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Howard v. American National Fire Ins. Co.

August 11, 2010


(San Francisco County Super. Ct. Nos. 307379 & 307383). Trial Judge: Honorable Steven Stone.

The opinion of the court was delivered by: Sepulveda, J.


James Howard, a young man molested as a child by a Catholic priest, sued the Bishop who retained the priest in the diocese. A jury found the Bishop liable for negligent retention, and the court entered judgment in the amount of $5.5 million: $2.5 million in compensatory damages and $3 million in punitive damages. The Bishop settled with Howard while the case was on appeal, and agreed to join Howard in an action against the Bishop's insurers to recover on the judgment and for bad faith failure to deend, settle, and indemnify the molestation case. This action against one of the defendant insurers, American National Fire Insurance Company (American), was adjudicated in a bench trial. The court found American liable for breach of contract and bad faith failure to defend, settle, and indemnify. The court awarded almost $3 million in damages. American appeals the judgment, and plaintiffs appeal the denial of prejudgment interest. In a separate appeal, American challenges the legal costs awarded to plaintiffs in a postjudgment order. We consolidated the two appeals for purposes of oral argument and decision. As discussed below, we modify the judgment to award prejudgment interest but affirm the judgment in all other respects. We also affirm the postjudgment order awarding costs, with one modification.

I. Facts

A. The underlying Lawsuit and Insurance Coverage Disputes

A Catholic priest, Father Oliver O'Grady, sexually molested many young children over many years and was criminally convicted of child molestation in 1993. In 1994 and 1995, James Howard and his brother Joh Howard sued O'Grady and other defendants for damages suffered from the priest's molestation. The named defendants included the head of the diocese that employed O'Grady, the Roman Catholic Bishop of Stockton (Bishop), who is a corporation sole (a corporation of one person whose successor becomes the corporation on his death or resignation).

In his complaint, James Howard alleged that the Bishop employed O'Grady from approximately 1977 through 1991. James, who was born in June 1975, alleged that he was an active parishioner in the church from the time of his birth and that O'Grady regularly and repeatedly molested him "[b]eginning in approximately 1979" and continuing through about 1988. James Howard's younger brother, Joh Howard (born in August 1978) alleged molestation by O'Grady "[b]eginning in approximately December 1984" through 1991.

The Bishop had several comprehensive general liability policies from different insurers and excess insurance policies as well. American insured the Bishop from November 1, 1978 to November 1, 1979, under a comprehensive general liability policy for all sums he became legally obligated to pay as damages for "bodily injury caused by an occurrence," defined as an "accident" resulting during the policy period in bodily injury "neither expected nor intended from the standpoint of the insured," including bodily injury caused by an employee's battery, up to a limit of $500,000 per occurrence. American also agreed to defend civil lawsuits brought against the Bishop. When the Bishop was sued for negligent retention of a molesting priest, the Bishop sought defense and indemnity from several insurers, including American. A number of insurers defended the Bishop. American did not. American maintained that the molestation was not covered by its policy because the molestation occurred after expiration of American's policy in November 1979, and thus it denied any duty to defend or indemnify. American also denied coverage for Joh Howard's claims, noting that Joh's complaint did not allege molestation prior to 1984.*fn1 As for James Howard, American's letter denying coverage made no mention of the complaint's allegation that James was molested beginning in about 1979. Instead, American relied upon statements James made during his deposition to conclude that the abuse really began in 1984.

James and Joh Howard made several pretrial settlement demands. In July 1997, they demanded $2.75 million each to settle. James reduced his demand to $2.3 million in October 1997 and to $1.85 million in April 1998. American did not offer any contribution toward settlement and refused to attend mediation sessions until the April 1998 mediation, where the lowest settlement demand was made. During that mediation, American said that it would contribute only "a minimal amount toward the settlement" and "no firm figure was given." Internal documents show that American's counsel had no authority to pay above $50,000 in settlement at the April 1998 mediation. The case did not settle.

Trial began in May 1998. The case was tried to a jury against a single defendant, the Bishop, and on a single cause of action, negligent retention or supervision. The jury found the Bishop negligent in the James and Joh Howard cases and assessed both compensatory and punitive damages. The jury found compensatory damages to be $3.05 million for James Howard and $3.3 million for Joh Howard. The jury also awarded punitive damages of $12 million for each plaintiff.

The trial judge reduced the awards in September 1998 on posttrial motions. Compensatory damages were reduced pursuant to Proposition 51, which limits liability for non-economic damages in proportion to a defendant's percentage of fault. (Civ. Code, § 1431.1 et seq.) Here, the jury in the underlying case found the Bishop to be eighty percent at fault in the negligent retention of O'Grady and the court applied that percentage to reduce the amount of the compensatory damages assessed by the jury. The trial judge also found the punitive damages to be excessive and granted a remittitur of punitive damages from $12 million to $3 million for each plaintiff.

