RICHARDSON v. STATE FARM FIRE AND CASUALTY COMPANY (1995)

Robert G. Richardson appeals a summary judgment in favor of State Farm Fire and Casualty Company on his cross-complaint for breach of the covenant of good faith and fair dealing based on State Farm's alleged breach of a duty to defend by delaying payments to the attorneys who were defending Richardson.   The trial court granted summary judgment based on findings State Farm had no duty to defend or indemnify Richardson and any delay in making payments did not impair the quality of Richardson's defense or otherwise prejudice his substantive rights.

On appeal, Richardson contends the court erred in granting summary judgment based on the lack of impairment of his defense, because he was not seeking damages based on impairment of his defense but for the lost use of money paid for attorney's fees, attorneys' fees incurred to compel State Farm to pay the fees it had agreed to pay and emotional distress damages resulting from the anxiety caused by the insurer's failure to pay the fees.   Richardson also contends the court erred in finding that because there was no coverage under the policy State Farm was retroactively relieved of any liability for breaches of its duty to defend.   We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

State Farm issued a personal liability umbrella policy to Richardson.   This policy covered accidents resulting in personal injury or property damage and contained a provision promising to defend Richardson if he was sued on a claim covered by the policy.   The policy defined “personal injury” as including “libel, slander, defamation of character or invasion of rights of privacy.”   The policy excluded coverage for claims caused by Richardson's business operations.

In December 1986, while the personal liability umbrella policy was in effect, Richardson was named as a defendant in a lawsuit, McKellar Development of La Jolla v. Richardson, et al. (Super.Ct. San Diego County, 1986, No. 579613).  The complaint alleged various causes of action based on Richardson's breach of a real property purchase agreement.   Richardson hired the law firm of Luce, Forward, Hamilton and Scripps (hereafter Luce, Forward) to defend him.

On March 16, 1987, Luce, Forward tendered defense of the McKellar action to State Farm.   On March 31, 1987, State Farm wrote to Richardson, questioning whether the lawsuit involved a claim covered by the policy.   On April 13, 1987, State Farm wrote to Luce, Forward, explaining it did not believe the lawsuit involved a covered claim because the complaint did not appear to involve claims for either personal injury or property damage.

Subsequently, the plaintiff in the McKellar action amended his complaint to include a claim for damages to his “credit and business reputation.”   On May 8, 1987, Luce, Forward, pointed out the amendment to State Farm and asserted this claim was covered under the policy's inclusion of personal injury damages for “libel, slander, defamation of character or invasion of rights of privacy.”

On July 23, 1987, State Farm wrote to Richardson questioning whether the claim was covered, pointing out there was a question whether the claim involved bodily injury or property damage, involved bodily injury or property damage which was expected or intended by Richardson (which was excluded), involved damages due to Richardson's business pursuits or provision of professional services (both of which were excluded) or involved liability arising out of an agreement in connection with Richardson's business.   State Farm sent a copy of this letter to Luce, Forward.

On September 3, 1987, State Farm accepted the tender of the defense, stating it was reserving its rights to deny coverage, refuse to further defend, to seek reimbursement of defense costs and to pursue a declaratory relief or other appropriate action if necessary.   State Farm requested Luce, Forward provide “a complete, accurate and detailed scenario of the background of this claim,” monthly written status reports and copies of all documents filed in the case.   State Farm also stated, it was “currently paying defense counsel in the range of $85.00 to $125.00 an hour” and assumed Luce, Forward would bill them “within those perameters [sic].”

In November 1987, State Farm requested summaries of depositions and interrogatories, monthly status reports and sent Luce, Forward a check for $1,148.35 to cover the October 26, 1987 billing.   This amount was less than requested.   State Farm disputed some of the items being billed.   The record contains a series of letters between State Farm and Luce, Forward disputing billings and complaining about payments being late.

In September 1989, a mistrial was declared in the McKellar action due to the illness of Richardson's attorney.   A new trial date was set for January, 1990.

In December 1989, State Farm filed a declaratory relief action seeking a declaration it had no duty to defend or indemnify Richardson in the McKellar action.

By March 30, 1990 (after judgment in the McKellar case), State Farm had paid $418,543.32 to defend Richardson.   Richardson conceded in a subsequent deposition that none of the delays in payment affected the quality of his defense.

