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Date: 04-12-2002

Case Style: Tradewinds Escrow, Inc. v. Truck Insurance Exchange

Case Number: B145867

Judge: Lillie

Court: California Court of Appeals, Second Appellate District

Plaintiff's Attorney: Law Office of Alex Powell and Alex Powell for Plaintiff and Appellant.

Defendant's Attorney: Greines, Martin, Stein & Richland, Robert A. Olson and Edward L. Xanders; Tharpe & Howell, Timothy D. Lake and Louis K. Tsiros for Defendant and Respondent.

Description: Tradewinds Escrow, Inc. (Tradewinds) appeals summary judgment granted in favor of defendant Truck Insurance Exchange (Truck) in its action for breach of contract and breach of the covenant of good faith and fair dealing. Truck refused to defend a third-party action against Tradewinds arising out of the failed sale of a home on the grounds the policy specifically excluded indemnity for actions based upon the furnishing of “escrow services,” and refused to pay pre-tender defense costs and settlement costs Tradewinds incurred in connection with defending the underlying action.

Tradewinds contends the trial court erred in finding Truck had no duty to indemnify and hence no duty to defend. Tradewinds contends the policy provides numerous grounds for indemnity, the professional services exclusion does not apply, it is entitled to pre-tender legal fees, Truck is required to indemnify it for both pre-tender and settlement costs; and triable issues of fact exist with respect to its punitive damages claim.

On February 3, 1997, Allison Feltus (Feltus) commenced an action against Tradewinds, its president Michael G. Wuerth (Wuerth), Home Savings & Loan, and the sellers of a home. Feltus alleged seven causes of action.1 Her claims against Tradewinds and Wuerth were based on her contentions that Tradewinds’s failure to close the escrow caused her to lose her financing and be evicted from the premises. Feltus alleged the conduct was willful and done intentionally in concert with the sellers in order to misrepresent the true condition of the house and to realize a larger gain on the sale of the premises. She contended Wuerth defamed her, harassed her, refused to return her deposit, and parked his car in front of the house and verbally assaulted her.2

Sometime after commencement of the Feltus action, Tradewinds tendered defense to its errors and omissions carrier, Media One, and Media One provided Tradewinds with a defense to the Feltus action. Apparently, Media One refused to pay Tradewinds $20,000 in legal fees Tradewinds incurred prior to the tender to it of the Feltus action. Tradewinds contends the $20,000 consisted of a $10,000 deductible and a settlement of $10,000 in disputed fees.

Tradewinds tendered defense of the Feltus action to Truck in June 1998. Tradewinds explained that it did not earlier tender the lawsuit because it believed that the “obvious coverage” for the Feltus Action was with Media One, its errors and omissions carrier. Tradewinds contends Wuerth did not initially understand that the Truck policy could potentially apply to the Feltus action. In July 1998, summary judgment was granted in favor of the sellers in the Feltus action.

On September 22, 1998, Truck refused to defend on the grounds that the lawsuit arose out of Tradewinds’s failure to render professional services and was therefore within a specific policy exclusion for professional services.3 On December 2, 1998, Tradewinds settled the Feltus action for $25,000. Of this sum, Media One paid $15,500, Wuerth paid $5,000, and Tradewinds waived $4,500 in attorneys’ fees that Feltus owed to it.

On November 9, 1999, Tradewinds commenced the instant action against Truck for breach of contract and breach of the covenant of good faith and fair dealing based upon Truck’s failure to defend. Tradewinds sought its attorneys’ fees and costs incurred in defending and settling the Feltus action. This included the $20,000 in attorneys’ fees expended before the tender to Media One and the $9,500 that Tradewinds contributed to the settlement of the Feltus action. Tradewinds also sought punitive damages.

Truck moved for summary judgment, contending there was no duty to defend the first six causes of action.4 Truck based this argument on the policy schedule excluding coverage for professional services as “escrow agents.” With respect to the seventh cause of action for emotional distress, Truck contended it was without merit because it was based on economic loss and barred by Insurance Code section 533’s prohibition on coverage for willful conduct. In addition, Truck contended that because Tradewinds first tendered the defense to its errors and omissions carrier, Media One, and incurred the $10,000 of attorneys’ fees voluntarily, Truck was not liable for said fees.Tradewinds opposed the motion on the grounds that Tradewinds’s conduct in connection with the escrow was outside the scope of the rendering of professional services. Tradewinds pointed to Feltus’s factual allegations that Wuerth had wrongfully cancelled the escrow, refused to return her deposit, engaged in discriminatory conduct, and demeaned her with obscenities. Tradewinds also contended the professional services exclusion did not trump all other coverage, and argued that because a car had been used in connection with some of Tradewinds’s wrongful conduct, the conduct was covered under the business automobile portion of the policy. Tradewinds also contended Feltus’s emotional distress claims were covered because they were the result of defamation, conduct covered by the policy. Finally, Tradewinds argued its entitlement to pre-tender legal fees and punitive damages raised questions of fact.

The trial court granted the motion, finding that the legal fees Tradewinds sought were incurred prior to tender of the defense to Truck, and thus there was no causal connection between the fees and denial of coverage; the contract of insurance did not provide for coverage of the claims in the Feltus action, and thus Truck had no duty to indemnify and consequently no duty to defend; and Tradewinds failed to proffer evidence which raised a triable issue of fact.

