ALTMEYER v. AICCO INCORPORATED (1984)

Plaintiff and Appellant, Estate of Erwin J. Altmeyer (“Altmeyer”) appeals from a judgment notwithstanding the verdict reducing damages from $25,000 to $3,600, and defendant and cross-appellant, AICCO, Incorporated (“AICCO”) appeals from other conclusions under the judgment.¹  The principal issues on appeal are:  (1) whether a finance company is required to give notice of its limited liability before it can rely on Financial Code section 18608;  (2) whether a settlement with codefendants should operate to reduce contract liability of remaining defendants;  and (3) whether the attorney's fee provision under the pre-1983 amendment version of Civil Code section 1717 limits the reciprocality of an award for attorney's fees.

We conclude that:

(1) A lender must give notice within the financing contract if he intends to rely on the limitation of liability provided in Financial Code section 18608;

(2) A settlement with a codefendant responsible for the same damage operates to offset the contract liability of a non-settling defendant;

(3) The reciprocal rights for attorney's fees provided under Civil Code section 1717 may be guided by equitable considerations.

Statement of the Facts

In June 1975, Altmeyer entered into an agreement with AICCO to finance an insurance premium for his business, Altmeyer Trucking.   The insurance, covering theft and damage to Altmeyer's trucks and rigs, was procured through a broker from Emmco Insurance Company.   The transaction involved financing the $4,500.15 premium through AICCO.   Altmeyer agreed to pay $900.15 down payment.   The remaining $3,600 of the premium was to be paid in seven monthly installments of $535.05.²

Altmeyer's finance agreement with AICCO provided AICCO with a power of attorney to cancel the insurance policy in the event that Altmeyer defaulted on the loan.

Altmeyer was late in making several of his installments.   However, he managed to cure his defaults within the time provided after notice of his late payment was issued.   Each of those notices warned Altmeyer that if his payment was not received within 10 days his insurance would be cancelled.

In December 1975, Altmeyer again became delinquent on the installment.   AICCO, this time, instead of sending a 10-day “NOTICE OF INTENT TO CANCEL INSURANCE POLICIES,” sent a 10-day “NOTICE OF INTENT TO TERMINATE PREMIUM FINANCE AGREEMENT.”   Altmeyer did not make payment to AICCO until January 21, 1976.   On January 20, 1976, AICCO mailed Altmeyer a further notice that AICCO had exercised its right to cancel the insurance effective February 1, 1976.

On February 15, 1976, one of Altmeyer's trucks and a trailer were stolen.   Although Altmeyer had sought reinstatement of his insurance policy, reinstatement did not occur in time.

The stolen truck and trailer were eventually recovered.   However, the vehicle was substantially stripped and required extensive repair.   Altmeyer's claim from Emmco for recovery of damages was rejected.   Altmeyer filed suit against Emmco, the insurance broker Ron Meyer, and AICCO.   Altmeyer eventually settled with Emmco for $8,000 and with Meyer for $6,400.

Altmeyer's suit sought recovery for damages to the truck as well as consequential damages for loss of business.   Altmeyer's business consisted of making long distance hauls with his two trucks.   With one of the trucks out of commission and the insurance companies' failure to settle the claim, Altmeyer contended that his business resultingly suffered.

The case went before a jury which returned a verdict in favor of Altmeyer in the amount of $25,000.   AICCO sought and obtained a judgment notwithstanding the verdict reducing the judgment to $3,600, on the basis of California Financial Code section 18608.  Section 18608 provides:  “A premium finance agreement may contain a power of attorney or other authority enabling the company to cancel the insurance contract or contracts listed in the agreement in the event of default in the terms thereof.   Upon the exercise of such right to cancel, the company shall mail to the insured, to his last known address or to the address shown on the premium finance agreement at least 10 days prior to cancellation, a notice of its intent to cancel the insurance contract or contracts.   The liability of a company to any person or corporation upon the exercise of such right or authority of cancellation shall be limited to the amount of the principal balance, except in the event of willful failure by the company to mail the notice required by this section.”

