ESSEX INSURANCE CO v. FIVE STAR DYE HOUSE INC (2005)

INTRODUCTION

In the published portion of this opinion, we reverse the trial court's order denying attorney fees and hold that an insured may assign its right, established in Brandt v. Superior Court (1985) 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796 (Brandt ), to recover as damages attorney fees incurred in obtaining the benefits of an insurance policy that were denied as a result of the insurer's bad faith (Brandt fees).   In the unpublished portion of this opinion, we discuss why we affirm the trial court's determination that there was insurance coverage and a bad faith denial of coverage for a claim arising out of the operation of a commercial trucking business.   Also, in the unpublished portion of the opinion, we discuss why we affirm the trial court's decisions that the damages do not have to be reduced to the amount of the policy limit or to take into account prior settlement amounts and affirm the trial court's award of costs.

PROCEDURAL BACKGROUND

This case is before us for the second time.   It emanates from a dispute over insurance coverage by Five Star Dye House, Inc.'s (Five Star) lawsuit (the underlying action) against L.A. Machinery Moving (L.A.Machinery), among others, for damages Five Star suffered when a commercial dryer L.A. Machinery was transporting fell while on L.A. Machinery's truck, and L.A. Machinery failed promptly to repair the dryer.   L.A. Machinery tendered the claim to its insurer, Essex Insurance Co. (Essex), and Essex denied coverage.   Essex brought the instant action for declaratory relief against Five Star, Luis Sanchez (Sanchez), and Sanchez doing business as L.A. Machinery.   L.A. Machinery had assigned to Five Star its claims against Essex.

In its complaint, Essex sought a declaration that (1) it was not obligated to defend or indemnify L.A. Machinery in the underlying action, (2) the underlying action did not seek recovery for “property damage,” (3) the damage claims in the underlying action did not fall within the coverage of the policy, and (4) the policy excluded the damages claimed in the underlying action.   Five Star, Sanchez, and L.A. Machinery cross-complained against Essex for breach of the insurance contract and bad faith arising from Essex's refusal to defend Sanchez and L.A. Machinery in the underlying action.   Sanchez and L.A. Machinery ultimately were dismissed from the present action as a result of Essex's demurrer to the cross-complaint and Essex's voluntary dismissal of them from the declaratory relief action.

In the first appeal (Case No. B128725), we reversed a judgment in favor of Essex and against Five Star, Sanchez, and L.A. Machinery, holding there were disputed issues of fact regarding the contents of the insurance policy L.A. Machinery purchased from Essex.   Following a jury trial on the contents of the insurance policy and a court trial on coverage, bad faith, and damages issues, the trial court found that the policy provided coverage for the underlying claim, that Essex acted in bad faith by denying L.A. Machinery's claim and violating its duty to defend, and that Five Star was not entitled to Brandt fees.   Judgment in the amount of $2,242,776.69 was entered in favor of Five Star, and the trial court awarded Five Star costs in the amount of $47,760.35 after the court granted in part Essex's motion to tax costs.   Essex appeals from the judgment, and Five Star cross-appeals from the judgment to the extent the trial court ruled that Five Star was not entitled to Brandt fees.

FACTUAL BACKGROUND **

C. Brandt Fees

In its cross-complaint, Five Star, as assignee of Sanchez's and L.A. Machinery's claims against Essex, sought to recover the attorney fees it incurred in bringing its claim for breach of the insurance contract.   As the California Supreme Court explained in Brandt v. Superior Court, supra, 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796, such fees are recoverable as damages in an action for breach of the implied covenant of good faith and fair dealing if it is found that the insurer acted in bad faith.  (Id. at p. 817, 210 Cal.Rptr. 211, 693 P.2d 796;  see also Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 806, 16 Cal.Rptr.3d 374, 94 P.3d 513 (Cassim ).)   Although the trial court in this case found that Essex had acted in bad faith, it denied Five Star's request, citing Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501, 15 Cal.Rptr.2d 726 (Xebec ), on the ground that the right to Brandt fees is not assignable.   Five Star challenges this ruling in its cross-appeal.

In Xebec, supra, 12 Cal.App.4th 501, 15 Cal.Rptr.2d 726, after reversing a judgment against the insurer because of an erroneous instruction, the court suggested in dictum that although an insured may assign its claims against an insurer for breach of contract and bad faith, the insured cannot assign the right to recover as tort damages the attorney fees incurred in prosecuting the breach of contract claim.  (Id. at p. 571, 15 Cal.Rptr.2d 726.)   The court reasoned that because the insured did not incur those fees, the assignee cannot recover them as damages because they are not damages incurred by the insured and such fees cannot be deemed tort damages to the assignee.  (Ibid.) Respectfully, we disagree with Xebec.

