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Millennium Laboratories, Inc. v. Darwin Select Insurance Co.

United States District Court, S.D. California

December 9, 2014

MILLENNIUM LABORATORIES, INC., Plaintiff,
v.
DARWIN SELECT INSURANCE COMPANY, Defendant.

ORDER: (1) CLARIFYING EVIDENTIARY ISSUES; (2) ORDERING SUPPLEMENTAL BRIEFING; AND (3) DENYING DARWIN'S MOTION TO TERMINATE THE DUTY TO DEFEND (ECF 195)

CYNTHIA BASHANT, District Judge.

On December 3, 2014, the Court heard argument from the parties in this matter on several outstanding issues. This Order clarifies some of the outstanding issues, orders supplemental briefing to be filed simultaneously by both parties, and DENIES Darwin's Motion to Terminate its Duty to Defend. ECF 195.

I. Reasonableness of Brandt Fees

Under Brandt v. Superior Court, "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 liable in a tort action for that expense. The attorney's fees are an economic loss-damages-proximately caused by the tort." Brandt v. Superior Court, 37 Cal.3d 813, 817 (1985). The fees "are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action." Id.

At oral argument, Millennium suggested that the reasonableness of such fees would not be in question at trial, citing to the Brandt court's comparison between medical fee recovery and Brandt fees. Darwin argued that it could challenge the reasonableness of fees. Darwin is correct.

Under California law, as well as the Restatement of Torts, "a personal injury plaintiff may recover the lesser of (a) the amount paid or incurred for medical services, and (b) the reasonable value of the services." Howell v. Hamilton Meats & Provisions, Inc., 52 Cal.4th 541, 555-56 (2011); but see Katiuzhinsky v. Perry, 152 Cal.App.4th 1288, 1296, 62 Cal.Rptr.3d 309, 314 (2007) (holding a tortfeasor liable for the full billed expense instead of the discounted debt purchased by a bill collector). In the medical context, quoted prices do not generally represent the real value of services, and as such are not "necessarily representative of either the cost of providing those services or their market value." Howell, 52 Cal.4th at 564. Evidence of the amount actually paid is certainly admissible at trial. Howell, 52 Cal.4th at 562.

However, in the medical context, the California Supreme Court was reticent to suggest alternate methods for calculating market value, other than the rate paid for the services. See Corenbaum, Corenbaum v. Lampkin, 215 Cal.App.4th 1308, 1326-27 (2013), as modified (May 13, 2013) (analyzing Howell ). The California Court of Appeal has persuasively stated that expert testimony on the reasonableness of fees from both parties would be admissible on this point. See Dodd v. Cruz, 223 Cal.App.4th 933, 167 Cal.Rptr.3d 601, 608 (2014) (unpublished). As such, the reasonableness of rates and the amount of damages is appropriately determined by the factfinder, and it is appropriately the lesser between the amount actually paid and the reasonable rate.

In the context of Brandt, plaintiffs are charged with proving "(1) the amount to which the insured was entitled to recover under the policy, (2) that the insurer withheld payment unreasonably or without proper cause; (3) the amount that the insured paid or incurred in legal fees and expenses in establishing the insured's right to contract benefits and (4) the reasonableness of the fees and expenses so incurred." Jordan v. Allstate Ins. Co., 148 Cal.App.4th 1062, 1079 (2007), as modified on denial of reh'g (Apr. 20, 2007). Under this rubric, plaintiffs must prove the reasonableness of the fees claimed to recover. As with medical expenses, this includes the reasonableness of the rate charged. Thus, the Court finds that California court decisions and basic tort principles require Millennium to prove the reasonableness of the rates it claims as damages. Clearly then, Darwin may rebut Millennium's evidence.

Accordingly, insofar as Millennium orally moved to limit challenges to the reasonableness of the rates its counsel charged in this case, Millennium's oral motion is DENIED.

II. Darwin's Duty to Investigate

At the final pretrial conference on December 3, 2014, the Court addressed Millennium's proposed jury instruction on Darwin's duty to investigate, a modified version of CACI ยง 2332. Darwin argues this instruction applies only to "first-party" insurance cases, and that there is no duty to investigate in a third-party claim.

In fact, California law imputes a duty to investigate in third-party claims. "[A]n insurer's obligation of equitable contribution for defense costs arises where, after notice of litigation, a diligent inquiry by the insurer would reveal the potential exposure to a claim for equitable contribution, thus providing the insurer the opportunity for investigation and participation in the defense in the underlying litigation." St. Paul Mercury Ins. Co. v. Mountain W. Farm Bureau Mut. Ins. Co., 210 Cal.App.4th 645, 663 (2012), quoting OneBeacon America Ins. Co. v. Fireman's Fund Ins. Co., 175 Cal.App.4th 183, 203 (2009) (italics added). At times, this diligent inquiry may be satisfied "by comparing the allegations of the complaint with the terms of the policy, " Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792 (1993), and considering "the extrinsic facts [...] known by the insurer at the inception of the third party lawsuit, " Gunderson v. Fire Ins. Exch., 37 Cal.App.4th 1106, 44 Cal.Rptr.2d 272, 277 (Ct.App.1995) (emphasis in original). Bock v. Travelers Prop. Cas. Ins. Co., 465 F.Appx. 623, 625 (9th Cir. 2012).

The Ninth Circuit has suggested that there may be a further duty to investigate in some cases. See Bock, 465 F.Appx. at 625. This may be triggered if the insurer is aware of any extrinsic facts at the time of tender that suggest further investigation is required. In Bock, the insurer specifically told the insured that if they knew of "any other facts or theories which... are relevant to the duty to defend... we welcome your thoughts and will give serious consideration to any information that you may provide." Id. However, because the insured provided no further facts, the insured was warranted in believing no further investigation was necessary. It is a question of fact, therefore, as to whether the extrinsic facts known to Darwin at the time of tender triggered a duty to conduct a further investigation.

As a result, the parties may argue whether the extrinsic facts known to Darwin at the time should have reasonably resulted in Darwin's further investigation of the tendered claim. Such a factual inquiry does not require any further instruction beyond the general duty of good faith and fair dealing. Therefore the Court ...


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