Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County, Daniel J. Buckley, Judge. Affirmed in part, reversed in part and remanded with direction., Los Angeles County Super. Ct. No. BC323305.
Hennelly & Grossfeld, John J. Hennelly and Susan J. Williams for Defendant and Appellant.
The Ehrlich Law Firm, Jeffrey Isaac Ehrlich; Shernoff Bidart & Darras, Michael J. Bidart and Ricardo Echeverria for Plaintiffs and Respondents.
KITCHING, J.
INTRODUCTION
Plaintiffs and appellants Larry Stone (plaintiff Stone) and Linda Della Pelle (plaintiff Pelle) (collectively plaintiffs) sued defendant and appellant Fidelity National Insurance Co. (Fidelity) for breach of an insurance contract and for bad faith for allegedly undervaluing damage to plaintiffs’ home, which was damaged during a fire. Upon a loss, the insurance policy required Fidelity to pay “actual cash value” until plaintiffs completed repair of the home within a certain time period, at which point, the policy required Fidelity to pay “replacement cost” value.
Following a jury trial, the trial court entered judgment awarding plaintiffs $160,956.42 in economic damages, which amount represented the difference between the actual cash value amount actually paid by Fidelity and the amount of actual cash value the jury determined that Fidelity should have paid. The jury also awarded plaintiffs $5,163,217 in punitive damages. In the judgment, the trial court awarded plaintiffs $64,382.56 for attorney fees pursuant to Brandt v. Superior Court (1985) 37 Cal.3d 813 (Brandt), leaving costs for a later determination.
The trial court then granted plaintiffs’ motion to vacate the judgment. The court found that because Fidelity breached the contract with respect to payment of actual cash value, plaintiffs were excused from the contractual condition precedent of repairing the home and thus entitled to the difference between the amount actually paid by Fidelity and the jury’s determination of replacement cost value. The trial court denied Fidelity’s motion for new trial conditioned on plaintiffs agreeing to a remittitur reducing the punitive damages award to $1,600,000, which plaintiffs accepted.
The trial court entered a second judgment awarding plaintiffs $197,939.56 in economic damages, which amount represented the jury’s determination of replacement cost value minus the amount Fidelity actually paid. The trial court also awarded plaintiffs $1.6 million in punitive damages; $79,175.82 in Brandt attorney fees; and $23,776.48 in costs, together with interest from the date of entry of judgment.
Fidelity appeals from both judgments. We affirm in part, reverse in part, and remand the matter to the trial court to enter a new and different judgment consistent with this opinion.
We affirm the award of economic damages awarding plaintiffs the difference between the amount Fidelity paid and the jury’s determination of actual cash value. We reverse the award of economic damages awarding plaintiffs the difference between the amount Fidelity paid and the jury’s determination of replacement cost value. The trial court erred by finding that plaintiffs were excused from the condition precedent of repairing the home prior to making a claim for replacement cost value.
We affirm the awards of punitive damages and Brandt attorney fees. Plaintiffs presented substantial evidence that Fidelity breached the covenant of good faith and fair dealing. Plaintiffs also presented substantial evidence that Fidelity acted with deliberate disregard for the rights of plaintiffs sufficient to support an award of punitive damages under Civil Code section 3294. Moreover, the punitive damages award – as reduced by the trial court to $1.6 million – does not violate Fidelity’s constitutional right to due process as articulated in State Farm Mut. Automobile Ins. Co. v. Campbell (2003) 538 U.S. 408 (State Farm) and Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159 (Simon). In addition, the trial court’s jury instruction defining “reprehensibility” did not constitute legal error. Moreover, plaintiffs’ counsel did not engage in prejudicial misconduct during closing argument. Lastly, the award of Brandt attorney fees constitutes a sufficient award of tort damages to support an award of punitive damages.
With respect to the Bandt fees, there is no evidence that the trial court awarded plaintiffs an amount greater than the fees incurred to obtain the policy benefits under the contract of insurance.
Finally, the trial court did not abuse its discretion by ruling that if Fidelity intended to produce an out-of-state witness for its case-in-chief, it must also produce the same witness for plaintiffs’ case-in-chief.
FACTUAL AND PROCEDURAL BACKGROUND
1. Plaintiffs’ House
At the time of the 2003 wildfires, plaintiffs owned a 3582 square foot house located in Claremont, California. The house was built in 1964 and remodeled in 1984. It consisted of a two-story section on a concrete foundation and a one-story section on a raised foundation.
Fidelity’s contractors described the residence as a premium grade home in a nicer area. It had granite counter tops, custom cabinets, and expensive Pella windows.
2. Plaintiff’s Insurance Policy With Fidelity
In August 2003, Fidelity issued plaintiffs a homeowner’s policy. The policy provided dwelling coverage (Coverage A) of up to $320,000.
The policy also provided “other structures” coverage (Coverage B) of up to $32,000. The policy provided personal property coverage (Coverage C) up to $240,000, as well as loss of use coverage (Coverage D) for actual loss of use.
With respect to the Coverage A dwelling coverage, an endorsement amended the policy. The endorsement provided an additional 150 percent of the amount of coverage under Coverage A if a loss exceeded the Coverage A limits, for a total of $800,000 in coverage.
Section B(3) of the endorsement provided: “We will pay no more than the actual cash value of the damage until actual repair or replacement is complete.”
Section B(4) of the endorsement provided: “You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss to the building on an actual cash value basis. You may then make [a] claim for any additional liability on a replacement cost basis, provided you notify us of your intent to do so within 180 days after the date of loss.”
The policy defined “actual cash value” as: “the lesser of repair or replacement cost, exclusive of sales tax, at the time of loss less applicable depreciation for physical deterioration and obsolescence and applicable contractor’s profit and overhead.”
The policy defined replacement cost value as the actual cost of repairing or rebuilding the damaged structure to its pre-loss condition.
Specifically, the endorsement to the policy provided as to replacement cost value: “ . . . We will pay no more than the smallest of the following amounts: [¶] a. The replacement cost of that part of the building damaged with material of like kind and quality and for like use; [¶] b. The necessary amount actually spent to repair or replace the damaged building; [¶] c. The limit of liability under this policy that applies to the building, plus any additional amount provided by this endorsement.”
The policy also contained an appraisal clause. The clause provided that if the parties failed to agree on the amount of the loss, either party could demand an appraisal. Each party could designate an appraiser, and the appraisers could designate an umpire.
The policy also provided that any waiver of a policy provision had to be in writing.
The waiver provision provided: “A waiver or change of a provision of this policy must be in writing by us to be valid. Our request for an appraisal or examination will not waive any of our rights.”
3. Fire Damages Plaintiffs’ House
At 3:30 a.m. on October 26, 2003, plaintiff Stone woke up to discover that his house was on fire caused by a wild fire. Plaintiffs left immediately, without time to gather any belongings.
Plaintiffs returned the following day. The entire top story of the house had been destroyed. Debris was everywhere in the house, the windows were broken, and everything was soaking wet. Anything that had not burned had smoke damage.
The damaged areas on the first floor included the kitchen, a nook room, the dining room and the living room. Upstairs, in the bedroom area, the entire roof had collapsed, all the roof framing had burned, and the sky was visible from the first floor living room.
Plaintiff Pelle testified at trial that a City inspector told her the home was 90 percent destroyed. According to Pelle, a contractor, Oakwood Construction Insurance Restoration Specialists (Oakwood), agreed with the City’s damage estimate.
Fire fighting efforts saturated the house with water. Plaintiffs understood that as of November 2003, the house needed to be demolished, except for a concrete slab and the garage. Plaintiffs noted that this was why plaintiffs’ and Fidelity’s initial contractor, Oakwood, did not tarp the majority of the house to keep out any rain or moisture. In addition, an Oakwood representative and an independent adjuster retained by Fidelity informed plaintiffs that the suggested course of action was demolition.
By December 2003, mold was evident throughout the house and continued to spread.
4. Fidelity Accepts Coverage and Begins Processing Claim
Plaintiffs submitted a claim through their insurance agent. Fidelity accepted coverage and assigned the claim to claims adjuster Steven Pursley (adjuster Pursley) in the Santa Barbara office. Adjuster Pursley contacted plaintiffs on October 27, 2003, and sent them funds for emergency expenses.
Fidelity retained a firm called American Claims Experts (ACE), an independent adjusting firm, to process plaintiffs’ claim. ACE assigned Lou Harris (Harris) to the claim. Harris inspected the property on October 28, 2003. According to plaintiffs, by November 2003, Harris advised plaintiffs that the house needed to be demolished.
5. Inspections of the House
After the fire, plaintiffs needed a contractor to board up the property, tarp the portions that could be saved and remove the debris. Upon a neighbor’s recommendation, plaintiff Stone contracted with Oakwood to do the immediately necessary work to protect the house, remove the debris, and clean and inventory the house contents.
On October 31, 2003, Harris of ACE met with plaintiff Stone and Jim Benson of Oakwood to inspect the property. At trial, Harris testified the house had suffered major structural damage, but that it was only 70 percent destroyed. Harris took photographs of the damage to the home. According to adjuster Pursley’s “Activity Log,” which is a written record of contemporaneous incidents related to the claim, Harris reviewed the claim with Fidelity’s adjuster Pursley, and discussed setting Coverage A reserves at $250,000.
Oakwood Construction used a structural engineer, Hansen Hokama Structural Engineers (Hansen Engineers), to inspect the house. Fidelity eventually retained Hansen Engineers.
On November 5, 2003, Hansen Engineers sent its engineer, Michael Hokama (Hokama), to inspect the house. Hokama concluded that the roof was completely destroyed. He also concluded that there was framing and wall damage. He further concluded that the concrete foundation was undamaged. He based the conclusion on his observation that the fire had burned down to the middle of the wall that connected with the concrete foundation. Hokama did not believe that the concrete foundation needed to be tested.
Hansen Engineers concluded that the house was not a total loss and that portions of the structure were useable. The firm completed structural engineering plans dated December 4, 2003, to restore the house to its pre-fire condition. The plans were ready for submission to the City of Claremont. The plans showed foundation details, walls to remain, walls to be replaced, ceiling framing and a new roof. Fidelity paid the firm $5,790 for its work.
On November 13, 2003, ACE’s Harris and Oakwood’s Jim Bensen inspected the house to determine the work to be done.
6. Fidelity Re-Assigns Claim to Omaha, Nebraska Office
On December 9, 2003, Fidelity re-assigned the claim to claims adjuster Michael Madrigal (adjuster Madrigal), who worked in Fidelity’s Omaha, Nebraska office.
Madrigal documented the processing of the claim in his “Activity Log.” Because the claim had been handled by two offices, there were two Activity Logs. The Omaha Activity Log indicated that Madrigal had a conversation with Harris from ACE on December 11, 2003. The Log indicated that Harris “explained that the house [was] a total loss . . . and that Harris] estimated that the repairs will exceed $480,000 and the contents will exceed the limit as the insured has a lot of high-end property.”
At trial, Harris denied making the statement to Madrigal that the house was a total loss.
After speaking with adjuster Madrigal, on December 11, 2003, Harris of ACE completed a preliminary estimate. That day, Harris sent a written report to Fidelity recommending that it set Coverage A reserves at $350,000.
