(Super. Ct. Nos. 1096761 & 1090510 Santa Barbara County). Denise deBellefeuille, Judge Thomas P. Anderle, Judge.
The opinion of the court was delivered by: Yegan, J.
CERTIFIED FOR PARTIAL PUBLICATION*fn1
Respondent Jamey Lynn Parks obtained a personal injury judgment of $2,187,886 against 16-year old Michelle Miller. Safeco Insurance Company of America (Safeco) issued a homeowner's policy to Eddie Barnette, the man with whom Michelle's mother lived and with whom Michelle periodically stayed. It issued a similar policy to Michelle's grandmother Evelyn Miller, with whom Michelle and her father Charles resided. Safeco declined to defend Michelle, to settle Parks' action against her, and to indemnify her under the policy it issued to Barnette. Michelle assigned her causes of action against Safeco to Parks. When Parks later made a claim under the belatedly-discovered policy issued to Evelyn Miller, Safeco paid Parks the $100,000 policy limits but refused to pay any part of the excess judgment.
A jury found that Safeco breached the covenant of good faith and fair dealing implied in the policy issued to Evelyn Miller when Safeco failed to settle the personal injury case or to defend or indemnify Michelle Miller. The trial court entered judgment in favor of Parks against Safeco for $3,245,333.76. It later awarded Parks costs of $70,104.23 and attorney fees of $426,208 as cost of proof sanctions for Safeco's failure to admit certain matters in response to Parks' requests for admission. (Code Civ. Proc, § 2033.420.)*fn2
Safeco appeals from that judgment and from post-judgment orders entered in the related declaratory relief action. Parks cross-appeals in the bad faith action, contending the trial court improperly limited his recovery on a judgment creditor's claim.
We reverse the order awarding Parks his attorney fees as cost of proof sanctions. We affirm the judgments in all other respects.
We described the facts of the underlying accident in our prior published opinion, Safeco Ins. Co. of America v. Parks (2004) 122 Cal.App.4th 779 (Safeco I), and again, more briefly, in our subsequent unpublished opinion, Safeco Ins. Co. of America v. Parks (July 5, 2006, B185335) (Safeco II). In summary, during the early morning hours of February 28, 1999, Parks was walking on Highway 101 north of Santa Barbara when he was struck by a passing motorist. Parks suffered serious, permanent injuries in the collision including having his leg amputated. He was on the side of the freeway because his then girlfriend, 16-year old Michelle Miller, and two of her friends left him there. Miller had been driving Parks, who was drunk, from Santa Barbara to his home in Santa Maria when the car got a flat tire. She called a friend, Teresa Cooney, to pick them up. Cooney arrived with her friend Isaiah Rivera and the group started back to Santa Maria in Cooney's car. Parks was soon forced out of the car because he was being violent toward Miller. Over one mile and more than 15 minutes later, Parks was struck by a car as he walked back to his own car.
At the time, Miller lived with her father, Charles Miller, and grandmother Evelyn Miller, in a condominium rented by the grandmother. Miller's parents were divorced. Her father, Charles, had sole legal and physical custody of Michelle. Her mother was living with Eddie Barnette whom she later married. Miller sometimes stayed with her mother at Barnette's house. Barnette had a homeowner's insurance policy issued by Safeco.
Parks sued Cooney, Rivera and Miller. Cooney's automobile insurer provided all three with a defense, retaining Richard Phillips to represent them. Cooney and Rivera settled with Parks for the policy limits of $30,000. Phillips tendered Miller's defense to Safeco under the homeowner's policy issued to Barnette. Safeco declined the defense. Miller and Parks submitted their claims to binding arbitration. The arbitrator, a retired superior court judge, James Slater, found in favor of Parks, awarding damages of $2,187,886 after a 50 percent reduction for comparative fault. A judgment in that amount was entered against Miller in January 2002. Miller settled with Parks by assigning to him any claims she might have against Safeco.
