4. Conduct of U.S. Hotels
First State argues that the conduct of the insureds caused the actual harm that they have suffered. Defendant claims that U.S. Hotels settled for twenty cents on the dollar despite unexhausted layers of coverage in excess of $ 7.5 million and that the settlement was not in good faith. First State argues that justice requires a reduction.
However, U.S. Hotels settled with other insurance companies to reduce the amount of harm as it reduced the money for which they were liable. First State's argument that its insureds settled "too cheap" rings hollow. "Where the insurer has repudiated its obligation to defend[,] a defendant in the absence of fraud may, without forfeiture of his right to indemnity, settle with the plaintiff upon the best terms possible, taking a covenant not to execute." Samson, 30 Cal. 3d at 240 (quoting Zander v. Texaco, Inc., 259 Cal. App. 2d 793, 802, 66 Cal. Rptr. 561 (1968)). Defendant passed on the opportunity to settle the case for $ 1.3 million and now must suffer the consequences of compensatory damages.
Defendant's final assertion is that the U.S. Hotels have failed in their duty to mitigate their losses by failing to obtain "reasonable" settlements from the underlying carriers. However, "neither a coinsurer nor the plaintiffs in a suit against an insured defendant have a duty to the insurer, in the absence of any positive steps that might lead the insurer to expect notice from them." Samson, 30 Cal. 3d at 241 (citing Drinnon v. Oliver, 24 Cal. App. 3d 571, 581-583, 101 Cal. Rptr. 120 (1972)). Here, no such "positive steps" were undertaken, and accordingly, plaintiffs were under no duty to First State absent general obligations of good faith. Nonetheless, the fact that U.S. Hotels settled with the other insurers for less than the policy limits is not "unreasonable" in light of their own need to reduce their liability in the absence of a defense.
Accordingly, as none of defendant's objections have merit, the Court GRANTS plaintiffs' motion for entry of the proposed compensatory damages judgment.
D. Attorneys' Fees
The U.S. Hotel plaintiffs have also moved for attorneys fees for both the fees incurred in prosecuting this action and the non-reimbursed attorneys' fees incurred in the underling action.
1. Legal Standard
The so-called "American Rule" dictates that parties to litigation bear their own attorneys' fees. However, plaintiffs rely on the California Supreme Court case Brandt v. Superior Court, 37 Cal. 3d 813, 817, 210 Cal. Rptr. 211, 693 P.2d 796 (1985), which held that "when an insurer's tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be held liable in a tort action for that expense." Still, fees incurred in establishing extra-contractual damages are not compensable. As for allocation between the two, the Brandt court stated that:
the determination of recoverable fees must be made by the trier of fact unless the parties stipulate otherwise. . . . A stipulation for a post-judgment allocation and award by the trial court would normally be preferable since that determination would be made after completion of the legal services . . . and proof . . . could be simplified because of the court's expertise in evaluating legal services.
Id. at 819-20 (citations omitted).
Here, the parties have stipulated that the Court determine post-judgment fees.
a. Fees in the Present Action
U.S. Hotels' counsel Brian Strange has submitted a declaration stating, and has attached itemized billing statements showing, that the total legal bills in this case for time and costs through February 24, 1993 is $ 332,472.19. Strange Declaration, Mar. 1, 1993, at 2. As for allocation, plaintiffs propose that an award of two-thirds is fair and avoids the difficult task of dividing fees. Certainly, plaintiffs assert, the portion of trial for extra-contractual damages was no more than one-third given that U.S. Hotels had to prove a breach of contract before requesting extra-contractual damages. Thus, the total request for fees in this action is $ 221,648.13.
Defendant objects to fees, claiming that Brandt provides little support for plaintiffs' arguments. First State argues that Brandt permits recovery of fees incurred by the insured to compel payment of benefits due under an insurance policy, but does not allow fees incurred in order to prove that an insurer breached its insurance contract. However, this argument appears to raise a distinction without a difference. Plaintiffs should not be denied Brandt fees on the basis that they proved First State breached its contractual duties.
Defendant also claims that The Pacific Group was not the victim of First State's tortious conduct. Further, First State notes that Brandt fees were intended to benefit an insured who retains counsel to compel benefits. See Xebec Dev. Partners, Ltd. v. Nat'l Union Fire Ins. Co., 12 Cal. App. 4th 501, 571-72 (1993) (insureds assigned all of their rights to claimant, in this context court held assignee could not seek attorneys' fees under Brandt).