On April 4, 1990, Richardson filed a cross-complaint alleging State Farm had breached its covenant and the covenant of good faith and fair dealing.   In the complaint as amended (in June 1990), Richardson alleged State Farm had breached the contract by failing to provide benefits to which he was entitled.   Richardson alleged State Farm acted in bad faith by initially denying his claim and then later withholding and delaying payments to Luce, Forward.   Richardson, inter alia, alleged he had “been forced to retrain counsel in order to recover Policy benefits owed” and was “entitled to recover his reasonable attorneys' fees incurred in connection with seeking unpaid Policy benefits owed by [State Farm].”

On October 5, 1990, State Farm filed a motion for summary adjudication.   The trial judge granted summary adjudication on one issue (i.e., that the McKellar action did not expose Richardson to liability for bodily injury within the policy) but otherwise denied the motion.¹

In March 1991, State Farm amended its complaint.

In June 1991, State Farm paid Luce, Forward an additional $350,035.10 to cover statements from October 26, 1989 to March 31, 1991 and pre-tender litigation expenses from the service of the complaint to March 15, 1987.

In August 1991, the court ordered the attorney fee dispute between State Farm and Luce, Forward (over the hourly rate to be paid by State Farm and over certain billed items) to be submitted to arbitration pursuant to Civil Code section 2860.

In September 1991, State Farm again filed for summary adjudication or judgment.   The trial court granted the motion in November 1991 as to State Farm's complaint, finding State Farm had no duty to either defend or indemnify Richardson.

In January 1992, the trial court granted summary judgment in State Farm's favor on Richardson's cross-complaint, explaining:

“Motion for summary judgment is granted as Court finds as a matter of law that the allegations of the cross-complaint do not support a cause of action for bad faith as there is no allegation that the delay in paying attorney's fees impaired the quality of the defense or otherwise prejudiced cross-complainant's substantive rights, per Travelers Insurance v. Lesher.   Court further finds that there can be no cause of action for breach of contract for failure to pay policy benefits when there is no coverage under the policy.   Amended cross-complaint is dismissed, and the case is disposed of in its entirety.”  (Emphasis in original.)

DISCUSSION

Richardson contends the trial court erred in granting summary judgment.   He argues that he is entitled to damages for emotional distress and attorneys' fees he paid because State Farm, in bad faith, withheld and delayed payments for his defense.   He contends he is entitled to damages for State Farm's bad faith conduct despite the uncontested findings that State Farm had no duty to either defend or indemnify him in the McKellar action and State Farm's conduct did not impair his defense.

 Whether an insurance company had a duty to defend is a proper subject for summary adjudication.  (Regan Roofing Co. v. Superior Court (1994) 24 Cal.App.4th 425, 29 Cal.Rptr.2d 413;  Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 298–301, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)

The summary judgment procedure aims to discover whether there is evidence requiring the fact-weighing procedures of a trial.  (Decker v. City of Imperial Beach (1989) 209 Cal.App.3d 349, 353, 257 Cal.Rptr. 356.)  “[T]he trial court in ruling on a motion for summary judgment is merely to determine whether such issues of fact exist, and not to decide the merits of the issues themselves.  [Citation.]”  (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1107, 252 Cal.Rptr. 122, 762 P.2d 46.)   The trial court decides whether triable issues exist by examining the affidavits and evidence before the court, including any reasonable inference which may be drawn from the facts presented.  (Gootee v. Lightner (1990) 224 Cal.App.3d 587, 591, 274 Cal.Rptr. 697.)

“ ‘A defendant moving for summary judgment must conclusively negate a necessary element of the plaintiff's case or establish a complete defense, and thereby demonstrate that under no hypothesis is there a material factual issue which requires the process of a trial.  [Citation.]’ ”  (Snoke v. Bolen (1991) 235 Cal.App.3d 1427, 1431, 1 Cal.Rptr.2d 492;  Evan F. v. Hughson United Methodist Church (1992) 8 Cal.App.4th 828, 841, 10 Cal.Rptr.2d 748.)   If the defendant presents affidavits or declarations sufficient to sustain the motion, the burden shifts to the opposing party to demonstrate triable issues of fact exist.  (Chern v. Bank of America (1976) 15 Cal.3d 866, 873, 127 Cal.Rptr. 110, 544 P.2d 1310.)  “A party may not avoid summary judgment based on mere speculation and conjecture [citation], but instead must produce admissible evidence raising a triable issue of fact.  [Citation.]”  (Compton v. City of Santee (1993) 12 Cal.App.4th 591, 595–596, 15 Cal.Rptr.2d 660.)