In July 2002, Parks sued Safeco to recover the judgment he obtained against Miller (the bad faith action). He alleged that Safeco breached the Barnette policy and its implied covenant of good faith and fair dealing by refusing, in bad faith, to defend Miller under the Barnette policy and to settle within the limits of that policy. In August, Safeco filed a separate action for declaratory relief against Miller and Parks, alleging that it had no duty to defend or indemnify Miller under the Barnette policy (the declaratory relief action). The two cases were consolidated.
Parks served Safeco with requests for production of documents that asked Safeco to produce all "applicable insurance policy or polices providing coverage for the nature and extent of the damages alleged . . . [,]" and all "applicable umbrella insurance policy or policies providing coverage for the nature and extent of the damages alleged . . . ." Safeco objected that the document requests were vague, ambiguous, overbroad, burdensome and oppressive and that the documents they sought were not relevant or reasonably calculated to lead to the discovery of admissible evidence. It declined to produce any documents in response to the requests. Parks did not move to compel further responses to the request for production of documents.
The bad faith action was stayed while the parties tried the declaratory relief action to the court sitting without a jury. Charles Miller testified at the trial. Afterwards, he went home and asked his mother Evelyn, apparently for the first time, whether she had any insurance on her condominium. Charles then discovered that Safeco had issued Evelyn a renter's insurance policy covering the condominium. He gave the policy to Michelle or to her lawyer.
In August 2003, the trial court entered a declaratory judgment in favor of Parks and against Safeco, finding that Safeco had a duty to defend and to indemnify Miller because she was an insured under the Barnette policy. The parties agreed to rescind the order consolidating the bad faith and declaratory relief actions and to stay the bad faith action "until further order of the court."
Safeco appealed the declaratory judgment in October 2003. In August 2004, we reversed, holding that Safeco had no duty to defend Miller under the Barnette policy because she was not an insured under that policy. (Safeco I, supra, 122 Cal.App.4th at pp. 792-794.)
In September 2004, Parks' counsel demanded that Safeco pay the policy limits under the policy issued to Evelyn Miller. Safeco assigned the claim to James Diley, an adjuster who had not participated in the prior coverage determination or the litigation between Safeco and Parks. Diley interviewed Charles Miller and reviewed portions of the transcripts of Charles and Michelle Miller's depositions in the personal injury action. He purposefully did not review the claims file for the Barnette policy because he wanted to make an independent evaluation of the present claim. Diley also did not review the arbitrator's award in Parks v. Miller. Within one week of receiving the demand letter from Parks' counsel, Diley concluded that Michelle was an insured under the policy issued to her grandmother and its automobile exclusion did not preclude coverage. He forwarded a check for the policy limits of $100,000 to Parks on September 17, 2004. In May 2005, after receiving another demand from Parks, Safeco forwarded to him a check for the $1,000 medical payments coverage limits.
In February 2005, Parks amended his complaint in the bad faith action to allege for the first time that Safeco had a duty under the policy issued to Evelyn Miller (the "Miller policy") to pay the judgment and that it breached the implied covenant of good faith by refusing to defend or indemnify Miller under the Miller policy.
As required by our decision in Safeco I, the trial court, in June 2005, entered a declaratory judgment in favor of Safeco. It later reversed itself, however, denying Safeco's motions for costs and attorneys fees and eventually vacating the judgment entirely. The trial court reasoned that, although we held Safeco had no duty to defend Miller, we had not decided whether it had a duty to indemnify her. As a result, the trial court decided it had prematurely entered judgment in favor of Safeco.
Safeco appealed a second time. We reversed in Safeco II, holding that there could be no duty to indemnify without a duty to defend: "In the prior appeal, we considered only Safeco's potential duty to defend Miller under the Barnette policy. We held that it had no such duty. It follows that Safeco has no duty to indemnify Miller under that policy." (Safeco II, supra, at p. 9.) Our opinion noted that, while the holding in Safeco I, foreclosed continued litigation with respect to the Barnette policy, the declaratory judgment had no "res judicata or collateral estoppel effect on the question of whether Safeco owes a duty to defend or indemnify Miller" under the policy issued to her grandmother. (Id.)