7. Estimates Regarding the Damage to the Home
On December 19, 2003, Harris submitted an estimate of the replacement cost value of the house in the amount of $314,140.69 The estimate, however, left open items for framing, subcontractor bids items and roofing for which Harris did not estimate a replacement cost.
Harris started with the replacement cost value and then deducted an amount for depreciation to compute the actual cash value of the property at the time of the loss. He deducted $16,952.02 for depreciation to compute an actual cash value of $297,188.67. He did not deduct sales tax and contractor’s profit and overhead, which Fidelity’s policy allowed him to do. Harris sent the estimate to Fidelity. Fidelity did not object to the manner in which Harris calculated actual cash value.
8. Oakwood’s Estimate
On December 19, 2003, Oakwood Construction completed an estimate. Oakwood calculated the replacement cost value at $355,131.32, and actual cash value at $288,837.32. The estimate, however, did not account for damage from later rainstorms. It also did not account for mold because Benson of Oakwood did not observe mold when he inspected the house. Oakwood provided the estimate to plaintiffs and Madrigal at Fidelity.
In January 2004, plaintiff Stone told Harris of ACE that he was not satisfied with Oakwood’s estimate on the basis that it was incomplete, and because of Oakwood’s efforts to have Stone sign a contract without a price. Stone was also not satisfied with the Oakwood estimate because it identified prices for items such as home fixtures which were lower than what the items had cost prior to the fire. Stone told Harris that he did not want Oakwood involved with providing an estimate.
Robert Rettig, an adjuster retained by plaintiffs, testified at trial that the Oakwood estimate was “outrageously low.” He testified that the house could not be rebuilt for the amount of the estimate. The estimate left open the costs of plumbing, architectural costs, engineering fees, supervision, building permits, code upgrades and mold abatement. The estimate also contained calculations based upon removal, but not replacement of carpets, and subflooring that was left exposed.
At trial, Oakwood’s president, testified that he knew that the $355,131.32 estimate was not the actual cost number given the open items. He testified that the actual cost to completely repair the home was between $531,000 and $556,000.
9. Harris of ACE Revises Estimates of Damage to the Home
In January 2004, Harris of ACE prepared a second estimate. There, he calculated the replacement cost value at $331,602. Harris deducted $20,100.44 in depreciation to determine actual cost value.
Harris testified that he felt good about this estimate and that he wanted to get an “agreed price” for it from a contractor. According to Harris, an “agreed price” is when the adjuster and contractor agree that a given price is a fair price for a job, and that is the price that the insurance company will pay.
Harris ultimately made five estimates of replacement cost value. His final estimate, dated May 11, 2004, calculated replacement cost value at $435,601.38.
10. Plaintiffs Retain Their Own Consultant
In January 2004, plaintiffs hired adjuster Rettig to prepare an estimate. Rettig was a licensed contractor. At that time, he had prepared approximately 3,000 estimates.
Rettig requested that plaintiffs complete a questionnaire to obtain information about the house prior to the fire. The questionnaire asked for details about the quality of the cabinets, the finishes, and the carpets. Harris, Oakwood, and Har-Bro Construction, Fidelity’s other construction company hired to prepare an estimate, did not ask plaintiffs for similar details about the house prior to the fire. Rettig testified that the questionnaire was necessary to have a realistic representation of what was lost. Parts of the house were gone and other parts were covered in debris.
In April 2004, one of Rettig’s independent contractors, Dan Pfeifer, inspected the house. He noticed spalling and cracking in the concrete foundation. Based on this inspection, Rettig anticipated that the foundation would be tested to determine its condition. Rettig began preparing an estimate. To be cautious, Rettig prepared an estimate calling for a complete tear-down of the house because of the problems observed in the concrete foundation.
11. Har-Bro Construction Estimates the Damage to the Home
After plaintiff Stone rejected Oakwood, Harris of ACE hired Har-Bro Construction to prepare an estimate. Har-Bro’s first estimate, dated April 13, 2004 calculated replacement cost value at $460,462.07. On April 30, 2004, Har-Bro submitted a revised estimate for $467,033.92.
Har-Bro’s estimate contained a number of open items, including the cost of framing, code upgrades, architectural services, engineering services, permits and mold abatement. The estimate included costs for partial painting and texture, but did not guarantee that it could match existing painting or texture. In addition, there was no labor cost for installation of doors and windows.
At trial, Har-Bro’s estimator, Jorge Reza, testified that the $467,033..92 replacement cost value estimate would have gone higher depending upon the ultimate cost of the items left open in the estimate.
12. Plaintiffs’ May 22, 2004 Letter to Adjuster Madrigal
On April 22, 2004, plaintiffs sent a letter to adjuster Madrigal disputing Fidelity’s determination of actual cash value. There, plaintiffs explained to Madrigal that the City of Claremont had listed the home as destroyed. Plaintiffs stated that this was printed in a local newspaper. In addition, plaintiffs explained that Oakwood and Harris of ACE both told plaintiffs that the house was 90 percent destroyed.
At trial, adjuster Madrigal testified that he called plaintiffs on April 28, 2004 and told them that he did not agree that the house was 90 percent destroyed. He also stated that the City of Claremont had not declared the house a total loss. He informed plaintiffs that Harris of ACE had concluded the house was repairable.
13. Harris of ACE Revises Estimate
After Har-Bro submitted its second estimate, Harris of ACE prepared his fourth estimate, which calculated replacement cost value at $431,465.32. In early May 2004, Harris emailed the estimate to Har-Bro and Oakwood and asked if they could do the work for that amount. Har-Bro informed Harris that the Har-Bro estimate was “tight” and that there was no room to negotiate.
Harris knew that plaintiff Stone did not want to work with Oakwood. Nevertheless, after Har-Bro refused to reduce its estimate, Harris contacted Oakwood to determine an agreed price. Harris testified that an agreed price with a contractor did not mean that the insured had to use the contractor.
On May 5, 2004, Oakwood agreed to perform the repairs for $431,465.32. At trial, Fidelity adjuster Madrigal testified that Oakwood was “salivat[ing]” at the chance to repair the house for the approximate $431,000 amount.
Fidelity never informed plaintiffs that it was seeking an agreed price from Oakwood. In any event, Fidelity obtained Oakwood’s agreement to perform the work for the $431,000 amount.
14. Harris of ACE Again Revises Estimate
After obtaining Oakwood’s agreement to perform the work for approximately $431,000, on May 11, 2004 Harris of ACE revised his estimate to include additional items. His last estimate of replacement cost value was in the amount of $436,601.38.
15. Fidelity Calculates Actual Cash Value Payment to Plaintiffs
Because Har-Bro would not reduce its estimate, Fidelity based its payment to plaintiffs on the ACE estimate of replacement cost value, and determined replacement cost value to be $433,195.45. This was the estimate to which a contractor, Oakwood, had agreed. Fidelity informed plaintiffs that if they were not satisfied with the payment, they could invoke the appraisal clause in the insurance policy.
On May 18, 2004, Fidelity’s adjuster Madrigal sent plaintiffs a letter explaining Fidelity’s payment and its determination of actual cash value. The letter stated that Fidelity would issue plaintiffs a check for $405,797.88 as actual cash value. Specifically, Madrigal started with the replacement cost value of $433,195.45 and then deducted $26,397.57 for depreciation and $1,000 for the plaintiffs’ deductible.
In the May 18, 2004 letter, Madrigal calculated the actual cash value payment Fidelity intended to pay plaintiffs. On page 2 of the letter, Madrigal quoted the policy definition of actual cash value as “the lesser of repair or replacement cost, exclusive of sales tax, at the time of the loss less applicable depreciation for physical deterioration and obsolescence and applicable contractor’s profit and overhead.”
Despite the policy definition of actual cash value, page 4 of Madrigal’s May 18, 2004 letter shows in writing that Fidelity in practice defined actual cash value as replacement cost value minus only depreciation, which came to $405,797.88. In other words, Fidelity did not use the policy definition of actual cash value to determine the amount owed to plaintiffs. If Fidelity had used the policy definition of actual cash value, it would have also subtracted amounts for sales tax and contractor’s profit and overhead to determine actual cash value.
The letter also contained a “Replacement Cost” form indicating that plaintiffs could seek additional coverage amounts once the repairs were completed.
On May 27, 2004, Fidelity sent plaintiffs a check for $405,797.88. Fidelity’s Coverage A payments equaled $418,446.05.
In addition, Fidelity paid additional Coverage A benefits, including: $5,790 to Hansen’s Engineering; $2,197.77 for emergency services; $2,340 for excess contents; $1,338.40 as a supplement for the correct sales tax rate; and $1000 for plaintiff’s deductible.
16. Correspondence Following Payment to Plaintiffs
On July 9, 2004, adjuster Madrigal sent plaintiffs a letter responding to some of plaintiffs’ concerns about the claim adjustment process. There, Madrigal wrote that plaintiffs had the right to disagree with Fidelity’s evaluation of the repairs to the house. Specifically, Madrigal advised them of the right to initiate the appraisal process pursuant to the insurance policy.
In addition, Madrigal stated that Fidelity would do what was necessary to evaluate and remedy any mold condition. Finally, Madrigal agreed that Fidelity had miscalculated the amount of sales tax and sent plaintiffs a check for $1,338.40.
Madrigal also wrote to explain Fidelity’s definition of estimates: “An estimate is our determination of the approximate cost or an approximate calculation of the cost to repair a structure. We consider our estimate to be an accurate reflection of the damage and cost of repair. However, if there are damages discovered that we were not aware of and/or have not taken into consideration, we will consider those damages.”
17. Rettig Finishes First Estimate
Plaintiffs’ adjuster, Rettig completed his first estimate on August 23, 3004, for Coverage A dwelling coverage. He calculated replacement cost value as $679,000.
Plaintiffs submitted Rettig’s estimate to adjuster Madrigal, who testified at trial that he did not review it in detail once he saw that the estimate was based upon a complete tear down. Madrigal did not ask Harris of ACE, Oakwood or Har-Bro to review Rettig’s estimate. He did not call Rettig to discuss the estimate. Instead, Madrigal recommended to his superiors that Fidelity reject the estimate.
In his activity log, Madrigal noted: “I am unable to approve this estimate as we have demonstrated through our inspections that the dwelling can be repaired.” Madrigal testified that he did not have information indicating that the house was a complete tear-down.
On August 31, 2004, Madrigal responded to plaintiffs in writing concerning the Rettig estimate. In the letter, Madrigal stated that he could not approve a complete tear down and rebuild pursuant to the Rettig estimate. Madrigal wrote: “As we explained in our prior letters, your dwelling has been inspected by our independent adjuster, Lou Harris, your original contractor, Oakwood Construction, H.C. Hansen Structural engineering and [Har-Bro] Construction which they have all agreed the house is repairable and have completed plans and estimates to repair your home.” Madrigal offered to submit the matter to an appraisal.
In his activity log, Madrigal noted that there were new regulations enacted to assist victims of the California wildfires. He noted that insureds now had 24 months from the date of the first actual cash value payment to repair or replace the home. At trial, Madrigal testified that plaintiffs’ 24 month time period to repair the house would expire on May 27, 2006. Madrigal also noted that homeowners and insurers could seek to resolve disputes voluntarily through mediation before the California Department of Insurance.
