The California Court of Appeal, First District, affirmed a judgment entered in the San Francisco Superior Court against an insurer after a bench trial finding bad faith and punitive damages. The central coverage issue was the timing of injury. The insurer claimed there was no evidence of injury during the policy period introduced in the underlying case, but the Court of Appeal found that evidence of timing may be introduced in the coverage action because timing was not adjudicated in the underlying action. The Court of Appeal also held the genuine dispute doctrine is inapplicable in third party, refusal to settle contexts.
James Howard ("James") and his brother Joh Howard sued Father Oliver O'Grady ("O'Grady") for damages suffered from molestation. The named defendants included the head of the diocese, the Roman Catholic Bishop of Stockton ("Bishop"). In his complaint, James alleged that O'Grady repeatedly molested him "[b]eginning in approximately 1979."
American Fire National Insurance Company ("American") insured the Bishop from November 1, 1978 to November 1, 1979, under a comprehensive general liability policy for sums he became legally obligated to pay as damages up to a limit of $500,000 per occurrence. When the Bishop was sued for negligent retention, the Bishop sought a defense from American. American refused the tender, maintaining that the molestation was not covered because it occurred after the expiration of American's policy in November 1979.
The Howards made several pretrial settlement demands. Their final pretrial settlement offer was $1.85 million. American did not contribute to any settlement offer made by the Bishop. The case did not settle.
The final judgment awarded compensatory damages of $2.5 million to James Howard and $2.75 million to Joh Howard. The Howards' punitive damages were $3 million each. Subsequently, the Bishop settled the underlying litigation with assistance from its other insurers.
The Howards filed a complaint against American as judgment creditors seeking to collect on their judgment. The Bishop filed a separate complaint against American for breach of contract and bad faith breach in failing to defend, settle, and indemnify the Howards' claims against him. The complaints were consolidated in the trial court. The trial court found that coverage under the policy was triggered, and that American acted in bad faith.
During the coverage action, evidence was introduced that O'Grady had stayed in the Howard home during the American policy period. American argued that this evidence was inadmissible because it was not introduced in the underlying litigation. The Court of Appeal rejected that argument, explaining that the underlying litigation only addressed whether molestation occurred – not the timing of any alleged molestation. Accordingly, the evidence in the underlying litigation did not dictate the scope of evidence in the coverage action.
American also cited to deposition testimony in which James stated that his "first memories" of molestation were at age five. This testimony did not impact the coverage issues because it concerned James' "memories" of the molestation and not the actual dates of molestations. Accordingly, the Court of Appeal held that American did have a duty to indemnify the Bishop in the underlying litigation.
The Court of Appeal likewise held that American breached its duty to defend by relying on James' deposition testimony to deny a defense to the Bishop.
The trial court found that American breached its duty to settle the underlying litigation supporting a finding of bad faith. American argued that its failure to settle the underlying litigation was not unreasonable because it was never presented a settlement offer within its policy limits. The Court of Appeal held that in actions involving a single insurer, a settlement offer within policy limits is necessary to support a finding of bad faith. However, where multiple insurers are on the risk, an insurer can be held liable for failure to settle if the settlement offer is less than the total limits of the policies insuring the risk. Here, although American's policy limit was $500,000, there was a settlement demand for $1.85 million that was well within the primary insurance policy limits of the multiple insurers which totaled $4.3 million.
In addition, American argued that its refusal to settle was prompted by a genuine dispute concerning coverage which precludes a finding of bad faith. The Court of Appeal held that the genuine dispute doctrine does not apply in all bad faith insurance contexts. Pertinently, an insurer in a third party case may not rely on a genuine dispute over coverage to refuse settlement. Moreover, even if the genuine dispute standard was applied, the Court of Appeal found that American's no-coverage position was based on an unreasonable interpretation of James' deposition testimony.
Two of the Bishops' other insurers assigned their contribution rights to James and Joh Howard. The trial court calculated the two insurer's right of contribution from American at $75,523.87 and awarded that amount to the assignees. American argued that the amount of the contribution award was incorrect because the sum represented American's total share of defense costs and not all of the insurers in the underlying action had assigned their contribution rights. However, the Court of Appeal upheld the award because the defense costs in the underlying action could not be apportioned because they arose out of a common core of facts.
As bad faith damages, the trial court awarded the Bishop the entire amount he paid to settle the underlying action. American argued that this was in error because the underlying judgment included sums for punitive damages which are uninsurable under California law. The Court of Appeal rejected that argument, noting that at the time of settlement, the underlying action was on appeal and the settlement explicitly stated the payment was to compensate plaintiffs for their physical injuries and not the underlying judgment.
In addition, the trial court refused to award pre-judgment interest to James and Joh Howard because the amounts sought in the underlying litigation were uncertain. The Court of Appeal held that the sums due on the underlying judgment and the bad faith damages were certain. Accordingly, the Court of Appeal held that James and Joh Howard were entitled to pre-judgment interest.
This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.
Click here for opinion.
This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.