Anthony Charles AMATO, Plaintiff and Appellant, v. MERCURY CASUALTY COMPANY, Defendant and Respondent.
This case presents a question of the damages recoverable when an insurer breached its duty to defend the insured but ultimately prevailed on the issue of coverage. Because he had no funds to obtain other counsel to defend the underlying lawsuit following the insurer's refusal to defend, the insured suffered a default judgment against him. In the subsequent lawsuit against the insurer upon the underlying judgment and for breach of the duty to defend, the insurer prevailed on the coverage issue but was found to have wrongfully refused to defend. Upon those findings the trial court initially granted judgment for the insured in the amount of the underlying default judgment. On a prior appeal from that judgment, Amato v. Mercury Casualty Co. (1993) 18 Cal.App.4th 1784, 23 Cal.Rptr.2d 73 (Amato I) we held that because the insurer had ultimately prevailed on the coverage issue, the measure of the insured's damages was not the full amount of the underlying judgment but rather the insured's costs of defense. Then upon remand the trial court ruled that, since it was stipulated the insured incurred no costs of defense because the matter went by default, the insured suffered no compensable damages. The trial court therefore rendered a judgment for the insurer, from which the insured now appeals. Now, in light of more recent authority and the clarification of the record that the underlying judgment was by default, we reconsider Amato I and conclude the trial court was correct the first time in entering judgment for the amount of the underlying default judgment. We hold that where an insurer tortiously breaches the duty to defend and the insured suffers a default judgment because the insured is unable to defend, the insurer is liable for the default judgment, which is a proximate result of its wrongful refusal to defend.
FACTUAL AND PROCEDURAL BACKGROUND
The facts may be summarized primarily from the opinion in Amato I. Defendant Mercury Casualty Company (Mercury) issued an automobile policy on a Renault automobile. The policy defined insured to include permissive users and resident relatives of permissive users, including relatives by marriage. While driving the Renault, plaintiff Anthony Charles Amato (Amato), a permissive user, negligently caused an accident which injured his passenger, Jacqueline Sutton (Sutton), who was his mother-in-law. When Sutton sued Amato, Amato tendered the defense to Mercury. Mercury refused to defend, contending there was no coverage on the ground Sutton was a resident relative of Amato's. At the time Mercury refused to defend, Mercury had information which, if true, indicated that at the time of the accident Amato and Sutton did not live at the same residence. Mercury also refused Sutton's offer to settle for the policy limit of $15,000.
Following Mercury's refusal to defend, Amato could not afford to hire other counsel to defend him. Sutton obtained a judgment by default against Amato for $165,750 plus costs of $156.
Amato brought the present action against Mercury for breach of the covenant of good faith and fair dealing, and Sutton sued Mercury on her judgment against Amato. A jury found by special verdict that Sutton did reside with Amato at the time of the accident. Thus the injury to Sutton was in fact not covered by the policy, and Sutton took nothing by her complaint against Mercury. But the trial court found Mercury breached its duty to defend, because there were facts known to Mercury at the time of its refusal which gave rise to the potential of liability under the policy. Based on this finding the trial court originally gave judgment for Amato against Mercury in the full amount of the underlying judgment by Sutton against Amato, plus costs and interest. Amato waived any other compensatory damages.
On Mercury's appeal from that judgment, this court affirmed as to Mercury's liability but reversed and remanded as to damages. (Amato I, supra, 18 Cal.App.4th 1784, 23 Cal.Rptr.2d 73.) We held that because Mercury was aware, at the time of its refusal, of facts which if true indicated Amato was not residing with Sutton, the record supported the trial court's conclusion that Mercury's refusal to defend breached its covenant of good faith and fair dealing. (Id. at pp. 1789–1793, 23 Cal.Rptr.2d 73.) Although the jury subsequently agreed with Mercury as to the facts determinative of coverage, those facts were disputed at the time of the refusal to defend, and Mercury therefore owed a duty to defend. (Id. at pp. 1791–1792, 23 Cal.Rptr.2d 73.)