On September 4, 2004, Madrigal sent a letter to plaintiffs offering to resolve any disputes through mediation before the Department of Insurance.
On October 5, 2004, Madrigal spoke with plaintiffs. He again informed that he could not approve the Rettig tear down estimate. He offered to participate in the mediation process. His Activity Log indicated that plaintiffs agreed to mediate, but that they wanted additional information about the mediation process.
18. Plaintiffs File Suit
On October 21, 2004, plaintiffs filed this lawsuit. Pursuant to a second amended complaint, plaintiffs alleged causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, promissory fraud, fraudulent misrepresentation, negligent misrepresentation, reformation and professional negligence.
Plaintiffs alleged that Fidelity unreasonably withheld benefits under the policy and that Fidelity conducted an inadequate investigation into plaintiffs’ losses. Plaintiffs sought compensatory damages, punitive damages and attorney fees.
19. Rettig Prepares Second Estimate
In August 2005, plaintiffs’ adjuster, Rettig, re-inspected the house. He prepared a second estimate, which did not call for a complete tear-down. Rettig concluded that the foundation and the floor slab could be retained. At trial, Rettig testified that he no longer considered his initial tear down estimate to be valid. Rettig testified that with respect to the tear down estimate, it was based upon the fact that testing of the concrete slab had not been accomplished. Rettig testified that by the time of the 2005 estimate, he believed that the concrete slab no longer needed to be tested.
The second estimate, dated August 15, 2005, calculated replacement cost value at $600,296.23. Deducting $33,417.27 for depreciation, Rettig calculated actual cost value at $566,878.96. Based upon the mold in the structure and the potential for asbestos and lead based paint, Rettig believed that the estimate could go five percent higher for an additional $30,000. Rettig also testified, however, that had the construction work commenced in December 2003 before the development of the mold, he would have reduced the approximate $600,000 estimate by $10,000 to $20,000.
20. Motion Practice
Fidelity filed a motion for summary judgment/summary adjudication. In response, plaintiffs voluntarily dismissed a number of causes of action. Ultimately, the case went to trial on plaintiffs’ causes of action for breach of contract and breach of the covenant of good faith and fair dealing.
21. Motions in Limine
Prior to trial, plaintiffs filed a motion in limine for an order allowing them to defer closing their case-in-chief until Fidelity produced its out-of-state employee, adjuster Madrigal, to testify as a live witness. Fidelity filed an opposition and asserted that if Fidelity called Madrigal as a defense witness, plaintiffs must nevertheless present Madrigal’s testimony in their case-in-chief via prior deposition testimony of Madrigal.
The trial court denied the motion without prejudice. The trial court explained that Fidelity had a choice to make. If Fidelity intended to call Madrigal as a live witness, Fidelity must allow plaintiffs to call him as a live witness. The court stated: “I’m not going to have the jury sit through that deposition and then the live testimony.” The court noted that if Madrigal’s testimony became necessary for plaintiffs to avoid a non-suit, Fidelity would have the choice of producing him to testify in plaintiffs’ case-in-chief or both parties would have to present his testimony via Madrigal’s prior deposition.
22. Trial Commenced
The trial commenced in October 2005. The trial was bifurcated into two phases, liability and punitive damages.
During trial, Fidelity made an offer of proof that under the policy, it was obligated to pay only actual cash value until the home was repaired and that repair would not be completed by May 2006, because plaintiffs intended to build a new home. In response, plaintiffs asserted that the jury should determine actual cash value and replacement cost value so that if plaintiffs completed the rebuild by May 2006, the amount of the difference between actual cash value and replacement cost value would be known. Plaintiffs also asserted that a jury finding of breach of the implied covenant would excuse the policy requirement that repairs must be completed within two years.
The trial court ruled that the jury would determine replacement cost value to determine actual cash value. The trial court then stated that plaintiffs’ breach of contract damages would be the difference between actual cash value and the amount paid by Fidelity. Plaintiffs responded that in the event of a finding of bad faith, the jury verdict would have no line item for tort damages, because the only tort damages would be Brandt attorney fees, which the parties agreed the trial court would determine after trial. The trial court agreed with this procedure.
In addition, during trial, Fidelity sought to introduce plaintiffs’ financial condition as relevant to plaintiffs’ claim of emotional distress. In response, plaintiffs withdrew any claim for emotional distress damages. The trial court then ruled that evidence of plaintiffs’ financial condition would be excluded.
23. Stipulation that House Was Not Repaired and Motion for Non-Suit
At the conclusion of the evidence, the parties stipulated that plaintiffs had not completed repair or replacement of the damage to the house. Fidelity filed a motion for non-suit on plaintiffs’ claim for punitive damages, which the trial court denied.
24. Plaintiffs’ Insurance Coverage Expert
At trial, plaintiffs presented the testimony of David Peterson, an expert witness on coverage disputes and insurance bad faith. Peterson testified that in this case he reviewed the entire claim file to evaluate how Fidelity investigated the claim, how it communicated with plaintiffs, how it evaluated coverage, how it settled with plaintiffs, and how management resolved issues that arose during the claim process.
As to the claim investigation, Peterson testified that Fidelity’s investigation of the claim based upon the initial December 19, 2003 Harris estimate in the amount of $314,000 for replacement cost value was “significantly below the standard and unreasonable relating to getting enough information to provide the insured with a reasonable, accurate estimate for the repair of the . . . home.” Peterson categorized this estimate as “the first of a series of low-ball estimates,” which he defined as not bearing “any rational relationship to the total damage that was suffered by the insured.”
Peterson concluded that this first December 2003 estimate did not properly calculate the replacement cost of the home. He noted that: Harris did not ask plaintiffs to identify all the improvements to the home, he did not ask plaintiffs to provide receipts or documents showing the floor plan, and he did not obtain information from the city related to the cost of permitting in relationship to necessary code upgrading. Peterson explained that the Harris estimate did not include replacement of the Pella windows, the custom cabinetry, the library, or the home theater and speaker system.
Peterson further testified about the December 2003 estimate: “There was no estimate regarding permits and fees, engineering, architect, upgrades. They didn’t estimate the garage, the attic and deck. They didn’t estimate the rough plumbing and framing. They didn’t estimate supervision costs that I mentioned earlier. When you have so many subcontractors, you’re going to have to get somebody in there to coordinate everything.”
Peterson commended Fidelity for hiring a structural engineer early in the claim process, but was critical of the fact that neither Fidelity nor the engineer tested the concrete foundation.
Peterson also testified about Fidelity’s management’s response to the December 2003 estimate: “I thought that management stuck their head in there and looked at the estimate and put a stamp of approval on it, and I thought that that was below standard and unreasonable because there were so many items that were missing.” Finally, Peterson was critical of the fact that Fidelity did not send a copy of the December 2003 estimate to plaintiffs.
Peterson explained that the claim file showed that adjuster Madrigal requested Harris of ACE to provide a revised estimate, which Harris did in the amount of $331,000 for replacement cost value. About the revised estimate, Peterson testified that “the deficiencies in this estimate were the same as existed for the first estimate.”
Peterson also noted that the claim file included an estimate from Oakwood in the amount of $355,000 for replacement cost value. He explained that the second Harris estimate and the Oakwood estimate were both above the policy limit of $320,000 which then invoked coverage under the endorsement. Peterson noted that plaintiffs and Fidelity disputed whether the endorsement provided coverage up to $480,000 or $800,000. Peterson was critical of Fidelity for not resolving this coverage question more quickly.
Peterson then testified that the claim file showed that Fidelity hired Har-Bro to provide a new estimate. Peterson explained that Har-Bro did not provide an estimate until April 2004, approximately six months after the fire. Peterson testified that the Har-Bro estimate in the approximate amount of $467,000 for replacement cost value was low because it left a number of open items, including estimates for upgrades, architect, engineering, permits and fees.
Peterson explained that Fidelity then requested a revised estimate from Harris of ACE. About the Harris and the Har-Bro estimates, Peterson testified that the Harris estimate “had no[t] estimate[d] for the garage, the attic and the deck, and Har-Bro’s estimate was higher in 17 of 26 categories that Harris had estimated. Neither one had evaluated the upgrades. Neither one had gotten information from the insured on the extent of their upgrades.” Peterson also noted that the Har-Bro estimate included a $60,000 amount for the windows and the cabinets, which he testified should have been in the original Harris estimate.
Peterson was critical of the fact that Fidelity used the final Harris estimate to calculate actual cash value, instead of the Har-Bro estimate, as well as the manner in which Fidelity communicated to plaintiffs its intentions to rely upon the Harris estimate. Peterson testified “[t]hat when Harris did his estimate, he reduced Har-Bro in half of the areas. And think about that. Here is a non-contractor reducing an estimate of a contractor.” Peterson also explained that the Harris estimate did not include amounts for code upgrades, permits or engineering fees, or work to the attic. Peterson noted that the claim file showed that Fidelity knew the house would require code upgrades.
According to Peterson, the claims file showed that at that point, Harris provided a fourth estimate in the approximate amount of $431,000 for replacement cost value. Fidelity then sent this fourth Harris estimate to Har-Bro, who refused to perform the work for that amount. Peterson noted, however, that Oakwood, the contractor rejected by plaintiffs, agreed to perform the work for the $431,000 amount. Peterson testified: “I think Oakwood even agreed that estimate was low, that it would probably be at least a hundred to a [$]150,000 more if they actually undertook the work.” Peterson was critical that the claim file showed that Fidelity did not inform plaintiffs that it was seeking from Oakwood an agreed price to perform the work.
Peterson testified: “I mean you don’t go to a contractor that the insured has already rejected. I mean that’s not good claim handling. You would go – if you’re not going to accept the advice of your own contractor, then go hire another contractor to come in and give a full estimate.”
Peterson also noted that by this time, the house showed mold contamination. He was critical of Fidelity for allegedly failing to investigate the mold problem.
Peterson concluded that basing the actual cash value payment on the Harris estimate was unreasonable. It did not include an estimate for upgrades, and because it did not properly calculate replacement cost value, the actual cash value number was not correct. He did acknowledge, however, that when Fidelity paid plaintiffs the amount for actual cash value, Fidelity advised plaintiffs that they could file supplemental claims for additional work necessary to repair the home.
Peterson also concluded that Fidelity acted unreasonably by claiming a work product privilege and not providing plaintiffs with everything in the claim file as they requested. Peterson testified that Fidelity acted unreasonably by failing to conduct any further investigations after receiving the first and second estimates prepared by Rettig, plaintiffs’ contractor. In Peterson’s opinion, an appraisal pursuant to the policy to determine whether Fidelity had underpaid actual cash value was unnecessary because the dispute between Fidelity and plaintiffs did not constitute a genuine dispute.
25. Jury Instructions
With respect to jury instructions, the trial court instructed the jury that the definition of “actual cash value” was provided by the 2004 amendments to the California Insurance Code. The instruction given to the jury provided: “As of August 2004, California law provided that the measure of Actual Cash Value in this case is the amount it would cost the insured to repair, rebuild, or replace the dwelling, less a fair and reasonable deduction for depreciation.”
