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Chen v. Interinsurance Exchange of the Automobile Club

C.A. 2nd

06-19-2008

B194345

Cite as 08 C.D.O.S. 7657

PO-JEN CHEN et al, Plaintiffs and Appellants,

v.

INTERINSURANCE EXCHANGE OF THE AUTOMOBILE CLUB, Defendant and Respondent.

No. B194345

In the Court of Appeal of the State of California

Second Appellate District

Division Eight

(Los Angeles County Super. Ct. No. BC 315469)

APPEAL from the judgment of the Superior Court of Los Angeles. A. Workman,

Judge. Reversed and remanded.

Counsel

Law Office of Henry B. La Torraca and Henry B. La Torraca for Plaintiffs and

Appellants.

Ford, , Haggerty & Behar, L. and K. Michele for

Defendant and Respondent.

Filed June 19, 2008

OPINION

Po-Jen Chen and Fang-Mei Lin appeal from that portion of the court’s judgment

awarding costs under Code of Civil Procedure section 998 to Interinsurance

Exchange of the Automobile Club. We reverse and remand.

FACTS AND PROCEEDINGS

Po-Jen Chen and Fang-Mei Lin own their home in San and own a second

house in San Marino. In May 2003, their properties were damaged in two separate

incidents. Their San home suffered extensive water damage when an

upstairs bathroom water line broke, and their San Marino property suffered

damage from high winds. Respondent Interinsurance Exchange of the Automobile

Club insured both houses against property damage. Appellants filed claims with

respondent under those insurance policies.

In May 2004, appellants sued respondent, alleging breach of the policies and bad

faith. According to the lawsuit, respondent mishandled appellants’ claims by,

among other things, authorizing shoddy repair work, making low ball offers,

failing to pay certain benefits such as an adequate temporary housing stipend,

and refusing to properly remediate mold contamination. While the lawsuit was

pending in August 2005, appellants’ San home suffered new water damage

in the kitchen separate from the earlier bathroom flooding. Appellants filed a

new claim with respondent for insurance coverage for the kitchen. It is

undisputed the kitchen flooding is not part of this lawsuit.[FOOTNOTE 1]

In September 2005, respondent made a statutory offer of settlement to appellants

under Code of Civil Procedure section 998.[FOOTNOTE 2] Respondent’s offer

stated:

“[Respondent] offers to compromise the above-entitled action for both plaintiffs

in the total amount of $251,000.00. [¶]… [¶] This offer is conditioned upon

plaintiffs executing a dismissal with prejudice of the action, as well as a

general release of all claims in lieu of an entry of judgment against

defendants.”

Appellants rejected the offer.

The case went to trial in 2006. By special verdict, a jury found respondent

fully paid all of appellants’ covered losses under the insurance polices for the

wind damage and bathroom flooding. But, the jury additionally found that

respondent acted unreasonably in handling appellants’ claims. For respondent’s

unreasonable conduct, the jury awarded appellants $8,500 in economic damages and

$141,500 in non-economic damages.

Based on the total damages award of $150,000 being less than the $251,000 it had

offered to settle, respondent moved under section 998 to recover the costs of

its expert witnesses and its postoffer litigation and trial costs. Respondents

further moved that the court deny appellants’ attempt to recover the costs

appellants incurred after they had rejected the settlement offer. Opposing

respondent’s request, appellants argued the settlement offer was invalid under

section 998 because, one, respondent had not allocated the settlement proceeds

between appellants and, two, had conditioned the offer on both appellants’

accepting it. The court agreed with respondent and rejected appellants’

contentions.