On the other hand, we held that because it was ultimately determined there was no coverage, the trial court erred in awarding a judgment equal to the underlying judgment obtained against Amato. We cited Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 91 Cal.Rptr. 153, 476 P.2d 825, for the proposition that an insurer who breached only its duty to defend is not liable for the judgment against the insured but is liable for all costs and attorney fees expended by the insured in defending the underlying action. (Amato I, supra, 18 Cal.App.4th at pp. 1793–1794, 23 Cal.Rptr.2d 73.) We said that because the jury found facts showing there was no coverage, “the proper measure of damages is that amount which will compensate the insured for the harm or loss caused by the breach of the duty to defend, i.e., the cost incurred in defense of the underlying suit. [¶] It is not clear from the record before us whether Amato mounted a defense in the underlying action. The parties stipulated that the judgment was entered against him after the taking of evidence, but Amato alleged that it was a ‘Judgment by Court After Default.’ Therefore, remand is necessary to ascertain the amount of damages, if any, properly awardable.” (Id. at p. 1794, 23 Cal.Rptr.2d 73.)
On remand, Amato stipulated that since the matter went by default, he had “no cost of defense.” Amato offered to prove the following facts: Following Mercury's refusal to defend, Amato had no funds to hire counsel; the matter was tried as an uncontested default; Amato suffered emotional distress by having the litigation pending and having it go uncontested without the assistance of counsel; had the lawsuit been contested, Amato would have testified he was driving on the desert from Las Vegas at a speed which was not unusual for those conditions but probably in excess of the speed limit, when he encountered a vehicle driven at an abnormally slow speed; when Amato applied the brakes, Sutton, who was asleep and who was not wearing her seatbelt, was propelled against the dashboard and windshield, suffering serious injuries; Sutton had no recollection of the circumstances of the accident; in the opinion of an expert attorney in personal injury cases, had this matter been contested with the resources of an insurance carrier the judgment almost certainly would have been less than $165,000, based in part on the comparative negligence of Amato, Sutton, and the other driver, and upon impeachment of Sutton's damages.
The trial court believed Amato I compelled the conclusion Amato's only recoverable damages are the costs of defending the underlying suit. Because Amato stipulated he had no such costs, the court found Amato suffered no compensable damages, and therefore the court awarded judgment to Mercury. Amato appeals from this judgment.
Breach of an insurer's duty to defend violates a contractual obligation and, where unreasonable, also violates the covenant of good faith and fair dealing, for which tort remedies are appropriate. (Campbell v. Superior Court (1996) 44 Cal.App.4th 1308, 52 Cal.Rptr.2d 385, mod. 45 Cal.App.4th 1232a, 52 Cal.Rptr.2d 385). Contractual damages are “the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom.” (Civ.Code, § 3300; 2 Cal. Liability Insurance Practice (CEB 1996) § 24.57, p. 24–45; Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group) (1995) § 12:641, p. 12B–101 (hereafter Insurance Litigation).) Tort damages are “the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.” (Civ.Code, § 3333; 2 Cal. Liability Insurance Practice, supra, § 24.68, p. 24–50.) Here, the trial court's prior judgment determined that Mercury had no good cause to refuse to defend, and Mercury therefore tortiously breached the covenant of good faith and fair dealing.
Where an insured mounts a defense at the insured's own expense following the insurer's refusal to defend, the usual contract damages are the costs of the defense. (2 Cal. Liability Insurance Practice, supra, § 25.29, p. 25–16; Insurance Litigation, supra, § 12:651, p. 12B–102.)
Damages recoverable on a tort theory are broader. “Proof of breach of contract entitles the plaintiff only to damages that were contemplated by the parties at the outset of the contract. On proof of bad faith, the plaintiff can recover all consequential damages, whether they were foreseeable or not.” (2 Cal. Liability Insurance Practice, supra, § 24.68, p. 24–50; Campbell v. Superior Court, supra, 44 Cal.App.4th at pp. 1313–1314, 1319–1320, 52 Cal.Rptr.2d 385.) Among such consequential damages is the economic harm from the lost “opportunity to reduce personal liability in the underlying action.” (2 Cal. Liability Insurance Practice, supra, at § 24.72, p. 24–53, citing Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 195, 231 Cal.Rptr. 791.)
