CALIFORNIA DREDGING COMPANY v. INSURANCE COMPANY OF NORTH AMERICA

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Court of Appeal, First District, Division 5, California.

CALIFORNIA DREDGING COMPANY et al., Plaintiff/Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant/Respondent.

No. A057201.

Decided: August 31, 1993

Alvin H. Goldstein, Jr.,Mark L. Musto, Goldstein & Phillips, San Francisco, for plaintiff/appellant. Martin S. Checov, David P. Bell, Karen Beth Barr, O'Melveny & Myers, San Francisco, for defendant/respondent.

This is a dispute over attorney fees.   Appellants California Dredging Company (CDC) and Reliance Insurance Company (Reliance) claim that respondent Insurance Company of North America (INA) must pay the attorney fees they spent litigating a prior federal court action, because INA allegedly misrepresented the amount of insurance available to settle that prior suit.   The trial court ruled INA's alleged misrepresentations were privileged within the meaning of Civil Code section 47, subdivision (b) (section 47(b)) and sustained INA's demurrer without leave to amend.   CDC and Reliance appeal.   We affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

Since this is an appeal from a judgment entered after the trial court sustained a demurrer, we set forth the facts as pleaded in appellants' complaint.

In 1984, CDC, a dredging contractor, filed a complaint in federal court against Pipe Systems, Incorporated (PSI), the distributor of allegedly defective plastic pipe.   CDC claimed it had been damaged when it used PSI's pipe on a dredging project in the Petaluma River channel.   In 1985, CDC added several additional defendants to its complaint including Portco, the entity which had manufactured the pipe.   Portco was insured by INA, and INA retained counsel to defend Portco in the federal suit.   In August 1985, all the defendants in the federal action, including Portco, filed for bankruptcy;  however, in December 1985, the bankruptcy court lifted the stay when CDC agreed to limit its recovery “to [the] proceeds of applicable insurance policies, if any․”

CDC then initiated discovery against Portco;  and in formal and informal responses, Portco said it had only a single $100,000 primary policy, issued by INA, available to settle CDC's claim.   Portco made similar representations to the various parties in settlement discussions conducted with the court.   In fact, Portco had renewed its INA policy twice and another carrier had issued Portco a $5 million excess policy.   INA concealed the existence of these additional policies from the attorneys it had hired to defend Portco so it could avoid liability on the renewal policies, and so it would not be liable for a gap in coverage which existed between the primary and excess policies.   Those attorneys then relayed the misrepresentations to the various parties to the litigation.   Unaware of the additional policies, CDC agreed to settle its claim against Portco for $100,000 in February 1987.

Shortly thereafter, CDC learned of the renewal and excess policies, and it promptly rescinded the settlement agreement with Portco.   A new round of negotiations began, and the dispute was again settled for a sum which included the $300,000 cumulative limits of the three INA policies, plus an additional sum from the excess carrier.

Several months later, CDC, together with Reliance, its surety on the dredging project, filed the present complaint against INA in the San Francisco Superior Court.   Although containing several causes of action, the complaint alleged, in essence, that INA had fraudulently concealed the existence of the renewal and excess policies in the underlying federal action.   Accordingly, CDC and Reliance sought as damages the excess attorney fees they spent litigating the federal action.   In response, INA filed a cross-complaint against Portco and Reliance seeking, among other things, a declaration of its rights and obligations under the policies it had allegedly concealed.

After several years of discovery, INA filed a motion for judgment on the pleadings, claiming it was entitled to prevail because all of appellants' claims were based on statements made in the context of litigation and, thus, were barred by the absolute litigation privilege set forth in section 47(b).   The trial court granted the motion, but gave CDC and Reliance a chance to amend their complaint.   They did so, but INA then filed a demurrer arguing section 47(b) was still applicable.   The trial court agreed and entered an order sustaining the demurrer without leave to amend.   After the trial court entered a judgment in favor of INA, CDC and Reliance filed the present appeal.   Shortly thereafter, INA filed a protective cross-appeal seeking review of a prior order which limited the scope of the cross-complaint.

