PPG INDUSTRIES, INC., Plaintiff and Appellant, v. TRANSAMERICA INSURANCE COMPANY, Defendant and Respondent.
Plaintiff and appellant PPG Industries, Inc. appeals from the summary judgment entered in favor of defendant and respondent Transamerica Insurance Company in this bad faith insurance action for refusal to reasonably settle a third party action. The sole issue on appeal is whether consequential damages for breach of an insurer's duty to reasonably settle a third party action can include punitive damages imposed against the insured in the third party action. We conclude that punitive damages awarded against an insured in a third party action cannot be passed on to the insurer as consequential damages for breach of the duty to reasonably settle. We therefore affirm.
FACTS AND PROCEDURAL BACKGROUND
PPG is the successor in interest to Solaglas, California, Inc., having purchased its stock in 1987. Solaglas was in the business of installing replacement windshields. Solaglas, doing business in Colorado, had installed a replacement windshield in a truck subsequently driven by George Joseph Miller during a collision in Colorado. The windshield popped out and Miller was ejected through the opening and instantly rendered a quadriplegic.
Miller brought a lawsuit in Colorado against Solaglas, seeking compensatory and punitive damages. Two insurance policies issued by Transamerica with combined coverage of $1.5 million per occurrence covered Solaglas for the relevant period. Solaglas was also insured under a $9 million excess liability policy issued by Industrial Indemnity Company. Solaglas gave timely notice of the Miller action to Transamerica. Transamerica agreed to defend Solaglas in the Miller lawsuit, under a reservation of rights, and appointed independent counsel to conduct Solaglas's defense.
Settlement negotiations in the Miller lawsuit were unsuccessful. Miller offered to settle the action for $1.5 million, the policy limits. Independent counsel recommended that Transamerica offer $750,000 to settle the action. Transamerica offered only $250,000. In 1986, the Miller lawsuit was tried to a jury and resulted in a verdict in favor of Solaglas. The judgment was reversed on appeal. After the first trial, Miller reduced his settlement demand to $1 million, and Transamerica reduced its offer to $100,000. Solaglas consistently demanded that Transamerica settle within policy limits.
A second jury trial was held. This trial resulted in a plaintiff's verdict. Judgment was entered against Solaglas and PPG awarding Miller $5.1 million compensatory damages and $1 million punitive damages. On October 7, 1993, the judgment was affirmed on appeal. (Miller v. Solaglas California, Inc. (Colo.App.1993) 870 P.2d 559, cert. den. (1994).) The basis of the award of punitive damages was Solaglas's installation of the replacement windshield without a urethane seal. Solaglas had failed to use urethane seals as a matter of policy, despite a General Motors manual and industry publications, conventions and safety regulations discussing and requiring the use of urethane seals. Solaglas charged 2.8 hours of labor for installation of a windshield, even though the installation took only 30 minutes if urethane seals were not used.
Transamerica paid its policy limits of $1.5 million and an additional $1,277,094.88 as costs and interest on the Miller judgment. Industrial Indemnity paid the remainder of the compensatory damages, leaving PPG to pay the punitive damages.
On June 27, 1994, PPG brought this action against Transamerica for breach of the covenant of good faith and fair dealing. PPG alleged that Transamerica had failed to effectuate a reasonable settlement of the Miller lawsuit and was therefore liable for the punitive damage award PPG was required to pay.
On October 28, 1994, Transamerica filed its motion for summary judgment on the ground that it had no obligation to indemnify PPG for any punitive damages awarded in the Miller action. Transamerica based its motion on the single legal issue that an insurer is not obligated to indemnify its insured for punitive damages awarded after the insurer unreasonably failed to settle the case within policy limits. On September 27, 1995, the trial court entered summary judgment in favor of Transamerica. PPG filed a timely notice of appeal.