The final judgment, following post-verdict motions, awarded compensatory damages of $2.5 million to James Howard and $2.75 million to Joh Howard. The Howards' punitive damages were $3 million each. Both the Howards and the Bishop appealed the judgment. The Howards maintained that the trial court improperly applied Proposition 51 to reduce the amount of compensatory damages awarded by the jury and sought reinstatement of all punitive damages. The Bishop sought an entirely new trial.

B. Settlement and Partial Satisfaction of the Underlying Judgment

The Bishop had difficulty providing the collateral necessary for an appeal bond. In November 1998, the Bishop paid $1 million toward satisfaction of the punitive damages component of the judgment, to be credited equally between plaintiffs, in exchange for a stay of execution until January 1999. The Bishop felt that the assets of the diocese were at risk and, in early 1999, the Bishop negotiated with the Howards and various insurers to settle the litigation.

Two of those insurers, Century Indemnity Company and related entities (CIGNA) and St. Paul Fire & Marine Insurance Company (St. Paul), had contributed to the Bishop's defense while reserving their rights to contest coverage under their policies. In February 1999, CIGNA agreed to pay the Bishop its remaining policy limits of $956,342.12, plus interest on that amount from the date of judgment and CIGNA's share of costs taxed against the Bishop, in partial satisfaction of the judgment. Likewise, in March 1999, St. Paul agreed to pay the Bishop its remaining policy limits of $2.339 million plus interest and costs in partial satisfaction of the judgment.*fn2 Both insurers gave the Bishop permission to allocate the payment to either of the two Howards and among any claims, except punitive damages.

In May 1999, the Bishop finalized a settlement agreement with the Howards. At the time, the Howards had a judgment awarding James $5.5 million and Joh $5.75 million. Against that combined total of $11.25 million, the Bishop had already paid $1 million. The settlement agreement provided for an additional, immediate cash payment of $6,655,442.*fn3 That payment was funded by the CIGNA and St. Paul payments of their policy limits, described above, combined with the Bishop's payment of $3,360,099.88. The Howards equally divided the $6,655,442 cash payment between themselves. Each received $3,327,721.*fn4

All sums paid under the agreement were said "to compensate plaintiffs for their physical injuries and sickness caused by the events underlying" their lawsuit against the Bishop for negligent retention of O'Grady. The parties agreed that the Howards "may allocate any and all payments received by them under this agreement among their respective claims and interests as they, in their sole discretion, see fit." The Bishop also agreed to prosecute litigation against his insurers and to pay the Howards the proceeds from that litigation. In exchange for the Bishop's payments and promises, the Howards released him from all claims. The parties dismissed their appeals, rendering the judgment final.

C. Initiation of this Lawsuit by the Bishop as Insured and the Howards as Judgment Creditors

In October 1999, the Howards filed a complaint against the Bishop's insurers as judgment creditors seeking to collect on their judgment and claiming bad faith refusal to pay the judgment. The Bishop filed a separate complaint against the same insurers for breach of contract and bad faith breach of the insurance contracts in failing to defend, settle, and indemnify the Howards' claims against him. The complaints were consolidated in the trial court.

The defendant insurers included American, CIGNA, and St. Paul. In 2003, CIGNA and St. Paul reached a partial settlement of the coverage litigation with plaintiffs.*fn5 The parties agreed to submit insurance policy benefit claims to a private judge and settled the amount of "non-contractual claims," such as bad faith, at $75,000 to be paid by each insurer to plaintiffs at the conclusion of the trial. CIGNA and St. Paul also assigned to plaintiffs the insurers' contribution rights against American for defense costs the two insurers incurred in the underlying Howard litigation.

CIGNA and St. Paul later reached a comprehensive settlement with plaintiffs that included a release of policy claims. CIGNA paid the Howards a total of $425,000, of which $75,000 was for non-contractual claims as previously negotiated in the January 2003 partial settlement agreement. St. Paul agreed to pay plaintiffs $825,000 "for alleged compensatory damages awarded for alleged bodily injury sustained by the Howards arising from the events and circumstances underlying the Howard action and post judgment interest . . . ." St. Paul paid an additional $75,000 for non-contractual claims, as previously negotiated. The two insurers' assignments to plaintiffs of contribution rights against American were reaffirmed in these later settlement agreements.

Meanwhile, plaintiffs' claims against American proceeded to trial. Plaintiffs and American agreed to a bench trial by retired Justice Steven Stone of JAMS, appointed as a temporary judge of the superior court and privately compensated by the parties. The parties retained their right to appeal. The trial between plaintiffs and American was bifurcated into liability and damages phases with a statement of decision issued after each phase. The court's statement of decision on liability was issued in December 2005, and the final decision on damages issued in January 2008. Judgment was filed in March 2008.