In reviewing the propriety of a summary judgment, the appellate court must resolve all doubts in favor of the party opposing the judgment.  (Palma v. U.S. Industrial Fasteners, Inc. (1984) 36 Cal.3d 171, 183, 203 Cal.Rptr. 626, 681 P.2d 893.)   The reviewing court conducts a de novo examination to see whether there are any genuine issues of material fact or whether the moving party is entitled to summary judgment as a matter of law.  (Lichty v. Sickels (1983) 149 Cal.App.3d 696, 699, 197 Cal.Rptr. 137.)   While “[s]ummary judgment is a drastic procedure, should be used with caution [citation] and should be granted only if there is no issue of triable fact [citation]” (Brose v. Union–Tribune Publishing Co. (1986) 183 Cal.App.3d 1079, 1081, 228 Cal.Rptr. 620), it is also true “[j]ustice requires that a defendant be as much entitled to be rid of an unmeritorious lawsuit as a plaintiff is entitled to maintain a good one.”  (Larsen v. Johannes (1970) 7 Cal.App.3d 491, 507, 86 Cal.Rptr. 744.)  “A defendant is entitled to summary judgment if the record establishes as a matter of law that none of the plaintiff's asserted causes of action can prevail.  [Citation.]”  (Molko v. Holy Spirit Assn., supra, 46 Cal.3d at p. 1107, 252 Cal.Rptr. 122, 762 P.2d 46.)

 A covenant of good faith and fair dealing is implied in all contracts, including insurance policies.  (Camelot By the Bay Condominium Owners' Assn. v. Scottsdale Ins. Co. (1994) 27 Cal.App.4th 33, 45, 32 Cal.Rptr.2d 354.)   Pursuant to the covenant, the parties agree not to do anything to injure the right of the other to receive the benefits of the agreement.  (Ibid.)  “Tort liability for breach of the implied covenant of good faith and fair dealing has been variously measured.   The primary test is whether the insurer withheld payment of an insured's claim unreasonably and in bad faith.  [Citation.]”   (Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1151, 271 Cal.Rptr. 246.)

 As a general rule, before an insured can recover tort damages for breach of the implied covenant of good faith or fair dealing based on the insurance company's wrongful denial of benefits or a defense, the insured must establish the claim was covered by the policy or the defense was due;  “[w]here benefits are withheld for a proper cause [e.g., lack of coverage, failure to timely file claim], there is no breach of the implied covenant.  [Citation.]”   (Love v. Fire Ins. Exchange, supra, 221 Cal.App.3d 1136, 1151, 271 Cal.Rptr. 246.)   As we explained in Love, a first party property insurance case:  “[T]here are at least two separate requirements to establish breach of the implied covenant:  (1) benefits due under the policy must have been withheld;  and (2) the reason for withholding benefits must have been unreasonable or without proper cause.  [Citations.]”  (Ibid., fn. omitted.)

 An insurance company's duty to defend arises from the contractual provision contained in a liability policy.  (McMillin Scripps North Partnership v. Royal Ins. Co. (1993) 19 Cal.App.4th 1215, 1220–1221, 23 Cal.Rptr.2d 243.)   An insurer has a duty to defend an insured if it becomes aware of, or if a third party lawsuit pleads, facts that give rise to potential liability under the insurance policy.  (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168.)   An insurer's duty to defend is separate from and broader than its duty to indemnify.  (State Farm Fire & Casualty Co. v. Eddy (1990) 218 Cal.App.3d 958, 965, 267 Cal.Rptr. 379.)  “[T]he insurer's obligation is not unlimited;  the duty to defend is measured by the nature and kind of risks covered by the policy [citations].”  (Giddings v. Industrial Indemnity Co. (1980) 112 Cal.App.3d 213, 218, 169 Cal.Rptr. 278.)

An insurance company's duty to its insured includes not only hiring competent defense counsel, but also providing sufficient funds to conduct the defense, “ ‘keep[ing] abreast of the progress and status of the litigation in order that it may act intelligently and in good faith on settlement offers' ” and such “[o]ther duties and obligations” as are “ ‘necessary to assure the provision to [insured] of a proper defense by the insurer.’  [Citation.]”  (Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 191, 231 Cal.Rptr. 791.)  “The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded [citation], or until it has been show that there is no potential for coverage, ․”  (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153, emphasis in original.)   If an insurance company accepts a tender of defense, it may be liable for damages due to an inadequate defense even when there is ultimately a determination the insurance company had no duty to defend or indemnify.  (Travelers Ins. Co. v. Lesher, supra, 187 Cal.App.3d 169, 231 Cal.Rptr. 791, see also Love v. Fire Ins. Exchange, supra, 221 Cal.App.3d 1136, 1152, 271 Cal.Rptr. 246.)

