Date: 12-20-2002

Case Style: George F. Hillenbrand, Inc., et al. v. Insurance Company of North America, et al.

Case Number: C030059

Judge: Raye

Court: California Court of Appeals, Third Appellate District

Plaintiff's Attorney: Law Offices of Robert W. Drane, Robert W. Drane and Sack, Miller & Rosendin and William S. Miller for Plaintiffs and Appellants.

Defendant's Attorney: Hinshaw & Culbertson, Robert J. Romero, Paul E. Vallone and Michelle S. Dangler for Defendants and Appellants.

Description: A jury found that Aetna Insurance Company maliciously prosecuted two lawsuits against the insureds, George F. Hillenbrand, a framer, and his company, George F. Hillenbrand, Inc. The Insurance Company of North America (INA) handled the investigation and processing of the claim, as well as the prosecution of the lawsuits against Hillenbrand, but the trial court granted INA's motion for a directed verdict, concluding it was not liable as an agent for the insurer pursuant to section 2351 of the Civil Code.1 Based on evidence the insurer prosecuted the lawsuits despite its knowledge of facts triggering potential coverage and a duty to defend, and of the law prohibiting an insurer from suing its insured during the pendency of the underlying claim, the jury awarded Hillenbrand punitive damages. Hillenbrand accepted the trial court's remittitur of the award. Aetna appeals the judgment for compensatory and punitive damages. Hillenbrand appeals the judgment on a directed verdict in favor of INA and cross-appeals the reduction of punitive damages.

The insurer justifies the prosecution of the two lawsuits against its insured as routine advocacy and sound economics. The jury and several trial judges rejected the insurer's conservative notion of its duty to defend and its expansive notion of its right to fight its own insured. We conclude there is substantial evidence to support the jury's findings. We therefore affirm the judgment for the compensatory and punitive damages and find no abuse of discretion in the reduction of the punitive damages. We reverse, however, the judgment in favor of INA, having concluded that Civil Code section 2351 does not allow a corporation to exonerate itself from liability as an agent by delegating its obligations to its own employees.

FACTS

In 1973 Hillenbrand did the framing, subfloors and decking, and installed siding on various condominium units as one of several subcontractors for Ring Brothers Corporation and Dalehurst Comstock Corporation (Ring Brothers), the general contractor for the Crosswoods condominium project in Citrus Heights. Although the siding needed to be painted or sealed to protect it from delaminating and warping, Hillenbrand was not responsible for that work, nor was he responsible for the necessary periodic repainting or resealing of the siding.

In 1981 Crosswoods Homeowner Association sued Ring Brothers for negligent construction. Hillenbrand knew nothing of the lawsuit. He was not notified of any defects in his work. Customarily, he remedied any alleged problems; as a consequence, he had never been sued. In 1982 he was named Builder of the Year by the Building Industry Association, the same year he served as president of that organization. The award was particularly meaningful because he was the first president of the association who "had ever come up from a carpenter."

In August 1982 Ring Brothers demanded that Hillenbrand defend and indemnify it, pursuant to his subcontract, for all damages resulting from the services he performed on the Crosswoods project. Hillenbrand immediately notified his insurer, Aetna, but after an initial contact with G. John Palmer, a claims supervisor, he heard nothing from Aetna until late 1983. Meanwhile, Aetna sent the claim to INA for assistance in investigation and handling. The claim was assigned to the claims unit manager in the Sacramento regional office, Michael Cerf. Throughout his involvement with the claim, Cerf reported to home office supervisors Perry Huntington and Jane Joiner.

On June 30, 1983, Ring Brothers cross-complained against Hillenbrand and other subcontractors for indemnity and contribution, alleging that the homeowners' alleged damages were caused by Hillenbrand's and the other subcontractors' "fail[ure] . . . to perform their work on Crosswoods . . . in a workmanlike manner" and "[furnishing of] all . . . materials . . . for the . . . siding" in a "negligent" manner. The insurer later admitted that Ring Brothers's amended complaint alleged potential damage to property other than Hillenbrand's work product as a result of Hillenbrand's work on the siding. Hillenbrand tendered the cross-complaint to Aetna under two separate broad form comprehensive general liability (CGL) insurance policies.