The court found that James Howard was sexually molested during American's policy period, which triggered coverage under the policy, and that American, in bad faith, breached its duty to defend, settle, and indemnify the underlying litigation brought by James against the Bishop. American was ordered to pay almost $3 million, as follows: (1) American's per occurrence policy limit of $500,000 to James Howard as a judgment creditor; (2) $75,523.87 to plaintiffs as assignees of St. Paul and CIGNA in contribution for defense fees and costs and independent counsel fees and costs in the underlying action; (3) bad faith damages of $1,533,698 to reimburse the Bishop for settlement payments he made to James, and the further amount of $194,817.17 to reimburse the Bishop for his out-of-pocket payment of attorney fees and accounting expenses incurred postjudgment in the underlying action; and (4) $661,719.97 to reimburse attorney fees incurred to compel payment of benefits due under the insurance policy. The court also awarded plaintiffs costs of suit, to be assessed later. In a postjudgment order, the court awarded costs of $93,827.07.

American filed a timely notice of appeal from the judgment in May 2008, and plaintiffs cross-appealed. American challenges the judgment on numerous grounds and contests both the trial court's liability findings and its calculation of damages. Plaintiffs dispute the trial court's refusal to award them prejudgment interest. In a separate appeal, American disputes the court's postjudgment award of costs. The parties completed briefing on appeal in 2010. We consolidated the two appeals for purposes of oral argument and decision.*fn6

II. Discussion

A. American had a duty to indemnify the Bishop for damages assessed in the underlying litigation and James Howard, as a judgment creditor, was entitled to recover against American on that judgment

Liability insurance obligates the insurer to indemnify the insured against third party claims covered by the policy by settling the claim or paying any judgment against the insured. (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2009) ¶ 7:500, p. 7B-1.) Where judgment is obtained against an insured in an action based on bodily injury, death, or property damage, the plaintiff (now a judgment creditor) may bring an action against the insurer on the policy, subject to the policy's terms and limitations, to recover on the judgment. (Ins. Code, § 11580, subd. (b)(2).) In short, the " 'judgment creditor may proceed directly against any liability insurance covering the defendant, and obtain satisfaction of the judgment up to the amount of the policy limits.' " (Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54, 68 (Shafer v. Berger, Kahn).) Among the elements that must be proven is that " 'the policy covers the relief awarded in the judgment.' " (Garamendi v. Golden Eagle Ins. Co. (2004) 116 Cal.App.4th 694, 710.)

It is undisputed that James Howard obtained a judgment against the Bishop, American's insured, for compensatory damages of $2.5 million. The dispute at trial was "whether James Howard was injured (i.e., sexually molested) during the American insurance policy period from November 1, 1978 through November 1, 1979, such that coverage was triggered under the policy." The court found that plaintiffs met their burden of proving, by a preponderance of the evidence, that "James Howard was sexually molested by Father O'Grady during the American policy period."

The court's finding of molestation during the policy period is supported by substantial evidence. As the trial court observed, "Father O'Grady was a voracious sexual predator of children in 1979 and during that time he repeatedly had unfettered access to James Howard." During 1979, O'Grady frequently was in the Howard home, often staying overnight and sleeping with James. In 1993, James told the police that his sexual molestation by O'Grady first started "probably [in the] late seventies" when James "was around four or five years old." James Howard was born on June 16, 1975, and he was therefore four years old on June 16, 1979, in the midst of the American policy period. Other evidence likewise supports the court's finding of molestation in 1979, when James was four years old. James was interviewed by church officials in 1993, and told them that O'Grady molested him "from when [he] was aged 4" and later repeated that the molestation "first took place when [he] was about 4." O'Grady was deposed in 2000, during the course of this coverage litigation, and initially testified that he had sexual contact with James in the 1970's (he later equivocated and invoked the Fifth Amendment).

American does little to deny the force of this evidence. American even concedes that "O'Grady was a sexual predator" and "he abused James." But American argues that the evidence presented in the underlying litigation failed to show that O'Grady abused James during the 1979 policy period and that the court in this coverage action erred in considering evidence (like the police report) not presented in that underlying litigation. American insists that the only evidence admissible in this coverage action is the evidence that was presented to the jury in the underlying litigation. American is mistaken.

