WEST AMERICAN INSURANCE COMPANY, Plaintiff, Cross–Defendant and Appellant, v. Mark R. FREEMAN, Defendant, Cross–Complainant and Respondent.
West American Insurance Company appeals from a judgment following a jury verdict in favor of respondent and cross-complainant Mark Freeman on his claims that West American acted unreasonably and in bad faith in handling the underlying construction liability action and in bringing the present action for reimbursement of defense costs. West American contends that Freeman's cross-complaint is in effect a malicious prosecution complaint and that it was error to adjudicate it prior to the resolution of its coverage and reimbursement action. It also contends that the trial court erred in denying its motion to bifurcate the trial between the coverage issues and the cross-complaint allegations; that the judgment violates the litigation privilege; and that the punitive damages award must be reversed. We affirm.
In 1984, Freeman, a general contractor, obtained a comprehensive general liability policy from West American 1 that provided up to $500,000 in coverage. During 1984 and 1985, Freeman designed and constructed a house in Palo Alto. In August 1985, Freeman sold the house to Edward and Rhonda Pierce. Several months after they moved in, the Pierces noticed that the hardwood floors in their living room were warping. The Pierces reported the problem to Freeman who attempted to remedy the condition by adding vents and a French drain system. The warping condition was not alleviated, and Freeman offered to replace the hardwood floor. Freeman removed the damaged hardwood floor and delivered a new floor to the Pierce home. The Pierces, however, declined Freeman's offer to install the new floor, preferring to wait until the problem with the warping was remedied. By September 1986, the Pierces noticed several other problems in their home. Thereafter, Freeman notified West American that the Pierces intended to make a claim against him.
In May 1987, the Pierces sued Freeman claiming that the house was negligently designed and constructed. West American accepted Freeman's tender of the defense of the action but expressly reserved its right to deny coverage under the policy. In its letter reserving its rights, West American specifically acknowledged numerous coverage issues and indicated that several exclusions might apply to the claims raised in the Pierce complaint. In addition, West American noted that because of the coverage questions, Freeman might wish to seek separate counsel at his own expense for advice about coverage issues. West American's letter did not state that Freeman was entitled to Cumis counsel.2 West American assigned the defense of the action to the law firm of Lakin–Spears. In October 1987, Freeman hired James Kelley to represent him. Kelley was aware that Freeman was entitled to Cumis counsel. Kelley, and later the firm of Cox Buchanan & Padmore, which he joined in December 1987, therefore assumed that role. Lakin–Spears agreed to handle the investigation and defense of the Pierce complaint while Cox Buchanan's role was to “ride herd and pinch-hit” as necessary.
Lakin–Spears initially conducted the defense of the action and hired several experts to investigate the Pierce complaint. The opinion of each of the experts was favorable to Freeman's defense. Howard Donnally of Environmental Geotechnical Consultants, opined that the responsible party was the Palo Alto Unified School District that had developed the site. He also concluded that the foundation was properly built. David Cramer, a construction expert, opined that the Pierce house was well built and that the repairs to the foundation sought by the Pierces were “overkill”. Edward Diekmann, a structural engineer, found nothing in his inspection of the house to indicate that the foundation was inadequate. He recommended minimal, non-structural repairs to the property. Further, Daniel Dyckman, of William F. Jones, Inc., a soils engineering firm, concluded that repairs to the drainage system would alleviate the excessive moisture in the house and that repairs to the foundation were not necessary. And, Alan Horeis, a consulting structural engineer, opined that Ernest Wood, Freeman's structural engineer on the Pierce construction, performed below the standard of care in designing the foundation. The Pierce's expert, Earth Systems Consultants, similarly concluded that the foundation was not designed in conformance with the project soil report.