The parties thereafter filed costs bills. In the meantime, appellants moved for

a new trial and renewed their objection to respondent’s attempt to recover its

costs. In support of their objection, appellants argued the 998 offer was

invalid because it had required them to release “all claims,” which they

interpreted as including damage from the separate kitchen flooding incident that

had not been part of their lawsuit. The court rejected appellants’ argument. It

thereafter awarded more than $310,000 in postoffer costs to respondent and

almost $9,800 in pre-offer costs to appellants. Taking into account the $150,000

jury award for appellants, the costs awards resulted in a net recovery to

respondent of $150,949.79. Appellants appeal from the awards.[FOOTNOTE 3]

DISCUSSION

As a rule, prevailing parties, such as appellants here, may recover their

litigation and trial costs. (§ 1032.) When section 998 applies, it changes that

rule. Under that statute, if plaintiffs reject a defendant’s offer to compromise

and then fail to win a more favorable judgment, the plaintiffs cannot recover

their postoffer costs and must pay the costs the defendant incurred after the

offer.[FOOTNOTE 4]

An offer to settle under section 998 must have several features to be valid. For

example, it must not dispose of any claims beyond the claims at issue in the

pending lawsuit. (Valentino v. Elliott Sav-On Gas, Inc. (1988) 201 Cal.App.3d

692, 696–697 (Valentino).) That limitation exists because of the difficulty in

calculating whether a jury award is more or less favorable than a settlement

offer when the jury’s award encompasses claims that are not one and the same

with those the offer covers. (Valentino at p. 698; see also Weil & Brown, Cal.

Practice Guide: Civil Procedure Before Trial (The Rutter Group) ¶ 12:595,

p. 12(II)-18 [“To trigger the potential § 998 penalties, the terms and

conditions must be sufficiently certain to be capable of valuation. Otherwise,

it may not be possible to determine whether any recovery at trial is ‘more

favorable.’ [Valentino v. Elliott Sav-On Gas, Inc., [supra], 201 CA3d 692,

700–701, 247 CR 483,

488–$15,000 offer was conditioned on release of claims other than those being

litigated: value of those claims was uncertain, rendering $15,000 offer

uncertain].”)

We independently review whether respondent’s 998 settlement offer was valid.

(Fassberg Const. Co. v. Housing Authority of City of Los Angeles (2007)

152 Cal.App.4th 720, 765.) In our review, we interpret against respondent any

ambiguity in the offer. (Barella v. Exchange Bank (2000) 84 Cal.App.4th 793,

799.) Appellants’ lawsuit alleged respondent mishandled appellants’ claims for

water damage to one property from a broken upstairs bathroom pipe and for wind

damage to a second property; the kitchen flooding was not part of the lawsuit.

In settlement, respondent offered appellants $251,000. In return for its

payment, respondent demanded a “general release of all claims.”

Appellants contend the phrase “all claims” was, at the very least, ambiguous

because of its pending claim for the kitchen flooding.[FOOTNOTE 5] We agree. The

following hypothetical scenario illustrates why: Suppose appellants had accepted

respondent’s offer and signed a general release of all claims, but then tried to

prosecute a lawsuit involving water damage in the kitchen that both sides knew

about when appellants settled the lawsuit here. One can imagine respondent

arguing appellants’ release of “all claims” barred a new lawsuit involving the

kitchen. Strengthening respondent’s argument, the Civil Code’s definition of a

“general release” would favor respondent’s assertion. Civil Code section 1542

provides that a general release does not affect unknown claims; by implication,

a general release thus covers all known claims. (See § 1542 [“A general release

does not extend to claims which the creditor does not know or suspect to

exist… .”].) Without deciding whether respondent’s argument would prevail, one

can anticipate that a future court would not reject its argument as frivolous.

And, what is instructive is the argument pivots on the ambiguity of whether “all

claims” involves only the two claims of the lawsuit here or the three claims –

including kitchen damage – that appellants made under their insurance

policies.[FOOTNOTE 6]

Respondent contends Goodstein v. Bank of San Pedro (1994) 27 Cal.App.4th 899

(Goodstein) shows appellants are mistaken in seeing ambiguity in the offer.

Goodstein establishes that a general release can be part of a valid 998 offer.

But Goodstein is distinguishable because its general release did not apply to

“all claims.” The settlement offer in Goodstein proposed:

“ ‘In full settlement of this action, [defendant] hereby offers to pay

[Goodstein] the total sum of $150,000 in exchange for each of the following: [¶]

1. The entry of a Request for Dismissal with prejudice on behalf of [Goodstein]

in favor of [defendant]; [¶] 2. The execution and transmittal of a General

Release by [Goodstein] in favor of [defendant]; [¶] 3. Each party is to bear

their own respective costs and attorney’s fees.” (Goodstein at p. 905.)