Aetna's CGL policies provided for the following coverage: "[Aetna] will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of [] . . . property damage [] to which this insurance applies, caused by an occurrence, and [Aetna] shall have the right and duty to defend any suit against the insured seeking damages on account of such . . . property damage, even if any of the allegations of the suit are groundless, false or fraudulent . . . . [] . . . [] ‘[O]ccurrence' means an accident, including continuous or repeated exposure to conditions, which results in . . . property damage neither expected nor intended from the standpoint of the insured[.]" The policies did not apply "to that particular part of any property, not on premises owned by or rented to the insured, [] . . . [] (iii) the restoration, repair or replacement of which has been made or is necessary by reason of faulty workmanship thereon by or on behalf of the insured[.]"

The policies, therefore, covered: (1) damage to the siding if it was due to some cause other than Hillenbrand's own faulty workmanship, such as improper maintenance by others, defective materials, or design; and (2) damage to property other than the siding caused by Hillenbrand's faulty workmanship.

Aetna agreed to defend Hillenbrand, but only under a full reservation of rights, citing the faulty workmanship exclusion in its CGL policies. Aetna hired the law firm of Porter, Scott, Weiberg & Delehant to represent Hillenbrand.

Attorney Russell G. Porter advised Cerf that he had reviewed an April 1982 report from Scott Whitten, Inc., wherein Whitten concluded the major siding problem was buckling and loose siding sheets. Anthony S. Warburg, another lawyer from the Porter firm, advised Cerf in March 1984 that Hillenbrand had driven through the project and concluded: "[T]he great majority of the present complaints concerning the siding (were) the result of poor maintenance as opposed to faulty workmanship. Apparently the units have never been repainted and this type of plywood siding needs to be repainted periodically to protect it from water intrusion and weathering."

Again, in April 1984, Warburg reported to Cerf that the siding problems were due to poor maintenance and not to faulty workmanship. "Discussions at our meeting evinced three major problems with the project, namely, improper tile decking, improper roofing, and improper siding. The siding problems break down into three areas, including, warping, improper nailing and improper backing. Also, some of the Z-bar flashing is missing which has caused interior water damage to some of the units. Although approximately 80 units have siding problems, we do not know which units in which phase have the particular problems mentioned above. Also, of the problems mentioned, we are uncertain which were caused by improper installation, improper maintenance, or both."

On June 11, 1984, Warburg told Cerf that the homeowner association's experts estimated it would cost $963,140 to fix the defective siding work. But Cerf considered the insured's exposure grossly inflated, as he explained in his deposition testimony: "Well, in this type of litigation, construction defect litigation, the experts are always real high up in that range, where in reality, what happens in these cases is they settle for cents on the dollar in the long run. The carriers are aware of that. At the time you get to the settlement conference a nine hundred thousand dollar demand is settled for 25 thousand bucks so everybody knows that." On June 13, Cerf wrote to Hillenbrand, informing him that Aetna had no duty to defend because there was no potential coverage under the policy, and consequently, Aetna continued to assert its reservation of rights. Cerf told Warburg that Aetna/INA's "primary concern [was] effective management of the [litigation] expenses."

Cerf provided the INA home office an extensive report on the Hillenbrand litigation on July 9, 1984, concluding that it was not necessary to refer the case to outside counsel for a legal opinion as to coverage. He recommended INA not to file a declaratory relief action and sent the actual file and all original documents to the home office. He did not, however, mention either the potential maintenance problems or the potential damage to other property from the defective siding.

Within three weeks, Cerf changed his mind. On July 23 he warned Hillenbrand that "it may be necessary" to file a declaratory relief action to obtain a judicial determination whether INA/Aetna was obligated to indemnify him in the Crosswoods action. Because INA/Aetna would seek reimbursement of defense costs, Cerf advised Hillenbrand to hire his own lawyer to defend the declaratory relief action. It was not until the following day that he inquired about Hillenbrand's actual involvement in the construction project.

In August, Warburg apprised Cerf that his investigation of the causes of the damages to the condominium units was incomplete. He was particularly interested in the slope discrepancies on the second floor decking, which might have been due to design defects rather than faulty workmanship. The insurer also knew about water damage to wallboard and insulation not installed by Hillenbrand ("other property") caused by missing Z-bar flashing.

