac denying the claim for his signature.   On January 16, 1987, Neisser signed and mailed the letter, which stated:

“We have received your claim for attorney fees in the Lester H. Amey v. Marmac Electro Systems, Orange County Superior Court case no:  50 20 95 matter.   Accordingly we have reviewed your policy in its entirety, spoken to your agent, obtained the opinion of our house counsel and submitted the entire packet of information to our Regional Office for a decision regarding whether this loss is covered under your policy.

“The claim against Marmac is essentially a shareholder dispute regarding intentional acts committed by Marmac and their principles [sic ].   Intentional Acts are not covered under your Sentinel business policy or any endorsements taken out by Marmac.   Accordingly we are unable to make payment for legal expenses incurred by Marmac in this matter.”

Vaughter's intent in drafting the letter was to put Marmac on notice that its claim would not be covered.   He did not intend to list every ground on which coverage could be denied.   Neisser's intent in signing the letter was to inform Marmac its policy did not afford coverage;  he did not intend to list every ground for denying coverage.   Neisser did not intend to waive grounds for denying coverage not mentioned in the letter.

On February 18, 1987, Attorney William Ford, the insureds' coverage counsel, wrote Neisser an eight-page letter in which he retendered the defense of the Amey action, arguing Amey's first amended complaint created a potential for coverage under the policy.   Neisser gave the letter to Vaughter and instructed him to have in-house counsel review it.   Neisser told Ford in a telephone conversation the claim would be sent back to the regional office for reconsideration.   In March 1987, Neisser discussed the Marmac claim with in-house counsel, who confirmed the initial no-coverage decision.

On April 8, 1987, Ford wrote Neisser again, informing him that Amey had recently testified in a deposition “as to his alleged physical, mental, and emotional harm occasioned by the alleged negligence, mismanagement, failure to exercise due care, and corporate waste of the defendants.”   Neisser sent the letter to Eastman, who again concluded there was no coverage under the policy.

Between May 14, 1987 and August 11, 1987, Waller, Marmac and the four other plaintiffs filed their lawsuits against Truck.   Waller later amended his pleading to substitute Farmers, Farmers Group, Inc. and Truck Underwriters Association in place of Does 1, 2, and 3 respectively.4  Marmac and the other plaintiffs later amended their respective pleadings to substitute Farmers in place of Doe 1.   On May 18, 1989, the three lawsuits were consolidated.   Subsequently, each set of plaintiffs filed second amended complaints, which became the operative pleadings here.   Only Waller's second amended complaint included a cause of action for violation of Insurance Code section 790.03.

On April 22, 1991, the trial court denied Truck's and Farmers' joint motion for judgment on the pleadings.   Truck and Farmers had argued that the Amey action created no potential for coverage under the policy as a matter of law because (1) Marmac's complaint on its face revealed Amey was not seeking to recover from Marmac for bodily injury or property damage, (2) the policy expressly excluded coverage for liability to a named insured and Amey was a named insured.

On April 23, 1991, the parties tried legal issues to the court pursuant to Code of Civil Procedure section 592.   The court ruled as follows:  (1) Amey's first amended complaint “alleges facts potentially within bodily injury coverage” of the Truck policy;  (2) as a matter of law, “the occurrence clause in [the policy] gives rise to a duty to defend in this case”;  (3) as a matter of law and on its face, Truck's January 16, 1987, letter to Marmac denying coverage “waived policy based defenses not specified therein”;  and (4) section 533 did not excuse Truck from its duty to defend under the policy.   The trial court stated:  “[T]he logical conclusions of all the findings made so far, as a matter of law you had a duty to defend.”

The jury trial began May 6, 1991.   After plaintiffs' opening statements, the trial court granted defendants' motions for nonsuit of all plaintiffs' causes of action for breach of fiduciary duty, fraud, deceit and negligent misrepresentation as well as damage claims by Marmac and Hendrix, Akers, Petersen and Hepple regarding prejudice to their defense of the Amey lawsuit.

On June 12, 1991, the trial court granted plaintiffs' motions for partial directed verdict that Truck had breached the implied covenant of good faith and fair dealing in seven areas and that Farmers was jointly and severally liable with Truck for any such breach.