Standard of Review
We review orders granting or denying a summary judgment motion de novo. (FSR Brokerage, Inc. v. Superior Court (1995) 35 Cal.App.4th 69, 72, 41 Cal.Rptr.2d 404; Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 579, 37 Cal.Rptr.2d 653.) We exercise “an independent assessment of the correctness of the trial court's ruling, applying the same legal standard as the trial court․” (Iverson v. Muroc Unified School Dist. (1995) 32 Cal.App.4th 218, 222, 38 Cal.Rptr.2d 35; Union Bank v. Superior Court, supra, 31 Cal.App.4th at p. 579, 37 Cal.Rptr.2d 653.)
Civil Code section 3294 provides for an award of punitive damages “where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice.” “Malice” is defined as “conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” (Civ.Code, § 3294, subd. (c)(1).) In a products liability case, punitive damages may be assessed for intentionally engaging in conduct which exposes a user of the product to a serious potential danger known to the defendant, when the defendant does so in order to advance its pecuniary interest. Punitive damages are assessed in that situation because the defendant has acted with a “conscious disregard” for the safety of the users of its product. (Ford Motor Co. v. Home Ins. Co. (1981) 116 Cal.App.3d 374, 381–382, 172 Cal.Rptr. 59.) Punitive damages may be imposed on a successor corporation for the acts of its predecessor justifying the imposition of punitive damages. (Marks v. Minnesota Mining & Manufacturing Co. (1986) 187 Cal.App.3d 1429, 1435, 232 Cal.Rptr. 594; Moe v. Transamerica Title Ins. Co. (1971) 21 Cal.App.3d 289, 303–305, 98 Cal.Rptr. 547.)
Indemnification for punitive damages is barred both by statute and public policy. (City Products Corp. v. Globe Indemnity Co. (1979) 88 Cal.App.3d 31, 35, 151 Cal.Rptr. 494.) Insurance Code section 533 provides that an insurer is not liable for damages caused by an intentional act of its insured.1 When punitive damages are imposed for intentional acts, Insurance Code section 533 therefore prohibits indemnification. However, even when the punitive damages are not imposed for an intentional act, indemnification is still prohibited by public policy. (Peterson v. Superior Court (1982) 31 Cal.3d 147, 158–159, 181 Cal.Rptr. 784, 642 P.2d 1305; Ford Motor Co. v. Home Ins. Co., supra, 116 Cal.App.3d at pp. 382–383, 172 Cal.Rptr. 59.) “[T]he policy of this state that punitive damages may be recovered only ‘for the sake of example and by way of punishing the defendant’ precludes passing them on to an insurer.” (City Products Corp. v. Globe Indemnity Co., supra, 88 Cal.App.3d at p. 35, 151 Cal.Rptr. 494.) Because the purpose of punitive damages is to punish the defendant for conduct involving fraud, oppression or malice, public policy would be frustrated by allowing the wrongdoer to pass these damages on to its insurer. (Id. at p. 42, 151 Cal.Rptr. 494.) Public policy would likewise be frustrated by indemnification for punitive damages assessed against a successor corporation for the wrongful conduct of its predecessor.2 (Certain Underwriters at Lloyd's v. Pacific Southwest Airlines (C.D.Cal.1992) 786 F.Supp. 867, 871.) Indeed, were indemnification allowed when a successor corporation is liable for punitive damages due to the conduct of its predecessor, public policy could be easily frustrated by a restructuring of any corporation facing the imposition of punitive damages.
In some jurisdictions, insurance coverage for punitive damages has been found not to be violative of public policy. In those states, unlike California, punitive damages are allowed with respect to conduct which is merely grossly negligent, without a requirement of fraud, malice or oppression. (City Products Corp. v. Globe Indemnity Co., supra, 88 Cal.App.3d at p. 41, 151 Cal.Rptr. 494.) When an insured has suffered a judgment imposing such punitive damages, California public policy is not violated by an insurer's indemnification of punitive damages. (Continental Cas. Co. v. Fibreboard Corp. (N.D.Cal.1991) 762 F.Supp. 1368, 1372–1373, affd. (1992) 953 F.2d 1386, vacated (1992) 506 U.S. 948, 113 S.Ct. 399, 121 L.Ed.2d 325, remanded (1993) 4 F.3d 777.)