Because the Goodstein release did not use language that might suggest the offer

involved more than the claims in the pending lawsuit, the offer was valid.

(Goodstein, at p. 907 [“the offer reasonably cannot be construed to apply to

other litigation contemplated by Goodstein.”].) Here, in contrast, appellants

filed three claims with respondent for insurance coverage. Moreover, two of the

claims involved the same type of damage — one inside the lawsuit for water

damage in the upstairs bathroom, and one outside the lawsuit for water damage in

the kitchen. Appellants’ assertion of ambiguity in the scope of respondent’s

settlement offer is therefore well-taken.

Respondent contends “all claims” reasonably meant only the two claims being

litigated, and it was unreasonable to interpret it as meaning anything else. For

the reasons we have just stated, we disagree. Furthermore, respondent’s

contention relies on selectively quoting the settlement offer. In asserting the

proposed general release applied only to the wind damage and bathroom flooding,

respondent argues that the offer’s intent was “to compromise the above-entitled

action” by seeking dismissal “of the action” and a general release “in lieu of

an entry of judgment against defendant.” But in its recitation of the offer’s

language, respondent gamely tries to leap over the phrase “all claims,” which

lies in the middle of the sentence it emphasizes as follows (we italicize what

respondent quotes and highlight what it omits): “This offer is conditioned upon

plaintiffs executing a dismissal with prejudice of the action, as well as a

general release of all claims in lieu of an entry of judgment against

defendants.” (Italics added.) When not ignoring the word “all,” respondent tries

to dismiss it as inconsequential,[FOOTNOTE 7] but here that word makes all the

difference insofar as creating ambiguity.

DISPOSITION

The trial court is directed to vacate its costs award to respondent, and to

recalculate appellants’ costs award as a prevailing party without regard to

respondent’s 998 offer to settle. Appellants to recover theirs cost on

appeal.[FOOTNOTE 8]

RUBIN, J.

WE CONCUR: COOPER, P. J.FLIER, J.

FN1. In September 2006, appellants filed a separate lawsuit against respondent

for respondent’s handling of appellants’ insurance claim involving the kitchen.

(Case No. BC 358338.)

FN2. All further undesignated section references are to the Code of Civil

Procedure.

FN3. In connection with the appeal, we have granted respondent’s motion to

augment the record on appeal.

FN4. Section 998 states: “. . . [A]ny party may serve an offer in writing upon

any other party to the action to allow judgment to be taken or an award to be

entered in accordance with the terms and conditions stated at that time. The

written offer shall include a statement of the offer, containing the terms and

conditions of the judgment or award, and a provision that allows the accepting

party to indicate acceptance of the offer… [¶]… [¶] ©(1) If an offer made by a

defendant is not accepted and the plaintiff fails to obtain a more favorable

judgment or award, the plaintiff shall not recover his or her postoffer costs

and shall pay the defendant’s costs from the time of the offer. In addition… the

court… in its discretion, may require the plaintiff to pay a reasonable sum to

cover costs of the services of expert witnesses… .”

FN5. In fact, appellants appear to argue that the most reasonable interpretation

of the phrase “all claims” included the kitchen damage. They do not need to

prove this bolder assertion, however, to prevail on appeal because ambiguity in

the 998 offer is good enough to let appellants escape the offer’s cost-shifting

consequences. (Barella v. Exchange Bank, supra, 84 Cal.App.4th at p. 799 [“a

section 998 offer must be strictly construed in favor of the party sought to be

subjected to its operation”].)

FN6. Oftentimes legal writers use the terms “claim” and “cause of action”

interchangeably with no harm to anyone, but this case illustrates the hazard of

their use as synonyms in insurance litigation because “claim” has a particular

meaning in the insurance industry.

FN7. Respondent’s brief states:“[Appellants’] argument, which turns upon the one

word ‘all,’ is specious.”

FN8. Because we are reversing the cost award based on the 998 offer’s ambiguity,

we need not address appellants’ other contentions that the award was error.