Despite the expert opinion favorable to Freeman, Lakin–Spears did not seek to exonerate Freeman of liability or to join others in the lawsuit who might be at fault. For example, it refused Cox Buchanan's suggestion that Ernest Wood and others be joined in the lawsuit and did not follow advice from West American's claims office to join the exterior landscaper in the action. It did not depose or interview numerous other entities who were potentially liable in the action including the Palo Alto Unified School District, Enshallah Development Corporation, the developer, and Brian Kangas Foulk & Associates, the firm that prepared the improvement plans for the site. In fact, Lakin–Spears told Cox Buchanan that no depositions would be taken because West American wanted to minimize expenses. Further, Lakin–Spears failed to inform Cox Buchanan of a meeting in November 1988 in which the experts and attorneys for both sides met to discuss the matter. Finally, in March 1989, Lakin–Spears sought settlement authority from West American and proposed that West American fund a settlement of a portion of the Pierce complaint relating to foundation and drainage repairs. West American, through its coverage counsel, Archer, McComas & Lageson, then sent Freeman's counsel a letter proposing that it would fund settlement of structural repairs to the foundation in the amount of $40,000. West American advised, however, that any funding of a settlement would be subject to West American's reservation of right to seek reimbursement for funds that were not attributable to losses covered under the policy. West American further advised that if Freeman chose not to settle the action as proposed, that West American would not fund any future settlement or judgment regarding the foundation aspects of the case which exceeded $40,000. The letter to Freeman's counsel stated: “In effect, Mr. Freeman will personally assume the risk for any settlement or judgment in excess of $40,000.” Further, West American proposed that if Freeman did not settle, that he would be required to assume his own defense; Lakin–Spears would be discharged but West American would continue to pay his defense costs.
Freeman was opposed to the settlement. He believed that he was not at fault for the structural problems at the Pierce residence, that others including Ernest Wood, Enshallah Development Corporation, and Brian Kangas Foulk & Associates should be joined in the lawsuit.3 Freeman was concerned about his reputation and wanted to clear his name. In addition, he believed that the cost estimates for the work proposed to be funded by the settlement were too expensive. Despite these concerns, Freeman agreed to the settlement because he could not “afford to take on the insurance company” and because West American told him, contrary to its earlier letter, that if he did not accept the settlement, it would cease to fund his defense. He signed an “Acknowledgment of Understanding Regarding Partial Settlement” on May 10, 1989. The acknowledgment provided in part that “the proposed settlement in the amount of $46,500 is reasonable under all the circumstances and that it is a compromise of a disputed claim.” Freeman struck out the word “all” in the latter sentence before signing the document, because he believed he had no choice but to sign the document and he wanted to indicate on it that he was not in agreement with it.
Following Freeman's execution of the acknowledgment of understanding, Freeman entered into a settlement agreement with the Pierces of their claim regarding the defective foundation with Freeman advancing $46,500 through West American for repairs to the foundation and drainage system. After the settlement of the foundation aspects of the action, West American, through its coverage counsel, Archer, McComas & Lageson, continued to exert their influence over the lawsuit. Although Lakin–Spears was still charged with the responsibility for preparing for trial of the second phase of the case, it never took any depositions in the action and failed to prepare for trial. Then, prior to the scheduled trial of the remaining claims in the Pierce action, Lakin–Spears informed Cox Buchanan that it would not be available to handle the trial. The case nevertheless settled prior to trial, with West American paying an additional $10,000 on Freeman's behalf.
Less than a year later, West American brought the present action seeking reimbursement of the funds it paid on Freeman's behalf in settling the Pierce litigation. In addition to the sums paid in settlement, West American also sought all defense and Cumis fees. Shortly after the complaint was filed, Cox Buchanan asked Lakin–Spears for Freeman's file in the Pierce litigation. Lakin–Spears told Cox Buchanan that the file was destroyed. Cox Buchanan did not have a complete file of the Pierce litigation because their role had always been secondary to Lakin–Spears and Lakin–Spears agreed to maintain the file that included expert and other investigatory reports. The file was essential to Freeman's defense in the present action in trying to prove that he was not liable to the Pierces and that he was covered under the policy. Because Lakin–Spears did not turn the file over to Cox Buchanan, Freeman incurred substantial attorney's fees due to his counsel's efforts to recreate the file. The file was subsequently produced by West American through discovery, but not until Cox Buchanan had spent nine to ten months attempting to prepare the case without it.