Fidelity did not object to this instruction. Instead, Fidelity explained that it paid more then was required by the policy, because it made its actual cash value payment as stated by the foregoing jury instruction, instead of according to the definition set forth in the insurance policy. Fidelity explained that it would thus argue to the jury that because it paid an amount of actual cash value greater than what the policy required, it did not breach the contract. The trial court stated that Fidelity could seek to add language to the special verdict form on the issue of how to define actual cash value.
At trial, about this jury instruction, Fidelity’s counsel explained: “ . . . Given [the court’s] ruling on this, we’re going to ask for an extra finding because we were only obligated to pay – it’s my understanding we were only obligated to pay under the policy definition until this law became effective. And so to the extent that the jury now finds that we’re obligated to pay a higher number, that doesn’t necessarily mean that we were in breach at the time we adjusted the claim and paid that amount.” The trial court replied: “Given that you used this formula, how could it happen?” Counsel for Fidelity responded: “Again, we’re only obligated to pay – prior to the statute, we could define actual cash value as we did.” The trial court replied “Correct.” Fidelity’s counsel then stated: “Okay. We defined it in the policy. We were only obligated under the policy to pay under definition. We paid more.”
Fidelity presented an expert witness at trial, Craig Simon, on the issue of the methods for handling or processing insurance claims. Simon testified that his specialty was drafting language in insurance policies to make the language as clear as possible.
On cross-examination, Simon testified that part of his work history involved giving advice to insurance companies on how to adjust claims. Simon testified that he understood that replacement cost value equaled the cost to repair or rebuild after a loss. Simon further testified that the practice in the insurance industry was to define actual cash value as replacement cost less depreciation.
Counsel for plaintiffs then asked Simon: “At this juncture, I’m asking you for your opinion. And is it correct as an expert for Fidelity that it is your opinion that the better approach is [to] follow the statute and use the formula of the replacement cost less depreciation equals actual cause value; is that correct?” Simon responded: “Yes.”
Plaintiffs’ counsel then queried: “And in fact, when Fidelity made the payment to the insureds in May of 2004, that’s precisely the formula that they used; correct?” Simon responded: “Yes.”
26. Special Verdict Form
Plaintiffs filed a proposed special verdict form. The special verdict form required the jury to first determine replacement cost value, which is the amount to repair the home to its pre-loss condition. The jury was then to determine actual cash value in accordance with the jury instruction defining actual cash value, by subtracting depreciation from replacement cost value.
The special verdict form did not require the jury to determine how much Fidelity had actually paid on the claim. In addition, the special verdict form did not call for the jury to determine the amount of plaintiffs’ damages by subtracting the amount actually paid by Fidelity from the amount the jury determined to be actual cash value.
Plaintiffs stated that the questions on the special verdict form would result in a later determination of damages by the trial court. Fidelity did not object to proceeding in this manner.
Fidelity requested, however, that the special verdict form require the jury to find the actual cash value of plaintiffs’ loss as defined in the insurance policy. The trial court denied the request. The trial court, however, granted Fidelity leave to argue to the jury that it was not in breach of contract because it paid more in actual cash value than was required by the policy. Counsel for Fidelity then requested that the court provide a jury instruction defining actual cash value as the term was defined in the insurance policy. The trial court denied the request.
The trial court stated: “You’re free, and I think you’re entitled to argue, when answering question number one, that they look at what was done by Fidelity in May and whether that was a breach. And you can even argue that that’s a different question ultimately than question number[s] two and three.”
The trial court explained: “I’m going to deny it because I do think when you get to questions two and three that the jury is to answer those questions as to the current replacement cost value and the current actual cash value. So if we made reference to the policy, we will mislead the jury and in fact ask them to determine something that is not correct.”
In any event, the special verdict form completed by the jury set forth five questions. The first question asked: “Did [Fidelity] breach the contract with plaintiffs?” The jury answered “Yes.” The form then provided in pertinent part: “If your answer to Question No. 1 is ‘yes,’ please answer Question No. 2.”
The second question on the special verdict form asked: “What is the Replacement Cost Value of the loss?” The jury calculated $616,385 as the amount.
The third question on the special verdict form asked: “What is the Actual Cash Value of the loss?” The jury calculated $579,402.74 as the amount.
The fourth question on the special verdict form asked: “Did [Fidelity] breach the implied covenant of good faith and fair dealing?” The jury answered “Yes.” The special verdict form then provided in pertinent part: “If your answer to Question No. 4 is ‘Yes,’ please answer Question No. 5.”
Finally, in response to the fifth question on the special verdict form, the jury found that Fidelity’s conduct constituted fraud, malice and oppression.
27. Punitive Damages Phase
On November 8, 2005, the trial court commenced trial on the punitive damages phase. The trial court denied Fidelity’s motions for a directed verdict and a mistrial on the basis that the jury did not award tort damages. Finally, the trial court denied Fidelity’s request to instruct the jury as to the amount of plaintiffs’ contract damages and that the jury awarded no other damages in the liability phase.
28. Punitive Damages Jury Instruction
The trial court provided the jury with an instruction as to how to determine reprehensibility. By stipulation, the court reported did not transcribe the instructions actually given to the jury.
The appellant’s appendix, however, contains a jury instruction as to how to determine the reprehensibility of Fidelity’s conduct. That instruction provided: “ ‘In determining the reprehensibility of defendant’s conduct you must consider whether: [¶] the harm caused was economic and not physical; [¶] the conduct showed an indifference to or a reckless disregard of the health or safety of others; [¶] the [plaintiffs] provided evidence that they were financially vulnerable; [¶] the conduct involved repeated actions or was an isolated incident; [¶] the harm was the result of intentional malice, trickery or deceit, or mere accident. [¶] The absence of all these factors renders any award suspect.’ ”
On appeal, Fidelity claims and plaintiffs do not dispute that the trial court inserted the word “rights” into the jury instruction as follows: “In determining the reprehensibility of defendant’s conduct you must consider whether: . . . the conduct showed an indifference to or a reckless disregard of the rights, health or safety of others.” (Italics added, underscoring omitted.) As explained below in the Discussion, Fidelity asserts the trial court committed prejudicial error and allowed the jury to award an excessive punitive damages award.
29. Closing Arguments in the Punitive Damages Phase
Before closing arguments, as requested by Fidelity, the trial court ordered plaintiffs’ counsel not to refer to the testimony of adjuster Madrigal that there were 30 to 40 other wildfire claims.
Then, during closing argument, to support the assertion that Fidelity’s conduct was reprehensible, plaintiffs’ counsel first read a portion of adjuster Madrigal’s testimony: “Question: So with respect to the manner in which this file was handled, any insured of Fidelity could expect their claim to be handled in the same fashion; is that correct? [¶] Answer: I would say that’s correct.”
Plaintiffs counsel then stated to the jury: “Now, what I want to do is stop and really put into perspective how important that is. We know that there [are] hundreds of claims out there that this company has. . . . [¶] . . . [¶] And had [plaintiffs not put up a fight], they would have been shortchanged by $200,000. That’s one claim. You multiply that out by hundreds and hundreds of claims –”
At that point, the trial court sustained Fidelity’s objection. Plaintiff’s counsel continued: “This practice had the potential of harming insureds so substantially that it’s almost unthinkable. There is a reason why low-balling exists . . .” The trial court again sustained Fidelity’s objection.
Later, during closing argument, the trial court sustained Fidelity’s objection to plaintiffs’ counsel’s statement as follows: “Now, they showed you the harm to [Stone and Pelle]. What that ignores is what’s it going to take to prevent this for the future? What’s the potential harm for people? My God, the numbers are staggering when you apply them over a number of claims.”
Fidelity also objected to the following statements by plaintiffs’ counsel in closing argument, which objections the trial court sustained: (1) the fact that Fidelity did not have a representative at trial; and (2) references to criminal penalties for fraudulent conduct.
The trial court denied Fidelity’s motion for mistrial based upon plaintiffs’ counsel closing arguments.
30. Punitive Damages Verdict
On November 9, 2005, the jury awarded plaintiffs punitive damages in the amount of $5,163,217. The trial court directed plaintiffs to submit a proposed judgment.
31. Trial Court Enters Judgment
On February 15, 2006, the trial court entered judgment in favor of plaintiffs. The trial court awarded $160,956.42 in economic damages. The court also awarded $5,163,217 in punitive damages; and $64,382.56 in Brandt fees, leaving costs for a later determination.
In the judgment, the trial court explained: “This sum of economic damages is calculated by deducting from the jury’s finding of the Actual Cash Value of $579,402.47, the amount previously paid by [Fidelity] under Coverage A in the amount of $418,446.05[.]”
32. Post-Judgment Motions
On March 17, 2006, plaintiffs filed a motion to vacate the judgment and enter a new and different judgment. Plaintiffs requested the trial award replacement cost value instead of actual cash value. In the motion, plaintiffs explained that because the jury determined that Fidelity breached the contract, plaintiffs were excused from the condition precedent of rebuilding the house in order to recover replacement cost value. Plaintiffs asserted that to hold otherwise would allow Fidelity to take advantage of the breach of contract by withholding policy benefits. According to plaintiffs, the judgment would force plaintiffs to sue and recover actual cost value, then rebuild and file a second lawsuit to recover full replacement cost value.
Fidelity filed an opposition to plaintiffs’ motion to vacate.
33. Fidelity’s First Notice of Appeal
On March 30, 2006, Fidelity filed a notice of appeal from the February 15, 2006 judgment.
34. Trial Court Rules on Post-Judgment Motions
On April 10, 2006, the trial court denied Fidelity’s motion for judgment notwithstanding the verdict. The trial court also denied Fidelity’s motion for new trial, conditioned on plaintiffs accepting a remittitur reducing the punitive damages award to $1,600,000. The trial court ruled the award was excessive in relation to the award of compensatory damages. In response, plaintiffs filed a notice of acceptance of the remittitur.
In addition, on April 10, 2006, the trial court granted plaintiffs’ motion to vacate the judgment and enter a new and different judgment nunc pro tunc. The trial court found that Fidelity’s breach of contract excused the requirement that plaintiffs rebuild within two years in order to recover replacement cost value. The trial court determined that plaintiffs’ damages should be based upon replacement cost value, and re-calculated plaintiffs’ damages.
35. Trial Court Enters New Judgment
Over Fidelity’s opposition, on May 1, 2006, the trial court entered a new judgment against Fidelity. The trial court awarded plaintiffs $197,939.56 in compensatory damages, a sum representing the alleged underpayment of replacement cost value.
The trial court explained in the judgment: “This sum of economic damages is calculated by deducting from the jury’s finding of the Replacement Cost Value of $616,385.61 the amount previously paid by [Fidelity] under Coverage A, in the amount of $418,446.05.”
The trial court also awarded $79,175.82 in Brandt attorney fees with interest at the rate of ten percent per annum from the date of entry of judgment. The trial court explained: “This sum represents 40% of the award of compensatory damages awarded in paragraph 1, above, in accordance with the fee agreement between plaintiffs and their counsel.” Finally, the trial court awarded plaintiffs $1,600,000 in punitive damages plus interest, as well as $23,776.48 in costs, also awarded with interest.