After the close of evidence, the trial court granted an oral motion by Marmac and by Hendrix, Akers, Petersen and Hepple to amend their respective complaints to include causes of action for violating Insurance Code section 790.03.

On June 21, 1991, the jury returned verdicts in favor of the plaintiffs, finding both Truck and Farmers acted in bad faith and violated Insurance Code section 790.03, subdivision (h).   To Hendrix, Akers, Petersen and Hepple, the jury awarded policy benefits of $89,570.03 (the cost of defending the Amey action).   The jury awarded Marmac policy benefits of $348,870.63 and Brandt fees of $390,737.66 plus interest.   The jury awarded Waller policy benefits of $144,260.37, Brandt fees of $333,701.16 plus “June's Billings,” lost consulting fees of $227,500 and emotional distress damages of $250,000.   Also on June 21, the jury declared itself deadlocked on the issue of liability for punitive damages.

The trial court continued the trial for a week to honor a commitment made to a juror that she would be allowed to go on her previously paid-for vacation.   The jury recommenced its deliberations on July 1, 1991.   The following day, by 9–3 votes, the jury returned verdicts finding Truck and Farmers had acted with fraud, malice and oppression.   Subsequently, the jury heard evidence that Truck's net worth was $226,000,000 and Farmers' net worth was $1.6 billion.   After further deliberations, the jury awarded Waller $27,000,000 in punitive damages against Farmers and $3,000,000 in punitive damages against Truck.   The jury awarded Marmac $23,000,000 in punitive damages against Farmers and $3,000,000 in punitive damages against Truck.   The jury awarded Hendrix, Akers, Petersen and Hepple $3,500,000 in punitive damages against Farmers and $500,000 in punitive damages against Truck.   Judgment was entered on the verdict.

Truck and Farmers filed motions for new trial and judgment notwithstanding the verdict.   After plaintiffs conceded that judgment should not have been entered against Farmers for breach of contract, the trial court ordered the judgment corrected to eliminate Farmers' liability for policy benefits.   The trial court also ruled the punitive damages award to Hendrix, Akers, Petersen and Hepple were improper.   In all other respects, the trial court denied the motions for judgment notwithstanding the verdict and denied the motions for new trial in their entirety.


 We begin with the contractual liability of Truck since a contractual obligation is the underpinning of a bad faith claim or a claim for violation of statutory duties under the Insurance Code.  (See, e.g., Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1153, 271 Cal.Rptr. 246 [“[B]ad faith claim cannot be maintained unless policy benefits are due․”];  Brodkin v. State Farm Fire & Casualty Co. (1989) 217 Cal.App.3d 210, 218, 265 Cal.Rptr. 710 [“Even if there was evidence the claim was improperly handled, there could be no cause of action for breach of the covenant of good faith or of any statutory duty since State Farm correctly denied the claim.”].)

 It is well established that an insurer has a duty to defend an insured if it becomes aware of, or if the third party lawsuit pleads, facts that give rise to potential liability under the policy.  (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168.) 5  An insurer's duty to defend is separate from and broader than its duty to indemnify.  (State Farm Fire & Casualty Co. v. Eddy (1990) 218 Cal.App.3d 958, 965, 267 Cal.Rptr. 379.)   The duty to defend arises as long as the facts—either as expressed or implied in the third party's complaint or as learned from other sources—give rise to a potentially covered claim.   (Fresno Economy Import Used Cars, Inc. v. United States Fid. Guar. Co. (1977) 76 Cal.App.3d 272, 279, 142 Cal.Rptr. 681.)   However, an insurer's duty to defend is not absolute;  it is measured by the nature and kinds of risks covered by the policy.  (Giddings v. Industrial Indemnity Co. (1980) 112 Cal.App.3d 213, 218, 169 Cal.Rptr. 278.)

 The interpretation of an insurance policy is a question of law.   (Safeco Ins. Co. v. Gibson (1989) 211 Cal.App.3d 176, 184, 259 Cal.Rptr. 206.)   As such, a reviewing court will independently determine the proper construction.  (Cal–Farm Ins. Co. v. TAC Exterminators, Inc. (1985) 172 Cal.App.3d 564, 571, 218 Cal.Rptr. 407.)