II. DISCUSSION

A. General Principles

The issue on appeal is whether California's absolute litigation privilege bars a third party claimant, in litigation against an insured, from bringing a subsequent direct action against its insurer, based on misrepresentations the insurer allegedly made during the underlying litigation.   The privilege at issue is set forth in section 47(b).   It states:  “A privileged publication or broadcast is one made:  [¶] ․ [¶] (b) In any ․ judicial proceeding․”  Cases interpreting this wording have consistently held the privilege it describes applicable to any communication (1) made in judicial or quasi-judicial proceedings, (2) by litigants or other participants authorized by law, (3) to achieve the objects of the litigation, (4) that have some connection or logical relation to the action.  (Silberg v. Anderson (1990) 50 Cal.3d 205, 212, 50 Cal.3d 343A, 266 Cal.Rptr. 638, 786 P.2d 365.)

The question here is whether INA's alleged misrepresentations are privileged within the meaning of section 47(b).   To resolve that issue, we apply the four part test set forth above.

1. Were the Misrepresentations Made in a Judicial Proceeding?

 The first issue is whether INA's misrepresentations were made in a judicial proceeding.   Here, INA allegedly told the attorneys it had hired to defend Portco that Portco had only one policy available to settle CDC's claim.   Those attorneys then relayed that information to CDC in both formal and informal discovery responses.   INA also made similar representations in various formal and informal settlement discussions.   Each of these allegations clearly involves communications made in the context of a judicial proceeding.

 CDC and Reliance claim INA's communications were not privileged because they were made “in the exchange of and coordination of ․ settlement positions with co-defendants, their counsel and claims personnel.”   However, the litigation privilege is not limited to communications in legal pleadings or statements made in court.  (Albertson v. Raboff (1956) 46 Cal.2d 375, 380–381, 295 P.2d 405.)   Numerous cases have held it applicable to statements made during settlement discussions.  (See, e.g., AroChem Intern., Inc. v. Buirkle (2d Cir.1992) 968 F.2d 266, 270–272 [applying California law];  Abraham v. Lancaster Community Hospital (1990) 217 Cal.App.3d 796, 823, 266 Cal.Rptr. 360;  Asia Investment Co. v. Borowski (1982) 133 Cal.App.3d 832, 843, 184 Cal.Rptr. 317.)

2. Were the Misrepresentations Made by a Participant Authorized by Law?

 The second issue is whether the INA's misrepresentations were made by a participant who was authorized by law.   Basically, we must determine whether INA, as the insurer for Portco in the underlying federal suit, is entitled to the protection afforded by section 47(b).   This precise issue was discussed in two recent cases:  Doctors' Co. Ins. Services v. Superior Court (1990) 225 Cal.App.3d 1284, 275 Cal.Rptr. 674 and Kupiec v. American Internat. Adjustment Co. (1991) 235 Cal.App.3d 1326, 1 Cal.Rptr.2d 371.

In Doctors', the plaintiffs had brought a malpractice action against their doctor which the doctor's insurer defended and ultimately settled.   The plaintiffs then sued the doctor's insurer directly, alleging it had instructed the doctor “ ‘to not tell the truth in his deposition.’ ”  (Doctors' Co. Ins. Services v. Superior Court, supra, 225 Cal.App.3d at p. 1289, 275 Cal.Rptr. 674, emphasis in original.)   On appeal, the Doctors' court found these allegations were protected, rejecting the argument that “insurers of litigants are not ‘participants authorized by law’ to whom the privilege applies.”  (P. 1295, 275 Cal.Rptr. 674.)   The court reasoned that, because of the unique relationship between an insurer and its insured, insurers “are entitled to the protections of the privilege when they communicate with other participants in the litigation.”  (Id. at p. 1296, 275 Cal.Rptr. 674.)

The holding in Doctors' was then cited with approval and followed in Kupiec, where the court held an insurer's alleged concealment of evidence in prior litigation was privileged.  (235 Cal.App.3d at pp. 1332–1333, 1 Cal.Rptr.2d 371.)