36. Fidelity’s Second Notice of Appeal
Fidelity timely filed a notice of appeal from: the May 1, 2006 judgment, the order granting plaintiffs’ motion to vacate, and the order denying Fidelity’s motions for JNOV and new trial.
CONTENTIONS
Fidelity presents a number of contentions as to why the award of compensatory damages was erroneous: (1) The trial court committed legal error with respect to the jury instruction regarding the measure of actual cash value; (2) Plaintiffs failed to present substantial evidence that Fidelity breached its contractual duty to pay actual cash value; (3) The special verdict form was legally erroneous because it did not require the jury to determine every factual issue, including the amount paid by Fidelity or the amount of plaintiffs’ economic damages; and (4) With respect to the new and different May 1, 2006 judgment, the trial court erred by determining that plaintiffs were excused from rebuilding or repairing within two years from the date of loss.
Fidelity also presents a number of contentions as to why the award of punitive damages was erroneous: (1) Plaintiffs did not present substantial evidence that Fidelity breached the covenant of good faith and fair dealing because the evidence was insufficient that Fidelity breached the contract; (2) Plaintiffs did not show by clear and convincing evidence that Fidelity acted maliciously, oppressively, or fraudulently sufficient to support the award of punitive damages; (3) The trial court erred by permitting the jury to award punitive damages in the absence of an award of tort damages; (4) The trial court erred by giving an incorrect jury instruction defining reprehensible conduct; (5) The amount of punitive damages awarded violates the due process clause of the United States Constitution; and (6) Plaintiffs’ counsel committed prejudicial misconduct during closing argument of the punitive damages phase of the trial.
Finally, Fidelity contends that the trial court erred by awarding plaintiffs Brandt attorney fees and that the trial court erred by ruling that Fidelity must produce Omaha adjuster Madrigal to testify in plaintiffs’ case-in-chief or be precluded from presenting his live testimony.
DISCUSSION
We first address Fidelity’s contentions regarding the award of compensatory damages. We then address Fidelity’s contentions regarding the award of punitive damages. In the section of the opinion regarding whether the trial court erred by permitting the jury to award punitive damages in the alleged absence of an award of tort damages, we also address whether the trial court erred by awarding Brandt attorney fees.
I. Compensatory Damages
A. The Trial Court Did Not Err by Giving the Jury Instruction Defining Actual Cash Value
Fidelity asserts the trial court erred by giving the special jury instruction defining actual cash value as replacement cost value minus depreciation. Fidelity asserts that the trial court erred by failing to give an instruction defining actual cash value as it is defined in the policy. As stated, the policy defined actual cash value as “the lesser of repair or replacement cost, exclusive of sales tax, at the time of loss less applicable depreciation for physical deterioration and obsolescence and applicable contractor’s profit and overhead.”
The trial court gave the following special instruction: “As of August 2004, California law provided that the measure of Actual Cash Value in this case is the amount it would cost the insured to repair, rebuild, or replace the dwelling, less a fair and reasonable deduction for depreciation.”
We conclude that the trial court did not err. With full knowledge of the facts, Fidelity intentionally relinquished its right to a jury instruction defining actual cash value as stated in the policy. (See Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31 [“ ‘ “Waiver is the intentional relinquishment of a known right after knowledge of the facts.” . . . The waiver may be either express, based on the words of the waiving party, or implied, based on conduct indicating an intent to relinquish the right.’ ”]; and Gill v. Rich (2005) 128 Cal.App.4th 1254, 1264, fn. 10.)
It is undisputed that on May 18, 2004, Fidelity’s adjuster, Madrigal, sent plaintiffs a detailed letter explaining how Fidelity determined actual cash value. In the letter, Madrigal quoted the policy definition of actual cash value. Significantly, however, Madrigal did not use the policy definition of actual cash value to determine the amount owed to plaintiffs. Instead, Madrigal explicitly and in writing calculated actual cash value by deducting only depreciation from replacement cost value, which determination was consistent with section 2051 of the Insurance Code and the special instruction given to the jury.
Insurance Code section 2051, subdivision (b), provides in pertinent part: “Under an open policy that requires payment of actual cash value, the measure of the actual cash value recovery, in whole or partial settlement of the claim, shall be determined as follows: [¶] . . . [¶] (2) In case of a partial loss to the structure, or loss to its contents, the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its condition at the time of the injury or the policy limit, whichever is less. In case of a partial loss to the structure, a deduction for physical depreciation shall apply only to components of a structure that are normally subject to repair and replacement during the useful life of that structure.”
Thus, in the May 18, 2004 letter, Fidelity acknowledged that it had the right to determine the amount of actual cash value according to the definition in the policy. Nevertheless, with full knowledge of this fact, Fidelity relinquished its right to use the policy definition of actual cash value when it explicitly and in writing decided to use a different formula to determine actual cash value.
We find that Fidelity intentionally relinquished its right to insist upon a jury instruction based upon the policy definition of actual cash value. Thus, Fidelity has not shown prejudice or a miscarriage of justice with respect to the special instruction the trial court gave to the jury. (Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 580 [“A judgment may not be reversed for instructional error in a civil case ‘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.)”].)
B. Substantial Evidence Supports the Jury’s Special Verdict Finding That Fidelity Breached its Contractual Duty to Pay Actual Cash Value
Pursuant to the substantial evidence standard of review, we conclude that plaintiffs presented substantial evidence that Fidelity breached the contract with respect to payment of actual cash value.
Ninety Nine Investments, Ltd. v. Overseas Courier Service (Singapore) Private Ltd. (2003) 113 Cal.App.4th 1118, states that under the substantial evidence standard of review, we “view the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference and resolving all conflicts in its favor.” (Id. at p. 1127.)
Fidelity asserts that plaintiffs did not show that it breached its contractual duty to pay actual cash value. Fidelity makes two arguments. First, Fidelity attacks the Rettig estimate upon which plaintiffs relied to show that Fidelity underpaid actual cash value. Specifically, Fidelity asserts that the Rettig estimate cannot show a breach because Rettig did not use the actual cash definition as stated in the insurance policy.
Second, Fidelity asserts that the policy provided that an actual cash value payment was not a final payment under the policy. Thus, according to Fidelity, plaintiffs did not show economic damages because the purpose of actual cash value is to permit the insured to begin the repairs and plaintiffs could have made a supplemental claim for additional coverage.
In its opening brief, Fidelity explained: “[Plaintiffs] presented no evidence establishing that they were prevented from repairing their house by the claimed insufficiency of the ‘actual cash value’ payment, or were required to pay interest on burrowed funds or forego investments because they were required to commit personal capital to repairs, or otherwise suffered ascertainable economic harm because of the purported insufficiency of what is incontestably an interim payment intended to permit repairs to commence. Neither did they present any evidence that they had sought supplemental payments, after commencing repairs, which were denied.” (Fns. omitted.)
We reject both arguments and conclude that plaintiffs presented substantial evidence that Fidelity breached the contract with respect to payment of actual cash value.
1. The Rettig Estimate Was Not Defective Because it Calculated Actual Cash Value by Deducting Only Depreciation From Replacement Cost Value
Fidelity asserts that the second Rettig estimate does not constitute substantial evidence in support of the breach of contract as to payment of actual cash value because the estimate did not calculate actual cash value according to the policy definition, but instead calculated actual cash value by deducting only an amount for depreciation. We reject Fidelity’s argument.
On May 18, 2004, Fidelity’s adjuster, Madrigal, advised plaintiffs that it was calculating actual cash value by deducting from replacement cost value an amount for reasonable depreciation. On May 27, 2004, Fidelity sent plaintiffs a check for $405,797.88.
As explained above, pursuant to the May 18, 2004 letter, Fidelity intentionally relinquished its right to insist that actual cash value be determined according to the policy definition. With full knowledge of the policy definition of actual cash value, Fidelity acknowledged in writing to plaintiffs that the method for determining actual cash value would be based upon deducting depreciation from replacement cost value.
On this record, Fidelity cannot fault plaintiffs’ adjuster for then using the same formula employed by Fidelity to determine actual cash value.
2. Plaintiffs Were Not Required to Rebuild or Replace to Show a Breach of Contract with Respect to Payment of Actual Cash Value
Fidelity asserts that plaintiffs have not shown a breach of contract with respect to payment of actual cash value because actual cash value is not a final payment and plaintiffs could have sought additional or supplemental coverage once the repair process was complete. We reject this argument.
The policy in this case required Fidelity to pay to plaintiffs actual cash value upon a loss to their home. Section B(3) of the endorsement stated that Fidelity would pay no more than the actual cash value until repair was complete. Section B(4) of the endorsement expressly stated that plaintiffs could disregard the replacement cost provisions and make a claim for the loss to the building on an actual cash value basis. Thus, nothing in the policy required plaintiffs to repair or replace.
The conclusion is inescapable, therefore, that repair of the property was not a condition to seeking actual cash value. In other words, Fidelity’s contractual duty to pay actual cash value was in no way conditioned upon plaintiffs repairing or replacing the home. Thus, an underpayment of actual cash value could support a breach of the insurance contract at issue in this case.
On this record, plaintiffs showed that they suffered economic damages in relation to Fidelity’s underpayment of actual cash value.
C. The Special Verdict Form Was Legally Sufficient
Fidelity asserts that the special verdict form was legally defective or insufficient because it did not require the jury to determine plaintiffs’ economic damages. Specifically, Fidelity argues that the special verdict form was defective as a matter of law because it did not ask the jury to determine how much Fidelity had paid to plaintiffs. In addition, the special verdict form did not ask the jury to calculate damages by subtracting the amount paid by Fidelity from the amount the jury determined to constitute the actual cash value amount. We reject this argument.
Fidelity did not request that the special verdict form include any questions regarding how much Fidelity had paid or the amount of plaintiffs’ damages. The record shows that Fidelity made one objection concerning the special verdict form. It requested that the jury be instructed to determine actual cash vale pursuant to the policy definition instead of pursuant to the jury instruction based upon Insurance Code section 2051.
Thus, Fidelity waived any argument with respect to the special verdict form not containing questions about the amount paid by Fidelity or the amount of plaintiffs’ economic damages. (See John Y. v. Chaparral Treatment Center, Inc. (2002) 101 Cal.App.4th 565, 579 [“His failure to request modification of the special verdict form results in his waiver of any claim that it was insufficient to enable the findings he desired.”]; and Heiner v. Kmart Corp. (2000) 84 Cal.App.4th 335, 348-349.)
D. The Trial Court Erred by Determining That Plaintiffs Were Excused From the Condition Precedent of Rebuilding or Repairing Within Two Years of the Date of Loss
Fidelity asserts the trial court erred by determining that Fidelity’s breach of contract with respect to payment of actual cash value excused plaintiffs from the contractual obligation of repairing the home within two years from the date of the first payment of actual cash value in order to obtain replacement cost value coverage. We agree.
A condition precedent is an act that must be performed before a promisor’s duty of performance. (1 Witkin, Summ. Cal. Law, § 776, p. 866.) In this case, the insurance policy imposed upon plaintiffs a condition precedent, the duty to repair or replace the home before Fidelity had a corresponding duty to provide replacement cost value coverage. (See Section B(3) of the endorsement, which provided: “We will pay no more than the actual cash value of the damage until actual repair or replacement is complete.”)
