Plut v. Fireman's Fund Ins. Co.

102 Cal.Rptr.2d 36

85 Cal.App.4th 98

John PLUT et al., Plaintiffs and Appellants, v. FIREMAN'S FUND INSURANCE COMPANY, Defendant and Respondent.

No. B128620.

Court of Appeal, Second District, Division 4.

November 30, 2000.

Review Denied February 14, 2001.

Perona, Langer, Beck & Lallande and Ellen R. Serbin, Long Beach, for Plaintiffs and Appellants.

Hager & Dowling, Thomas J. Dowling, Joy L. Lim and John V. Hager, Santa Barbara, for Defendant and Respondent.

CURRY, J.

Appellants John and Karen Plut challenge the trial court's adjustments to an award of damages after a jury found respondent Fireman's Fund Insurance Company (Fireman's Fund) liable for breach of insurance contract and bad faith. We affirm in part and reverse in part.

RELEVANT FACTUAL AND PROCEDURAL BACKGROUND

The Pluts bought a house in Rancho Palos Verdes in 1975. In 1989, Fireman's Fund issued the Pluts a homeowners policy, effective from June 1989 to July 1990. The policy limits were $522,000 for the dwelling and $261,000 for personal property.

In February 1990, the Pluts hired Roto-Rooter Service & Plumbing Company (Roto-Rooter) to service their drains. In the course of Roto-Rooter's work, it removed a toilet in a first floor bathroom. On March 1, 1990, the Pluts awoke and discovered that the first floor was flooded. They notified Roto-Rooter, which accepted responsibility for the damages. They then reported the loss to Fireman's Fund, indicating that Roto-Rooter had promised to "take care of everything."

The Pluts hired Interior Services, Inc. (ISI) to store and restore their personal belongings, including numerous antiques. In June 1990, the Pluts learned that the truck containing their belongings had been stolen. Shortly thereafter, the police recovered some of the items, but ISI denied the Pluts access to the recovered items until November 1991, thus impairing their ability to inventory their losses.

After mistakenly filing a claim with another insurance company, the Pluts made claims for water loss and theft with Fireman's Fund in late November 1991. In a recorded statement, John Plut told Fireman's Fund on December 6, 1991, that the Pluts intended to sue both Roto-Rooter and ISI. On the same date, the Pluts and Fireman's Fund entered into a nonwaiver agreement, which recites that the parties intended to preserve their rights pending Fireman's Fund's investigation of the claim. Fireman's Fund eventually paid the Pluts a total of $71,378.42.

The Pluts sued Roto-Rooter and I SI in January 1992. Fireman's Fund did not participate in this action or its settlement, although the Pluts apprised Fireman's Fund of developments in the action, and invited it to send a representative to a settlement conference. In September 1995, the Pluts made an additional claim to Fireman's Fund for water loss and theft.

The Pluts reached separate settlements with Roto-Rooter and ISI in November 1996. The Pluts settled their action against Roto-Rooter for $200,000, and against ISI for $400,000. The settlement against ISI expressly recited that the Pluts would not assign any rights of recovery to Fireman's Fund. From the settlement funds of $600,000, the Pluts received $380,000, and the remainder paid their attorney fees and litigation costs incurred in the action against Roto-Rooter and ISI.

On March 10, 1997, Fireman's Fund informed the Pluts that it was denying their claims for theft and damage to personal property because it believed that the claims were untimely and not discovered within the policy period. On April 22, 1997, the Pluts filed their complaint against Fireman's Fund, alleging causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing.

Trial by jury began on September 8, 1998. On October 5, 1998, the jury returned verdicts in favor of the Pluts on their claims for breach of contract and bad faith, and assessed damages in the amount of $536,876.50. The jury made special findings that the Pluts had suffered $486,876.50 in damages as the result of Fireman's Fund's breach of contract, and $50,000 in damages as the result of its bad faith.

Subsequently, Fireman's Fund contended that it was entitled to a reduction of the award of damages in view of the settlement and the $71,378.42 that Fireman's Fund had paid to the Pluts. Following a hearing, the trial court filed a judgment awarding $85,498.08 in damages, not including costs and attorney fees. This appeal followed.¹

DISCUSSION

The Pluts contend that the trial court erred in reducing or adjusting the award for damages.

Fireman's Fund's request for a reduction of the damages award is in the nature of a motion for equitable offset, and thus we review the trial court's ruling for abuse of discretion. (See Margott v. Gem Properties, Inc. (1973) 34 Cal.App.3d 849, 854, 111 Cal.Rptr. 1.) With respect to a discretionary ruling, "[w]e are required to uphold the ruling if it is correct on any basis, regardless of whether such basis was actually invoked. [Citation.]" (In re Marriage of Burgess (1996) 13 Cal.4th 25, 32, 51 Cal.Rptr.2d 444, 913 P.2d 473.)