Discussion

INotice Required to Limit Liability

We examine first the issue whether the lender is required to give notice of its limited liability before it can rely on Financial Code section 18608.   While this is not a case involving an insurance company's liability for improper cancellation of an insurance policy, the nature of the transaction is symbiotic with the procurement of insurance.   Insurance premiums are often financed by premium finance companies and other lenders.   The financing transaction operates to advance the entire premium to the insurance company, so that the borrower may spread out payments due over a longer term.   The security for the lender's advance is the unearned premium.   For this reason, the lender is permitted to contract for a power of attorney to cancel the insurance in case of the borrower's default.   Because the advance is 100 percent secured, the loan is usually arranged by the insurance company or the insurance broker, with no independent need for a credit check or face-to-face dealing between the lender and the borrower.

Section 18608 of the Financial Code provides that the liability of a qualified premium finance company which exercises its power of attorney to cancel a financed policy “shall be limited to the amount of the principal balance, except in the event of willful failure by the company to mail the notice required by this section.”

The court below limited AICCO's liability to the $3,600 amount of the premium financed.   The court below found that no evidence was introduced to demonstrate that the dispatch of defective notice was willful.

 In the context of exclusion of liability within insurance policies, contracts are construed so that “ ‘any ambiguity or uncertainty in an insurance policy is to be resolved against the insurer and ․ if semantically permissible, the contract will be given such construction as will fairly achieve its object of providing indemnity for the loss to which the insurance relates.’  [Citations.]  The purpose of this canon of construction is to protect the insured's reasonable expectation of coverage in a situation in which the insurer-draftsman controls the language of the policy.”  (Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 807–808, 180 Cal.Rptr. 628, 640 P.2d 764.)  “If it deals with the public upon a mass basis, the notice of noncoverage of the policy, in a situation in which the public may reasonably expect coverage, must be conspicuous, plain and clear.”  (Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862, 878, 27 Cal.Rptr. 172, 377 P.2d 284.)

In Steven, the court noted that limitations of liability in delivery receipts and other contractual settings require clear notice to be effective.   “ ‘Where the contractual terms of a delivery sheet are not obvious, they may be denied enforcement.’  [Citation.]  In striking down a limitation of liability in a warehouse receipt to $25, the court pointed out in Wilson v. Crown Transfer etc. Co. (1927) 201 Cal. 701, 714, 258 P. 596, that the warehouse bore the duty ‘of bringing home to the respondents notice that the goods were accepted and held under such limited liability.’ ”  (Steven, supra, 58 Cal.2d at p. 881, 27 Cal.Rptr. 172, 377 P.2d 284.)

 In the case at bench, we have a statutory limitation of liability.   There are two basic classes of statutory limitations of liability.   The first class is where the parties have no contractual relationship prior to accrual of the cause of action.   An example of such a statutory limitation of liability is the railroad trespass statute.  (See Civ.Code, § 1714.7.)   Under the railroad trespass statute, a railroad is not liable to a third party injured while trying to jump a train.   There is no relationship between the railroad and the injured party prior to an accident.

Where, between the parties, there is no contractual relationship, there quite obviously can be no explicit notice of a legislatively determined limitation of liability.

The second class of statutory limitations of liability is where there is a more formal contractual relationship between the parties, such as in the innkeeper's limitation of liability for a guest's personal property.   Section 1859 of the Civil Code limits an innkeeper's liability for loss of a guest's personal property, not deposited in the innkeeper's safe.  Section 1859 would, for example, limit an innkeeper's liability to $500 for a trunk stolen from the guest's room, unless the hotel agrees in writing to assume a greater liability.   Although section 1859 requires no explicit notice be given the guest of this liability limitation, the reasonable expectation of a guest would be that the hotel was not in a position to safeguard articles of unknown and unlimited value left in the room.

Section 1860 of the Civil Code provides liability limitations for a guest's article deposited in the innkeeper's safe.   The hotel's liability for articles kept in the safe is limited to $500 unless the innkeeper gives the guest a receipt for a larger nominal amount.  (See also Gardner v. Jonathan Club (1950) 35 Cal.2d 343, 217 P.2d 961.)   In effect, this limits the hotel's liability unless it agrees in writing to assume greater liability.   However, section 1860 premises this limitation of liability on giving the guest notice “either personally or by putting up a printed notice in a prominent place in the office or the room occupied by the guest” of the limitation.   If a guest gives the innkeeper a diamond ring worth $5,000 to protect in the hotel safe, the guest has no reason to expect that if the ring is lost, the hotel will only be liable for $500.   Thus, the statute here requires prominent notice of the liability limitation.