Here, the Truck policy language was as follows:

“The company agrees to pay all damages which the insured becomes legally obligated to pay because of ․ bodily injury to any person, and ․ damage to property ․ to which this insurance applies, caused by an occurrence.”

“ ‘Occurrence’ means an event, or series of events, including injurious exposure to conditions, proximately caused by an act or omission of the insured regardless of the number of persons, vehicles or objects affected by the act or omission which results, during the policy period, in bodily injury or property damage, neither expected nor intended from the standpoint of the insured.”

The issue for us is whether Truck had an obligation to defend the plaintiffs here against Amey's lawsuit based on this liability policy language covering property damage and bodily injury.

Amey's complaint listed eleven causes of action:  involuntary dissolution (Corp.Code, § 1800, subds. (b)(4), (b)(5));  breach of fiduciary duty;  breach of statutory duty of good faith (Corp.Code, § 309);  interference with prospective economic advantage;  breach of contract;  breach of implied covenant of good faith and fair dealing;  breach of duty of good faith and fair dealing;  inducing breach of contract;  conspiracy;  intentional infliction of emotional distress and injunctive relief.   The Amey complaint set forth the following pertinent factual allegations:

“8. AMEY is the holder of record of 200 shares of common stock of MARMAC.   The number of common shares of MARMAC which are issued and outstanding is 500 shares.   The shares held by AMEY constitute at least thirty-three and one-third percent (331/313%) of the number of issued and outstanding common shares of MARMAC, exclusive of any shares owned by AKERS, HENDRIX, HEPPLE and PETERSEN, who, as alleged herein, personally participated in the transactions complained of herein.

“9. From August 29, 1986, through and including the present AKERS, HENDRIX, HEPPLE and PETERSEN, who are in control of the corporation, have been guilty of or have knowingly countenanced acts of persistent and pervasive fraud, mismanagement or abuse of authority and persistent unfairness toward AMEY, and have misapplied or wasted MARMAC's property in the following respects:

“(a) By operating MARMAC for their personal benefit without regard to the rights or interests of AMEY, or the best interests and growth and development of potential business opportunities of MARMAC,

“(b) By stripping AMEY of his position, privileges, authority and responsibilities as MARMAC's Secretary and Executive Vice–President, and imposing discriminatory, unfair and oppressive sales performance guidelines and quotas upon him as a condition of his continued employment by MARMAC,

“(c) By utilizing MARMAC's earnings to finance their personal purchases of stock in MARMAC as a means of increasing their control and excluding AMEY from any voice in the management of MARMAC, specifically including, instances of self-dealing in voting themselves substantial increases in salary, and causing MARMAC to enter into an unreasonable or sham contract of employment with WALLER,

“(d) By noticing and conducting meetings of MARMAC'S shareholders and directors in violation of MARMAC's Articles of Incorporation, By-laws and the California Corporations Code, and in a manner calculated to deny and exclude AMEY from any voice in the management of MARMAC, and

“(e) By depressing the market price or value of MARMAC's and AMEY's common stock.


“14.  On and before August 29, 1986, WALLER in disregard and breach of his fiduciary duties to AMEY, failed to exercise good faith and due care so as to avoid unfairness to AMEY by entering into a transaction to dispose of his dominant or control block of stock in MARMAC without the slightest regard to the wishes and interests, and without prior knowledge of AMEY, and for the purpose of gaining an unfair advantage in the sale or transfer of said controlling block of shares.


“24.  On and before August 29, 1986, AMEY and defendant WALLER entered into an oral agreement for the sale of WALLER's controlling interest in MARMAC to AMEY, subject only to the completion of a valuation of WALLER'S interest in MARMAC.


“26.  AMEY is informed and believes that on and before August 29, 1986, [AKERS, HENDRIX, HEPPLE and PETERSEN] ․ went directly to defendant WALLER and discussed the relationship between AMEY to defendant WALLER and attempted to induce WALLER to breach the agreement with AMEY for the sale of WALLER's stock, and to dispose of WALLER's stock without the slightest regard to the wishes or interests, and without the prior knowledge of AMEY and thereby enable these defendants to gain a controlling interest in and to freeze AMEY, a minority shareholder, out of the corporation.”