Freeman answered the complaint, denying its material allegations and also cross-complained against West American alleging breach of contract, breach of the covenant of good faith and fair dealing, and economic duress. The trial court initially indicated that it might bifurcate trial of the coverage issues from those pertaining to the bad faith allegations, but on the eve of trial, the court opted not to bifurcate the trial.4 At trial, West American sought to prove that Freeman was alone responsible for the foundation repairs to the Pierce home and that there was no coverage under its policy. Freeman, on the other hand, sought to show that he was not liable to the Pierces, that there was coverage under the policy for the Pierce claim and that West American acted in bad faith in handling his claim and in instituting the declaratory relief action. Jonathan Cox, Freeman's Cumis counsel, testified that John Barringer of Archer, McComas & Lageson told him, prior to Freeman's signing of the acknowledgment of understanding, that West American made a policy decision to seek reimbursement in cases in which it was required to pay Cumis counsel. “․ Mr. Barringer told me that the decision to sue Mr. Freeman was driven by the insurance company's experience that it was more expensive, that the biggest cost they had was legal fees, that it was cheaper to settle cases than it was to have them tried to a conclusion, and that's what was driving them forward was the recovery of legal fees.” Freeman further testified to the extreme emotional distress he suffered as a result of West American's actions. Although he paid over $60,000 in premiums for his liability insurance, West American's actions resulted in Freeman's loss of his business and assets, and in his liability for over $323,000 in attorney's fees incurred in defending litigation and in prosecuting the bad faith claim.
By special verdict, the jury found unanimously for Freeman.5 It found that Freeman had not caused the damage to the Pierce foundation system, that Freeman signed the settlement agreement under economic duress caused by West American, that West American acted unreasonably in its handling of the Pierce claim and in bringing the declaratory relief action and that Freeman suffered actual damages of $1,316,000. The jury further found that West American acted with oppression, malice or fraud towards Freeman and awarded Freeman $12,000,000 in punitive damages.
1. Malicious Prosecution
Relying on Babb v. Superior Court (1971) 3 Cal.3d 841, 92 Cal.Rptr. 179, 479 P.2d 379, West American contends that Freeman's cross-complaint should have been dismissed without prejudice pending resolution of its coverage action. In Babb, our Supreme Court held that a cross-complaint for malicious prosecution does not lie in the same action that the defendant claims is being maliciously prosecuted. (Id. 3 Cal.3d at p. 846, 92 Cal.Rptr. 179, 479 P.2d 379.) West American argues that Freeman's cross-complaint is in effect one for malicious prosecution and hence prohibited by Babb. We decline to so extend the Babb decision.
A cause of action for malicious prosecution of a civil proceeding requires that the plaintiff plead and prove that the prior action: (1) was commenced by or at the defendant's direction and was pursued to a legal termination favorable to the plaintiff; (2) was brought without probable cause; and (3) was initiated with malice. (Bertero v. National General Corp. (1974) 13 Cal.3d 43, 50, 118 Cal.Rptr. 184, 529 P.2d 608; Babb v. Superior Court, supra, 3 Cal.3d at p. 845, 92 Cal.Rptr. 179, 479 P.2d 379.) The Babb court held that malicious prosecution cross-complaints were prohibited in the same action alleged to be maliciously prosecuted because the cause of action has not yet accrued since it is impossible to prove the requirement of favorable termination. (Babb v. Superior Court, supra, 3 Cal.3d at p. 846, 92 Cal.Rptr. 179, 479 P.2d 379.) “Were we to entertain a cross-action for malicious prosecution [prior to the termination of the prior action], we would create the incongruous situation of such an action being filed long before the statute of limitations begins to run.” (Ibid.) The Babb court also cited several other factors in support of the “favorable termination” rule. The rule “prevents the inconsistent judgments which may result if a malicious prosecution action were permitted to be filed before the conclusion of the principal suit. In such a situation, with two triers of fact operating independently, the plaintiff in the main action may prevail in his claim, yet lose the malicious prosecution suit.” (Id. 3 Cal.3d at p. 847, 92 Cal.Rptr. 179, 479 P.2d 379.) In addition, it eliminates unnecessary litigation because a defendant who loses the main action will not institute a malicious prosecution suit. The favorable termination requirement also “facilitates speedy and orderly trials, because the other elements of the cause of action (malice and lack of probable cause) are substantially easier to determine with the record of the underlying action available as evidence.” (Ibid.)