In this case, we consider whether California public policy would be violated by indemnification of the punitive damages imposed against PPG in the Miller action. PPG contends California public policy would not be violated by indemnification of punitive damages in this case because the damages were imposed for conduct of its predecessor, not PPG, and in Colorado, not California. We are not persuaded that the public policy interests are somehow different because PPG is Solaglas's successor in interest, rather than the wrongdoer itself. PPG does not contend that it acquired Solaglas without notice of the pending litigation or without acceptance of the liability which might be imposed in that action. Instead, PPG seeks to recover in this action by standing in Solaglas's shoes as Transamerica's insured. PPG cannot accept the benefits of this arrangement without the liabilities as well.
We also are not persuaded that the punitive damages imposed in the Miller action may have been imposed on a basis that does not trigger California's public policy against indemnification. PPG contends the Colorado punitive damages may have been imposed for conduct not involving fraud, malice or oppression. This argument is refuted by the opinion of the Colorado Court of Appeals in Miller, upholding the award of punitive damages. Miller confirms that in Colorado, punitive damages may be imposed only for conduct involving fraud, malice or willful and wanton conduct. They may be imposed only when the plaintiff has proven “beyond a reasonable doubt, that the act causing the injury was performed with an evil intent and with the purpose of injuring the plaintiff, or with such a wanton and reckless disregard of the plaintiff's rights as to demonstrate a wrongful motive.” (Miller v. Solaglas California, Inc., supra, 870 P.2d at p. 568.) The only way in which this test could require a lesser degree of misconduct than required for the imposition of punitive damages in California would be if “wanton and reckless disregard” is a lesser standard than the “conscious disregard” standard used for awarding punitive damages in California.
The jury instruction given in the Miller action defined acting with “wanton and reckless disregard” as “the doing of an act ․ which creates a substantial risk of harm to another [when] the person or company doing the act ․ is aware of such risk and thereafter purposefully does the act ․ without any reasonable justification, in disregard of the consequences or of the rights and safety of the other.” In California, the punitive damage jury instruction reads: “A person acts with conscious disregard of the rights or safety of others when [he] [she] is aware of the probable dangerous consequences of [his] [her] conduct and willfully and deliberately fails to avoid those consequences.” (BAJI No. 14.72.1.) Both standards require subjective awareness of the risk and a purposeful act in disregard of the risk. We conclude these standards are substantially the same. Therefore, the public policy interest against indemnification of California punitive damage awards applies equally to the Colorado punitive damage award at issue in this case.3
We therefore proceed as we would with respect to a California punitive damage award in a third party action imposed directly against a wrongdoing insured.
Unreasonable Refusal to Settle
California provides a cause of action against an insurer for unreasonable refusal to settle. An insurer who fails to accept a reasonable settlement offer within policy limits assumes the risk that it will be held liable for all damages resulting from such refusal, including damages in excess of applicable policy limits. When a judgment in excess of policy limits is likely, the prudent course of action is for the insurer to accept a proffered settlement within policy limits and litigate the issue of coverage with its insured later. (Johansen v. California State Auto. Assn. Inter–Ins. Bureau (1975) 15 Cal.3d 9, 12, 19, 123 Cal.Rptr. 288, 538 P.2d 744; Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 660, 328 P.2d 198.) An insurer who unreasonably fails to accept a settlement offer within policy limits because it is giving more weight to its interests than the interests of its insured is liable for any excess judgment awarded. (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429, 58 Cal.Rptr. 13, 426 P.2d 173.)
In determining whether to settle a dispute within policy limits, the insurer must act as if it alone were liable for the entire judgment, regardless of policy limits. Thus, the only permissible consideration is whether, in light of the claimant's damages and the liability of its insured, the judgment is likely to exceed the offer. (Johansen v. California State Auto. Assn. Inter–Ins. Bureau, supra, 15 Cal.3d at p. 16, 123 Cal.Rptr. 288, 538 P.2d 744.) Whether the insurer's refusal to settle was in bad faith is unnecessary to a finding of liability. What matters is that the refusal was unreasonable. (Crisci v. Security Ins. Co., supra, 66 Cal.2d at pp. 429–430, 58 Cal.Rptr. 13, 426 P.2d 173.)