In Amey's tenth cause of action for intentional infliction of emotional distress, Amey alleged he “has suffered humiliation, mental anguish, and emotional and physical distress.”

It is by virtue of this allegation of “emotional and physical distress” in Amey's tenth cause of action that the plaintiffs have maintained throughout these proceedings that Truck had a duty to defend them against Amey's lawsuit under the bodily injury clause.6  We conclude otherwise.

Amey's alleged emotional and physical distress flowed from uncovered economic loss;  there was no duty to defend because none of the alleged misconduct by the plaintiffs against Amey was potentially covered by the Truck policy.  (See McLaughlin v. National Union Fire Ins. Co. (1994) 23 Cal.App.4th 1132, 1150–1151, 29 Cal.Rptr.2d 559;  Keating v. National Union Fire Ins. (9th Cir.1993) 995 F.2d 154, 156–157.)  “Where there is no potential for the third party to recover on a covered claim, there is no duty to defend.”  (Devin v. United Services Auto. Assn. (1992) 6 Cal.App.4th 1149, 1157, 8 Cal.Rptr.2d 263.)

Clearly, the Amey lawsuit sets forth nothing more than a business dispute;  the torts alleged in the suit are all business and contract transgressions.   Simply put, the gravamen of the Amey lawsuit is economic loss.   In our view, the damages claim for emotional and physical distress is clearly derivative of and caused by the economic loss suffered by Amey.

In Keating, supra, 995 F.2d 154, the issue was whether an insurer had a duty to defend its insureds against an action alleging that the insureds' conduct had caused the plaintiffs to suffer economic damages and resultant “ ‘emotional and physical distress, and impairment of health.’ ”  (Id. at p. 156).   The Ninth Circuit Court of Appeals in Keating held the insurer had no duty to defend the underlying investor lawsuits because the alleged emotional and physical distress flowed from uncovered economic loss, which is not covered by a comprehensive general liability policy and accordingly not potentially within the coverage of the policy.  (Ibid.)  Similarly, in McLaughlin, supra, 23 Cal.App.4th 1132, 1150, 29 Cal.Rptr.2d 559, the issue was whether the insurer had a duty to defend against an action alleging that the insureds' conduct had caused the investor plaintiffs to suffer economic damages and resultant “ ‘mental, physical and emotional distress․' ”  The Court of Appeal in McLaughlin, endorsed the reasoning of Keating and likewise held there was no duty to defend the underlying investor suits.

“[S]ince Plaintiffs' physical distress was induced by an uncovered economic loss it defies reason that bodily injury coverage would nevertheless independently obtain.  ‘It would expand coverage of [CGL] policies far beyond any reasonable expectation of the parties to sweep within their potential coverage any alleged emotional or physical distress that might result from economic loss that is itself clearly outside the scope of the policy.   [Citation.]’ ”  (McLaughlin, supra, 23 Cal.App.4th at p. 1151, 29 Cal.Rptr.2d 559, quoting Keating, supra, 995 F.2d at p. 156.)

Here, too, the alleged emotional and physical distress of Amey flowed entirely from uncovered economic losses.   Amey's lawsuit against the plaintiffs here was based entirely on corporate mismanagement, contractual breaches, a secret stock transaction and other corporate misdeeds.   Simply put, Amey's alleged emotional and physical distress was a byproduct of his economic loss.   This case falls well within the ambit of McLaughlin and Keating, which we conclude should be followed.   Here, the only occurrences consisted of conduct that was designed to cause financial injury.   We cannot torture the duty to defend by allowing pleadings of emotional and physical distress resulting from financial injury to convert uncovered claims for economic losses into potentially covered claims for bodily injury.

Waller and Marmac present various arguments urging us not to follow McLaughlin and Keating.   We find the arguments nonpersuasive.