The Babb rule is inapplicable to the cross-complaint here. Freeman's cross-complaint was not premised simply on West American's actions in bringing the declaratory relief action. Its primary thrust was the allegation that West American deliberately settled the Pierce claim because it made a determination that it would be more expensive to litigate it and because a verdict for Freeman would have precluded it from seeking reimbursement from Freeman for both the settlement and defense costs incurred. The cross-complaint further alleged that West American forced Freeman to sign the settlement agreements by economic duress and finally, that its action in bringing a declaratory relief action was further evidence of its breach of the covenant of good faith and fair dealing.6
Freeman was not required to await the determination of the declaratory relief action before filing his cross-complaint alleging bad faith. In California State Auto. Assn. Inter–Ins. Bureau v. Superior Court (1986) 184 Cal.App.3d 1428, 1431, 229 Cal.Rptr. 409, the court held that a cross-complaint asserting breach of the covenant of good faith and fair dealing was proper in an action by the insurer for a declaration of rights as to coverage under the policy. The court noted that “there is no prohibition to filing a cross-complaint in an action for declaratory relief” and that the issues raised by the cross-complaint could be resolved after the issue of coverage was decided. (Id. 184 Cal.App.3d at p. 1433, 229 Cal.Rptr. 409, footnote omitted.) “The trial court is empowered to determine the order in which the issues to be determined are tried and may order the declaratory relief complaint tried before the cross-complaint.” (Ibid.) 7 West American does not address this precedent but argues that Babb prohibits any cross-complaint that alleges malicious prosecution. West American's argument misses the mark. The cross-complaint here alleges the tort of bad faith; not that of malicious prosecution. An insurer's declaratory relief action can constitute an act of bad faith when the insurer has “otherwise abandoned, compromised or rejected the insured's claim.” (Atlas Assurance Co. v. McCombs Corp. (1983) 146 Cal.App.3d 135, 150, 194 Cal.Rptr. 66; see, also White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 885–886, 221 Cal.Rptr. 509, 710 P.2d 309 [insurer required to act in good faith when filing coverage action].) Hence, Freeman could properly assert in his cross-complaint that the declaratory relief action was brought in bad faith.
West American's contention that it was denied the constitutional right of access to the courts because of Freeman's bad faith cross-complaint also fails. West American was not precluded from filing an action to determine its right to reimbursement. Upon its filing, however, Freeman was entitled to assert his defenses and required to file his mandatory cross-complaint. West American has cited no authority which would support its argument that the cross-complaint was an improper infringement of its constitutional right of access to the courts.
2. Motion to Bifurcate Trial
West American contends that the trial court erred in denying its motion to bifurcate the trial between the coverage issues and the bad faith allegations. The trial court did not make a definitive ruling on West American's motion to bifurcate the trial prior to trial. Initially, in ruling on the in limine motion, the trial court indicated that bad faith issues would be reserved for the second phase of the trial. The trial court cautioned, however, that “it is not always possible to do that cleanly.” Counsel for West American then replied: “I've [sic] understand that. If it comes up, we will make our objection.” Counsel for Freeman later asked for confirmation that the court intended to bifurcate the trial. The trial court then stated: “I will listen to the evidence. Maybe we will bifurcate. Maybe we won't. Depends how much (inaudible) goes on.”
On the eve of trial, the trial court apparently opted not to bifurcate the trial of the coverage and bad faith issues. The record of the proceeding in which the trial court made this ruling, however, is not included in the record.
West American has the burden of affirmatively showing error by an adequate record. (9 Witkin, Cal. Procedure (3d ed. 1985) Appeal, § 418, p. 415.) “ ‘ “It is elementary that the burden is on an appellant to show sufficient basis for the reversal of the order or judgment from which he appeals.” ․ “In the absence of a contrary showing in the record, all presumptions in favor of the action of the trial court will be indulged by an appellate court.” ․ “[I]f any matters could have been presented to the court below which would have authorized the order complained of, it will be presumed that such matters were presented.” ’ [Citation.] ․ ‘Under this general rule it will be presumed, when necessary, that the parties consented to the court's action or waived objection thereto.’ [Citation.]” (Buckhart v. San Francisco Residential Rent Etc., Bd. (1988) 197 Cal.App.3d 1032, 1036, 243 Cal.Rptr. 298, italics in original.)