In an insured's action for bad faith against its insurer, the determination of the reasonableness of the insurer's refusal of a settlement offer is dependent on the information available to the insurer at the time of the offer. The finder of fact should consider such factors as motive, knowledge, experience and foreseeability. Primarily, however, the inquiry should focus on whether there was a great risk of a judgment against the insured in favor of the third party claimant in excess of policy limits. (Camelot by the Bay Condominium Owners' Assn. v. Scottsdale Ins. Co. (1994) 27 Cal.App.4th 33, 48, 32 Cal.Rptr.2d 354.)
Camelot by the Bay considered the issue of whether the insurer's reasonable consideration of the potential judgment against the insured in excess of policy limits necessarily includes consideration of claims not covered by the policy, in addition to covered claims which may result in a judgment in excess of the monetary policy limits. “[A]n insurer denies coverage at its own risk if, and only if, coverage is ultimately found. Essentially, there are two separate coverage questions: coverage within the monetary limits of a policy (‘vertical coverage’) and substantive coverage of an insurance policy (‘horizontal coverage’). These two coverage questions are not readily comparable and should not be confused.” (Camelot by the Bay Condominium Owners' Assn. v. Scottsdale Ins. Co., supra, 27 Cal.App.4th at p. 53, 32 Cal.Rptr.2d 354, italics in original.) In Camelot by the Bay, the potential claim against the insured never exceeded policy limits in a vertical coverage sense. The policy limit was $1 million, while the total third party claim was $937,245. (Id. at pp. 39–40, 32 Cal.Rptr.2d 354.) However, the claim and the rejected settlement offers indisputably encompassed some claims which were not covered by the policy. The underlying claim was an action for construction defects. Some defects were outside the scope of policy coverage, although the opinion does not specify the relative percentage of covered and noncovered claims, nor the insured's potential exposure for the noncovered claims. Thus, the only potential exposure of the insured in excess of policy limits was for noncovered claims. The Fourth District Court of Appeal reversed the trial court's finding of bad faith in these circumstances. “[W]e conclude the trial court erred in equating the noncovered defects at the construction project with the defects which were clearly covered by the insurance policy, and by finding that [the insurer] was required to settle the case in order to cap [the insured's] potential loss for both covered and noncovered defects.” (Id. at pp. 38–39, 32 Cal.Rptr.2d 354.)
Because California's public policy precludes indemnification for punitive damages, a claim for punitive damages is always outside the scope of the horizontal coverage of an insurance policy. As such, an insurer cannot be held liable based solely on a failure to settle within policy limits in order to cap its insured's potential loss for punitive damages. “The proposition that an insurer must settle, at any figure demanded within the policy limits, an action in which punitive damages are sought is nothing short of absurd. The practical effect of such a rule would be to pass on to the insurer the burden of punitive damages in clear violation of California statutes and public policy.” (Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co. (9th Cir.1983) 724 F.2d 1343, 1346.)4
Transamerica had no duty to settle Miller's claim in order to avoid PPG's exposure to punitive damages. Transamerica did, however, have a duty to reasonably settle Miller's claim for covered compensatory damages. Transamerica did not contend in its motion for summary judgment that it had not breached this duty. It argued that even had it breached the duty to reasonably settle the claim for compensatory damages, PPG nevertheless could not recover the punitive damage award as consequential damages arising from this breach. We will assume for purposes of this appeal that Transamerica breached its duty to reasonably settle and consider whether public policy prevents PPG from being compensated for the punitive damages awarded against it.
Scope of Recoverable Damages
No California court has answered the precise question at issue in this case: whether consequential damages for the breach of an insurer's duty to settle can include amounts awarded as punitive damages in the underlying litigation. However, several other jurisdictions have reached the issue.