Here, the insured did not mount a defense to the underlying action at his own expense because he was financially unable to do so. In these circumstances the insured is entitled by the general rule of Civil Code section 3333 to recover all detriment proximately caused by the insurer's wrongful refusal to defend.
“[T]he insurer must defend in some lawsuits where liability under the policy ultimately fails to materialize; this is one reason why it is often said that the duty to defend is broader than the duty to indemnify.” (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 299, 24 Cal.Rptr.2d 467, 861 P.2d 1153.) The duty to defend is a continuing one which arises on tender of the defense and lasts either until the conclusion of the underlying lawsuit or until the insurer can establish conclusively that there is no potential for coverage and therefore no duty to defend. (Id. at p. 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153.) The obligation of the insurer to defend is of vital importance to the insured. “In purchasing his insurance the insured would reasonably expect that he would stand a better chance of vindication if supported by the resources and expertise of his insurer than if compelled to handle and finance the presentation of his case. He would, moreover, expect to be able to avoid the time, uncertainty and capital outlay in finding and retaining an attorney of his own.” (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 278, 54 Cal.Rptr. 104, 419 P.2d 168.) “The insured's desire to secure the right to call on the insurer's superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability.” (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at pp. 295–296, 24 Cal.Rptr.2d 467, 861 P.2d 1153.) Mercury breached this important obligation to defend Amato and should be liable for the damages proximately caused thereby.
Subsequent to Amato I, we had occasion in Campbell v. Superior Court, supra, 44 Cal.App.4th 1308, 52 Cal.Rptr.2d 385, to consider a breach of the implied covenant of good faith and fair dealing based solely on the insurer's unjustified refusal to defend. The insurer contended that the law recognizes only a contract action, but not a tort action for breach of the covenant of good faith and fair dealing, where the insurer's only wrong was a refusal to defend. We rejected that contention, commenting that unless a tort action were recognized, the insurer would have an incentive to refuse to defend, knowing that if it were subsequently sued for refusal to defend, it would be no worse off than if it had provided the defense. (Id. at p. 1320, 52 Cal.Rptr.2d 385.) In explaining why that would be bad policy, we posed an example much like the instant case. “Limiting an insured to contract damages for breach of the duty to defend would result in inequitable treatment of insureds based upon their financial status. If the insured were financially capable of providing its own defense with minimal collateral damage, contract damages may well be adequate compensation for the money spent on attorney fees and settlement costs. But what of the insured who must use scarce assets or is forced to turn to a lender? Recoupment of expenses incurred would not make whole the insured who was required to sacrifice in order to finance a defense. And lastly, there is the insured who is financially incapable of mounting its own defense. Assuming that insured is able ultimately to successfully sue the insurer, contract damages would not even begin to compensate for the financial and emotional losses sustained prior to obtaining such a judgment.” (Id. at p. 1320, 52 Cal.Rptr.2d 385, emphasis added.)
Other than Mercury's reliance on statements in Amato I, the parties have cited no case which we regard as squarely deciding the precise issue before us. Here, Mercury tortiously refused to defend the underlying lawsuit. As a result of Mercury's wrongful refusal to defend, Amato was unable to defend at all and suffered a default judgment of $165,000. Not until Sutton's subsequent action on that judgment was it determined that there was in fact no coverage. We hold in these circumstances Mercury is liable for the judgment, which is a proximate result of its wrongful refusal to defend.