From Doctors' and Kupiec, we conclude that INA, as the insurer for Portco, is entitled to the protection afforded by section 47(b).   An insurer is a participant authorized by law within the meaning of that section.

CDC and Reliance claim the conclusion reached in Doctors' and Kupiec was aberrational and urge us to follow an older decision from this district, Bradley v. Hartford Acc. & Indem. Co. (1973) 30 Cal.App.3d 818, 106 Cal.Rptr. 718.   In Bradley, attorneys of record in a prior personal injury lawsuit brought a defamation action against an insurer which apparently insured a party in the prior action.   The complaint alleged the insurer had manufactured evidence and suborned perjury by inducing a third party falsely to charge the attorneys with colluding to dismiss another defendant in the personal injury suit in exchange for giving false testimony.  (Id. at p. 822, 106 Cal.Rptr. 718.)   The trial court sustained a demurrer, dismissing the action against the insurer;  and the Bradley court reversed, reasoning the insurer was not one of the “designated persons” to whom the absolute privilege had been extended.  (P. 826, 106 Cal.Rptr. 718.)   However, in reaching this conclusion, the Bradley court placed “special emphasis ” on its belief that to invoke the privilege the communication must be made “in furtherance of the litigation and to promote the interest of justice.”  (Ibid., emphasis in original.)   Only if this standard is met, the Bradley court reasoned, is it appropriate for the courts to define liberally the scope of persons who are protected by the privilege.  (Ibid.)

In Silberg v. Anderson, supra, our Supreme Court rejected the “ ‘interest of justice’ ” test described by Bradley.   The Silberg court explained, “A rule that an otherwise privileged communication is not privileged under section [47(b) ] unless made for the purpose of promoting the ‘interest of justice’ is wholly inconsistent with the numerous cases in which fraudulent communications or perjured testimony have nevertheless been held privileged․*  [E]ndorsement of the ‘interest of justice’ requirement would be tantamount to the exclusion of all tortious publications from the privilege, because tortious conduct is invariably inimical to the ‘interest of justice.’ ”  (50 Cal.3d at p. 218, 266 Cal.Rptr. 638, 786 P.2d 365, emphasis in original.)   Since Bradley 's refusal to extend the privilege to an insurer was based squarely on the now discredited interest of justice test, we respectfully decline to follow that decision.

CDC and Reliance claim Bradley is still good law because portions of it were cited with approval in Silberg and in Susan A. v. County of Sonoma (1991) 2 Cal.App.4th 88, 3 Cal.Rptr.2d 27, a recent case from this district.   However, the passages CDC and Reliance cite cannot be read as holding that insurers are excluded from the scope of section 47(b).   The Silberg court said the “ ‘interest of justice’ ” test was unnecessary to the decision in Bradley because, “The court had already concluded that both the communicator and the communicatee were strangers to the action (neither parties, prospective witnesses nor attorneys in the action), and that the communication was not reasonably related to the action.   Either of these conclusions was ample basis for holding that the communication was not privileged without resort to any ‘interest of justice’ test.”  (Silberg v. Anderson, supra, 50 Cal.3d at p. 217, 266 Cal.Rptr. 638, 786 P.2d 365.)   Bradley was cited by the court in Susan A. when holding the privilege described by section 47(b) does not apply to statements made to the media.   (2 Cal.App.4th at pp. 94–95 & fn. 6, 3 Cal.Rptr.2d 27.)   Thus, Silberg and Susan A. merely cited Bradley for the proposition that the privilege applies only to communications made by or to litigants or other persons authorized by law.   The issue here, whether an insurer is a participant authorized by law, was not discussed in either case.   It is, of course, settled that language used in any opinion must be understood in light of the facts and issues before the court and is not authority for a proposition not considered.  (Doctors' Co. Ins. Services v. Superior Court, supra, 225 Cal.App.3d at p. 1298, 275 Cal.Rptr. 674.)