 Civil Code sections 953 and 954 “establish the policy of the state, the “ ‘assignability of things [in action] is now the rule;  nonassignability, the exception;  and this exception is confined to wrongs done to the person, the reputation, or the feelings of the injured party․’ ” (Webb v. Pillsbury (1943) 23 Cal.2d 324, 327, 144 P.2d 1.)”  (Bush v. Superior Court, supra, 10 Cal.App.4th at p. 1381, 13 Cal.Rptr.2d 382;  see also McLaughlin v. National Union Fire Ins. Co. (1994) 23 Cal.App.4th 1132, 1146, 29 Cal.Rptr.2d 559 [only exception to general rule of assignability is for purely personal torts, i.e., “those involving wrongs done to the person, reputation or feelings of the injured party”].)   As the California Supreme Court explained in Reichert v. General Ins. Co. (1968) 68 Cal.2d 822, 69 Cal.Rptr. 321, 442 P.2d 377, “We have said that the ‘statutes in this state clearly manifest a policy in favor of the free transferability of all types of property, including rights under contracts.’  [Citation.]  As a general proposition it can be said ‘that the only causes or rights of action which are not transferable or assignable in any sense are those which are founded upon wrongs of a purely personal nature, such as slander, assault and battery, negligent personal injuries, criminal conversation, seduction, breach of marriage promise, malicious prosecution, and others of like nature.   All other demands, claims and rights of action whatever are generally held to be transferable.’  [Citations.]”  (Id. at p. 834, 69 Cal.Rptr. 321, 442 P.2d 377.)   Thus, an insured may assign a cause of action against an insurer for breach of the implied covenant of good faith and fair dealing.  (Smith v. State Farm Mut. Auto. Ins. Co. (1992) 5 Cal.App.4th 1104, 1110-1111, 7 Cal.Rptr.2d 131 (Smith ).)   The assignee “ ‘stands in [the] shoes' ” of the insured, “possessing the rights which the insured had against the insurer.”   (Id. at p. 1111, 7 Cal.Rptr.2d 131;  see also 1 Witkin, supra, Contracts, § 947, p. 843 [an assignment “carries with it all rights of the assignor”].)

 It appears that the court in Xebec, supra, 12 Cal.App.4th 501, 15 Cal.Rptr.2d 726, concluded that Brandt fees represent a purely personal loss to the insured.   The case the Xebec court cites in support of its statement that Brandt fees may not be assignable stands for the proposition that damages arising from “the personal tort aspect of the bad faith cause of action”-such as emotional distress damages and punitive damages-are not assignable.  (See Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 942, 132 Cal.Rptr. 424, 553 P.2d 584 (Murphy ), cited in Xebec, supra, 12 Cal.App.4th at p. 572, 15 Cal.Rptr.2d 726.)   But Brandt fees are not founded upon a wrong of a purely personal nature or, as stated in Murphy, a “personal tort aspect of the bad faith cause of action” (Murphy, supra, 17 Cal.3d at p. 942, 132 Cal.Rptr. 424, 553 P.2d 584).   Instead, they are “an economic loss” caused by an insurer's bad faith denial of coverage under an insurance policy.  (Brandt, supra, 37 Cal.3d at p. 817, 210 Cal.Rptr. 211, 693 P.2d 796.)   The purpose of allowing an insured to recover Brandt fees-i.e., the attorney fees incurred to vindicate the insured's rights under the insurance policy-is to make the insured whole by allowing the insured to recover the policy benefits in full, undiminished by the costs involved in bringing an action to enforce the contract.  (Burnaby v. Standard Fire Ins. Co. (1995) 40 Cal.App.4th 787, 795, 47 Cal.Rptr.2d 326;  May v. Miller (1991) 228 Cal.App.3d 404, 408, 278 Cal.Rptr. 341.)

 In the present case, L.A. Machinery assigned to Five Star its claims against Essex-including its claims for breach of the insurance contract and breach of the implied covenant of good faith and fair dealing.   Thus, L.A. Machinery assigned its right to recover the policy benefits in full, undiminished by the attorney fees incurred in bringing the action to recover those benefits.   The identity of the party incurring attorney fees to vindicate the insured's rights under the insurance policy is irrelevant-the right that is assigned is the right to recover the policy benefits in full.   This right to recover the policy benefits in full is not the kind of personal right that is not assignable.   Therefore, the trial court erred when it found that Five Star was not entitled to Brandt fees.   We remand the matter to the trial court to determine the amount of attorney fees to which Five Star is entitled in accordance with the procedure set forth in Cassim, supra, 33 Cal.4th at page 812, 16 Cal.Rptr.3d 374, 94 P.3d 513.

DISPOSITION

The judgment is reversed to the extent it does not include damages to which Five Star is entitled under Brandt v. Superior Court, supra, 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796, and the matter is remanded to the trial court to determine under Cassim v. Allstate Ins. Co., supra, 33 Cal.4th 780, 16 Cal.Rptr.3d 374, 94 P.3d 513, the amount of Brandt fees to which Five Star is entitled.   In all other respects, the judgment is affirmed.   Five Star shall recover its costs on appeal.

I concur in the published portion of the majority opinion.^***

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FOOTNOTES

FOOTNOTE.   See footnote *, ante.

FOOTNOTE.   Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinion is certified for publication with the exception as indicated by double brackets [[ ]] of this concurring opinion.

MOSK, J.

I concur:  ARMSTRONG, J.