Moreover, defendant argues that plaintiffs have failed to prove the amount of legal fees that were "reasonably necessary to collect benefits due under the policy." California State Automobile Ass'n, Inter-Ins. Bureau v. Superior Court, 184 Cal. App. 3d 1428, 1434, 229 Cal. Rptr. 409 (1986). That is, First State states that plaintiffs' two-thirds formula, although simple, is imprecise and no evidence has been adduced showing why the two-thirds allocation is fair.
Finally, defendant insists that if the Court elects to distribute Brandt fees, the proper amount is $ 4,462.50 because those where the only fees incurred to recover policy benefits. This figure is derived from the fact that, as of the Court's Order of July 19, 1990, plaintiffs had completed the task of proving that First State was obligated to drop down and the fees to that date indicate an amount of $ 4,462.50. Defendant claims that from the time of the settlement with The Pacific Group in August 1989 to the present, the U.S. Hotels were thus directed primarily toward achieving extra-contractual damages as it assigned its contract claims to The Pacific Group. However, this figure of $ 4,462.50 ignores First State's numerous attempts after July 1990 to convince the Court that it had no duty to defend its insureds.
Although the parties dispute this issue, plaintiffs tellingly acknowledge that it "does not appear that any California court has addressed the precise issue confronting this Court." U.S. Hotels' Reply in Support of Attorneys' Fees, Apr. 15, 1993, at 2. The general rule is that, unless specifically authorized, attorneys' fees are not recoverable. See Reynolds Metals Co. v. Alperson, 25 Cal. 3d 124, 127, 158 Cal. Rptr. 1, 599 P.2d 83 (1979). As there are no cases on point permitting those fees which plaintiffs seek, the Court will not expand the rule announced in Brandt. Rather, the Court defers to the American Rule and, therefore, DENIES plaintiffs' motion for attorneys' fees incurred in the present action.
b. Fees in the Underlying Action
U.S. Hotels also requests attorneys' fees from the underlying action incurred after its tender of defense to First State. Those fees total $ 361,329.41. Strange Declaration, Mar. 1, 1993, at 2. Defendant does not object to this amount. See Defendant's Response to the Court's June 2, 1993 Order, Jun. 17, 1993, at 9. Accordingly, the Court finds this amount reasonable and GRANTS plaintiffs' motion for attorneys' fees incurred in the underlying action.
For the foregoing reasons, the Court ORDERS as follows:
1. Defendant's motion for a new trial is DENIED.
2. Defendant's motion for to alter or amend the verdict or, as construed by the Court, motion for reconsideration, is DENIED.
3. Defendant's motion for judgment notwithstanding the verdict is GRANTED as to punitive damages and DENIED as to compensatory damages. The jury's punitive damages award is VACATED.
4. Plaintiffs' motion for compensatory damages and judgment is GRANTED.
5. Plaintiffs' motion for attorneys' fees is GRANTED as to the underlying action and DENIED as to the instant action.
IT IS SO ORDERED.
DATED: October 7, 1993.
D. Lowell Jensen
United States District Judge
JUDGMENT - October 7, 1993, Filed; October 8, 1993, Entered
On February 12, 1993, the jury in this case returned a verdict on three issues against the defendant First State Insurance Company. First, the jury found that defendant's failure to defend the U.S. Hotel Properties Corporation, U.S. Hotel Properties Hotel and Resort Management Company, Wallace Smith, and Horst Osterkamp ("U.S. Hotel plaintiffs") proximately caused the settlement and judgment in the underlying Hawaii lawsuit. Second, the Jury found that defendant breached its duty to act fairly and in good faith with the U.S. Hotel plaintiffs. Third, the jury found that defendant acted with malice or oppression in its dealings with the U.S. Hotel plaintiffs.
On February 19, 1993, the jury returned a verdict on the issue of punitive damages for the U.S. Hotel plaintiffs and against defendant in the amount of § 21 million.
Accordingly, pursuant to those verdicts and pursuant to the Court's Order filed October 7, 1993, the Court hereby ENTERS JUDGMENT in favor of plaintiffs and against defendant in the amount of $ 8,306,792.80 in compensatory damages, inclusive of pre-judgment interest through February 1, 1993, and $ 361,329.41 in attorneys' fees for the underlying action. The punitive damages award is VACATED.
IT IS SO ADJUDGED.
DATED: October 7, 1993
D. Lowell Jensen
United States District Judge