Superior Court of Orange County, No. 298034, Jerrold S. Oliver, Judge.
Opinion by Staniforth, J., with Cologne, Acting P. J., and Butler, J., concurring.
In an earlier (underlying) lawsuit for damages arising out of an automobile intersection accident (Gallucci v. Betts), Anne E. Gallucci obtained a jury verdict-judgment against Debra Betts for damages of $450,000,*fn1 $350,000 in excess of Betts' automobile insurance policy issued by Allstate Insurance Company (Allstate). Allstate assumed the Betts defense, furnished the law firm of Ruston and Nance (Ruston) to represent Betts in the underlying lawsuit, but flatly denied liability and adamantly refused during the entire course of litigation and up to and including the
motion for new trial to accept Gallucci's offer to accept its policy limits in settlement.
In the present action Betts sued Allstate, alleging breach of covenant to deal fairly and in good faith. She charges a "bad faith" refusal to accept a settlement offer within the policy limits. Betts alleges Ruston was negligent in conducting the defense of her lawsuit. A jury returned special verdicts awarding (1) compensatory damages against Allstate of $500,000 (to which the trial court added prejudgment interest and costs) and (2) punitive damages of $3 million. The jury found Ruston was also negligent and awarded $500,000 jointly and severally against the lawyers and Allstate for emotional distress. A motion for new trial was conditionally granted as to the latter $500,000 award of damages unless Betts accepted a reduction of the award of $500,000 to $50,000. Betts accepted that condition and a new trial was denied in its entirety. Allstate and Ruston appeal the respective portions of the judgment against them. Betts cross-appeals the order which conditionally granted the partial new trial.
At 1:30 a.m. on May 8, 1975, 17-year-old Debra Betts collided with a car driven by Anne Gallucci (another Allstate insured) at the signalized intersection of Imperial Highway and La Mirada Boulevard. Betts was alone in the car owned by her father. Witness Pamela Thayer was in the car which followed Gallucci into the intersection. Gallucci suffered severe brain injuries that nearly took her life and rendered her permanently incompetent, unable to relate what had happened. The accident was promptly reported to Allstate by Betts' father who claimed Gallucci had run the red light at the intersection. An employee in Allstate's Downey branch initially rated the case as one of 50-50 liability because it was an intersection collision, but later changed the evaluation to 90-10 against Betts' liability when he received Mr. Betts ' statement regarding Gallucci's traffic light violation and confirmation of that fact from witness Thayer. Another Downey branch office employee, Robert Myers, was put in charge of overseeing the handling of the Betts file. He originally evaluated the case at 80-20 against liability. He later changed this to 90-10 and then to 95-5 in response to claimed factual data affecting the case and because of Ruston's view. Allstate's home office personnel were of the same opinion: they characterized this case as one of no liability whatsoever and determined it should be approached on a "deny/defend" basis.
Allstate referred the Betts case to Ruston, an Orange County litigation firm, to undertake the defense of Gallucci's suit. The first attorney to review the file (Vic Eitel) was of the opinion this was a no liability or a 95-5 percent liability case. Throughout the entire pretrial period the opinion of both Allstate and its counsel was that Gallucci had horrendous injuries that could produce a verdict far in excess of $100,000 -- up to a million dollars -- in the event of a full liability finding against Betts. Allstate agents as fact bases for their "no pay/defend" stance, relied upon Betts' consistent and "patently sincere version of the [facts]" in which she unwaveringly described her speed as safe, within legal limits, her attitude as attentive, and the green light with her as she entered the intersection.
The Allstate Investigation -- Who Ran the Red Light?
Shortly after the accident, Betts related her version of the accident to the Allstate adjuster who wrote down her answers and prepared a written statement. Betts was never permitted to see or read this statement until the present trial. This statement suggests Betts negligently contributed to the accident in the form of (1) excessive speed and (2) inattention. She reported she had approached the intersection at 40 miles per hour and reduced her speed somewhat, maybe to 35; seeing the light was green she accelerated a little bit and entered the intersection. She did not not notice any cross -- traffic until the Gallucci vehicle was but one car length away from her. The intersection was posted for 40 miles per hour. The supervisor in the local Downey Allstate office reported Gallucci's severe brain damage and pointed out " it appears that both parties were speeding." He rated the liability as 50-50.
Thayer told officers at the scene Gallucci ran the red light. Allstate adjuster Santa Maria later took Thayer's statement under suggestive conditions. Thayer was in a hospital under medication. Within a month after the accident, Thayer gave a revised version which contradicted her first statement. She was confused as to where she was, the direction to which she had been traveling and whether she had been stopped or moving. With the change in her story, Allstate came to regard her as "flaky" and "unreliable," unable to substantiate Betts' account.
Allstate immediately hired Truesdale Laboratories, a reputable accident reconstruction firm, to investigate the accident. The author of the first Truesdale report, McElwain, concluded Betts had been driving at 45 to 50 miles per hour and Gallucci was found to have been wearing a seatbelt and had been traveling 15 to 20 miles per hour on the assumption that she was making a left turn.