The closest authority supporting this proposition is Mullen v. Glens Falls Ins. Co. (1977) 73 Cal.App.3d 163, 140 Cal.Rptr. 605 and commentary on that case in the practice guide, Croskey et al., California Practice Guide: Insurance Litigation (The Rutter Group), supra, previously cited as Insurance Litigation, at sections 12:671–12:673. In Mullen the insurer refused to defend or indemnify, contending the underlying action was based on an intentional assault which was excluded from coverage. The refusal to defend was wrongful because, at the time of the refusal, there was a potential for liability. The insured hired another attorney (unlike the present matter, Mullen was not a default case); the verdict against the insured in the underlying case was based on intentional assault, thus the insurer was ultimately vindicated in its belief of noncoverage. The court held the insured was entitled to seek not only his costs of defense but also the amount of the underlying judgment. (Id. at pp. 173–174, 140 Cal.Rptr. 605.) The court posed the question, “[M]ay an insurance company, without making an investigation of any kind, deny an insured a defense at a time when it has reason to believe that there is a potential liability under the insurance policy, and then rely upon the results of the personal injury lawsuit and subsequent factors to prove that there was in reality no potential liability in the first instance? ” The court answered, “We believe that public policy alone mandates a negative answer․ Otherwise an insurance carrier could refuse to defend its insured on the slightest provocation and then resort to hindsight for the justification.” (Id. at p. 173, 140 Cal.Rptr. 605, emphasis added.) The court remanded for a determination of damages “including the amount of the [underlying] judgment.” (Id. at p. 174, 140 Cal.Rptr. 605.) The Practice Guide's comment on Mullen presages the present case. It states, “Arguably, Mullen, supra, goes too far in penalizing the insurer for failure to defend. The insured is entitled to its defense costs in such a case [citing Amato I ]. But since there was in fact no coverage (no duty to indemnify) why should the insurer have to pay the judgment? (The result might be different if the insurer's refusal to investigate and defend caused the judgment, as where the judgment went by default; but that was not the case in Mullen.)” (Insurance Litigation, supra, § 12:673, p. 12B–108, emphasis inside parentheses added.)
We agree with the above reasoning that where the insurer tortiously refuses to defend and as a consequence the insured suffers a default judgment, the insurer is liable on the judgment and cannot rely on hindsight that a subsequent lawsuit establishes coverage was excluded. This result is also supported by other authorities. In Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263, 279–280, 54 Cal.Rptr. 104, 419 P.2d 168, the insurer who refused to defend argued that although it was required to reimburse the insured's costs of defense, it should not be required to pay the ensuing judgment, because apparently that judgment did not show whether it was based on a theory within coverage or not within coverage. The Supreme Court rejected that argument and concluded the insurer was liable for the amount of the underlying judgment regardless of the ambiguity, under the “general rule that an insurer that wrongfully refuses to defend is liable on the judgment against the insured.” Gray was reviewed in a law review case note cited in Kapelus v. United Title Guaranty Co. (1971) 15 Cal.App.3d 648, 653, 93 Cal.Rptr. 278, for the proposition that, “An insurer's wrongful refusal to defend will automatically subject it to liability for both the costs of defense and any adverse judgment the insured suffers, even when the judgment was rendered on a theory not within the policy coverage.” Gray was similarly interpreted by an annotation (1983) 20 A.L.R.4th 23, 30, which states, “An insurer that fails or refuses to defend a third-party action against its insured, on the ground that the claim involved in the action is not covered by the policy, may be held liable for an excess judgment because of its refusal—even though, had it defended the third-party action, it might have escaped liability for the resulting judgment․ [To avoid this dilemma the insurer] can obtain a declaratory judgment determining whether there is coverage ․ or it can defend under a reservation of rights and thereby preserve its right to dispute liability for the third-party judgment.”
In State Farm Mut. Auto. Ins. Co. v. Allstate Ins. Co. (1970) 9 Cal.App.3d 508, 528–531, 88 Cal.Rptr. 246, the court held that one insurer's refusal to defend, in conjunction with the other insurer's rejection of a reasonable settlement offer, subjected the insurer to liability for the judgment against the insured even in excess of the policy limit. The court mentioned that a verdict against the insured is an “expectable result” of an insurer's breach of the duty to defend. (Id. at p. 531, 88 Cal.Rptr. 246.) This is a corollary of the proposition in Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 659–660, 328 P.2d 198, that “if the insured has employed competent counsel to represent him, there is no ground for concluding that the judgment would have been for a lesser sum had the defense been conducted by the insurer's counsel, and therefore it cannot be said that the detriment suffered by the insured as the result of a judgment in excess of the policy limits was proximately caused by the insurer's refusal to defend.” (Emphasis added.) When the insurer refuses to defend and the insured does not employ counsel and presents no defense, it can be said the ensuing default judgment is proximately caused by the insurer's breach of the duty to defend.