 In the case at bench, AICCO and Altmeyer entered into a formal financing contract.   The contract provided for notice prior to cancellation of the insurance.   No mention is made in the contract of a limitation of liability for defective cancellation.   The limitation of liability is a material provision which is a cost to the borrower, like the interest charged.   It would not be within the reasonable expectations of the borrower that if the lender mistakenly cancels the policy the borrower will lose his protection.   Moreover, section 18608 of the Financial Code, which enables the premium finance company to provide for a power of attorney to cancel the insurance and sets forth the limitation of liability, comes within the section entitled “Permissive provisions;  cancellation.”   Therefore, we conclude that the lender is required to give notice within the contract if he intends to rely on the limitation of liability as provided in section 18608.

 AICCO contends that there was no evidence that the defective notice of cancellation misled Altmeyer.   However, the “defendants must show a strict compliance with [the terms of notice] in order to effect a cancellation.  [Citations.]”  (Naify v. Pacific Indemnity Co. (1938) 11 Cal.2d 5, 10, 76 P.2d 663.)   Thus, we hold the misreferenced notice does not strictly comply with the contractual or statutory requirements of notice.

 AICCO contends that it was error for the court below to allow the jury to consider consequential damages for loss of profits.   Consequential damages “actually contemplated, or within the reasonable contemplation of the parties, are recoverable.”  (Weaver v. Bank of America (1963) 59 Cal.2d 428, 434, 30 Cal.Rptr. 4, 380 P.2d 644.)   It is not, as a matter of law, unreasonable for the jury to consider loss of profits arising from failure of the defendants to replace the vehicles.

II

Offset

 The next issue is whether Altmeyer's settlement with codefendants Emmco and Meyer should operate to offset AICCO's liability.   AICCO suggests that Code of Civil Procedure section 877 provides an offset for nonsettling tortfeasors for amounts paid by a settling joint tortfeasor.   Altmeyer counters that their action is contractually based and thus section 877 does not apply.   Presuming that the action is one in contract, a party can recover twice for the same loss only if the “collateral source” rule applies.   (Patent Scaffolding Co. v. William Simpson Constr. Co. (1967) 256 Cal.App.2d 506, 510, 64 Cal.Rptr. 187.)   The collateral source rule provides that where a plaintiff obtains compensation from a source independent of a tortfeasor, that plaintiff's tort recovery is not reduced.   The doctrine is most often applied to preclude a tortfeasor from offsetting the plaintiff's own insurance recovery against the tortfeasor's liability.  “ ‘The collateral source rule expresses a policy judgment in favor of encouraging citizens to purchase and maintain insurance for personal injuries and for other eventualities.   Courts consider insurance a form of investment, the benefits of which become payable without respect to any other possible source of funds.   If we were to permit a tortfeasor to mitigate damages with payments from plaintiff's insurance, plaintiff would be in a position inferior to that of having bought no insurance, because his payment of premiums would have earned no benefit.’ ”   (Krusi v. Bear, Stearns & Co. (1983) 144 Cal.App.3d 664, 674, 192 Cal.Rptr. 793;  Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1, 10, 84 Cal.Rptr. 173, 465 P.2d 61.)

 “The collateral source rule, however, has not been generally applied in cases founded upon breach of contract, unless the ‘breach has a tortious or wilful flavor.’  [Citations.]  The collateral source rule is punitive;  contractual damages are compensatory.   The collateral source rule, if applied to an action based on breach of contract, would violate the contractual damage rule that no one shall profit more from the breach of an obligation than from its full performance.”  (Patent Scaffolding Co., supra, 256 Cal.App.2d at p. 511, 64 Cal.Rptr. 187.)   In contract, Altmeyer is entitled only to his uncompensated detriment.   Altmeyer suffered only one loss.   Thus, we hold that the settlement proceeds Altmeyer received for the loss from Emmco and Meyer should operate as an offset against AICCO's liability.