 First, we consider plaintiffs' procedural argument that the principles espoused by Keating and McLaughlin were not raised in the lower court or during the regular briefing of this case.   This is true, but for the reasons that follow is of little consequence.   At issue here is a question of law on undisputed facts, and, accordingly, it is well within our purview to consider the legal issue.  (See Ward v. Taggart (1959) 51 Cal.2d 736, 742, 336 P.2d 534.) 7  As to how this issue was raised before us, it is also true the issue was not raised in the regular briefing in this court—briefing that consisted of a total 350 pages exclusive of appendices.   But neither McLaughlin nor Keating was on the books when the final appellants' reply briefs were filed.   Here, after the Keating and McLaughlin decisions were rendered, Truck and Farmers sought and obtained permission to file supplemental briefs.   This is a proper manner in which to present a point of law following the regular briefing of a case on appeal.   (See Meier v. Ross General Hospital (1968) 69 Cal.2d 420, 423–424, fn. 1, 71 Cal.Rptr. 903, 445 P.2d 519;  Kievlan v. Dahlberg Electronics, Inc. (1978) 78 Cal.App.3d 951, 957, fn. 5, 144 Cal.Rptr. 585.)   To the extent the plaintiffs are arguing Truck and Farmers waived the issue by not raising it below or in their regular briefs, we reject the argument under the circumstances presented here.

Plaintiffs also argue unmeritously that because Keating and McLaughlin represent new case law they cannot be used to justify a decision by Truck to deny coverage in 1987.   This argument ignores the general rule of retroactive application of judicial decisions (see generally Newman v. Emerson Radio Corp. (1989) 48 Cal.3d 973, 258 Cal.Rptr. 592, 772 P.2d 1059) and the accepted practice of appellate courts to justify an insurer's refusal to defend on the basis of subsequently published opinions (see, e.g., Coit Drapery Cleaners, Inc. v. Sequoia Ins. Co. (1993) 14 Cal.App.4th 1595, 18 Cal.Rptr.2d 692).   Further, plaintiffs misinterpret the following language from CNA Casualty of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 605, 222 Cal.Rptr. 276 (criticized on another point in Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 297, 298, 24 Cal.Rptr.2d 467, 861 P.2d 1153):  “An insurer's duty to defend must be analyzed and determined on the basis of any potential liability arising from facts available to the insurer from the complaint or other sources available to it at the time of the tender of defense.”  (Original italics.)  CNA Casualty stands for the proposition that the duty to defend is assessed at the outset of the case based on the facts available to the insurer;  it does not stand for the argument plaintiffs make in one of their supplemental briefs that the duty to defend cannot be measured “in the context of factual and legal determinations not available to the actors involved in the decision at that time.”  (Italics added.)   To the extent that plaintiffs are arguing CNA Casualty holds an insurer's duty to defend has to be evaluated solely under the case law that existed at the time of the tender of the defense, plaintiffs are wrong.

Plaintiffs' attempt to distinguish this case from Keating on the basis that the “occurrence” language in the Truck policy is different also is unavailing.   True, the definition of occurrence in Truck's policy is much broader than that found in most policies, which commonly define occurrence in terms of accident or accidental event.  (See cases cited in United Pacific Ins. Co. v. McGuire Co. (1991) 229 Cal.App.3d 1560, 1564, 281 Cal.Rptr. 375.)   In the Truck policy's definition, the word accident is absent and there is no modifying language for “event or series of events,” indicating the volitional nature of the insured's conduct is of no consequence.   However, the coverage issue that we are concerned with does not revolve around whether plaintiffs' actions toward Amey were intentional; 8  thus, this difference in the policy language is irrelevant.   The key policy language here is “bodily injury ․ caused by an occurrence.”   The pertinent language in the National Union policy in Keating was “ ‘bodily injury’ arising out of an ‘occurrence.’ ”  (Keating, supra, 995 F.2d at p. 156.)   There is no substantive difference on this point.

Plaintiffs also argue that Keating and McLaughlin are inapplicable to this case because Amey's alleged emotional and physical distress did not arise exclusively from economic loss.   Plaintiffs claim that in addition to the economic loss Amey suffered as a result of the alleged business transgressions, the source of Amey's alleged emotional and physical distress could have been his lessened reputation and humiliation since the Amey complaint alleged he was given unfair and oppressive sales performance guidelines, demoted and set up to ridicule and humiliation.   We find this argument disingenuous.   Any lessened reputation or humiliation Amey suffered was a byproduct of the economic loss he sustained at the hands of the plaintiffs—just as surely as his alleged emotional and physical distress was a byproduct of the economic loss.   Arguing there was a middle layer of consequential damages in the form of personal suffering does not change the fact that Amey's alleged emotional and physical distress flowed solely from plaintiffs' alleged business transgressions and the ensuing economic loss Amey incurred.