Nevertheless, in September Cerf asked the superintendent of the home office claims department for permission to file a declaratory relief action, despite his belief that INA had a duty to defend. He wrote: "[I]t is my recommendation that we join with Transamerica Insurance Services on this case, retain outside counsel to represent both carriers and file a Declaratory Relief immediately. The Declaratory Relief, in my estimation, will not resolve the case completely, but it will in fact resolve the damages that the carrier is responsible for. I would distinctly feel that we will not come away from this case without an obligation to defend the insured."

David Mackenroth and Claudia Robinson, representing INA/Aetna, filed the declaratory relief action against Hillenbrand in October 1984. A month later, Warburg informed Cerf that INA/Aetna's expert had conducted a site inspection and it was his expert opinion that much of the damage, which Ring Brothers claimed was due to Hillenbrand's defective workmanship, was in fact caused by poor maintenance of the siding panels. Moreover, according to the same expert, the type of material used for the siding itself might have been defective. Hillenbrand did not supply the materials he installed in the Crosswoods development.

Hillenbrand was represented by Warburg in the underlying construction litigation. Warburg, paid by the insurer, reported to Cerf. At the same time, Hillenbrand was represented by Alvin R. Wohl and Steven B. Eggleston in the declaratory relief action filed against him by his own insurer. Hillenbrand was baffled, frustrated, and depressed. At trial, Eggleston explained: "[Hillenbrand] didn't understand -- as he explained it to me, he did not understand why it is that he was being sued by the very insurance company that he had paid to provide him protection if he got sued. [] And he was concerned about how he was going to -- he expressed his concern about how he was going to be able to financially defend against that insurance company. He also expressed his concern about them having a conflict of interest. How could they protect him on the one hand while at the same time they were suing him. And he expressed his concern about all the confidential things he had been telling his former attorney, for example, Mr. Warburg and just in general how all this was going to be kept separated. And how it wasn't going to be -- whether it was going to be used against him by INA, Aetna."

Hillenbrand's concerns were well founded. In March 1985 the insurer asked him to admit that the damage to the condominium units arose "from deficiencies and/or defects in workmanship." Eggleston explained the untenable position his client was then in. As he told Hillenbrand, "[F]irst of all, if you answer these interrogatories, what's going to happen is you're going to create a record which does two things. One, it will -- if you answer them in a certain way, it will be an admission that you did something wrong at the Crosswoods action. And it will then become a record, and the attorneys for Crosswoods will be able to get that information and use it against you in the underlying case. [] Secondly, the way these are written by answering the questions on faulty workmanship, you give answers that will hurt you and will cause the insurance company to deny coverage because they're not going to cover that. So if you respond to these, you run the risk of both by confessing to do [ sic ] doing something wrong [to] your underlying case and at the same time eliminating all the insurance coverage for what you just confessed was there. [] That was the risk you ran depending on what was happening, what the correct answers were. So what I told him was that we were in a very, very, very difficult spot. . . . [] . . . [] . . . So it's sort of like -- I was explaining to him it was sort of like being shot by your own people behind the lines as you're trying to fend off the other side."

Shortly after the requests for admissions were sent to Hillenbrand, David Pritchett replaced Cerf. In October 1985 Crosswoods project testified at his deposition that some of the siding installed by Hillenbrand appeared to be defective. She also told Pritchett that two experts confirmed at their depositions that there was water damage due to leakage after the siding buckled and pulled away and that there was evidence the damage was due to maintenance problems. The same month, she reported to Pritchett that there was evidence the pooling of water on approximately 78 tile balconies was the result of inaccurate slope design. In November, Eggleston also informed Pritchett that the failure to paint the siding after it was installed and to properly maintain the siding after the project was completed caused the siding problems.

In response to interrogatories propounded by Hillenbrand, the insurer stated: "[T]he reports and investigation of CIGNA received prior to the institution of the Declaratory Relief Action showed that the insured may not have been responsible for various damage claims being alleged by the homeowners, and that such damages may have been due to the negligence of other contractors or of the association in failing to properly maintain the complex."

Nevertheless, in January 1986 Pritchett instructed Robinson to file a motion for summary judgment in the declaratory relief action before any settlement conference in the Crosswoods action. Hillenbrand's lawyer reminded Pritchett of the evidence giving rise to potential coverage and emphasized the applicability of the analogous case, Economy Lumber Co. v. Insurance Co. of North America (1984) 157 Cal.App.3d 641. At the same time, the insurer challenged first party claims from Crosswoods condominium owners, asserting that the homeowners did not properly maintain the property.