On remand, the declaratory relief action was transferred to another department of the superior court and another trial court judge. That judge entered a judgment declaring that Safeco "had no duty to defend or indemnify defendant Michelle Miller" under the Barnette policy. The court reserved for future determination the question of whether Safeco was entitled to recover its costs as a prevailing party.
Meanwhile, the bad faith action proceeded to trial. The jury found in favor of Parks on both his judgment creditor's claim alleging breach of the Miller policy and his cause of action for breach of the covenant of good faith implied in that policy. The trial court entered judgment in favor of Parks, awarding damages of $3,245,333.76 and reserved the question of costs for a future hearing.*fn3
In the declaratory relief action, Safeco sought a cost award of $234,986.00, which included a claim for $215,432 in attorneys fees. Safeco contended it was entitled to attorneys fees as cost of proof sanctions, because Parks failed to admit, in response to a request for admission propounded by Safeco, "that Michelle Miller was not an insured" under the Barnette policy. (§ 2033.420) Parks moved to tax all of Safeco's costs on the grounds that Safeco could not be declared the prevailing party unless it also prevailed in the bad faith action. He opposed the award of cost of proof sanctions because he contended that he had a reasonable ground for believing he would prevail on the issue of Miller's status as an insured under the Barnette policy. (§ 2033.420, subd. (b)(3).) The trial court continued the hearing until after the jury returned its verdict in the bad faith action. It then found that Safeco was not entitled to recover costs because, on balance, it was not the prevailing party. It further found that Safeco was not entitled to cost of proof sanctions because Parks reasonably believed he would prevail on the question of Miller's status as an insured.
In the bad faith action, the trial court awarded Parks costs of $70,104.23. Parks moved for cost of proof sanctions under section 2033.420, based on Safeco's failure to admit, in response to requests for admission, that it "owed Michelle Miller a defense under Evelyn Miller's policy . . . [,]" and that it "breached the implied covenant of good faith and fair dealing with regard to its claims handling of Parks v. Miller . . . ." The trial court awarded Parks attorney's fees of $426,208.
Safeco appeals the judgment in the bad faith action. It contends: (1) Parks' cause of action for breach of the covenant of good faith implied in the Miller policy is barred by the applicable statute of limitations; (2) the trial court erred when it denied Safeco's motion for summary adjudication of that cause of action because: (a) Miller did not comply with the policy's notice provisions; (b) Miller received an adequate defense from another insurer; and (c) there is no substantial evidence that Safeco rejected a policy limits settlement demand; (3) Parks and Miller impermissibly "split" their causes of action under the Miller policy; (4) Safeco had no duty to settle the personal injury action because the automobile exclusion in the Miller policy precludes coverage for Parks' injuries; (5) Safeco was denied its right to a jury trial on the amount of Parks' damages;
(6) the trial court erred in its instructions to the jury concerning (a) the duty to initiate settlement negotiations, (b) Safeco's contract defenses, and (c) the definition of reasonable conduct by an insurer; (7) the trial court erred in removing from the jury's consideration the question of whether the judgment in the underlying personal injury action was collusive; (8) the trial court made erroneous evidentiary rulings relating to testimony by Parks' counsel and Safeco's conduct during discovery; (9) Parks was not entitled to recover attorney's fees as damages pursuant to Brandt v. Superior Court, supra, 37 Cal.3d 813;(10) the amount of the judgment was incorrectly calculated; (11) the trial court erred in awarding Parks his attorney's fees as cost of proof sanctions; (12) the trial court erred in its cost award to Parks; and (13) the trial court erred in the declaratory relief action when it struck Safeco's memorandum of costs and refused to award Safeco its attorneys' fees as cost of proof sanctions.*fn4
On the cross-appeal Parks contends the trial court erred when it granted Safeco summary adjudication of his judgment creditor's claim (Ins. Code, § 15580, subd. (b)(2)), to collect the entire judgment in the personal injury case. He makes a similar contention with respect to his first cause of action and requests that we reverse the judgment on that count if we reverse the judgment as to the cause of action for bad faith alleged in count 3. Because we affirm the judgments, except for the order granting Parks' attorney's fees, we need not address the latter contention.