Finally, plaintiffs argue that Keating and McLaughlin are wrong in creating “a kind of ‘economic loss exclusion’ into bodily injury coverage.”   Toward this end, plaintiffs denigrate Chatton v. National Union Fire Ins. Co. (1992) 10 Cal.App.4th 846, 13 Cal.Rptr.2d 318, a case heavily relied upon by the Keating and McLaughlin courts.9  Contrary to plaintiffs' attack, we find Chatton is well-reasoned and ought to be followed.

Chatton, supra, 10 Cal.App.4th 846, 850, 13 Cal.Rptr.2d 318, involved a lawsuit by a number of investors against the directors and officers of an investment services company for fraud, negligent misrepresentation, breach of fiduciary duty and negligence;  the investors prevailed on their negligence and fraud theories and were awarded damages for their investment losses and emotional distress as well as punitive damages.   Subsequently, the investors filed a declaratory relief action against the company's insurer to adjudicate coverage and the trial court held there was coverage under the bodily injury clause of the comprehensive general liability (CGL) policy.  (Id. at p. 851, 13 Cal.Rptr.2d 318.)   The insurer appealed, and the Court of Appeal reversed.   The Court of Appeal reviewed several cases holding that standard CGL policies do not cover economic injury.  (Id. at pp. 858–859, 13 Cal.Rptr.2d 318;  Fresno Economy Import Used Cars, Inc. v. United States Fid. & Guar. Co., supra, 76 Cal.App.3d 272, 142 Cal.Rptr. 681;  Giddings, supra, 112 Cal.App.3d 213, 169 Cal.Rptr. 278;  Allstate Ins. Co. v. Interbank Financial Services (1989) 215 Cal.App.3d 825, 264 Cal.Rptr. 25;  Warner v. Fire Ins. Exchange (1991) 230 Cal.App.3d 1029, 281 Cal.Rptr. 635.)  Chatton then concluded that emotional distress caused by financial injury is similarly uncovered.

“The emotional trauma suffered by respondents was caused by investment losses which, in turn, were occasioned by the alleged negligent mispresentations of the Technical Equities officers and directors.   Respondents' case thus clearly falls within the previously stated principles which deny recovery under the bodily injury and property damage clauses of the CGL policy for loss of economic or pecuniary interest or for investment loss brought about by negligent misrepresentations of the insured.”  (Chatton, supra, 10 Cal.App.4th at p. 860, 13 Cal.Rptr.2d 318, fn. omitted.)

Subsequently, the Ninth Circuit Court of Appeals in Keating, supra, 995 F.2d 154, applied Chatton to a case in which the third-party plaintiffs alleged both emotional and physical distress and found there was no duty to defend.   More recently, in McLaughlin, supra, 23 Cal.App.4th 1132, 29 Cal.Rptr.2d 559, the Court of Appeal (1st Dist.), relying upon its earlier decision in Chatton as well as the federal court's decision in Keating, found that the insurer had no duty to defend against an action alleging the insureds' tortious conduct had caused the plaintiffs to suffer economic damages and consequent “ ‘mental, physical and emotional distress․' ”  (McLaughlin, supra, 23 Cal.App.4th at p. 1150, 29 Cal.Rptr.2d 559.)   As stated above, Keating and McLaughlin are similar to this case in that all are duty-to-defend cases involving claims that arose out of business and contractual breaches and resulted in economic loss, which in turn gave rise to emotional and physical distress.

Plaintiffs attack Chatton, supra, 10 Cal.App.4th at page 860, 13 Cal.Rptr.2d 318, as well as McLaughlin, supra, 23 Cal.App.4th at page 1151, 29 Cal.Rptr.2d 559, for eliminating the separate and independent nature of “bodily injury” coverage and “property damage” coverage in a comprehensive general liability policy.   Plaintiffs argue that these decisions erroneously “require covered property damage as a prerequisite to bodily injury and thereby eviscerate the separate and independent coverage for bodily injury resulting from an occurrence.”