Here, West American has failed to show that the trial court abused its discretion in denying the bifurcation motion. Indeed, there is no record of the proceeding in which the trial court made its ruling to deny bifurcation. We therefore conclude that West American waived any objection to the court's ruling.
3. Litigation Privilege
West American also asserts that the litigation privilege bars the cross-complaint.8 Pacific Gas & Electric Co. v. Bear Stearns & Co. (1990) 50 Cal.3d 1118, 1132 and fn. 12, 270 Cal.Rptr. 1, 791 P.2d 587, relied upon by West American, however, recognized that the litigation privilege does not apply to bar liability based on a course of conduct in breach of the covenant of good faith and fair dealing in the insurance context. The Court cited White v. Western Title Ins. Co., supra, 40 Cal.3d at p. 888, 221 Cal.Rptr. 509, 710 P.2d 309 for the proposition that the litigation privilege does not apply to bar liability where the “gravamen of the complaint was not a communication but a course of conduct.” (Pacific Gas & Electric Co. v. Bear Stearns & Co., supra, 50 Cal.3d at p. 1132, fn. 12, 270 Cal.Rptr. 1, 791 P.2d 587.) The White court drew a distinction between a cause of action “based squarely on a privileged communication, such as an action for defamation, and one based upon an underlying course of conduct evidenced by the communication” and held that the litigation privilege did not bar evidence of settlement offers to show that the insurer was not resolving the insured's claim in good faith. (White v. Western Title Ins. Co., supra, 40 Cal.3d at pp. 888–889, 221 Cal.Rptr. 509, 710 P.2d 309.) The White court recognized that an insurer must act in good faith when filing a coverage action. “[I]t is not unusual for an insurance company to provide policy benefits, such as the defense of litigation, while itself instituting suit to determine whether and to what extent it must provide those benefits. It could not reasonably be argued under such circumstances either that the insurer no longer owes any contractual duties to the insured, or that it need not perform those duties fairly and in good faith.” (Id. 40 Cal.3d at pp. 885–886, 221 Cal.Rptr. 509, 710 P.2d 309.)
California Physicians' Service v. Superior Court (1992) 9 Cal.App.4th 1321, 12 Cal.Rptr.2d 95, relied upon by West American, is inapposite. There, the court held that the litigation privilege barred the use of the insurer's defensive pleading including the assertion of affirmative defenses as the basis for a claim of bad faith. (Id. 9 Cal.App.4th at p. 1330, 12 Cal.Rptr.2d 95.) The court distinguished White, noting that “[t]he effort here is not to use trial tactics as evidence of prior bad faith, but to mount a new cause of action for severable damages on the theory of an action for bad faith defense.” (Id. 9 Cal.App.4th at p. 1327, 12 Cal.Rptr.2d 95.)
Here, Freeman is not attacking the pleading itself as in California Physicians' Service, but the course of conduct reflected by West American's filing of a declaratory relief action. In the cross-complaint, Freeman alleged precisely that the filing of the declaratory judgment action was an additional act which evidenced West American's continuation of bad faith conduct.9 The litigation privilege did not bar liability here because the gravamen of the cross-complaint was not a communication but the allegation that West American continued its bad faith conduct by filing a declaratory relief action.10
4. Punitive Damages
West American argues that the punitive damages award must be reversed because Freeman wrongly relied on the theory that West American acted in bad faith by attempting to change the law and that it mischaracterized Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co. (1987) 189 Cal.App.3d 1072, 234 Cal.Rptr. 835 as establishing that West American had a pattern of bad faith conduct. These arguments are without merit.