1. Timeliness of Bad Faith Claim on Miller Policy
As indicated above, the dispute between Parks and Safeco spawned two separate lawsuits, one by Parks against Safeco for bad faith and the other by Safeco against Parks and Miller for declaratory relief. The two cases were consolidated. In August 2003, the trial court entered an order severing the cases, to permit Safeco's appeal of the adverse declaratory judgment. The order states, in part, "Case No. 1096761 [the bad faith action] is stayed until further order of the court." In February 2005, after Safeco I had concluded, Parks amended his complaint in the bad faith case to allege causes of action as a judgment creditor and assignee of Miller's cause of action for breach of the covenant of good faith implied in the Miller policy.
The statute of limitations for a cause of action for breach of the implied covenant of good faith is two years. (Code Civ. Proc., § 339.) Safeco contends Parks' cause of action under the Miller policy is barred by the statute of limitations because it was filed more than two years after entry of the personal injury judgment. Parks contends his cause of action is timely because the litigation was stayed during Safeco's first appeal, because the cause of action relates back to the first bad faith complaint, and because the doctrine of equitable tolling applies. We conclude that the cause of action was timely because the litigation was stayed during Safeco's appeal. We need not, therefore, discuss the "relation back" doctrine.
Section 916, subdivision (a) provides that "the perfecting of an appeal stays proceedings in the trial court upon the judgment or order appealed from or upon the matters embraced therein or affected thereby . . . ." Related proceedings in the trial court are stayed by an appeal where those proceedings would "substantially interfere with the appellate court's ability to conduct the appeal[,]" or where the outcome on appeal could be inconsistent or irreconcilable with the possible results in the trial court. (Varian Medical Systems Inc. v. Delfino (2005) 35 Cal.4th 180, 189-190; see also Dowling v. Zimmerman (2001) 85 Cal.App.4th 1400, 1427-1428.)
Here, Safeco's appeal in the declaratory relief action could have led to a result inconsistent or irreconcilable with possible outcomes in the bad faith action. For example, the bad faith action could have yielded a judgment that Safeco breached duties owed to Miller under the Barnette policy, in direct opposition to our eventual holding in Safeco I. Safeco's appeal thus operated to automatically stay proceedings in the bad faith action, even though the two actions were no longer consolidated.
Additional litigation in the bad faith action was also stayed by the trial court. Its order severing the two actions and staying the bad faith action tolled the limitations period with respect to Parks' cause of action under the Miller policy. (§ 356 [limitations period tolled while "commencement of action is stayed by injunction"].) Although Parks could conceivably have sought leave from the trial court to dissolve the stay and file an amended complaint, no authority mandates that he take these extraordinary steps. We conclude Parks reasonably and correctly relied on the stay imposed by the trial court to toll the limitations period. If the time the first appeal was pending is excluded, Parks' cause of action for bad faith under the Miller policy is timely.
2. Issues Raised In Safeco's Unsuccessful Motion For Summary Adjudication And The Absence Of Prejudice
Safeco moved for summary adjudication of Parks' cause of action for breach of the implied covenant on the grounds that its duties to defend, settle or indemnify never arose because Miller breached the policy's notice provisions; that Miller was not prejudiced by Safeco's failure to defend because she received a defense from another insurer; and that Safeco never rejected a policy limits settlement demand. The trial court denied the motion. Safeco contends this was error. Parks contends an order denying summary adjudication cannot be reviewed on appeal.
