Essex Ins. v. Five Star Dye House 1/27/05 CA2/5

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State: California

Court: 1st District Court of Appeal 1st District Court of Appeal

Docket No: B167295

Case Date: 05/11/2005

Preview:Filed 1/27/05

CERTIFIED FOR PARTIAL PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION FIVE

ESSEX INSURANCE CO., Plaintiff, Cross-defendant, and Appellant, v. FIVE STAR DYE HOUSE, INC., Defendant, Cross-complainant, and Respondent.

B167295 (Los Angeles County Super. Ct. No. BC156517)

APPEAL from a judgment of the Superior Court for Los Angeles County, Kenneth R. Freeman, Judge. Affirmed in part and reversed in part. Carroll, Burdick & McDonough, David M. Rice, Don Willenburg, John D. Boyle, and Donna P. Arlow for Plaintiff, Cross-defendant, and Appellant. Dodell Law Corporation, Herbert Dodell, and Gerald J. Miller for Defendant, Cross-complainant, and Respondent.

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Pursuant to California Rules of Court, rules 976(b) and 976.1, the only parts of this opinion certified for publication are the Introduction, Procedural Background, part C and the Disposition.

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 (1995) 37 Cal.3d 813 (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 In the unpublished portion of this opinion, we discuss why we affirm the trial court's determination that there was insurance coverage and a bad faith denial of coverage for a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 Also, in the unpublished portion of the opinion, we discuss why we affirm the trial court's decisions that the damages do not have to be reduced to the amount of the policy limit or to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 cross2

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.

[The portions of this opinion that follow (Factual Background, Discussion, part A and part B) are deleted from publication.]
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FACTUAL BACKGROUND

In 1993, Sanchez was doing business as L.A. Machinery, a trucking company that hauled heavy machinery within Los Angeles County. In late 1993, L.A. Machinery, through its agent Wenger Day Insurance Services (Wenger Day), applied to Sovereign
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We view the evidence in a light most favorable to the judgment. (People v. Osband (1996) 13 Cal.4th 622, 690.)

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General Insurance Services (Sovereign General), Essex's managing general agent in California, for a commercial general liability policy offered by Essex through its "truckman general liability program." Essex was the only insurer with which Sovereign General worked that wrote commercial general liability coverage for truckmen. Sovereign General sent a quote for the coverage to Sheryl Ridling of Wenger Day, L.A. Machinery's agent. Ms. Ridling asked Sovereign General to bind the quote. According to a representative of Sovereign General, the policy for which Wenger Day applied was a commercial general liability policy and was rated for the truckmen class of general liability. On January 7, 1994, Sovereign General issued a binder to L.A. Machinery retroactive to January 5, 1994. The binder did not specify the type of coverage, but it provided the amount of the premium and other charges, set forth the policy limit--$1 million--and deductible, and specified that it excluded "fire legal, loading and unloading and contractual." It also required L.A. Machinery to provide the current motor vehicle records for each driver. Wenger Day received the binder and provided a copy to L.A. Machinery. On March 15, 1994, Essex issued several commercial liability declarations retroactive to January 5, 1994. Immediately under the policy number listed on the declarations page were the words "TRUCKMEN GL PROGRAM," and the business description for L.A. Machinery was "TRUCKMEN." There was a space on the page where the form for the coverage part of the policy was supposed to be inserted. In that space was written, "REFER TO ITEM 6." Item 6 listed various forms and endorsements, none of which was a form containing a coverage part. The declarations page and the forms and endorsements listed in Item 6 were sent by Sovereign General to Wenger Day, and copies were provided to L.A. Machinery. One of the endorsements listed and provided to L.A. Machinery was "Endorsement #11." That endorsement stated in relevant part, "no coverage nor defense exists under this policy with regard to any loss, claim, suit, allegation or the like arising out of, or involving automobile liability." The 4

term "automobile liability" was not defined in that endorsement or in any other document provided to L.A. Machinery or Wenger Day in March 1994 as part of the policy. In July 1994, Essex cancelled the policy for reasons unrelated to this case. In June 1994, L.A. Machinery was delivering a large commercial dryer to Five Star when a block holding the dryer broke, and the dryer fell onto the floor of the truck. The dryer was damaged and rendered inoperable for three months until it was repaired. Five Star, which used the dryer in its business of dying and stone-washing denim jeans for major manufacturers, commenced the underlying action by suing L.A. Machinery, among others, for damages resulting from its loss of use of the dryer. Five Star did not allege that L.A. Machinery was negligent in its operation of the truck. Instead, Five Star alleged that L.A. Machinery negligently operated its business by delaying for three months the repair of the dryer, which repair L.A. Machinery undertook to perform. L.A. Machinery tendered its defense in the underlying action to Sovereign General in January 1996, while that action was pending. Sovereign General sent the claim to Essex, along with the declarations page, forms, and endorsements it had provided to Wenger Day. Howard Ellis (Ellis), the Essex claims adjuster assigned to the claim, noted that the documents Sovereign General provided to Essex did not contain a coverage part form, and requested Sovereign General to send him a copy of the form that was provided to Wenger Day. Ellis also interviewed Sanchez, who told him that the dryer fell off of the truck due to a broken block placed in the truck by the dryer manufacturer to keep the dryer from falling, and that he was being sued for damages for the time that Five Star did not have a working dryer. Although Sovereign General initially informed Ellis that a certain standard Commercial General Liability (CGL) form had been issued with the policy, at some point Essex and Sovereign General determined that no CGL form or other coverage part had ever been sent to Wenger Day or L.A. Machinery. On February 8, 1996--almost two years after Essex had cancelled the policy--Essex issued an endorsement to the policy that provided, "IN CONSIDERATION OF THE PREMIUM CHARGED, IT IS 5