* * *

The CGL portion of the Policy contains a “no voluntary payments provision” at Section IV, paragraph 2(d) that “[n]o insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, except for first aid, without our consent.” Such clauses bar reimbursement for pre-tender expenses based on the reasoning that until the defense is tendered to the insured, there is no duty to defend. (Truck Ins. Exchange v. Unigard Ins. Co. (2000) 79 Cal.App.4th 966, 976-977.) They are also based on the equitable rule that “‘the insurer [is invested] with the complete control and direction of the defense’” and cannot be expected to pay for that which it does not control. (Gribaldo, Jacobs, Jones & Associates v. Agrippina Versicherunges, A.G. (1970) 3 Cal.3d 434, 449.) Only when the insured has requested and been denied a defense may it ignore the “no voluntary payment” provision of the policy. (79 Cal.App.4th at p. 981.) Thus, where the insured has failed to demand a defense and relinquish control over the case, it cannot expect the quid pro quo of pre-tender voluntary payments, expenses, or other obligations incurred by the insured pre-tender without the insurer’s consent.5 (Ibid.)

However, even if the policy contains a no voluntary payments provision, pretender expenses are not barred if they were incurred involuntarily. Generally, voluntariness is a question of fact. (Fiorito v. Superior Court (1990) 226 Cal.App.3d 433, 440 (Fiorito).) In Fiorito, the court reversed a judgment sustaining a demurer, and pointed out that the insured’s pleading was sufficient to raise facts whether the pre-tender expenses were voluntarily paid. (Ibid.) However, the question of voluntariness may be decided as a question of law on undisputed facts. (Shell Oil Co. v. National Union Fire Ins. Co. (1996) 44 Cal.App.4th 1633, 1648-1649; cf. Jamestown Builders, Inc. v. General Star Indemnity Co. (1999) 77 Cal.App.4th 341, 348 (Jamestown); Faust v. The Travelers (9th Cir. 1995) 55 F.3d 471, 473 [where no dispute of material fact, voluntariness may be decided as question of law].)

Jamestown pointed out that payments may be involuntary where the circumstances of the case show the payments were out of the insured’s control. “This situation might occur where the insured is unaware of the identity of the insurer or the contents of the policy.” (Jamestown, supra, 77 Cal.App.4th at p. 348.) In Fiorito, the insureds waited four months before tendering a defense to their insurer, in the meantime having hired their own counsel while they searched for insurance policies. (Fiorito, supra, 226 Cal.App.3d at p. 436.) As a pleading matter, factual issues existed whether this indicated the pre-tender costs were involuntary. (Id. at p. 440.) In Jamestown, however, reimbursement was denied because the insured knew of the policy, “had ample time to review the policy, investigate the claims, and tender them” to the insurer, but took its time notifying the insurer of the potential claim. (Jamestown, supra, at p. 348.) Similarly, where the urgency of time pressures requires the insured to expend money pretender, the no voluntary payments provision will not apply. (Northern Ins. Co. of New York v. Allied Mut. Ins. (1992) 955 F.2d 1353, 1360.) In Faust, the insured waited four months after the filing of a lawsuit to tender the defense to its insurer. During the interim, it had retained its own counsel to defend the action, which was dismissed. The plaintiff filed another lawsuit against the insured; the insured then tendered the defense of both actions to the insurer. As a matter of law, the court found that the four-month delay demonstrated no involuntariness of pre-tender defense costs in the first action. (Faust v. The Travelers, supra, 55 F.3d at p. 473.)

Tradewinds contends that because Truck was not prejudiced by the delay, the pretender costs must be reimbursed, or at the very least, factual questions exist precluding summary judgment. We first point out that a separate showing of prejudice is not part of the equation in evaluating denial of pre-tender costs. (Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501, 533.) Xebec set forth the rationale as an issue of relevance because notice was a condition precedent to the right to indemnity. (Id. at p. 566; Faust v. The Travelers, supra, 55 F.3d at pp. 472-473; Jamestown, supra, 77 Cal.App.4th at p. 350 [no prejudice showing required because insurer did not seek to avoid performance based on tardy tender].)

Second, Tradewinds does not point to any facts in the record demonstrating it was under any kind of duress before tendering the claim to Truck. Instead, the facts in the instant case show that Tradewinds first tendered defense to its errors and omissions carrier, Media One, but the record does not disclose when this occurred, or when Tradewinds incurred the pre-tender expenses for which it now seeks reimbursement. However, we can assume that the expenses were incurred between January 1997 and June 1998. Tradewinds offers no explanation for this 17-month delay other than Wuerth did not believe the Truck policy covered the Feltus action. There was no searching for unknown policies or confusion over the identity of Tradewinds’s CGL insurer. Rather, Tradewinds was unsuccessful with its errors and omissions carrier and thus sought to see if the CGL policy might help with its problems, and this delay denied Truck the opportunity to control the expenditure of defense costs. (Jamestown, supra, 77 Cal.App.4th at p. 349 [insured’s ignorance of policy rights does not extend time within which it was required to take action].) We therefore find that Tradewinds may not recover its pre-tender defense costs in the sum of $20,000.

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Click the case caption above for the full text of the Court's opinion.

Outcome: The judgment is affirmed. Respondent to recover its costs on appeal.

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: None



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