We find this attack unwarranted.   Where the underlying third-party complaint alleges emotional and/or physical distress flowing from economic losses—as was the case in Chatton, Keating, and McLaughlin as well as this lawsuit—the “property damage” and “bodily injury” coverages are necessarily interdependent.   Furthermore, “bodily injury” coverage under a comprehensive general liability policy is still extant where the third-party plaintiff's physical injuries are not solely parasitic to the plaintiff's economic losses or other financial injuries.

Moreover, the result reached by the courts in Chatton, Keating and McLaughlin also is consistent with the reasonable expectations of the parties when they enter into insurance contract for comprehensive general liability policies.  “Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation.”  (AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 821, 274 Cal.Rptr. 820, 799 P.2d 1253.)   It simply is not within the intent of parties to a contract for a comprehensive general liability policy that the “bodily injury” provision would cover a lawsuit in which economic loss is the gravamen of the complaint.   Nor is it within the intent of the parties negotiating the insurance contract that coverage would be extended simply because there is a pleading of emotional distress and/or physical distress as a result of economic loss.  (Keating, supra, 995 F.2d at p. 157, fn. 1.)   As the court said in Keating:

“It would expand coverage of these polices far beyond any reasonable expectation of the parties to sweep within their potential coverage any alleged emotional or physical distress that might result from economic loss that is itself clearly outside the scope of the policy.”  (Id. at p. 156.)

Comprehensive general liability policies were never intended to cover conduct that causes economic losses.  (Giddings, supra, 112 Cal.App.3d at pp. 218–219, 169 Cal.Rptr. 278.)   Additional pleading of parasitic emotional and/or physical distress should not expand coverage to include coverage that was never intended by the parties to a comprehensive general liability policy.10


All of the judgments against Truck and Farmers are reversed in their entirety.   The trial court is directed to enter judgment for Truck and Farmers.


1.   In addition to arguing that it owed no duty to defend, Truck raised the following contentions:  (1) the trial court erred in ruling as a matter of law that Truck waived all policy-based defenses not mentioned in its letter denying the plaintiffs' claims;  (2) at least two of the exclusionary clauses in the policy properly should have defeated coverage here;  (3) the trial court erred in directing the jury to find Truck liable for multiple acts of bad faith;  (4) the trial court erred in excluding expert testimony;  (5) the trial court erred in permitting the plaintiffs to contend Truck's bad faith continued during the course of this litigation, and (6) the punitive damages awarded must be reversed because of a faulty jury instruction on the burden of proof, insufficient evidence and the excessiveness as a matter of law of the damages.Additionally, Truck, along with Farmers, assigned error on the following grounds:  (1) Marmac was improperly allowed to amend its pleading to allege a violation of Insurance Code section 790.03;  (2) the jury was compelled to find a violation of Insurance Code section 790.03;  (3) Waller was improperly allowed to recover damages for emotional distress;  (4) the lost consulting fees awarded to Waller were excessive as a matter of undisputed fact;  (5) the trial court improperly coerced the jury into rendering a punitive damages verdict, and (6) the trial court's failure to explain the basis for its refusal to strike or remit the punitive damages awards deprived the defendants of due process.Also, Farmers contended that since it was not a party to any contract with the plaintiffs it did not owe a duty of defense and cannot be liable for breach of the implied covenant of good faith and fair dealing or a violation of Insurance Code section 790.03 or be held jointly liable for the alleged bad faith of Truck.   Farmers argued it was reversible error for the trial court to direct the jury to find Farmers breached the implied covenant of good faith and fair dealing.   Farmers also argued that it cannot be liable for Brandt  (Brandt v. Superior Court (1985) 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796) fees since it did not insure plaintiffs.   As to the punitive damages awards against it totaling $50,000,000, Farmers contended the awards (1) are not supported by the evidence or the jury's findings, (2) are the result of legal error on various grounds and (3) are excessive, unconstitutional and offend basic notions of fairness and reasoned judgment.