HEREBY UNDERSTOOD AND AGREED THAT FORM CG0001 (11/88) [i.e., the CGL form] IS ADDED TO THE POLICY." The endorsement stated that it was effective January 5, 1994. On February 16, 1996, Essex denied L.A. Machinery's tender and declined to provide a defense, based upon the language of the CGL form that Essex sent in 1996, Endorsement #11 that it sent in 1994, and Ellis' interview with Sanchez. The underlying action by Five Star proceeded to trial, resulting in a judgment against L.A. Machinery in the amount of $1,350,000 plus costs. In its statement of decision filed June 5, 1996, the trial court in the underlying action found that L.A. Machinery's negligence caused the dryer to fall from the truck, and that Five Star suffered additional damages, i.e., lost revenue, caused by L.A. Machinery's unreasonable delay in having the dryer repaired. Following the entry of judgment, Sanchez and L.A. Machinery assigned to Five Star Sanchez's and L.A. Machinery's rights against Essex for breach of the insurance contract and bad faith denial of coverage and a defense. Essex filed the instant action for declaratory relief against Five Star, L.A. Machinery, and Sanchez in August 1996. As noted above, in the first appeal in this case, we reversed the judgment and remanded the matter for a jury trial on the contents of the policy sold to L.A. Machinery. On retrial, the trial court excluded evidence of Essex's undisclosed intent with regard to the terms of the policy. Therefore, because no CGL form or other coverage part was identified, provided to, or discussed with Sanchez, L.A. Machinery, or their agent Wenger Day during the time the policy was in effect in 1994, the court excluded all evidence regarding the CGL form that Essex sent to Wenger Day and L.A. Machinery in 1996. The jury on remand found that the policy issued to L.A. Machinery consisted of the binder issued January 7, 1994 and the declarations page, forms, and endorsements (including Endorsement #11) that were provided to L.A. Machinery in March 1994. Construing those documents, the trial court found that Five Star's claim for damages against L.A. Machinery was covered under L.A. Machinery's policy because Five Star sought damages caused by L.A. Machinery's delay in having the dryer repaired. The trial 6

court also found that Essex had acted in bad faith in denying coverage and in refusing a defense based upon a document that Essex knew had not been identified or provided to L.A. Machinery during the term of the policy. The trial court awarded Five Star damages in the amount of $2,242,776.69, which consisted of the amount of the judgment against L.A. Machinery in the underlying action, plus interest. The trial court denied Five Star's request to include Brandt fees in the judgment, finding that the right to those fees is not assignable.

DISCUSSION In its appeal, Essex contests the trial court's finding that Five Star's claim was covered by the policy and contends that, even if there was coverage, the amount of the judgment must be reduced. In its cross-appeal, Five Star contends that the trial court erred when it found that Five Star was not entitled to Brandt fees as an element of damages.

A.

Coverage Issues 1. Rules Governing Interpretation of Insurance Policies

The interpretation of an insurance policy is reviewed de novo. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18.) As a preliminary matter, the policy consists of the written documents that are provided to the insured or referred to in the provided documents and expressly made a part of the policy. (See Allstate Ins. Co. v. Dean (1969) 269 Cal.App.2d 1, 4 ["The idea of a policy as an instrument in written form, whose tangible shape protects both parties to the insurance contract and acts as a check against unwarranted demands and unwarranted rejections, has been well publicized, and most persons take the view that a policy consists of what is written in it, either directly or by reference"].) The written policy is then interpreted under the ordinary rules of contractual interpretation. (Haynes v. Farmers Ins. Exchange (2004) 32 Cal.4th 1198,

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1204 (Haynes) ["`"While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply"'"].) "`The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the "mutual intention" of the parties.'" (E.M.M.I., Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465, 470 (E.M.M.I.).) It is the mutual intention of the parties at the time the contract is formed that governs the interpretation. (Id., citing Civ. Code,

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