Witkin explains: “[I]f the person prevents or makes impossible the performance or happening of a condition precedent, the condition is excused.” (1 Witkin, Summ. Cal. Law, § 821, p. 910; see also Erich v. Granoff (1980) 109 Cal.App.3d 920, 930 [“[H]indrance of the other party’s performance operates to excuse that party’s nonperformance.”]; and Lortz v. Connell (1969) 273 Cal.App.2d 286, 290 [“ ‘A person cannot take advantage of his own act or omission to escape liability. If he prevents or makes impossible the performance or happening of a condition precedent, the condition is excused.’ ”].)
There are two out of state cases almost directly on point. In Ward v. Merrimack Mututal Fire Ins. Co. (2000) N.J.Super 515 [753 A.2d 1214] (Ward), an insured’s residence was destroyed by fire. The policy contained a replacement cost value provision identical to the endorsement in this case. The Ward policy provided: “[W]e will pay no more than the actual cash value of the damage until actual repair or replacement is completed.” (Id. at p. 1216.)
The trial court in Ward determined that the insured was entitled to actual cash value, not replacement cost value, because the insured never rebuilt the building. (Ward, supra, 753 A.2d at p. 1217.) The Ward appellate court reversed, however, for a trial on the issue of whether the insured’s duty to replace was excused. (Id. at p. 1221.)
The Ward appellate court explained the general rule that “an insurer is estopped from arguing that an insured cannot demand replacement costs under a policy provision requiring actual replacement of the of the damaged property as a precondition to recovery where the insurer’s conduct frustrates the insured’s ability to satisfy the precondition.” (Ward, supra, 753 A.2d at p. 1218.) The court further noted: “To excuse the condition precedent, the facts must show that ‘the promisor [insurer] has caused the non-performance of the condition. . . . If the promisee [insured] could not or would not have performed the condition, or it would not have happened whatever had been the promisor’s conduct, the condition is not excused.’ 5 Williston on Contracts § 677 (Jaeger ed.1961).” (Id. at p. 1220 (original italics).)
Significantly, the Ward court also explained: “Evidence of financial wherewithal or the ability to finance would obviously belie plaintiff’s claim that [the insurer’s] refusal to provide coverage frustrated his plans to rebuild.” (Ward, supra, 753 A.2d at p. 1220.)
Likewise, in National Tea Co. v. Commerce & Industry Ins. (1983) 119 Ill.App.3d 195 [456 N.E.2d 206], a fire destroyed a commercial building. The insurance policy provided: “ ‘If the property damaged or destroyed * * * is not repaired, rebuilt or replaced on the same or another site within a reasonable time after the loss or damage, this Company shall not be liable for more than the actual cash value (ascertained with proper deduction for depreciation) of such property.’ ” (Id. at p. 209.) The court held that repair or replacement is a condition precedent to recovery under this policy of any amount in excess of actual cash value. (Id. at p. 211.) The court further held that “there was simply no competent evidence that [the insured] had no other source for the necessary funds and therefore was unable to comply with the condition precedent of this policy.” (Id. at p. 212.)
In this case, Fidelity paid plaintiffs $405,797.88 on May 27, 2004. This payment constituted funds for actual cash value under the policy. Plaintiffs made no evidentiary showing that with receipt of these funds, they could not accomplish repair of the home within the time permitted. Plaintiffs presented no evidence of their financial condition one way or another.
In fact, the record shows that Fidelity sought to introduce evidence that plaintiffs had substantial funds available shortly after the fire. Fidelity made an offer of proof to the trial court that plaintiffs received a loan in May 2004 for $350,000 to purchase a commercial building. The trial court explained that Fidelity would be permitted to put this evidence before the jury in relation to whether plaintiffs suffered emotional distress from the loss to the home. In response, plaintiffs withdrew the claim for emotional distress.
Thus, plaintiffs failed to present substantial evidence to show that Fidelity’s payment of $405,797.88 as actual cash value caused plaintiffs not to be able to rebuild their home. Plaintiffs failed to show that any action on the part of Fidelity frustrated or made impossible plaintiffs’ ability to rebuild in the time allotted. Therefore, plaintiffs failed to show that the condition precedent of rebuilding was excused.
In conclusion, the trial court erred by making the factual finding, which was not supported by substantial evidence, that plaintiffs were excused from performing the condition precedent of repairing the home prior to seeking an award for replacement cost value. The May 1, 2006 judgment awarding compensatory damages of $197,939.56 for alleged underpayment of replacement cost value is legally erroneous and must be reversed.
Because we conclude that the trial court erred by finding that plaintiffs were excused from performing the condition precedent of repairing the home prior to seeking an award for replacement cost value, we have no occasion to address the whether Fidelity’s first notice of appeal, filed on March 30, 2006, divested the trial court of jurisdiction to vacate the February 15, 2006 judgment.
II. Punitive Damages
1. Plaintiffs Presented Substantial EvidenceTthat Fidelity Breached the Covenant of Good Faith and Fair Dealing
We conclude that plaintiffs presented substantial evidence to show that Fidelity acted in bad faith.
In Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062 (Jordan), the court summarized the duty of good faith and fair dealing. The court stated: “An insurer is said to act in ‘bad faith’ when it not only breaches its policy contract but also breaches its implied covenant to deal fairly and in good faith with its insured. ‘A covenant of good faith and fair dealing is implied in every insurance contract. [Citations.] The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the agreement’s benefits. To fulfill its implied obligation, an insurer must give at least as much consideration to the interests of the insured as it gives to its own interests. When the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort. And an insurer cannot reasonably and in good faith deny payments to its insured without fully investigating the grounds for its denial. [Citation.]’ [Citation.] Indeed, in Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809 . . . the Supreme Court emphasized that, in order to protect the interests of its insured, it was ‘essential that an insurer fully inquire into possible bases that might support the insured’s claim.’ [Citation.]” (Id. at pp. 1071-1072.)
The Jordan court reiterated: “As already noted, an insurer owes a duty to its insured to investigate all of the possible bases of an insured’s claim. The insurer’s duty to give as much consideration to the insured’s interests as it does to its own obligates it to investigate a claim thoroughly. An insurer must fully inquire into the bases for the claim; indeed, it ‘cannot reasonably and in good faith deny [benefits] to its insured without thoroughly investigating the foundation for its denial.’ [Citaiton.] ‘An insurance company may not ignore evidence which supports coverage. If it does so, it acts unreasonably towards its insured and breaches the covenant of good faith and fair dealing.’ [Citations.] [¶] As we made clear in Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., [(2001)] 90 Cal.App.4th 335 where an insurer denies coverage but a reasonable investigation would have disclosed facts showing the claim was covered, the insurer’s failure to investigate breaches its implied covenant. The insurer cannot claim a ‘genuine dispute’ regarding coverage in such cases because, by failing to investigate, it has deprived itself of the ability to make a fair evaluation of the claim.” (Jordan, supra, 148 Cal.App.4th at pp. 1073-1074, first italics added.)
Likewise, in Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., supra, 90 Cal.App.4th 335 (Chateau Chamberay), the court set forth a non-exclusive list of circumstances when a bad faith claim should go to the jury, including when an insurer’s experts are unreasonable and when an insurer fails to conduct a thorough investigation. (Id. at pp. 348-349.)
Plaintiffs presented substantial evidence that Fidelity failed to fully and thoroughly investigate plaintiffs’ claim and consistently provided plaintiffs with replacement cost value and actual cash value estimates which substantially undervalued the loss to the home. Based upon inadequate investigation by its experts, Fidelity sought to substantially underpay plaintiffs’ claim. In other words, Fidelity did not give as much consideration to plaintiffs’ interests as it did to its own.
The fire occurred during the early morning hours on October 26, 2003. Fidelity accepted coverage and began investigating the claim. On October 28, 2003, Fidelity’s adjuster, Harris of Ace, inspected the house and advised plaintiffs that the house needed to be demolished. The activity log notes of adjuster Madrigal confirmed that by December 11, 2003, Harris of ACE had advised Fidelity that the house was a total loss and that the repairs would exceed $480,000.
Despite Harris’s conclusion that the house was a total loss, on December 19, 2003, Harris submitted a replacement cost value estimate of $314,140.69 and an actual cash value estimate of $297,188.67. Harris left a number of open items, including framing and roofing. Moreover, plaintiffs’ house was a premium grade home in a nicer area. It had granite counter tops, custom cabinets, and expensive Pella windows. Harris did not provide plaintiffs with a questionnaire which would have allowed plaintiffs to identify the upgrades and other premium aspects to the home, such as the Pella windows.
The jury later calculated replacement cost value to be $616,385 and actual cash value of the loss to be $579,402.74. Thus, at this point in time, the Harris estimate undervalued the actual cash value loss by almost half – in the amount of $282,214.74.
Then, in January 2004, Harris of ACE revised his estimate of replacement cost value to be $331,602 and actual cash value to be $311,501.56 This second estimate undervalued the actual cash value loss by $267,901.18.
Plaintiffs hired a contractor, Oakwood, immediately after the fire to tarp the house and clean up any debris. On December 19, 2003, Oakwood, on its own, provided an estimate of actual cash value at $288,837.32 and replacement cost value at $355,131.32. In January 2004, however, plaintiffs advised Fidelity that they were not satisfied with the estimate because it was incomplete and because of Oakwood’s efforts to have plaintiffs sign a contract. At trial, Oakwood’s president conceded that the estimate was not correct given the number of open items and that replacement cost value was actually between $530,000 and $550,000.
In January 2004, plaintiffs hired contractor Robert Rettig to prepare an estimate. To conduct a thorough investigation because much of the house was destroyed, Rettig provided plaintiffs with a detailed questionnaire about the house, the quality of the cabinets, finishes and carpets. Importantly, none of Fidelity’s experts used such a questionnaire. Notably, at trial, Rettig, testified that the Oakwood estimate was too low and that the house could not be rebuilt for that amount. The Oakwood estimate left open costs for plumbing, architectural costs, engineering fees, supervision, building permits, cost upgrades and mold abatement.
In April 2004, Rettig’s representative observed spalling and cracking in the concrete foundation. Thus, Rettig anticipated that the foundation would have to be tested to determine its correct condition. Rettig prepared his estimate calling for a complete tear down because of the problems in the foundation.
Fidelity also hired Har-Bro Construction to prepare an estimate. Plaintiffs presented evidence that Har-Bro did not conduct a thorough investigation. On April 30, 2004, Har-Bro submitted a revised estimate for replacement cost value of $467,033. This estimate contained a number of open items, including the costs for framing, code upgrades, architectural services, engineering fees, permits and mold abatement. Notably, this final Har-Bro estimate was approximately $150,000 less than the $616,385 amount determined by the jury to be replacement cost value. In addition, Har-Bro did not provide plaintiffs with a detailed questionnaire in order to determine the quality and nature of plaintiffs’ home prior to the fire.