Here, the trial court did not explain its adjustment. However, Fireman's Fund asked the trial court to setoff the settlement proceeds and Fireman's Fund's prior payments against the Pluts' recovery for breach of contract against Fireman's Fund ($486,876.50). Following this request, the trial court reduced the total award by $451,378.42, which is precisely equal to the portion of the settlement proceeds paid to the Pluts ($380,000) and the payments from Fireman's Fund ($71,378.42). Because the trial court evidently offset the award for breach of contract by these settlement funds and payments, the key issues concern whether the trial court properly adjusted the award for breach of contract in this manner.

A. Adjustment For Settlement Funds

Before the trial court, Fireman's Fund contended that its rights of subrogation under the policy entitled it to a setoff regarding the $380,000 that the Pluts had received in settlement.² We first examine whether these rights support a setoff against the jury's award for breach of contract.

"Subrogation is the insurer's right to be put in the position of the insured, in order to recover from third parties who are legally responsible to the insured for a loss paid by the insurer. [Citation.]" (Barnes v. Independent Auto. Dealers of California (9th Cir.1995) 64 F.3d 1389, 1392.) "Where a subrogation provision exists, an insurer may recoup its payments directly from the tortfeasor or from the proceeds of the insured's action against a tortfeasor. [Citation.]" (Pacific Gas & Electric Co. v. Superior Court (1994) 28 Cal.App.4th 174, 183, 33 Cal.Rptr.2d 522.)

Generally "the insurer's safest course in order to preserve its subrogation rights is to seek intervention in the underlying action" brought by the insured against the legally responsible party. (3 Cal. Insurance Law & Practice (1996 rev.) § 35.11[8][d], pp. 35-52.17 to 35-52.19.) Although there is little California case authority regarding the status of an insurer's subrogation rights when the insurer foregoes participating in the underlying action, the weight of foreign case authority supports the proposition that, in some circumstances, an insurer may recover funds paid to the insured by a legally responsible third party, even though the insurer did not participate in the insured's legal action against the third party. (16 Couch on, Insurance (2d ed. 1983) § 61:47, p. 130; 44 Am.Jur.2d (1982) Insurance, § 1820, p. 808.)

A determining factor on this matter is whether the insured has been "made whole." (Barnes v. Independent Auto. Dealers of California, supra, 64 F.3d at p. 1396.) "It is a general equitable principle of insurance law that, absent an agreement to the contrary, an insurance company may not enforce a right to subrogation until the insured has been fully compensated for [his or] her injuries, that is, has been made whole. [Citations.]" (Id. at p. 1394; see Sapiano v. Williamsburg Nat, his. Co. (1994) 28 Cal.App.4th 533, 536, 33 Cal.Rptr.2d 659.)

When an insurer does not participate in the insured's action against a tortfeasor, despite knowledge of that action, the insurer cannot recover any funds obtained through settlement of the action unless the full amount received exceeds the insured's actual loss. (See Sapiano v. Williamsburg Nat. Ins. Co., supra, 28 Cal. App.4th at p. 536, 33 Cal.Rptr.2d 659.) Furthermore, the insured need not account to the nonparticipating insurer "for more than the surplus remaining in his hands, after satisfying his loss in full and his reasonable expenses incurred in the recovery." (16 Couch on, Insurance, supra, § 61:47, p. 130.) Thus, when an insurer elects not to participate in the insured's action against a tortfeasor, the insurer is entitled to subrogation only after the insured has recouped his loss and some or all of his litigation expenses incurred in the action against the tortfeasor. (Ortiz v. Great Southern Fire & Cas. Ins. Co. (Tex. 1980) 597 S.W.2d 342, 343-344 [citing cases from several jurisdictions]; Texas Farmers Ins. Co. v. Seals (Tex.App.1997) 948 S.W.2d 532, 533-534; Motor Club Ins. Ass'n v. Bartunek (1995) 3 Neb.App. 292, 293-296 [526 N.W.2d 238, 240-241]; cf. Lee v. State Farm Mut. Auto. Ins. Co. (1976) 57 Cal.App.3d 458, 129 Cal.Rptr. 271 [when automobile insurance policy requires insureds to reimburse insurer for medical payments recovered by insured's litigation from third party, insureds are entitled to recoup some or all of their attorney fees incurred in litigation against third party].)

Here, the Pluts received $380,000 from the settlement after they had paid the litigation costs incurred in their action against Roto-Rooter and ISI. In view of this fact and the principles described above, Fireman's Fund is entitled to an adjustment for this $380,000 only if (1) the award of $486,876.50 for breach of contract, taken by itself, is...