In Amato I we reversed the trial court on the ground the proper measure of damages was not the amount of the underlying judgment but the costs of defense. We cited Hogan v. Midland National Ins. Co., supra, 3 Cal.3d 553, 91 Cal.Rptr. 153, 476 P.2d 825. There, the insurer refused to defend; the insured defended at its own expense and suffered an adverse judgment. The underlying judgment did not determine the issue of coverage. On appeal the Supreme Court held the judgment was severable; some of the claims were covered and some were not. The result was that the insurer was liable for all the costs of defense but only that part of the underlying judgment which represented covered claims.
We no longer believe Hogan controls this case, primarily because of the unusual factor of the default. We noted in Amato I that the record of the trial proceedings was very sparse and vague, and we could not be certain whether the underlying judgment was a default. (18 Cal.App.4th at p. 1788, fn. 1, 23 Cal.Rptr.2d 73.) The subsequent proceedings on remand now establish clearly that the underlying judgment was suffered by default. In addition, significant new case law has been made after Amato I. Our own decision in Campbell v. Superior Court, supra, 44 Cal.App.4th 1308, 52 Cal.Rptr.2d 385, clarifies that an insurer who wrongfully refuses to defend may tortiously breach the covenant of good faith and fair dealing and should be liable for consequential damages; we even posed an example that contract damages would be inadequate for an insured who was financially unable to mount a defense at the insured's own expense. (Id. at pp. 1320, 52 Cal.Rptr.2d 385.) Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th 287, 24 Cal.Rptr.2d 467, 861 P.2d 1153, decided shortly after Amato I, clarifies that where there is any issue of a potential for coverage and therefore a duty to defend, the insurer must defend until it can secure an adjudication that there is no such potential or duty. Reexamining this issue with the benefit of a clarified record and subsequent case law, we now believe the trial court was correct in its initial judgment that Mercury is liable for the default judgment, which constitutes the detriment to Amato proximately caused by Mercury's tortious breach of the duty to defend. It suffices to say that, “ ‘ “The matter does not appear to [us] now as it appears to have appeared to [us] then.” ’ ” (Smith v. Anderson (1967) 67 Cal.2d 635, 646, 63 Cal.Rptr. 391, 433 P.2d 183 (conc. opn. of Mosk, J.), quoting Andrews v. Styrap (Eng.) 26 L.T.N.S. 704, 706.) The doctrine of law of the case is a discretionary policy which should not be followed if it results in a manifestly unjust decision. In looking to a just determination of the rights of the parties, an appellate court is not precluded from reconsidering questions decided on a former appeal. (England v. Hospital of Good Samaritan (1939) 14 Cal.2d 791, 795, 97 P.2d 813.)
Instead of remanding the matter for further trial, we shall simply direct the trial court to enter judgment for Amato, as before, for the amount of the underlying judgment. The prior statement of decision recites that Amato waived any additional compensatory damages (e.g., emotional distress) when informed the court would not award punitive damages. We may infer Amato was satisfied to be awarded the amount of the underlying judgment and did not seek other forms of damages until remand after we reversed the prior judgment. Similarly, we may infer that previously Mercury either raised or waived whatever defenses it had (e.g., the possibility the default judgment between relatives was collusive [Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 240–242, 178 Cal.Rptr. 343, 636 P.2d 32; Sunseri v. Camperos Del Valle Stables, Inc. (1986) 185 Cal.App.3d 559, 561, 230 Cal.Rptr. 23].) Had we known at the time of Amato I what we know now, we would have affirmed the prior judgment. In these circumstances we see no good reason to require yet another round of proceedings.
The judgment is reversed and the trial court is directed to enter judgment for Amato in the amount of $165,906 plus appropriate interest. Costs on appeal are awarded to Amato.
CHARLES S. VOGEL, Presiding Justice.
HASTINGS and ARANDA*, JJ., concur.