In Soto v. State Farm Ins. Co. (1994) 83 N.Y.2d 718, 613 N.Y.S.2d 352, 635 N.E.2d 1222, the New York Court of Appeals confronted this issue in a bad faith refusal to settle the case in which the excess compensatory award was paid, but the insurer refused to pay the substantial award of punitive damages incurred by the insured in the underlying action. Although it was undisputed the insured would not have been exposed to the punitive damages absent the insurer's refusal to settle within policy limits, the court concluded that the public policy interests against indemnification for punitive damages precluded a judgment passing the punitive damages on to the insurer. (Id. 613 N.Y.S.2d at pp. 354, 635 N.E.2d at pp. 1224–1225.) The purpose of punitive damages in New York, as in California, is to punish the wrongdoer. “That goal cannot be reconciled with a conclusion that would allow the insured wrongdoer to divert the economic punishment to an insurer because of the insurer's unrelated, independent wrongful act in improperly refusing to settle within policy limits.” (Id. 613 N.Y.S.2d at p. 355, 635 N.E.2d at p. 1225.) While the insured may attempt to categorize the punitive damage award against it as mere consequential damages arising out of the insurer's failure to settle, this is misleading. “[A]n insurer's failure to agree to a settlement, whether reasonable or wrongful, does no more than deprive the insured of a chance to avoid the possibility of having to suffer a punitive damage award for his or her own misconduct.” (Ibid.) The ultimate cause of the punitive damage award is the insured's conduct supporting the award of those damages. That conduct triggers the strong public policy interest in having the wrongdoer bear the burden of those damages, which cannot be undermined by passing the damages on to an insurer, even one who has acted unreasonably.5
The Soto rationale was adopted by the Colorado Supreme Court in Lira v. Shelter Ins. Co., supra, 913 P.2d 514. In Lira, the underlying lawsuit, for both compensatory and punitive damages, could have been settled for the policy limits of $50,000. The insurer refused and judgment was ultimately entered for $43,650 in compensatory damages and an equivalent amount of punitive damages. The insurer paid the compensatory damage award, but not the punitive damage award. The Colorado Supreme Court reversed a judgment in favor of the insured in its subsequent bad faith insurance action seeking recovery of the punitive damage award. The Colorado Supreme Court rested its holding on both the insurance contract exclusion of punitive damages and the Colorado public policy against indemnification of punitive damages. (Id. at pp. 516–517.) “To allow the [insured] in this case to recover compensatory damages which derive from his own wrongful conduct undercuts the public policy of this state against the insurability of punitive damages.” (Id. at p. 517.) 6
We find the rationale of Soto and Lira to be sound.7 California's public policy regarding punitive damages is clear. Such damages are imposed to punish culpable defendants for their wrongdoing. For this reason, punitive damages cannot be passed on to an insurer by contract. Similarly, the damages cannot be passed on to an insurer based on its unreasonable refusal to settle. Indeed, the insured's conduct justifying the imposition of punitive damages may be of a higher level of culpability than the insurer's refusal to settle, which need not have been in bad faith in order to justify a judgment for the insured. If the insurer's conduct is of a similar level of wrongdoing to that of its insured, that is, accompanied by fraud, malice or oppression, the insurer can be liable in the bad faith action for punitive damages to its insured. Yet, even if the insurer's wrongdoing is sufficiently egregious to justify an award of punitive damages, the insured cannot escape punishment for its own egregious conduct and pass on financial responsibility for the punitive damages in violation of public policy.8
The thrust of PPG's argument is that the punitive damages would not have been awarded had Transamerica accepted a settlement within policy limits and are, therefore, akin to any other damages which may arise as a consequence of an insurer's breach of the duty of good faith. Yet a second, and more important, cause of the punitive damage award is Solaglas's wrongful conduct. Public policy demands that Solaglas, and PPG as its successor, bear responsibility for that wrongful conduct and suffer full financial responsibility for the punitive damages awarded as a result.