On July 24, 1975, supervisor Myers wrote to Allstate district casualty claims supervisor Majorie Boyce to express his concern over the Truesdale report. He proposed further contacts with the expert in an effort to change the conclusions concerning Betts' speed, suggesting a mistaken assumption that Gallucci had been making a left turn as a possible basis for change. Furthermore he scolded Boyce. "This appears to be the type of a report that we would have wanted over the phone orally rather than in written form."
Myers also admitted to knowledge of this damaging fact: Betts' statement did not tell whether she looked in both directions for cross-traffic before entering the intersection to check that it was safe even though she may have had the green light. Myers stressed this was most important. He suggested further contact with the insured to " restatementize her on this key issue." He concluded with comparative negligence involved, a $100,000 policy involved, and brain damage involved " we need a little extra effort on this case." While the liability estimate was changed from 50-50 to 90-10 based upon Thayer's statement and Myers estimated 95-5 exposure, nevertheless on August 12, 1975, Allstate created a $50,000 reserve. Such reserve was felt to be warranted because of the seriousness of the injuries.*fn3
With this state of knowledge Allstate ordered a second, then a third Truesdale report. The second differed little from the first. Thus, in spite of Boyce's effort to have Truesdale "review" the entire subject, the second report (authored by McElwain and dated Sept. 3, 1975) again stated Gallucci was traveling at a lesser rate of speed than Betts. In short the second Truesdale report refused to say Betts' speed was less than an excessive 45 to 50 miles per hour.
In June 1976 Truesdale was prevailed upon by Allstate representative Strowmatt to issue yet a third report with a new author, Pennycook. Pennycook proposed Betts' rate of speed (estimated by Truesdale's first report at 45 to 50 and unchanged in the second report) might have been as low as 30. However, Pennycook admitted to Powers (the Ruston attorney then working on the case) that a scientifically acceptable basis for the calculation was not possible. Powers called the defect in the report to Allstate's attention. He described Pennycook's conclusion as not being scientifically supportable. With this as Allstate's state of knowledge concerning the Truesdale findings, Powers interviewed Pennycook and concluded that the two men at Truesdale had so hopelessly "botched" matters as to require employment of another reconstruction firm. Thus the third Truesdale report
was also rejected as useless because it was inaccurate and vulnerable to attack by Gallucci. Thereafter from Allstate's head office to the district level the hiding of the Truesdale reports became a focus of activity.
First, Myers reacted by seeking to conceal the Truesdale reports. He proposed the first report be returned to Truesdale for deletion of Allstate's name and any other matters indicating Allstate requested the report. Secondly he suggested a law firm be hired without delay into whose hands the altered report would be placed and thereafter in the event of discovery the law firm would be in a position to assert the work product privilege. Myers said he wanted "the lawyers at Ruston and Nance to claim that they had requested that report and it was attorney work product." Instructions were sent to Boyce to do this precise thing -- to alter the report so no one would know that Allstate had asked for it. Ruston's Powers unequivocally condemned the coverup stating "it would be completely wrong; it would be lying; it would be altering a piece of potential evidence; it would be potentially perjury."
In face of the developing evidence of liability, district manager Boyce received a home office directive ordering defense on the basis of " no negligence -- claimant ran red light." By October 9, 1975, however, Allstate's Myers had begun to question the no liability stance. He wrote to Boyce on another subject with a copy to house counsel Smith to which he added a "blind post script" to Smith's copy. In it he acknowledged Betts' failure to check the intersection before entry as a troublesome fact. He acknowledged as a fact she was traveling some five to ten miles above the speed limit. Myers stressed the fact Betts was speeding and not looking, yet viewed the case as at best a 90-10 exposure. Response from higher officials at Allstate was not long in coming. On November 13, 1975, Smith delivered a written message to Myers followed up by a telephone conference. In essence, the writing said Betts was legally in the intersection and therefore improper lookout and excessive speed could not be material. Smith disagreed with the existing reserve of $50,000 or any settlement close to it.
These further facts, critical to any rational evaluation of exposure of Betts, were known to Allstate pretrial. Less than a month after the accident Allstate learned the injuries suffered by Gallucci were most severe. In addition to fractures and contusions the diagnosis included a brain stem injury with coma. Medical costs were already approaching $21,000. Boyce obtained this information concerning Gallucci's costs by a practice known as "backdooring." Gallucci's file was in another Allstate district office being processed for her medical payment coverage under her Allstate policy. Despite Gallucci's husband's express refusal to give authorization to Allstate, their agents went into her records. In an effort to disguise the transfer of
information, Boyce crossed out the file marks identifying it as part of Gallucci's medical payments claim and substituted a styling to indicate the material originated in connection with Gallucci's injury claim against Betts. There was evidence that this misidentification procedure as well as the "backdooring" (invasion of cross-files) was a general practice of Allstate.