2.   After he was terminated from employment with Marmac, Amey amended his complaint to add a cause of action for wrongful discharge.

3.   Over the next two months, six additional tender letters were sent to Truck by various attorneys hired to represent the defendants in Amey's lawsuit.   Neither Truck nor Farmers acknowledged receipt of the tender letters until early December 1986 even though Farmers' claims procedure manual requires such acknowledgment within 24 hours of receipt.

4.   Shortly before the case went to the jury, Waller dismissed his action against Farmers Group, Inc. and Truck Underwriters Association.   Neither Farmers Group Inc. nor Truck Underwriters Association is a party to this appeal.

5.   In Gray, supra, 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, the seminal case on an insurer's duty to defend, a third party sued the insured, alleging an intentional assault.   Subsequently, the insured sued his insurer for failing to defend him in the third party lawsuit.   Although the type of injuries suffered by the third party were clearly covered under the policy, the insurer claimed it had no duty to defend because of an exclusion for bodily injury intentionally caused by the insured.   Our Supreme Court said there was a duty to defend, concluding that since the damages were the type covered by the policy, the broad language setting forth the insurer's duty to defend reasonably led the insured to expect a defense.   Also, the exclusionary clause relied upon by the insurer was ambiguous and not sufficiently conspicuous, plain and clear to have negated the reasonableness of the insured's expectations;  accordingly, the insurer had a duty to perform under the language of the policy and the reasonable expectations it engendered.  (Id. at pp. 267–275, 54 Cal.Rptr. 104, 419 P.2d 168.)   The Supreme Court also said an insurer must defend a lawsuit which potentially seeks damages within the coverage of the policy.  (Id. at pp. 275–277, 54 Cal.Rptr. 104, 419 P.2d 168.)  “ ‘[T]he ultimate question is whether the facts alleged do fairly apprise the insurer that plaintiff is suing the insured upon an occurrence which, if his allegations are true, gives rise to liability of insurer to insured under the terms of the policy.’  (Italics added.)  [Citations.]  The corollary ․ finds expression in the cases which hold that the insurer need not defend if the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.”   (Id. at p. 276, fn. 15, 54 Cal.Rptr. 104, 419 P.2d 168.)   Furthermore, “[s]ince modern procedural rules focus on the facts of a case rather than the theory of recovery in the complaint, the duty to defend should be fixed by the facts which the insurer learns from the complaint, the insured, or other sources.   An insurer, therefore, bears a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy.”  (Id. at pp. 276–277, 54 Cal.Rptr. 104, 419 P.2d 168.)

6.   While an allegation of emotional distress standing by itself (i.e., without accompanying physical injury) does not trigger coverage under the bodily injury provision of a policy (Aim Insurance Co. v. Culcasi (1991) 229 Cal.App.3d 209, 220, 226, 280 Cal.Rptr. 766), here Amey's complaint did alleged “physical distress” as well as emotional distress.

7.   The plaintiffs have not identified any additional evidence they could have presented at trial to show Amey's emotional and physical distress did not flow solely from his economic loss.

8.   We note the Amey complaint alleges both intentional and unintentional acts by Marmac and its five individual co-defendants, including mismanagement (¶ 9), unfairness towards Amey (¶ 9), imposition of unfair and oppressive sales performance guidelines (¶ 9), failures to exercise due care toward Amey (¶ 14, 15), and failures to pursue courses of conduct with such care, including reasonable inquiry as an ordinarily prudent person in a like position would use under similar circumstances (¶ 19).

9.   In fact, McLaughlin was part of the same litigation that spawned Chatton, supra, 10 Cal.App.4th 846, 13 Cal.Rptr.2d 318, which was a declaratory relief case on the scope of coverage in the underlying dispute.

10.   In light of our conclusion that there was no contractual liability on the part of Truck, there can be no valid bad faith claim.   (Love v. Fire Ins. Exchange, supra, 221 Cal.App.3d 1136, 1151, 271 Cal.Rptr. 246.)   Accordingly, there is no liability on the part of Farmers either, and it is unnecessary for us to address Farmers' arguments on this point.

TODD, Associate Justice.

WORK, Acting P.J., and FROEHLICH, J., concur.

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