 Here, Richardson contends State Farm's withholding and delay in making payments to his attorneys constitutes conduct sufficient to support a claim for bad faith.   Richardson argues that delay in paying defense costs, in and of itself, can support a tort claim for damages.

In Travelers Ins. Co. v. Lesher, supra, 187 Cal.App.3d 169, 231 Cal.Rptr. 791, a third party liability case with facts the court characterized as “unusual” (id. at p. 180, 231 Cal.Rptr. 791), the court upheld a bad faith damage award against an insurance company which had been determined to have no duty to defend or indemnify the insured.   The Lesher court found the insured was entitled to recover for bad faith damages on the basis the insured had presented evidence showing the insurance company's refusal to engage in settlement negotiations and to appoint a substitute attorney until shortly before trial was scheduled to begin resulted in the insured suffering damage due to having to enter an unfavorable settlement.

Here, unlike Lesher, there is no contention Richardson was denied an adequate defense.   It is undisputed that Richardson's defense was adequate and that any delays by State Farm did not affect the quality of the defense provided to Richardson.   The delays here, rather than affecting Richardson's defense, primarily involved a dispute between State Farm and the attorneys over particular items billed and hourly rates.

Richardson argues the trial court erred in limiting Lesher to situations where the insurance company's actions have prejudiced the insured's defense.   He contends he was entitled to seek damages for State Farm's delay in paying the defense costs.   To support his contention an insured may recover tort damages for an insurance company's delay in paying policy benefits, he cites McCormick v. Sentinel Life Ins. Co. (1984) 153 Cal.App.3d 1030, 1051, 200 Cal.Rptr. 732 and Schlauch v. Hartford Accident & Indemnity Co. (1983) 146 Cal.App.3d 926, 936, 194 Cal.Rptr. 658.   Neither of these cases hold mere delay, in and of itself, can support a bad faith claim when the insurance company has no liability under the policy.   Rather, these cases hold when a delay in paying a policy benefit is tantamount to a denial of benefits, the insured may be entitled to damages for breach of the covenant of good faith and fair dealing.   Here, there was no delay which was tantamount to a denial of “benefits” under the policy.   State Farm actually provided a defense to Richardson.

We have previously rejected a claim similar to Richardson's that a bad faith tort claim can be based on mere delay when the insurer had no liability under the policy.   In Love v. Fire Ins. Exchange, supra, 221 Cal.App.3d 1136, 271 Cal.Rptr. 246, a first party property insurance case, we rejected a claim inadequacy in the investigation or delay in denying a claim could independently support a claim for bad faith when the insurance company had properly denied the claim because it was time-barred.   We explained:

“In essence, the covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party's rights to the benefits of the contract.   Thus, when benefits are due an insured, delayed payment based on inadequate or tardy investigations, oppressive conduct by claims adjusters seeking to reduce the amounts legitimately payable and numerous other tactics may breach the implied covenant because it frustrates the insured's primary right to receive the benefits of his contract—i.e., prompt compensation for losses.   Absent that primary right, however, the auxiliary implied covenant has nothing upon which to act as a supplement, and should not be endowed with an existence independent of its contractual underpinnings.”  (Love v. Fire Ins. Exchange, supra, 221 Cal.App.3d 1136, 1153, 271 Cal.Rptr. 246.)

Like the insureds in Love, Richardson has failed to establish State Farm wrongfully frustrated a primary right to receive the benefits of his contract since the trial court found, and Richardson does not dispute, that State Farm had no duty under the policy to provide a defense.

 Richardson seeks to distinguish Love as a first party property insurance case which is not applicable to the situation here which involves a personal liability policy.   We disagree.   We believe the basic principle of Love is sound, that is, as a rule an insured may not recover bad faith damages for an insurance company's delay relating to benefits which are not otherwise due under the policy.  Lesher, a liability policy case, does not hold otherwise.  Lesher did not involve mere delay;  Lesher involved actions by the insurance company which prejudiced the insured's defense.