The Gallucci Investigation
Gallucci's attorney John Trotter hired expert Harry Krueper, a respected specialist in accident reconstruction.
Krueper was of the opinion (and so reported Aug. 12, 1976) on the basis of calculations from data derived from Betts' own deposition and other physical site evidence it was Betts, not Gallucci, who had run the red light.
For some reason not made clear, an agreement between opposing counsel was reached by which Allstate counsel would not seek to compel production of the basis of Krueper's opinion in exchange for Trotter's cessation of efforts to depose Truesdale's McElwain. Due to the self-confessed negligence, Allstate's trial attorney, Dragonette, when he deposed Krueper, did not ask sufficiently pointed questions to elicit his opinion or its factual basis. Trotter (in the present trial) was of the opinion Ruston and Allstate must have anticipated Krueper's damaging testimony ; surprise was only pretextual ; Allstate, of course, learned of Krueper's opinion and its fact basis early in the trial.
At trial the defense was unable to make a showing of any effective rebuttal to the evidence of liability. Defense expert witness Auksmann was admittedly not qualified to challenge Krueper's conclusions or facts. Ruston attorney Powers refused to stipulate to Gallucci's incompetency and therefore lawyer Trotter brought her into the courtroom. The court promptly declared her incompetent. Allstate district claims representative Strowmatt states she was one of the "most pathetic pieces of humanity I've ever observed." In this continuing collapse of the defense position and the overwhelming evidence of an enormous exposure because of Gallucci's injuries, Allstate continued adamant in its no-pay position.
Strowmatt (who had estimated up to 20 percent exposure on the collapse of witness Thayer) admitted (in his deposition in the present action) that after Krueper's testimony the cause was an excess judgment case involving potential bad faith. Smith, claims attorney at Allstate's home office, acknowledged Krueper's testimony required a readjustment of the no liability stance and called for a 50-50 allocation. Finally, the two and one-half year no-pay stance was in the face of knowledge of the Allstate officials that
Betts early in the proceeding had made a "slip of the tongue" in her deposition.*fn4
With knowledge of all the foregoing facts, the Allstate home office absolutely rejected offers by Gallucci to settle within the policy limits and denied all settlement authority to local representatives. Dragonette recommended payment of the policy limits but was refused authority. After the collapse of witness Thayer, Myers requested settlement authority but was refused (in a July 22, 1977, telephone conversation). Significantly, the contents of this telephone conversation were unrecorded and the written correspondence between home office claims Attorney Thorton and Myers omitted any reference to the discussion.
By the time of Myers' request for authority, the Trotter firm had made two offers to settle within the policy limits. One demand was made orally by Mr. Handweiler on June 8, 1977, the second was made in writing by Mr. Bahan on July 18, 1977. Handweiler's demand for the policy limits was made to Ruston attorney Powers. Powers realized the potential conflict in interest between Betts and Allstate precipitated by this demand. He reported the demand to Allstate but failed to report it to Betts. But Bahan's demand letter reviewed the facts pointing to liability of Betts and called attention to the catastrophic nature of the injuries. Powers however stated there was then no evidence of liability warranting a settlement.
Strowmatt then wrote to Betts concerning the demand letter, explaining no offer was made because discovery had not yet been concluded primarily because of the Trotter firm's refusal to cooperate with regard to key witness Thayer. This statement was at a time, however, when Thayer had already been deposed and had recanted.
Nineteen-year-old Betts went to Ruston's office to participate in the meeting concerning Bahan's demand. Betts said she relied entirely on Dragonette, Allstate's trial attorney. She had no reason to doubt that he was advising her or making a decision other than in her best interest. She did
not understand the reference to a settlement conference nor did she understand what was meant by the Strowmatt letter saying that her policy limits were being demanded. At that meeting there was no discussion of a possible conflict of interest arising because of the settlement demand. Betts was told nothing about the known liability problems arising from the Truesdale findings, Gallucci's employment of a specialist on traffic signals, or Thayer's dismissal, not as a favorable witness, but as " a flake." Betts was not informed of the settlement recommendation of Dragonette and Strowmatt.
The jury could draw a rational inference the lawyers assured Betts she would win at trial. Typical of the statements made to her were: "You had a green light and you got to give that a try. You shouldn't have someone else in the wrong get the money. They're trying to get the money and you had a green light and you should try it. We can win. While we admire you Ms. Betts there is not too many people like you who stand behind what they say and feel the right and take action upon it." Myers recounted Betts and her father had met with the defense attorneys and they "both tell us to try the case." Betts maintained she had done nothing wrong and should the verdict exceed the limits she would " just file bankruptcy."
Dragonette signed a letter to the insurance company (actually written by Strowmatt) asserting Betts was virtually judgment proof. He noted her understanding that should the jury not believe her and should a substantial verdict result she would file bankruptcy to discharge the obligation. Most important to the lawyer was this: Betts was positive she had the green light and the other party was entirely at fault. He stated Betts ...