3. Were INA's Misrepresentations Made to Achieve the Objects of, or Did They Have Some Relation to, the Litigation?

 The third and fourth issues are whether INA's misrepresentations were made to achieve the objects of, or had some relationship to, the federal litigation.   Our Supreme Court has stated that these two requirements really describe but one test, whether the challenged communication is logically related to litigation.  (Silberg v. Anderson, supra, 50 Cal.3d at pp. 219–220, 266 Cal.Rptr. 638, 786 P.2d 365.)   Here, INA's misrepresentations clearly meet this requirement.   Indeed, since CDC agreed to limit its recovery to the proceeds of Portco's applicable insurance policies, INA's alleged misrepresentations involved the primary issue in the federal suit.

CDC and Reliance claim INA cannot meet the relationship test because, in misrepresenting the amount of insurance Portco had available, INA was not seeking to achieve the objects of the litigation, but was attempting to advance its own self-interests.   However, the relationship requirement was not intended as a test of a participant's motives, morals, ethics, or intent.   (Silberg v. Anderson, supra, 50 Cal.3d at p. 220, 266 Cal.Rptr. 638, 786 P.2d 365.)   Accordingly, courts have repeatedly applied section 47(b) (or its predecessor) to bar actions based on communications which would advance one party's self-interests.  (See Doctors' Co. Ins. Services v. Superior Court, supra, 225 Cal.App.3d at p. 1300, 275 Cal.Rptr. 674 [subornation of perjury];  Carden v. Getzoff (1987) 190 Cal.App.3d 907, 909, 235 Cal.Rptr. 698 [manufacturing false evidence];  see also the cases cited in Silberg v. Anderson, supra, 50 Cal.3d at pp. 215–216, 266 Cal.Rptr. 638, 786 P.2d 365.)

 We conclude that INA's alleged misrepresentations meet each of the requirements for characterizing a communication as privileged under section 47(b).

B. Other Arguments

 CDC and Reliance raise an array of other reasons why we should not find INA's conduct privileged under these facts.   First, they claim INA's misrepresentations were not communications which come within the scope of section 47(b), but a course of conduct which the Supreme Court has recognized as not privileged.  (See, e.g., Kimmel v. Goland (1990) 51 Cal.3d 202, 211–212, 271 Cal.Rptr. 191, 793 P.2d 524 [tortious conduct in litigation, such as illegal wiretapping, is not privileged].)   However, in Rubin v. Green (1993) 4 Cal.4th 1187, 1195–1196, 17 Cal.Rptr.2d 828, 847 P.2d 1044, the Supreme Court stated that even acts taken during litigation which are communicative in their essential nature can be privileged within the meaning of section 47(b).   The test is whether the gravamen of the complaint alleges conduct which is communicative in nature.  (Ibid.)  Here, INA allegedly misrepresented the extent of Portco's insurance coverage.   While that misrepresentation may have required various discrete “acts,” each of those acts was communicative in nature.   The gravamen of the complaint alleges conduct which is privileged.

 Next, CDC and Reliance claim we should not hold INA's misrepresentations privileged because they involved “extrinsic” rather than “intrinsic” fraud.   Appellants note that in Silberg, supra, the court expressly held that acts amounting to extrinsic fraud are not covered by the privilege.  (50 Cal.3d at p. 214, 266 Cal.Rptr. 638, 786 P.2d 365.)   This argument is premised upon a misunderstanding of the applicable terms.   Fraud is extrinsic when the defrauded party was deprived of the opportunity to present his or her claim or defense to the court.  (Flood v. Templeton (1907) 152 Cal. 148, 155–156, 92 P. 78.)   A common example is when one party convinces another not to obtain counsel because the matter is not going to proceed, and then surreptitiously obtains a judgment.  (In re Marriage of Stevenot (1984) 154 Cal.App.3d 1051, 1069, 202 Cal.Rptr. 116.)   Intrinsic fraud, by contrast, is fraud which goes to the merits of the litigation.  (See, e.g., Burch v. Hibernia Bank (1956) 146 Cal.App.2d 422, 432–433, 304 P.2d 212 [Suppression of evidence is intrinsic fraud.].)   It frequently involves the testimonial function.  (See, e.g., La Salle v. Peterson (1934) 220 Cal. 739, 740, 32 P.2d 612 [A false claim supported by perjured testimony is intrinsic fraud.].)   The allegations CDC and Reliance make, that INA misrepresented the amount of Portco's insurance, clearly constitute intrinsic fraud.   They do not come within the Silberg exception.