The judgment is affirmed. PPG is to pay Transamerica's costs on appeal.
1. Insurance Code section 533 provides: “An insurer is not liable for a loss caused by the wilful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured's agents or others.”
2. Insurance Code section 533's prohibition against indemnification for intentional acts does not apply to a situation where the insured's liability is wholly vicarious. (Arenson v. Nat. Automobile & Cas. Ins. Co. (1955) 45 Cal.2d 81, 84, 286 P.2d 816.) A successor corporation's liability for punitive damages arising out of the conduct of its predecessor is not vicarious. Liability is imposed on the successor corporation because it has assumed the debts and liabilities of the wrongdoing predecessor corporation.
3. Colorado law is in accord. The Colorado Supreme Court has held that, since punitive damages are imposed to punish the wrongdoer and deter future conduct, public policy prohibits their indemnification. (Lira v. Shelter Ins. Co. (Colo.1996) 913 P.2d 514, 517.)
4. Camelot by the Bay considered only whether the insurer's duty of good faith encompassed a duty to settle noncovered claims. It did not consider whether the insurer's duty of good faith required any other behavior with respect to such claims. (See Magnum Foods Inc. v. Continental Cas. Co. (10th Cir.1994) 36 F.3d 1491, 1506 [while the duty of good faith does not include settlement of the uninsurable punitive damage claim, it includes “working cooperatively with [the insured] throughout in both defending and attempting to settle the entire case, with fair consideration given to the [insured's] concerns because of its exposure to the uninsured punitive claim.”]; Ging v. American Liberty Insurance Company (5th Cir.1970) 423 F.2d 115, 120–121 [when an insurer undertakes to defend an action in which punitive damages are alleged, the duty of good faith includes the duty to apprise the insured of settlement opportunities, to warn the insured of potential difficulties with noncovered claims and to conduct settlement negotiations in good faith with respect to the insured's interests wherever they may be divergent from the insurer's].) The scope of the insurer's duty of good faith with respect to a claim for punitive damages is not at issue in this appeal.
5. Soto recognized that this public policy is not effectuated when the insurer settles the lawsuit within policy limits, thus saving the insured from a potential award of punitive damages. But that release is a mere incident of the settlement process. “It is certainly not a right whose loss need be made subject to compensation when a favorable pretrial settlement offer has been wasted by a reckless or faithless insurer.” (Soto v. State Farm Ins. Co., supra, 613 N.Y.S.2d 352, 635 N.E.2d at p. 1225.)
6. To the same effect is Magnum Foods, Inc. v. Continental Cas. Co., supra, 36 F.3d 1491, which applied Oklahoma law. Although the Tenth Circuit held that the insurer has a duty of good faith with respect to the noncovered claim for punitive damages, it concluded the damages for a breach of that duty could not include an amount to compensate the insured for the amount it paid in punitive damages. (Id. at p. 1507.)
7. PPG relies on Carpenter v. Automobile Club Interinsurance Exch. (8th Cir.1995) 58 F.3d 1296, which applied Arkansas law and concluded that a contractual exclusion of coverage for punitive damages did not preclude a bad faith award of consequential damages comprised of punitive damages imposed in the underlying automobile accident lawsuit. (Id. at p. 1302.) Carpenter did not consider any public policy argument to the contrary, because Arkansas does not have such a public policy. (Southern Farm Bureau Casualty Ins. Co. v. Daniel (1969) 246 Ark. 849, 440 S.W.2d 582, 584.)
8. We do not reach the issue of whether the insurer can be held liable in the amount of the underlying punitive damages when the punitive damage award was imposed improperly due to the insurer's mishandling of the defense of the case. In such a case, the insured can argue that public policy is not frustrated by passing on the punitive damage award, because the insured's conduct in reality did not justify an award of punitive damages. Such a claim would sound more in malpractice than bad faith and may be distinguishable.
GRIGNON, Acting Presiding Justice.
ARMSTRONG and GODOY PEREZ, JJ., concur.