In March, Judge Roger K. Warren initially granted the motion for summary judgment, but on reconsideration he denied the motion. Before the motion had been reconsidered and denied, Robinson warned Pritchett the decision might be reversed. She wrote: "This situation is made more complicated by the fact that a recent decision on insurance coverage was not cited by Hillenbrand's counsel and has not been spotted by Judge Warren. That is the case of Cal Farm Insurance Company v. TAC Exterminators, Inc. at 172 Cal.App.3d 564. I am sending you a full copy of the opinion should you wish to review it. [] . . . [] . . . Should either Judge Warren or Steve Eggleston pick up on the TAC case, it may be that our motion will be denied. In any event, the presence of that case in the books adds strength to the insured's position and increases the chances that if we win in the Superior Court, we will be reversed on appeal."

Judge Warren ultimately denied the motion for summary judgment because he discovered that Hillenbrand had presented evidence of "other property." Robinson explained to Pritchett: "At the hearing on the motion to reconsider, Judge Warren indicated that he had gone back over materials submitted to the court on April 14, 1986 by Wohl's office and had concluded that those papers may have established damage to ‘other property' that is validly claimed in the underlying action. He specifically referenced cracked tiles, damage to insulation, and damage to sheetrock." Nevertheless, the insurer continued to prosecute its lawsuit against its insured and thereafter filed a second lawsuit against Hillenbrand.

In July 1986 Hillenbrand settled the Crosswoods litigation with Ring Brothers for $40,000. Aetna paid one-third of the settlement, or $13,333, and gave up its right to recover this amount from Hillenbrand. On or about July 28, 1986, INA/Aetna filed a second action against Hillenbrand -- a cross-complaint against both Hillenbrand individually and George F. Hillenbrand, Inc.

In March 1987 Pritchett asked Robinson to suspend work on the declaratory relief action while he consulted with his home office. He told his home office that INA/Aetna may "have little further basis for continuing the [declaratory relief action] except as to the reasonableness of the insured's attorney's fees." Yet he advised the insurer to stay the course.

In July 1987 Pritchett received $44,840 from another insurer for Aetna's defense costs. A year later, Robert Paine, a claims supervisor, replaced Pritchett and continued to prosecute the action despite Robinson's advice that it "would be extremely difficult to prevail . . . ." Hillenbrand added a bad faith claim to his cross-complaint.

In 1988 Marc Babin summarized the insurer's position as to coverage for damage to "other" property: "[T]he Complaint alleged that the siding was improperly nailed to the framing. The resulting damage to other property seemed minimal and at first glance did not seem to justify forcing the carrier to pay the potential six figures in defense costs, merely because of this minimal damage."

The insurer brought a motion for summary adjudication of the bad faith claim while the declaratory relief action was pending. Judge Jeffrey L. Gunther held that "INA/Aetna's filing and maintenance of an action for declaratory relief cannot form the basis of an action for bad faith, for breach of fiduciary duty, or for other cause of action for wrongful conduct." In later proceedings, Judge Gunther granted Hillenbrand's motion for summary judgment, concluding that "INA/Aetna did owe a duty to defend Hillenbrand in the underlying action and thus cannot recover back its defense fees and costs from Hillenbrand."

The insurer, in a motion in limine before trial of the bad faith claim, asked the court to exclude any reference to the declaratory relief action. Robinson argued that the bad faith claim rested exclusively on the insurer's failure to investigate. The trial court held the declaratory relief action was "expunged" for the purposes of the bad faith trial. The jury thereafter returned a defense verdict.

In March 1991 Hillenbrand sued INA/Aetna for the malicious prosecution of both civil proceedings that had terminated in his favor: the 1984 complaint for declaratory relief and the 1986 cross-complaint to recover defense costs. In April 1998 the jury awarded Hillenbrand $1,445,000 in compensatory damages and $14,000,000 in punitive damages. INA/Aetna appeals the judgment in the malicious prosecution action. Hillenbrand appeals the trial court's reduction of punitive damages to $3,000,000 and the directed verdict in favor of INA.2

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

Outcome: The judgment in favor of INA is reversed. The judgment in favor of Hillenbrand but reducing the award of punitive damages is affirmed. Hillenbrand is awarded costs on appeal.

Plaintiff's Experts: Unavailable

Defendant's Experts: Unavailable

Comments: None