 CDC and Reliance also claim that holding INA's misrepresentations privileged somehow undermines the principle described in Moradi–Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 304–305, 250 Cal.Rptr. 116, 758 P.2d 58, that insurers can be liable to third party insurance claimants for fraudulent claims practices.   However, we do not hold that insurers are immune from liability for fraudulent claims practices.   Rather, we simply conclude that communications made in the context of underlying litigation cannot form the basis for a subsequent action.

 CDC and Reliance next argue that extending the privilege to INA is inconsistent with the Supreme Court's opinion in White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 221 Cal.Rptr. 509, 710 P.2d 309.   However, in that case, the court merely drew “a careful distinction between a cause of action based squarely on a privileged communication ․ and one based upon an underlying course of conduct evidenced by the communication.”  (Id. at p. 888, 221 Cal.Rptr. 509, 710 P.2d 309.)   After concluding the allegations at issue were of the latter variety, the White court ruled the privilege now set forth in section 47(b) was inapplicable.  (Ibid.)  The analysis in White is really nothing more than an application of the same test which is described in Rubin v. Green, supra.   As we noted above, appellants' complaint is based on allegations which are essentially communicative in character.   That conclusion is entirely consistent with White.

 Next, CDC and Reliance maintain that holding INA's conduct to be protected would violate section 47(b), subdivision (2) which states the privilege does not extend to “any communication made in furtherance of an act of intentional destruction or alteration of physical evidence undertaken for the purpose of depriving a party to litigation of the use of that evidence․”  CDC and Reliance claim INA destroyed certain documents in its claims file, and that these acts can form the basis for liability.   However, this language was only added to the codes in 1991.  (See Stats.1991, ch. 432, § 1, No. 6 West's Cal.Legis.Service, p. 1947.)   The explanatory information describes the new subsection as “establish[ing] an exception” to the then applicable litigation privilege.  (Id. at p. 1946.)   Although appellants' complaint does not clearly state when INA was alleged to have committed these misdeeds, it is apparent that they must have occurred before 1990.   It is, of course, elemental that statutes affecting a substantive right are applied prospectively.  (See 7 Witkin, Summary of Cal.Law. (9th ed. 1988) Constitutional Law, § 495, p. 685.)

 CDC and Reliance also claim we should apply the doctrines of unclean hands and estoppel and bar INA from asserting the privilege.   This argument is, in essence, a request that we resurrect the “ ‘interest of justice’ ” test developed in Bradley v. Hartford Acc. & Indem. Co., supra, and expressly rejected in Silberg v. Anderson, supra.   We are not at liberty to do so.   (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455, 20 Cal.Rptr. 321, 369 P.2d 937.)

 Finally, CDC and Reliance argue that, if the lower court's ruling is affirmed, trial courts will never be able to rely on statements made by insurance carriers when conducting settlement negotiations.   They claim that holding INA's misrepresentations to be privileged would grant insurers carte blanche to commit fraud.   This argument vastly overstates the problem presented by the present case.   INA's alleged misrepresentations were uncovered before the federal action was concluded, and CDC and Reliance ultimately received an amount which included the $300,000 cumulative limits of the three INA policies.   Thus, CDC and Reliance received every penny to which they were entitled.   At that point, the only issue remaining in the case was who should bear the cost of attorney fees caused by INA's alleged misrepresentations.   We believe that issue was best resolved in the federal court, not by initiating a new action in state court.1

C. Conclusion

If appellants' argument that the lower court's ruling encourages insurance fraud were not overstated, this case nonetheless would clearly involve the resolution of two arguably competing public policies of this state.

