The California Court of Appeal has held that an insurer has no obligation under its policy’s supplementary payments provision to cover costs awarded in connection with a claim that was not potentially covered, even if the insurer defended the action and even if other claims in that action were potentially covered. ( State Farm Gen. Ins. Co. v. Mintarsih (2009) 175 Cal.App.4th 274.)
Facts
This insurance coverage action arose out of an underlying civil lawsuit for false imprisonment. The claimant, Mimin Mintarsih, alleged that Dennis and Dina Lam falsely imprisoned her in their home, forcing her to work as a domestic servant for seven years and preventing her from seeking needed medical and dental care. Among other things, Mintarsih sued the Lams for false imprisonment, negligence, and wage and hour violations. Following a jury trial, the trial court entered judgment in favor of Mintarsih. The award included $87,000 in compensatory damages for false imprisonment and negligence and $162,000 in attorneys’ fees for the wage and hour claims, as permitted under the Labor Code.
State Farm, which insured the Lams, filed a declaratory relief action against Mintarsih (the Lams’ assignee) as to its coverage obligations. Issues before the appellate court included (1) whether State Farm had a duty to cover the attorneys’ fee award under the policies’ supplemental payments provisions; (2) whether Insurance Code section 533 barred indemnity coverage for the negligence claim; and (3) whether State Farm owed post-judgment interest on the entire action. As set forth below, the Court of Appeal found in favor of State Farm on all three issues.
Holding
First, the Court held that State Farm has no obligation to cover costs (including attorneys’ fees) arising from the wage and hour claims, because those claims were not potentially covered under the policy. This was true even though the underlying action was a “mixed” action involving both covered and uncovered claims. The policies both provided that State Farm would pay expenses incurred and costs taxed against the insured “in suits we defend.” The Court observed that this obligation to cover costs only arises when there is a duty to defend, and that this obligation is contractual in nature – that is, it arises out of the policy’s defense provision. The Court then observed that an insurer’s duty to defend a “mixed” action, by contrast, is not contractual but rather is implied in law.
The Court went on to note that under Buss v. Superior Court, an insurer is entitled to reimbursement of defense costs allocated solely to claims that were not potentially covered, since an insured cannot reasonably expect to retain the benefit of those payments. Likewise, reasoned the Court, an insured cannot reasonably expect its insurer to pay costs that can be allocated solely to claims that were not even potentially covered. Thus, even in mixed actions, an insurer is not obligated to cover costs arising from claims were not potentially covered under the policy.
Second, the Court held that Insurance Code section 533 precludes indemnity coverage for the negligence claims. The Court observed that section 533 bars coverage for willful or intentional conduct, as well as negligent conduct that is so closely related to intentional misconduct as to be inseparable from it. Since the Lams’ negligent failure to provide timely medical and dental care to Mintarsih was closely interrelated to the false imprisonment, section 533 barred coverage for the negligence claim.
Finally, the Court held that State Farm does not have an obligation to pay post-judgment interest on the entire action. The policy provision in question provided that State Farm would pay “interest on the entire judgment which accrues after entry of the judgment and before we pay . . . that part of the judgment which does not exceed the limit of liability.” The Court reasoned that this provision contemplates a covered claim and is necessarily tied to an insurer’s indemnity obligation, as reflected by the provision’s reference to the policy limits. Thus, held the Court, where there is no coverage for the damages awarded, there is no coverage for post-judgment interest.
Comment
In reaching its decision regarding costs in “mixed” actions, the Second Appellate District diverged with the Fourth Appellate District’s decision in Prichard v. Liberty Mutual Insurance Co. (2000) 84 Cal.App.4th 890. Footnote 22 of the Prichard decision supported an insurer’s liability for costs arising solely from claims that were not even potentially covered. ( Id. at 912 n.22.) Noting that Prichard did not properly distinguish the insurer’s contractual duty to defend from its duty implied in law, the State Farm Court expressly declined to follow Prichard . This arguably creates a circuit split, making the issue ripe for review by the California Supreme Court.