West American's first argument is premised on the theory that the jury's punitive damages award was based in part on Freeman's counsel's argument that this case was “an avenue for West American to try to create some law, to put itself in a position to impair other insureds and create a pattern for other insurance companies to follow.” West American's premise, however, ignores the fact that argument is not evidence and that there is substantial evidence in the record of its bad faith conduct including forcing Freeman to settle the Pierce claim through the threat of withdrawal of defense counsel, ignoring the expert opinions on the Pierce matter, refusing to join other liable parties, refusing to turn over the defense file on the Pierce claim and putting its interests ahead of those of Freeman. Moreover, the theory that West American attempted to create new law at Freeman's expense and that this was further conduct evidencing bad faith is not without merit. “For the insurer to fulfill its obligation not to impair the right of the insured to receive the benefits of the agreement, it again must give at least as much consideration to the latter's interests as it does to its own.” (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818–819, 169 Cal.Rptr. 691, 620 P.2d 141, citation omitted.)
West American's second argument that Freeman improperly relied on Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co., supra, 189 Cal.App.3d 1072, 234 Cal.Rptr. 835 also fails. Freeman's bad faith expert testified that the Downey case showed a similar pattern of conduct of putting the insurer's interests above those of the insured and that it involved a related company inasmuch as both West American and the defendant in Downey are subsidiaries of Ohio Casualty Group. In its argument to the jury on punitive damages, counsel for Freeman argued that “[t]his has happened to Ohio Casualty before, the parent of West American. They have engaged in this type of conduct and they weren't deterred by an eight million dollar punitive damages award.” West American concedes that it is related to Ohio Casualty but contends that it was prejudiced by the Downey argument because Freeman's counsel erroneously argued that $8 million was awarded in Downey when in fact the actual amount of punitive damages was $5 million and that the bad faith conduct in Downey was not similar to the acts complained of here.
The trial court properly permitted testimony on the Downey case. In Downey, the court noted several acts of bad faith similar to those at issue here which supported a punitive damages award including conducting only a cursory investigation of a claim, placing the insurer's interests above those of the insured, and using litigation tactics to burden insureds with expense in order to create a “climate for settlement.” (Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co., supra, 189 Cal.App.3d at pp. 1072, 1083, 1097–1099, 234 Cal.Rptr. 835.) The court held that a punitive damages award of $5 million, representing one percent of the net worth of Ohio Casualty Corporation, was not excessive. (Id. 189 Cal.App.3d at p. 1099–1100, 234 Cal.Rptr. 835.) While counsel for Freeman erroneously argued that the punitive damages awarded in Downey were $8 million rather than $5 million, Freeman's expert witness on the issue, who also made the same error, did correctly testify that the punitive damages award amounted to 3.6 weeks of the insurer's net annual income. (Id. 189 Cal.App.3d at p. 1100, 234 Cal.Rptr. 835.) West American did not object to counsel's error below nor to the testimony of Freeman's expert witness on the issue, and hence cannot do so for the first time on appeal. (9 Witkin, Cal.Procedure, Appeal, supra, § 307, p. 317.) Had West American objected to the incorrect amount, the error could easily have been cured.
West American also contends that the punitive damages award is excessive and requests that this court substantially reduce the amount.
“An award of punitive damages will be reversed as excessive only when the entire record viewed most favorably to the judgment indicates the award was the result of passion and prejudice.” (Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co., supra, 189 Cal.App.3d at pp. 1072, 1099, 234 Cal.Rptr. 835.) Here, West American does not challenge the award based on its relationship to the actual damages suffered, but argues that the award should be reduced because the jury acted out of passion and prejudice against West American's attempt to seek judicial relief. Again, West American fails to recognize that the award was based on the reprehensibility of its conduct toward Freeman and its failure to accord Freeman the consideration to which he was entitled. (See Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d at pp. 818–819, 169 Cal.Rptr. 691, 620 P.2d 141.)