First, it is axiomatic that truthful and accurate disclosure of insurance coverage in response to appropriate discovery procedures is critical to a very substantial body of modern litigation.   The law mandates a policy requiring provision of reliable answers disclosing whether insurance is available to settle a claim, and the limits of coverage thereby provided.   The reason is clear:  Such facts are usually determinative of and fundamental to the duration, course, and scope of litigation.   This truthful disclosure dictates what resources litigants and their counsel can apply to a case;  and is a substantial factor in determining whether a case is settled or tried, affects the settlement positions of the parties before and during trial, and is usually a crucial consideration before the commitment of time and expense of scarce judicial resources is triggered as the means of final resolution of a case.   Further, if litigants and courts cannot rely on insurance companies to fully and accurately disclose the amount of applicable insurance coverage, the functioning of the civil justice system will be rendered more expensive to litigants and taxpayers by reason of repetitive, onerous, and unnecessary discovery to verify the accuracy of such disclosure and court time to resolve disputes concerning the same.   Our system operates now with varying degrees of efficiency, despite an explosion of litigation, because litigants and their insurance carriers are relied upon to tell the truth when asked to disclose the fact and nature of insurance coverage.   If appellants' allegations are true, INA's conduct should be heavily punished.

Our Supreme Court, in Silberg and Rubin, has clearly established and approved a second policy holding that communications or acts communicative in nature, made or taken during judicial proceedings—as were INA's alleged actions in the case at bench, fall within California's absolute litigation privilege, because the immunization of “participants [in litigation] from liability for torts arising from communications made during judicial proceedings ․ [enhances] the finality of judgment and [avoids] an unending roundelay of litigation, an evil far worse than an occasional unfair result.”   (Silberg v. Anderson, supra, 50 Cal.3d at p. 214, 266 Cal.Rptr. 638, 786 P.2d 365, emphasis added.)

We recognize the unfairness of INA's alleged false understatement of insurance coverage.   It would affect this litigation in a most fundamental and crucial way, striking at the heart of a legal system founded on expected truthful disclosures of such coverage.   We are bound, however, by the decisions of our Supreme Court (Auto Equity Sales, Inc. v. Superior Court, supra, 57 Cal.2d at p. 455, 20 Cal.Rptr. 321, 369 P.2d 937) which holds that the overriding policy of section 47(b)—enhancing the finality of judgments and avoiding unending post judgment litigation to redress wrongs committed during the proceedings predicating the judgment—avoids an evil greater than the grossly unfair result alleged to have occurred here(Silberg v. Anderson, supra, 50 Cal.3d at p. 214, 266 Cal.Rptr. 638, 786 P.2d 365).   In short, the policy established by Silberg immunizes INA from liability here because of the absolute litigation privilege.   We acknowledge this holding produces the “occasional unfair result” Silberg discusses (ibid.), which undermines the policy of requiring truthful disclosure of insurance coverage information.   We, like other courts, read Silberg as controlling here despite an unfair result undermining important policies of this state, i.e., the alleged subornation of perjury (Doctors' Co. Ins. Services v. Superior Court, supra, 225 Cal.App.3d at p. 1300, 275 Cal.Rptr. 674) and the alleged concealment of evidence (Kupiec v. American Internat. Adjustment Co., supra, 235 Cal.App.3d at p. 1333, 1 Cal.Rptr.2d 371) by insurance carriers.

We are, thus, impelled to conclude INA's purported conduct, as abominable as alleged, is sheltered by the absolute litigation privilege afforded by section 47(b).