III

Attorney's Fees

 AICCO contends that Altmeyer is not entitled to attorney's fees under Civil Code section 1717 and interpretation of that statute under Sciarrotta v. Teaford Custom Remodeling, Inc. (1980) 110 Cal.App.3d 444, 167 Cal.Rptr. 889.   An award of attorney fees must be based on contract or specific statute.   Altmeyer's contract with AICCO provides:  “[The insured] [a]grees, if the loan becomes delinquent and the unpaid balance thereof is in excess of $300, to pay in the event a judgment at law is sought, the court costs and reasonable attorney's fees allowed by the court in a judgment․”  Altmeyer entered into the financing arrangement with AICCO on June 16, 1975.   At that time Civil Code section 1717 read:  “In any action on a contract, where such contract specifically provides that attorney's fees and costs, which are incurred to enforce the provisions of such contract, shall be awarded to one of the parties, the prevailing party, whether he is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to costs and necessary disbursements.”   In Sciarrotta v. Teaford Custom Remodeling Inc., supra, 110 Cal.App.3d at page 450, 167 Cal.Rptr. 889, the court determined that “the law in California has been to limit the scope of application of section 1717 to the provisions which the parties themselves have agreed to make it applicable.”   In Sciarrotta, the plaintiff owner contracted with the defendant contractor to build a house.   The form contract provided:  “ ‘In the event that default should occur in the payment of the contract price or of any part thereof, Owners agree to pay Contractor's reasonable attorney's fees and court costs incurred by Contractor to enforce payment herein.’ ”  (Id., at p. 454, 167 Cal.Rptr. 889.)   After the house was completed and the Owner paid the Contractor, certain defects were discovered and the Owner brought suit against the Contractor for breach of contract.   The Sciarrotta court found that section 1717 limits reciprocality of an attorney's fee provision to the scope determined by the contract.   Thus, the Owner could not recoup attorney's fees for bringing a breach of contract action where the contract provision limits the scope of attorney's fees only to actions on collection of the purchase price.   In 1983, section 1717, subdivision (a), was amended to provide that “[w]here a contract provides for attorney's fees ․ such provision shall be construed as applying to the entire contract․”

 Assuming, without deciding, that AICCO's contract is interpreted under the pre-amendment version of section 1717, we still determine that Altmeyer is entitled to attorney's fees under the contract provision.

On the contract, AICCO possessed an option to recover the “purchase price” of the finance contract by either (1) cancelling the insurance and pocketing the unearned premium, or (2) suing on the debt.   If AICCO had sued on the debt, the insurance would not have been cancelled.   Essentially, Altmeyer's action is one for a defective confiscation of the purchase price and the proximate results stemming from the defective cancellation.   In order to make the attorney's fee provision truly reciprocal, we cannot allow AICCO to benefit from the manner in which it exercises its option of remedies.  “ ‘Enactment of section 1717 commands that equitable considerations must rise over formal ones.   Building a reciprocal right to attorney fees into contracts, and prohibiting its waiver, the section reflects legislative intent that equitable considerations must prevail over both the bargaining power of the parties and the technical rules of contractual construction.’ ”  (Bank of Idaho v. Pine Avenue Associates (1982) 137 Cal.App.3d 5, 17, 186 Cal.Rptr. 695.)

The court below awarded Altmeyer attorney's fees in the amount of $3,150.   The court took into account that Altmeyer's counsel should have known that section 18608 of the Financial Code placed a statutory limit on recovery and that Altmeyer rejected a settlement for the statutory amount.   On remand, the court should reconsider the award for attorney's fees in light of our finding that the statutory limit of Financial Code section 18608 does not apply in this case.

Disposition

The judgment notwithstanding the verdict is reversed and remanded.   The trial court is directed to reinstate the jury verdict and reduce the amount of the judgment against AICCO by the amount of the settlement between Altmeyer and the codefendants.   The trial court is further directed to reconsider the question of attorney's fees in light of our opinion.

FOOTNOTES

1.   Altmeyer died prior to the trial and the action was maintained by his estate.

2.   The arrangement yielded AICCO a 12 percent return.

THOMPSON, Acting Presiding Justice.

JOHNSON and PICKARD,* JJ., concur.