The trial court's determination on the issue of the excessiveness of a jury's award of punitive damages is accorded great weight because the trial court is necessarily more familiar with the evidence. (Bertero v. National General Corp., supra, 13 Cal.3d at p. 64, 118 Cal.Rptr. 184, 529 P.2d 608.) Here, the trial court, after hearing West American's argument on a motion for a new trial, stated: “I think the conduct of the insurance company in this case was egregious. I really do. [¶] They had experts, more than one—it seems to me five—telling them that this was not Mr. Freeman's fault, but Mr. Arter [West American's claims adjuster] somehow seemed to determine that he wasn't going to cover this claim, and that he would do what he wanted despite the evidence to the contrary. [¶] He exhibited an absolute total disregard for Mr. Freeman's rights under the contract, and for his rights as a person to be treated decently. [¶] I think there was a lot of powerful testimony regarding the emotional distress that was suffered by Mr. Freeman. Maybe he didn't put it all into words, but when you lose your business, and you are effectively deprived of your livelihood, after having paid 60,000 dollars in insurance premiums, because a 46,000 dollar claim was not honored, and then the insurance company turns around and sues you for that—and I do believe the settlement was constructed to make it look like the foundation problem was the entire first 46,000 dollars when others who should have contributed to the foundation settlement were deferred to the second half of the settlement. [¶] [Lakin–Spears] certainly didn't represent Mr. Freeman's best interests. [It] appeared to be ․ totally inept in [its] handling of Mr. Freeman's case․ [It] disregarded [the] experts completely. [It] didn't stand up against Mr. Arter and represent [Freeman] at all. [¶] And it seems to me that a lot of people who regarded themselves as rather powerful got together and [rode] roughshod over Mr. Freeman because they viewed him as someone who was powerless and unable to fight back.” Based on the record before us, we cannot conclude that the trial court erred in its determination upholding the award.
The judgment is affirmed. Freeman to recover his costs on appeal.
1. West American is a subsidiary of Ohio Casualty Group of Insurance Companies.
2. San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 208 Cal.Rptr. 494 [holding that if there exists a conflict of interest between an insurer and its insured because the insurer has reserved its rights to deny coverage under the insurance policy, the insurer must pay the insured's reasonable costs incurred for hiring independent counsel].
3. Because Lakin–Spears did not pursue the issue of joining Wood, Cox Buchanan filed the cross-complaint against Wood on March 28, 1989.
4. There is no transcript in the record of the proceedings in which the trial court ruled not to bifurcate the trial. The parties, however, in briefing issues on West American's new trial motion, acknowledge that the trial court decided not to bifurcate the bad faith issues from the coverage phase of the trial.
5. On the issue of whose work caused the damage, one juror did not agree that Ernest Wood caused damage to the Pierce foundation but did agree that the Pierces and their landscape architect caused the damage. Nonetheless, all jurors concluded that Freeman had not caused the damage.
6. The allegations of the cross-complaint were directly related to West American's declaratory relief and reimbursement action and hence the cross-complaint was mandatory pursuant to Code of Civil Procedure, section 426.30. That section provides in relevant part: “[I]f a party against whom a complaint has been filed and served fails to allege in a cross-complaint any related cause of action which (at the time of serving his answer to the complaint) he has against the plaintiff, such party may not thereafter in any other action assert against the plaintiff the related cause of action not pleaded.”
7. Here, the trial court properly allowed the declaratory relief complaint tried before the cross-complaint.
8. West American did not raise the issue of litigation privilege until it moved to dismiss the cross-complaint after the completion of Freeman's case.
9. Freeman's cross-complaint alleged in relevant part: “For the sole purposes of compelling Cross–Complainant to consent to the settlement of his claim and if he did not consent to the settlement, payment of his defense expenses would cease, Cross–Defendant, in breach of its covenant of good faith and fair dealing, intentionally, maliciously, and oppressively refused and failed to allow Freeman to continue to litigate the Underlying Action and pay for his defense costs. West American continued its bad faith acts by filing the instant declaratory relief action which frivolously seeks reimbursement of defense costs while attempting to impose a novel, however despicable, reversal of the burden of proof. Such a reversal would theoretically require that Freeman prove his innocence in the underlying matter in order to avoid reimbursing West American for settlement costs it imposed on Freeman. This conduct constitutes a breach of the implied covenant of good faith and fair dealing by maliciously and oppressively disregarding the right of its insured.”
10. We note that consistent with our conclusion that the cross-complaint was not grounded upon a communication protected by the litigation privilege, the jury was correctly instructed that the filing of the declaratory relief action was “not in and of itself, bad faith.”
PERLEY, Associate Justice.
POCHÉ, Acting P.J., and REARDON, J. concur.