Insurance coverage and personal injury liability present distinct issues. "Generally speaking, in an action by an injured party against the party who allegedly caused the injury the court does not adjudicate the issue of insurance coverage. The only questions litigated are the defendant's liability and the amount of damages. The plaintiff is not concerned with the theory of liability which produces victory; only with procuring the largest possible judgment. Similarly, the defendant is concerned only with avoiding, or at least minimizing, a judgment for the plaintiff. [Citation.] Whether the plaintiff's loss is covered by the defendant's insurance is not germane to the action, and evidence on that issue would be excluded as irrelevant." (Schaefer/Karpf Productions v. CNA Ins. Companies (1998) 64 Cal.App.4th 1306, 1313.) The evidence presented in the underlying litigation is properly focused on questions of liability, not insurance coverage, and therefore does not necessarily dictate the scope of evidence in a later coverage action.

The underlying litigation may, of course, impact issues in the coverage litigation. A party may be collaterally estopped from relitigating issues actually litigated in the underlying litigation. (Schaefer/Karpf Productions v. CNA Ins. Co., supra, 64 Cal.App.4th at pp. 1312-1313.) Generally, the issues litigated in the underlying litigation are the defendant insured's liability and the amount of damages suffered by the injured party, not coverage issues. (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, ¶¶ 15:1083 to 15:1086, pp. 15-188 to 15-189.) Accordingly, it has been held that a jury's finding that the injured party suffered property damage for purposes of establishing liability and assessing damages was not conclusive against the insurer on the distinct issue of whether the damages suffered were covered by insurance as property damage under policy terms. (Schaefer/Karpf, supra, at p. 1314.)

The underlying litigation may also impact issues in the coverage litigation by application of the simple principle that the duty to indemnify "is determined by the actual basis of liability imposed on the insured." (Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1, 108.) Where a jury expressly imposed liability on the basis of trademark infringement and the insurance policy excluded coverage for trademark infringement, no indemnification was due. (Palmer v. Truck Ins. Exchange (1999) 21 Cal.4th 1109, 1113-1114, 1120.) The insured was not permitted to recharacterize the injury as an advertising injury in a later coverage action. (Id. at p. 1120.)

These cases do not assist American. The exact dates of molestation were not adjudicated in the underlying litigation and thus provide no grounds for invoking the doctrine of collateral estoppel. It is true, as American notes, that the timing of the molestation was a subject of testimony in the underlying litigation and a necessary element of plaintiffs' contention that the Bishop had reason to know, before James was molested, that O'Grady posed a risk to children. But the specific dates of James's molestation--and whether those dates fell within the insurance policy term--were not adjudicated. As for the basis of liability, the jury in the underlying action found that James was injured by the Bishop's negligent retention of O'Grady, which clearly falls within the policy's coverage provisions. American misconstrues Palmer v. Truck Ins. Exchange, supra, 21 Cal.4th at p. 1120 (and similar cases) in arguing that California law requires that plaintiffs "prove that James's judgment against the Bishop was based on the jury's acceptance that James was molested during American's policy period." Plaintiffs were not required to prove molestation within the policy period in the underlying action. It is sufficient that plaintiffs proved to the jury that James was molested by a priest negligently retained by the Bishop (establishing a basis for liability encompassed by the policy) and later proved, in this coverage action, that the molestation occurred within the policy period.

In a related argument, American maintains that plaintiffs should have been precluded from introducing evidence of molestation during the policy term of 1979 because the evidence contradicts James's testimony in the underlying litigation placing the start of molestation in 1980. The argument rests on James's response to a single question when he was asked at the 1998 trial, "When in time is your first memory of Oliver O'Grady violating you?" and James answered, "It's probably five or six years old." American points out that James was five years old on June 16, 1980, seven months after the American policy expired.

American makes too much of this testimony. James testified about his "first memory" of molestation, not the first actual incident of molestation; vaguely said he was "probably" five or six years old; and gave his testimony in a context where the exact time that the molestation started was immaterial. As the trial court noted, "the fact that James Howard testified that his first memory of the abuse was 'probably' at [five or six] years of age establishes that James Howard was simply estimating an answer to a question that was entirely irrelevant to the issues actually being litigated before the jury." The trial testimony is far too uncertain to constitute a binding admission. "An unclear or equivocal statement does not create a binding judicial admission." (Stroud v. Tunzi (2008) 160 Cal.App.4th 377, 385.) A court may disregard fragmentary and equivocal statements, especially when contradicted by other credible evidence. (Price v. Wells Fargo Bank (1989) 213 Cal.App.3d 465, 482.) Here, there was other credible evidence. Among that evidence was James's 1993 interviews with the police and church officials, which predated the trial testimony, in which James reported molestation in 1979, when he was four years old. As the trial court noted, these early reports of molestation in 1979 "were given long before coverage under the 1979 American insurance policy was an issue--indeed, long before anyone even knew that American insured the Bishop at that time. James Howard's lack of incentive to report molestation in 1979 lends additional credence and veracity to the statements." The trial court was not precluded from considering these statements and other evidence ...

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