If a trial court denies summary judgment or adjudication because it erroneously concludes that disputed issues of material fact exist, and those issues are resolved against the moving party at a trial on the merits, the error in denying summary judgment "cannot result in reversal of the final judgment unless that error resulted in prejudice to the defendant." (Waller v. TJD, Inc. (1993) 12 Cal.App.4th 830, 833; see also California Housing Finance Agency v. Hanover/California Management & Accounting Center, Inc. (2007) 148 Cal.App.4th 682, 689 [denial of summary judgment not prejudicial where jury later resolved fact issues adversely to moving party].) The applicable standard of prejudice is that described in article VI, section 13 of the California Constitution: a judgment cannot be set aside ". . . unless, after an examination of the entire cause, including the evidence, the court shall be of the opinion that the error complained of has resulted in a miscarriage of justice." (Cal. Const., art. VI, § 13; Waller v. TJD, Inc., supra, 12 Cal.App.4th at p. 833.) We apply that same standard of prejudice here.
a. Notice to Safeco Under the Miller Policy
Safeco argued that its duty of good faith and fair dealing under the Miller policy never arose because Michelle Miller tendered her defense only under the Barnette policy and there was no evidence Safeco had actual knowledge of the Miller policy when it declined the defense.*fn5 The trial court correctly rejected this argument because the adequacy of Safeco's investigation of Miller's claim and the prejudice it may have suffered from delayed notice were disputed issues of material fact.
The duty of good faith and fair dealing implied in every insurance contract includes a duty on the part of the insurer to investigate claims submitted by its insured. "[A]n insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial." (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819.) These duties, however, arise after the insured complies with the claims procedure described in the insurance policy. (KPFF Inc. v. California Union Ins. Co. (1997) 56 Cal.App.4th 963, 977-978; Paulfrey v. Blue Chip Stamps (1983) 150 Cal.App.3d 187, 199-200 [insurer's responsibility to investigate "would not arise unless and until" insured files claim or makes "good faith effort to comply with claims procedure . . . ."].) "[W]ithout actual presentation of a claim by the insured in compliance with claims procedures contained in the policy, there is no duty imposed on the insurer to investigate the claim." (California Shoppers Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 57.)
An insured's failure to comply with the notice or claims provisions in an insurance policy will not excuse the insurer's obligations under the policy unless the insurer proves it was substantially prejudiced by the late notice. (Clemmer v. Hartford Ins. Co. (1978) 22 Cal.3d 865, 881-883; Campbell v. Allstate Ins. Co. (1963) 60 Cal.2d 303, 306.) "Prejudice is not presumed from delayed notice alone. [Citations.] The insurer must show actual prejudice, not the mere possibility of prejudice." (Shell Oil Co. v. Winterthur Swiss Ins. Co. (1993) 12 Cal.App.4th 715, 761.) Where, as here, the insurer denies coverage, it may establish substantial prejudice only by demonstrating that, "in the event that a timely tender of the defense [in the underlying action] had been made, it would have undertaken the defense." (Clemmer v. Hartford Ins. Co., supra, 22 Cal.3d at p. 883.) "If the insurer asserts that the underlying claim is not a covered occurrence or is excluded from basic coverage, the earlier notice would only result in earlier denial of coverage. To establish actual prejudice, the insurer must show a substantial likelihood that, with timely notice, and notwithstanding a denial of coverage or reservation of rights, it would have settled the claim for less or taken steps that would have reduced or eliminated the insured's liability." (Shell Oil Co. v. Winterthur Swiss Ins. Co., supra, 12 Cal.App.4th at p. 763.)
Here, Safeco's notice defense was rejected by the trial court on the motion for summary adjudication and later by the jury. Those decisions were correct because Safeco did not establish that it was prejudiced by the delayed notice. In the declaratory relief action, Safeco contended that, even if Miller was an insured under the Barnette policy, its automobile exclusion precluded coverage for this accident. Safeco now relies on the same automobile exclusion to contend there was no potential for coverage under the substantially identical Miller policy. As a result, both the trial court and the jury could reasonably infer that Safeco was not prejudiced by the late notice because it would have relied on the automobile exclusion to decline the defense under the Miller policy. Safeco suffered no prejudice by the order denying summary adjudication of the issue.
b. Defense Provided By Another Insurer
Safeco also argued that Miller was not damaged by its denial of a defense because she was defended by Cooney's automobile insurer, California Casualty Insurance Company. The trial court found that the question whether the lawyer did everything possible to defend Miller was a triable issue of fact. ...