Richardson argues a subsequent judicial determination an insurance company has no duty to defend or liability under a policy cannot retroactively relieve an insurance company of its obligation to conduct in good faith a defense it has voluntarily accepted.   He argues once State Farm voluntarily accepted the tender of his defense, it was obligated to pay all defense costs and its withholding or delaying payments to the attorneys constituted bad faith entitling him to damages for lost use of money, attorneys' fees incurred to obtain payment from State Farm and for emotional distress.   We find Richardson's “retroactivity” argument unpersuasive.

 It is well established that when an insurance company defends under a reservation of rights and reserves the right to seek reimbursement of attorneys' fees paid for the defense if there is a subsequent determination the insurance company had no duty to defend, the insurance company has a right to seek reimbursement of the attorneys' fees it expended in the insured's defense.  (Gossard v. Ohio Casualty Group of Ins. Companies (1994) 29 Cal.App.4th 1660, 1673, 35 Cal.Rptr.2d 190.) ²  Here, State Farm reserved its right to seek reimbursement of the attorneys' fees for Richardson's defense.   Thus, State Farm, upon the judicial determination it had no duty to defend, was entitled to seek reimbursement of all the attorneys' fees it expended in Richardson's defense.³  In other words, contrary to Richardson's argument, State Farm was entitled to “retroactive” relief.   Richardson was not entitled to lost use of money for attorneys' fees he paid for his defense or for attorneys' fees incurred to require State Farm to pay for his defense.   State Farm had no obligation to pay any of Richardson's attorneys' fees.   Richardson suffered no lost use of money for attorneys' fees or loss of attorneys' fees for requiring State Farm to pay his attorneys' fees since it has been determined he, and not State Farm, was liable for those fees;  any lost use of money here was suffered by State Farm and not Richardson.⁴  Nor is Richardson entitled to emotional distress damages based on mere delay.

Richardson has failed to raise any material issues of fact which would defeat summary judgment.   The fact State Farm may have delayed or disputed some payments (whether justified or not) does not support an independent claim for bad faith damages where, as here, State Farm was found to have had no duty to provide any defense to Richardson and no actions by State Farm affected the quality of the defense which Richardson received.   The mere delay by State Farm did not result in denying Richardson any benefits under the policy which were otherwise due.   The trial court correctly granted summary judgment in favor of State Farm.

DISPOSITION

The judgment is affirmed.

FOOTNOTES

1.   At the time of its ruling, the court indicated its ruling was based on the fact the McKellar action was pending on appeal and until liability was finally established, the court could not determine State Farm's duty to indemnify.   The court also indicated its belief the policy language was ambiguous, especially what was included within personal injury coverage for libel, etc., and that a reasonable person would believe, as did Richardson, that State Farm had a duty to defend in the McKellar action.   However, the court subsequently clarified its order, stating, “it was not the Court's intention to make affirmative rulings in favor of either party on [any of the issues on which it denied summary adjudication] that would be binding on the Trial Court.   Rather, the Court merely denied State Farm's Motion for Summary Adjudication of issues Two through Eight.”

2.   Richardson misplaces his reliance on Reliance Ins. Co. v. Alan (1990) 222 Cal.App.3d 702, 272 Cal.Rptr. 65, for the proposition an insurance company is not entitled to reimbursement of defense costs.   The Reliance court merely rejected an argument based on equitable restitution.   Richardson's reliance on Travelers Ins. Co. v. Lesher, supra, 187 Cal.App.3d 169, 231 Cal.Rptr. 791, is also misplaced.   In Lesher, the insurance company, in its reservation of rights letter failed to mention a reservation of its right to seek reimbursement of defense costs.  (See Gossard v. Ohio Casualty Group of Ins. Companies, supra, 29 Cal.App.4th 1660, 1673, 35 Cal.Rptr.2d 190.)

3.   State Farm initially sought a declaration Richardson was entitled to reimburse State Farm for the sums spent in his defense.   State Farm later abandoned this claim.

4.   We additionally note Richardson, on appeal, has failed to support his claim he lost the use of any money.   Richardson, on appeal, cites only to allegations in his cross-complaint and to a letter from Luce, Forward to State Farm which notes that both the Luce, Forward attorney and Richardson had written to State Farm seeking payment of attorneys' fees to support his assertion.   These citations do not constitute evidence supporting his claim.   While on demurrer, the allegations of the complaint would be sufficient to establish the fact;  on summary judgment it is not.

KREMER, Presiding Judge.

FROEHLICH and NARES, JJ., concur.