We must disagree with our dissenting colleague's view that INA's misrepresentations simply constitute “conduct” excluding the application of section 47(b).  (Dis. opn. at p. 470.)   The misrepresentations were made in discovery responses and in settlement discussions, and were quintessentially communicative in nature.   Those misrepresentations were certainly no less heinous or communicative than various acts characterized as communication by our Supreme Court and the Courts of Appeal in applying section 47(b).  (See Silberg v. Anderson, supra, 50 Cal.3d at pp. 219–220, 266 Cal.Rptr. 638, 786 P.2d 365 [Wife's attorney, concealing his affair with a psychologist, falsely duped husband into believing that in performing an evaluation the psychologist was impartial;  the attorney's conduct was held communicative.];  Kupiec v. American Internat. Adjustment Co., supra, 235 Cal.App.3d at p. 1333, 1 Cal.Rptr.2d 371 [The conduct of a liability carrier and its investigative agency, in concealing evidence and misrepresenting facts concerning that concealment during discovery, was held to be communicative acts.];  Doctors' Co. Ins. Services v. Superior Court, supra, 225 Cal.App.3d at pp. 1298–1299, 275 Cal.Rptr. 674 [An insurer's alleged conduct, in suborning its insured to perjure himself in deposition testimony, constituted a communicative act.].)

Nor do we think it appropriate to create an exception to section 47(b) for communications regarding insurance coverage.   Like our dissenting colleague, we appreciate the unique role that insurance plays in modern litigation;  however, that role is no more important to the administration of justice than the obligation of a party to testify truthfully.   Despite the importance of truthful testimony, the courts have uniformly held that a party who testifies falsely is entitled to the protection of section 47(b).  (See Silberg v. Anderson, supra, 50 Cal.3d at p. 218, 266 Cal.Rptr. 638, 786 P.2d 365 and cases cited there;  see also Kupiec v. American Internat. Adjustment Co., supra, 235 Cal.App.3d at p. 1333, 1 Cal.Rptr.2d 371.)   Since the Supreme Court and Courts of Appeal have refused to exempt the application of section 47(b) to conduct, communicative in nature, constituting perjury or subornation of perjury, both felonies (Pen.Code, §§ 118, 127), adoption of the exception the dissent suggests would require us to ignore the Supreme Court's holding in Silberg and Rubin, and violate our obligation to follow Supreme Court decisions.  (Auto Equity Sales, Inc. v. Superior Court, supra, 57 Cal.2d at p. 455, 20 Cal.Rptr. 321, 369 P.2d 937.)

 Silberg unequivocally establishes the threat of derivative legal action based on communications made during litigation as the paramount evil which must be avoided, even at the risk of producing unfair results in some cases which undermine other important state policies.

We conclude the trial court properly sustained INA's demurrer.2

III. Disposition

The judgment is affirmed.

I respectfully but vigorously dissent.   I disagree with the majority that “This is a dispute over attorney fees.”   This is a dispute over fraudulent conduct of an insurance company intentionally failing to disclose the amount of policy limits available to satisfy a plaintiff's claim.   Under the holding of the majority, insureds and their carriers are free to commit fraud which causes monetary damages, yet have no tort liability for those damages.

I would hold that fraudulent conduct by an insurance carrier in failing to disclose insurance policy limits does not fall within the absolute litigation privilege for communications provided by Civil Code section 47, subdivision (b), section 47(b).   Alternatively, if it is communication, because of the critical nature of full disclosure of insurance policy limits in achieving settlement of civil cases, I would hold that the fraudulent failure to disclose insurance policy limits is an exception to the general rule providing an absolute litigation privilege.

Because INA's insured was bankrupt, the only monetary recovery available to satisfy the damages claimed by the plaintiff in the underlying action was from the bankrupt's insurance coverage.   Since this appeal is from a judgment after a demurrer was sustained, we accept as true the allegations of the complaint.   It is alleged that INA fraudulently concealed the existence of $200,000 of available insurance coverage for INA's own benefit, and failed to disclose the existence of an excess policy with another carrier.   This fraud was allegedly carried out both in formal discovery and in settlement conferences before the court.   In my view this was not a communication privileged pursuant to Silberg v. Anderson (1990) 50 Cal.3d 205, 212, 266 Cal.Rptr. 638, 786 P.2d 365.  (Communication privileged if made in judicial or quasi-judicial proceedings by litigants or other participants which was authorized by law in order to achieve the objects of the litigation and which had some connection or logical relation to the action.)   This was fraudulent conduct, thus it is not privileged under section 47(b).