In May 2004, Harris of ACE revised his estimate of replacement cost value to be $436,601.48 and his actual cash value to be $353,891.23. Despite the fact that the final Harris estimate and the Har-Bro estimates contained a number of open items, the evidence showed that Fidelity considered its own interests ahead of those of plaintiffs and based its replacement cost value estimate on a different and lower Harris estimate of $433,195.45. Fidelity then calculated actual cash value as $405,797.88, approximately $173,604 less than the $579,402.74 amount determined by the jury to be actual cash value.
The record indicates that Fidelity based the actual cash value payment on this lower Harris estimate of $433,195.45 (as opposed to the $436,601.48 amount) because this was the amount for which Oakwood had agreed to perform the work.
Fidelity then sent plaintiffs a check for $405,797.88 for actual cash value. Fidelity made its payment of actual cash value knowing that there were open items on the estimates, and only did so after trying to convince Har-Bro to reduce its estimate.
Plaintiffs responded to Fidelity in writing. Plaintiffs objected to Fidelity having obtained an “agreed” price from Oakwood. In addition, plaintiffs noted that the estimates contained a number of “open” items. Plaintiffs requested that Fidelity define the open items and provide supplemental insurance coverage for these items.
Fidelity rejected plaintiffs’ position with respect to the “open” items on the estimates. On July 9, 2004, Madrigal wrote to plaintiffs and advised that with respect to the open items, plaintiffs could initiate an appraisal process. Thus, the record shows that Fidelity knew there were open items on the estimates. Despite knowing it was not paying plaintiffs for these open items, Fidelity then placed the burden on plaintiffs to initiate an appraisal process to obtain additional coverage for the items left open in each of the Fidelity’s estimates.
Notably, plaintiffs’ contractor, Rettig, completed his first estimate in August 2004. This estimate was based upon a complete tear-down of the house because Rettig’s representative had observed spalling and cracking in the concrete foundation. Plaintiffs sent this estimate to Fidelity. Rather then investigating the integrity of the foundation, Fidelity rejected this estimate out of hand. Fidelity did so despite the fact that in December 2003, its own expert, Harris, concluded the house was a total loss. Moreover, according to the record and the testimony of plaintiffs’ expert, Peterson, neither Fidelity nor the Hansen engineer ever tested the concrete foundation to determine its integrity. After receiving the Rettig estimate, instead of conducting an investigation, Fidelity again advised plaintiffs that they could initiate an appraisal process.
In his second estimate, Rettig concluded that it was not necessary to replace the concrete foundation. However, the first Rettig estimate is important because upon receiving it, Fidelity conducted no investigation into the integrity of the foundation which had never been tested. In addition, Fidelity did not examine the first Rettig estimate with respect to any other aspects of the repair.
In addition, plaintiffs’ expert, Petersen, testified that Fidelity’s investigation was substandard and unreasonable in terms of obtaining sufficient information from plaintiffs to provide an accurate estimate of the claim. He testified that the allegedly “open” items were not in fact open, but instead, were uninvestigated. Peterson also testified that Fidelity attempted to provide plaintiffs with unreasonable lowball estimates.
We reject Fidelity’s assertion that the plaintiffs are not entitled to punitive damages based upon the genuine disputed doctrine. (See Chateau Chamberay, supra, 90 Cal.App.4th 335.) The foregoing facts show that Fidelity did not conduct a full, reasonable, or thorough investigation and that Fidelity unreasonably relied upon estimates which substantially undervalued the loss. Substantial evidence supports the conclusion that Fidelity breached the covenant of good faith and fair dealing.
B. Plaintiffs Presented Clear and Convincing Evidence That Fidelity Acted Maliciously, Oppressively, or Fraudulently
Fidelity asserts that plaintiffs failed to present clear and convincing evidence that it acted maliciously, oppressively, or fraudulently to justify an award of punitive damages. We disagree.
Fidelity correctly notes that to establish that an insurer’s conduct has gone sufficiently beyond bad faith to support an award of punitive damages, plaintiffs must show by clear and convincing evidence that the insurer acted maliciously, oppressively, or fraudulently. (Mock v. Michigan Millers Mutual Ins. Co. (1992) 4 Cal.App.4th 306, 328 (Mock).) In Mock, the court explained: “ ‘ “Something more than the mere commission of a tort is always required for punitive damages. There must be circumstances of aggravation or outrage, such as spite or ‘malice,’ or a fraudulent or evil motive on the part of the defendant, or such a conscious and deliberate disregard of the interests of others that his conduct may be called wilful or wanton.” [Citation.]’ ” (Ibid.) Plaintiffs made such a showing in this case.
Civil Code section 3294 provides: “In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant. [¶] . . . [¶] (c) As used in this section, the following definitions shall apply: [¶] (1) ‘Malice’ means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others. [¶] (2) ‘Oppression’ means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights. [¶] (3) ‘Fraud’ means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.”
Summarizing the facts presented in the foregoing discussion of bad faith, plaintiffs showed that for a seven month time period from November 2003 to May 2004, Fidelity knowingly undervalued the loss to their home. Plaintiffs also showed that Fidelity knowingly conducted an inadequate investigation. Plaintiffs responded to each estimate prepared by Fidelity to show that the estimates did not account for numerous open items. Plaintiffs’ expert, Petersen, categorized Fidelity’s estimates as not bearing any rational relationship to the total damage suffered by plaintiffs.
Then, despite knowing that it was undervaluing and underpaying plaintiffs’ claim, Fidelity placed the burden on plaintiffs to initiate an appraisal process to obtain coverage that Fidelity should have paid in the first instance.
Plaintiffs presented evidence that Fidelity showed a conscious and deliberate disregard for the interests of its own insureds to the point where the jury could well have concluded that Fidelity’s conduct was willful or wanton.
C. The Jury Instruction Defining Reprehensible Was Not Erroneous
On appeal, Fidelity asserts the trial court committed prejudicial error by inserting the word “rights” into the definition of reprehensible conduct as follows: “In determining the reprehensibility of defendant’s conduct you must consider whether: . . . the conduct showed an indifference to or a reckless disregard of the rights, health or safety of others.” (Italics added, underscoring omitted.) Fidelity asserts that there was no evidence that Fidelity showed indifference or disregard to the health or safety of plaintiffs, and thus the instruction as given permitted the jury to conclude that Fidelity’s conduct could be deemed reprehensible if it showed an indifference or disregard for the “rights” of others. Fidelity asserts that the term “rights” is a board, undefined term, which permitted the jury to award excessive punitive damages. We conclude that the instruction as given was not erroneous.
Significantly, Civil Code section 3294, which governs awards of punitive damages, defines malice, oppression and fraud with reference to a conscious disregard of the “rights” of others. (See footnote 20.)
In Simon,the California Supreme Court addressed whether the defendant’s conduct in that case was sufficiently reprehensible to support an award of punitive damages. Focusing upon a different portion of the jury instruction defining reprehensibility (i.e., whether the harm was the result of intentional malice, trickery or deceit, or mere accident), the Simon court noted that accidentally harmful conduct would not support an award of punitive damages. (Simon, supra, . 35 Cal.4th at p. 1181.) The Simon court then explained: “At a minimum, California law requires conduct done with ‘willful and conscious disregard of the rights or safety of other’” or despicable conduct done ‘in conscious disregard’ of a person’s rights.” (Ibid., italics added; see also Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 893.)
Given this statutory and case law authority supporting the proposition that a conscious disregard of a person’s rights may show reprehensibility and support an award of punitive damages, we cannot conclude that the trial court’s insertion of the word “rights” into the jury instruction defining “reprehensibility” was erroneous or prejudicial.
D. The Amount of Punitive Damages – as Reduced by the Trial Court – Did Not Violate the Due Process Clause of the United States Constitution
Fidelity asserts that the award of $1.6 million award of punitive damages (as reduced by the trial court in response to Fidelity’s motion for new trial) violates the due process clause of the United States Constitution. Applying a de novo standard of review, (Simon, supra, 35 Cal.4th at p. 1172), we disagree.
Plaintiffs’ compensatory damages ($160,956.42) and Brandt attorney fees ($64,382.56), which we affirm below, amounted to a total damages award of $225,339.18. Thus, the ratio of total compensatory damages to punitive damages following the remittitur is 7 to 1.
Pursuant to the reasoning of Bardis v. Oates (2004) 119 Cal.App.4th 1 (Bardis), the award of $160,956.62, representing Fidelity’s underpayment of actual cash value, must be considered when determining the ratio between punitive damages and compensatory damages. The Bardis court explained: “ ‘Compensatory damages “are intended to redress the concrete loss that the plaintiff has suffered by reason of the defendant’s wrongful conduct. [Citations].’ [Citation.]” . . . The idea behind looking at ratios is that ‘[p]unitive damages must bear a reasonable relationship and be proportionate to the actual harm suffered by the plaintiff (i.e., compensatory damages).’ [Citations.] Logic and common sense tell us that the amount the jury found to be the ‘total amount of damages suffered by plaintiffs’ . . . most closely reflects the United States Supreme Court’s formulation of the ‘actual harm as determined by the jury’ [citation], and should be used as the base figure in calculating the ratio for punitive damages.” (Id. at pp. 17-18; see also Pilimai v. Farmers Ins. Exchange Co. (2006) 39 Cal.4th 133, 147 [“The substance of a bad faith action in these first party matters is the insurer’s unreasonable refusal to pay benefits under the policy.”].)
In Simon,the California Supreme Court explained that the due process clause places limits on state court’s awards of punitive damages. (Simon, supra, 35 Cal.4th at p. 1171.) In State Farm, the United States Supreme Court applied three guideposts set forth in BMW of North America, Inc. v. Gore (1996) 517 U.S. 559 (BMW), for determining whether an award of punitive damages violates the right to due process: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.” (State Farm, supra, 538 U.S. at p. 418.)
In State Farm, the Supreme Court declined to impose a bright-line ratio which a punitive damage award could not exceed. (State Farm, supra, 538 U.S. at p. 425.) However, with respect to setting a ratio, the court explained that few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process. (Ibid.)
Like the United States Supreme Court in State Farm, the California Supreme Court in Simon, explained that reprehensibility is the most important factor of the reasonableness of a punitive damages award. (Simon, supra, 35 Cal.4th at p. 1180.) According to State Farm and Simon, reprehensibility is determined by considering five factors: (1) whether the harm was physical as opposed to economic; (2) whether the tortious conduct evinced indifference to or reckless disregard for the health or safety of others; (3) whether the plaintiff was financially vulnerable; (4) whether the conduct was repeated or isolated; and (5) whether the harm was the result of intentional malice, trickery or deceit or mere accident. (State Farm, supra, 538 U.S. at p. 419; Simon, supra, 35 Cal.4th at p. 1180.)
In Simon, the plaintiff alleged that the defendant committed promissory fraud in relation to a failed attempt to purchase an office building. (Simon, supra, 35 Cal.4th at p. 1166.) The jury awarded the plaintiff $5,000 in compensatory damages and $1.7 million in punitive damages. The California Supreme Court concluded the punitive damages award exceeded federal due process limitations and further held that the maximum award of punitive damages could be no more than $50,000, a 10 to 1 ratio in relation to the award of compensatory damages. (Ibid.)