This case “forces us to draw a careful distinction between a cause of action based squarely on a privileged communication and one based upon an underlying course of conduct evidenced by communication.”  (White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 888, 221 Cal.Rptr. 509, 710 P.2d 309;  also see Kimmel v. Goland (1990) 51 Cal.3d 202, 211–212, 271 Cal.Rptr. 191, 793 P.2d 524.)   The allegations against INA constitute a course of fraudulent conduct against a party to the underlying action, as well as against the court, and is conduct evidenced by communication or failure to communicate.

As the majority opinion points out, knowledge of insurance policy limits is critical to obtaining settlement of civil cases and to the smooth operation of our civil justice system.   Failure to subject an insurance company to liability for fraudulently concealing insurance policy limits, let alone the existence of policies, is a disastrous blow to the administration of civil justice.   It puts the adversary of an insured in the position of no longer being able to rely upon answers to formal discovery given under oath, or on representations to the court in settlement conferences, as to the existence of policies or of policy limits.   This is intolerable.

INA's reply is that the imposition of a sanction by the court in the underlying action is available as a deterrent against such conduct;  thus the litigation privilege of section 47(b) should preclude actions such as this.   This is not a satisfactory answer for injury caused by fraud for which sanctions cannot compensate.   It would be of little satisfaction to the quadriplegic plaintiff who settles for a small sum based on discovery responses stating policy limits under oath, being left unable to afford necessary care, only to discover years later that there were additional limits or additional policies which were fraudulently hidden.   A sanction is not going to compensate for years of inadequate care.   In any event, such fraud will most likely never be discovered because knowledge of policy limits or the existence of policies lies solely with the insured or the carrier.   The threat of damages for fraud is essential to provide incentive for insurance carriers to comply truthfully with their duty of disclosure under the law.

If the majority is correct that fraudulent misrepresentation as to policy limits is communication because of transmittal (or nontransmittal) as part of discovery, or in oral or written representations to the court, the litigation privilege still is inapplicable because two critical Silberg prongs are not present.   Such conduct has neither a connection nor a logical relation to the action, and is not action taken to achieve the objects of the litigation.

Finally, even if a fraudulent failure to disclose policy limits and the existence of excess coverage can be construed to be a communication meeting all the elements of the Silberg test, accurate disclosure of policy limits is so critical to the operation of our civil justice system that fraudulent failure to do so should be an exception to the litigation privilege provided by section 47(b).   At the very least, such conduct should estop the insurance carrier from being able to claim the privilege.   Fraud should be neither encouraged nor rewarded.

FOOTNOTES

1.   Citing Bergeson v. Dilworth (D.Kan.1990) 132 F.R.D. 277, 280 (vacated Bergeson v. Dilworth (D.Kan.1990) 749 F.Supp. 1555, 1568), appellants claim the federal court could not punish INA for its misrepresentations because it was not a party to the suit and was not subject to rule 11 sanctions.  (See Fed.Rules Civ.Proc., 28 U.S.C.)   Assuming arguendo this were true, we are confident the federal court would not allow misrepresentations such as these to go unpunished.   For example, the court could have imposed discovery sanctions on Portco which would then be passed on to INA.  (See, e.g., O'Brien v. Fischel (D.Hawaii 1987) 74 B.R. 546, 550 [A litigant in bankruptcy is still subject to sanctions under rule 11.];   see also Papadakis v. Zelis (1991) 230 Cal.App.3d 1385, 1389, 282 Cal.Rptr. 18.)   Alternately, INA may have made some of its misrepresentations directly to the federal court during settlement discussions which might form the basis for civil contempt proceedings.   (See, e.g., 18 U.S.C. § 401;  Connolly v. J.T. Ventures (7th Cir.1988) 851 F.2d 930, 932–933.)

2.   Having reached this conclusion, we need not address the arguments in INA's protective cross-appeal.

PETERSON, Presiding Justice.

HANING, J., concurs.