In Simon, the court applied the five factors identified above to determining the reprehensibility of the defendant’s conduct. The court explained that the defendant’s conduct caused only economic harm and, thus, the first two factors were inapplicable. (Simon, supra, 35 Cal.4th at p. 1180.) As to the third factor – financial vulnerability of the victim – the court assessed the factor as neutral. (Ibid.)
With respect to the fourth factor – whether the conduct was repeated or isolated – the Simon court explained that the defendant’s conduct was based upon a single false promise (or set of promises) made in the letter of intent. The court concluded that this subfactor failed to support a high assessment of reprehensibility. (Simon, supra, 35 Cal.4th at p. 1180.)
The Simon court held that the last subfactor – whether the conduct was intentional – applied and weighed on the side of reprehensibility. (Simon, supra, 35 Cal.4th at p. 1181.).
In the present case, we begin with the reprehensibility subfactors. Like the Simon case, the first three subfactors are neutral or inapplicable. Here, the harm was economic; the tortious conduct did not evince a reckless disregard for the health or safety of others; and there is no evidence that plaintiffs were financially vulnerable.
However, Fidelity’s conduct did evince a reckless disregard for the rights of its insureds. As noted above, Fidelity’s conduct in conducting an inadequate investigation could be characterized as repeated, rather than an isolated incident. For seven months during the claim investigation process, Fidelity refused to properly investigate the nature of plaintiffs’ losses. In addition, Fidelity’s first estimate was almost half of the amount determined by the jury to constitute actual cash value. Then, each of Fidelity’s subsequent estimates knowingly left a number of items open. Fidelity then knowingly used an inadequate estimate to calculate and pay plaintiffs for the actual cash value loss.
Finally, with respect to the last subfactor, plaintiffs’ harm was not the result of a mere accident. Instead, Fidelity’s conduct evinced a conscious disregard for the rights of plaintiffs.
The compensatory damages award in this case was purely economic and did not contain an element of damages for emotional distress. According to Simon, due process permits a higher ratio between punitive damages and a small compensatory award for purely economic damages. (Simon, supra, 35 Cal.4th at p. 1189.)
Given the foregoing analysis, as well as the fact that the Simon court approved a 10 to 1 ratio in that case, we cannot say here that the award here with a 7 to 1 ratio is constitutionally excessive under the due process clause.
E. Plaintiffs’ Counsel Did Not Engage in Prejudicial Misconduct During Closing Argument of the Punitive Damages Phase of the Trial
Fidelity asserts that plaintiffs’ counsel committed prejudicial misconduct during closing argument of the punitive damages phase of the trial. We disagree.
In this case, we address only those portions of plaintiffs’ counsel’s closing argument to which Fidelity timely objected. (Horn v. Atchison, T. & S.F. Ry. Co. (1964) 61 Cal.2d 602, 610 [“Generally a claim of misconduct is entitled to no consideration on appeal unless the record shows a timely and proper objection and a request that the jury be admonished.”].) Specifically, Fidelity contends that plaintiffs’ counsel committed misconduct by: (1) referring to other wildfire claims; (2) noting that Fidelity did not have a representative at trial; and (3) making references to criminal penalties for fraudulent conduct.
The trial court denied Fidelity’s motion for a mistrial based upon the alleged misconduct of plaintiffs’ counsel during closing argument. The trial court found that there was no prejudice. The court explained that because it sustained Fidelity’s objections to the references to other claims, the jury saw that the trial court rejected that argument. The court also noted that when it sustained Fidelity’s objections, plaintiffs’ counsel stayed away from the objectionable argument. The court found that plaintiffs’ counsel did not go into any substantive areas about other purported claims.
During closing argument, counsel is permitted wide latitude to discuss the merits of a case and to argue all reasonable inferences from the evidence. (Nishihama v. City and County of San Francisco (2001) 93 Cal.App.4th 298, 305.)
We have reviewed the entire closing argument of plaintiffs’ counsel, including the portions to which the trial court sustained Fidelity’s objections. There, counsel first established that based upon adjuster Madrigal’s testimony, any Fidelity insured could expect their claim to be handled in a fashion similar to the claim handling practice in this case. Plaintiff’s counsel then made three statements concerning how such conduct could harm other insureds and also made reference to hundreds of claims. The trial court immediately sustained Fidelity’s objections.
Like the trial court, we see no prejudice arising from this closing argument. First, the essence of counsel’s argument focused upon whether Fidelity’s conduct could be characterized as reprehensible. The argument concerned whether Fidelity’s conduct was repeated or isolated. Moreover, given the trial court’s strict control of closing argument, the sustaining of Fidelity’s objections showed the jury that it was not to credit such argument.
We see no prejudice arising from plaintiffs’ counsel’s reference to the fact that Fidelity did not have a representative at trial. Counsel made that statement in the context of asking the jury to send a message to the Fidelity board of directors that such claims handling practices like those at issue in this case are not to be tolerated. The trial court immediately sustained Fidelity’s objection, thus again indicating to the jury that such argument was not to be considered.
Finally, plaintiffs’ counsel made an oblique reference to the fact that certain crimes of fraud may carry a criminal penalty. As instructed by State Farm and Simon, supra, one of the factors for determining the excessiveness of an award of punitive damages is the existence of certain civil penalties for such conduct. Thus, this argument was linked to the reprehensibility analysis. In addition, the trial court immediately sustained Fidelity’s objection.
The record supports the conclusion that plaintiffs’ counsel’s closing argument did not improperly inflame the jury. Plaintiffs’ counsel sought a punitive damage award of $7.3 to $14.6 million. The jury, however, awarded plaintiffs approximately $5.1 million in punitive damages. On this record, we cannot conclude that it is reasonably probable that Fidelity would have achieved a more favorable result absent the allegedly objectionable portions of plaintiffs’ counsel’s closing argument. (Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 802-803.)
F. The Award of Brandt Attorney Fees as Damages Supports the Award of Punitive Damages
Fidelity asserts that compensatory tort-related damages (e.g., damages for emotional distress) are a necessary element of the bad faith tort and that because the jury did not award such tort damages, plaintiffs did not establish an essential element of the tort. We reject this assertion.
In Brandt, the California Supreme Court held that when an insurer tortiously withholds policy benefits, attorney’s fees reasonably incurred to compel the payment of those policy benefits are recoverable as damages resulting from the insurer’s tortious conduct. (Brandt, supra, 37 Cal.4th at p. 815.)
In this case, during the liability phase of the trial, the parties stipulated that the trial court would determine Brandt attorney fees after trial in the event that the jury found Fidelity acted in bad faith. Then, following the punitive damages phase of the trial, the trial court awarded approximately $64,000 in Brandt attorney fees. Thus, the trial court awarded plaintiffs tort-related damages.
Notably, in Brandt, the Supreme Court noted that this was the preferred method for determining the amount of such tort-related damages: “Since the attorney’s fees are recoverable as damages, the determination of the recoverable fees must be made by the trier of fact unless the parties stipulate otherwise. [Citation.] A stipulation for a postjudgment allocation and award by the trial court would normally be preferable since the determination then would be made after completion of the legal services [citation], and proof that otherwise would have been presented to the jury could be simplified because of the court’s expertise in evaluating legal services.” (Brandt, supra, 37 Cal.3d at pp. 819-820.)
G. The Calculation of Brandt Attorney Fees Was Not Erroneous
Fidelity asserts that the award of Brandt attorney fees was erroneous because plaintiffs did not present evidence of the reasonable value of the services performed by defendant’s attorneys to recover the policy benefits. In the context of this case, we disagree.
As noted, in Brandt, supra, the Supreme Court explained that to make an insured whole, attorney’s fees reasonably incurred to compel the payment of policy benefits are recoverable as tort damages resulting from an insurer’s tortious conduct. The Brandt court cautioned: “The fees recoverable, however, may not exceed the amount attributable to the attorney’s efforts to obtain the rejected payment due on the insurance contract. Fees attributable to obtaining any portion of the plaintiff’s award which exceeds the amount due under the policy are not recoverable.” (Brandt, supra, 37 Cal.3d at p. 819.)
Here, plaintiffs did not present evidence showing the amount of time their attorneys spent on recovering the policy benefits. Instead, plaintiffs presented the contingency fee agreement showing that plaintiffs would pay their attorneys 40 percent of any recovery. The trial court then used the contingency fee agreement as the basis to award plaintiffs as Brandt fees 40 percent of the policy benefit (i.e., $160,956.62) obtained by plaintiffs at trial for a fee award of $64,382.56. On this record, because the Brandt attorney fee award was based solely upon a percentage of the policy benefit obtained by plaintiffs, there is no indication that the trial court awarded plaintiffs attorney fees for recovering punitive damages or litigating whether Fidelity acted in bad faith.
This was the same method of calculating Brandt fees in Textron Financial Corp. v. National Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061, 1074 [“Plaintiff retained legal counsel under an agreement requiring it to pay counsel 40 percent of all amounts recovered in the case. After a lengthy discussion, the trial court limited the sum plaintiff could recover as damages under Brandt . . . to 40 percent of the amount recovered as policy benefits during the trial’s first phase. . . . [¶] . . . [¶] . . . The trial court did not err by limiting the damage award under Brandt . . . to the percentage specified in the parties’ contingency agreement.”].)
On remand, however, the trial court is directed to base the award of Brandt attorney fees on the compensatory damage award of $160,956.62 in the February 15, 2006 judgment. For the reasons stated above, the award of compensatory damages of $197,939.56 in the May 1, 2006 judgment cannot stand.
III. The Trial Court Did Not Abuse Its Discretion by Requiring Fidelity Adjuster Madrigal to Appear for Plaintiffs’ Case-In-Chief
Fidelity asserts that the trial court committed prejudicial misconduct by giving Fidelity a choice: (1) either produce out-of-state adjuster Madrigal as a live witness for each parties’ case-in-chief; or (2) both parties would have to present his testimony via his prior deposition. We disagree and conclude that the trial court did not abuse its discretion.
In Amoco Chemical Co. v. Certain Underwriters at Lloyd’s of London (1995) 34 Cal.App.4th 554, the court held that pursuant to Code of Civil Procedure section 1989, a trial court did not have the authority to order a party to produce an out-of state witness for a trial in California. (Id. at p. 555.)
Contrary to Fidelity’s assertion in this case, the trial court did not order Fidelity to produce Madrigal. Instead, to avoid jury confusion, the court gave Fidelity a choice – either both parties could present Madrigal’s testimony live or both parties would have to present his prior deposition testimony. Given the concern for jury confusion and orderly trial proceedings, we cannot say that this was an abuse of discretion. (See Evidence Code section 302 [Except as otherwise provided by law, the court in its discretion shall regulate the order of proof.”].)
DISPOSITION
The judgment is affirmed in part and reversed in part. The award of $160,956.62 in economic damages is affirmed. We affirm the $1.6 million award of punitive damages, the $64,382.56 award of Brandt attorney fees, and the $23,776.48 award of costs. The award of $197,939.56 in economic damages is reversed.
Upon remand, the trial court is directed to enter a new and different order consistent with this opinion. Costs on appeal are awarded to plaintiffs.
We concur: KLEIN, P. J., CROSKEY, J.