California Casualty Management Co. v. Martocchio

533 is to discourage willful torts, by denying coverage for willful wrongs. (B & E Convalescent Center v. State Compensation Ins. Fund, supra, 8 Cal.App.4th at pp. 93-94.)

The Supreme Court’s recent ruling in J. C. Penney, supra, has clarified the meaning of the statute. In a prior case, Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865 , 887 [ 151 Cal.Rptr. 285 , 587 P.2d 1098 ], it seemed to suggest that a “wilful act” for which insurance coverage is proscribed by Insurance Code section 533 is one committed with a “ ‘preconceived design to inflict injury.’ ” Thereafter, various appellate courts held a willful act described by section 533 was one involving a general intent to commit that act coupled with a subjective intent to harm or with a specific intent to injure or harm. (Cf. Republic Indemnity Co. v. Superior Court (1990) 224 Cal.App.3d 492 , 501 [ 273 Cal.Rptr. 331 ]; B & E Convalescent Center v. State Compensation Ins. Fund, supra, 8 Cal.App.4th at p. 94, and cases there cited.) Martocchio relies on these and similar authorities in urging that, absent a specific finding his conduct in filing the lawsuit was willful, i.e., was coupled with his subjective intent thereby to harm Chronicle, his conduct, though concededly intentional, is nonetheless within the ambit of indemnity under California Casualty’s policy.

J. C. Penney has clarified the Clemmer decision in two important particulars. First, “the Clemmer discussion of a ‘preconceived design’ was limited to the insured’s mental capacity to commit the wrongful act [murdering Dr. Clemmer by shooting him five times].” (J. C. Penney Casualty Ins. Co. v. M. K., supra, 52 Cal.3d at p. 1023.) Second, “Clemmer does not require a showing by the insurer of its insured’s ‘preconceived design to inflict harm’ when the insured seeks coverage for an intentional and wrongful act if the harm is inherent in the act itself.” (Id. at p. 1025, italics added.)

In short, J. C. Penney holds that Insurance Code section 533 precludes coverage where the insured’s conduct (child molestation in that case) “is always intentional . . . , always wrongful, and . . . always harmful.” (52 Cal.3d at p. 1025, original italics, underscored italics added; Fire Ins. Exchange v. Altieri (1991) 235 Cal.App.3d 1352 , 1358 [ 1 Cal.Rptr.2d 360 ] [“The emphasis [on whether an act is uninsurable under section 533] is on the wrongfulness of the act committed by the insured, not on the insured’s subjective expectation of injury [to another].”]; B & E Convalescent Center v. State Compensation Ins. Fund, supra, 8 Cal.App.4th at pp. 98, 99 [A termination of employment “in violation of antidiscrimination statutes or other fundamental and substantial public policies is inherently harmful” and “must be held wrongful as a matter of law. ... It would be unreasonable,

mischievous and improper if section 533 . . . were construed in any way other than to deny insurance coverage in the most certain and unambiguous terms for willful and intentional acts that contravene ‘fundamental policies that are delineated in constitutional or statutory provisions’ [citation].” Italics in original.].)

B. Application of Insurance Code Section 533 to Sanctions Under Code of Civil Procedure Section 128.5

It is certainly self-evident and undisputed here that the filing of a lawsuit is always an intentional act. No one urges that Martocchio accidentally undertook such action. Further, examination of the standards for the imposition of sanctions under Code of Civil Procedure section 128.5 reveals that, in a case such as this one, Insurance Code section 533 bars the attempt to shift to an insurer the losses occasioned by the “wilful act” of a violation of section 128.5.

The term “wilful act” means “something more than the mere intentional doing of an act constituting [ordinary] negligence. . . . [Citation.]” (J. C. Penney Casualty Ins. Co. v. M. K., supra, 52 Cal.3d at p. 1021, internal quotation marks omitted), or the intentional violation of a statute (B & E Convalescent Center v. State Compensation Ins. Fund, supra, 8 Cal.App.4th at p. 94), i.e., some act more blameworthy than ordinary negligence (State Farm Fire & Casualty Co. v. Drasin (1984) 152 Cal.App.3d 864 , 868 [ 199 Cal.Rptr. 749 ]). “[S]ection 533 does not preclude coverage for acts that are negligent or reckless.” (J. C. Penney Casualty Ins. Co. v. M. K., supra, 52 Cal.3d at p. 1021.) Insurance Code section 533 does preclude insurance coverage, as a matter of public policy, for a wrongdoer from his act of wrongdoing (Dart Industries, Inc. v. Liberty Mutual Insurance Co. (9th Cir. 1973) 484 F.2d 1295 , 1298); or for fines or restitution imposed as a result of a criminal conviction, or for civil proceedings prosecuted by the state in the exercise of its police power and regulatory authority conferred by statute (Jaffe v. Cranford Ins. Co. (1985) 168 Cal.App.3d 930 , 934-935 [ 214 Cal.Rptr. 567 ]).

While the parties have not cited and our own research has not disclosed any published decisions precisely on point, it is clear that Insurance Code section 533 and the public policy it represents bar the attempt to shift a court-imposed sanctions award to an insurer. (See J. C. Penney Casualty Ins. Co. v. M. K., supra, 52 Cal.3d at p. 1021.)

Our conclusion that Martocchio’s insurance policy provides no coverage for these sanctions is reinforced by the trial court’s proper application, in imposing sanctions, of the factors elucidated in Code of Civil Procedure section 128.5.

Code of Civil Procedure section 128.5 provides a means of ordering one party to pay another’s “reasonable expenses, including attorney’s fees”

While arguably sanctions may serve compensatory purposes similar to those of a malicious prosecution action (cf. Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863 , 873-874 [ 254 Cal.Rptr. 336 , 765 P.2d 498 ]), sanctions are often imposed and calculated without regard to the need to compensate the opposing party, but for the purpose of deterrence (see, e.g., Bank of California v. Varakin (1990) 216 Cal.App.3d 1630 , 1638-1639 [ 265 Cal.Rptr. 666 ]). Sanctions imposed under Code of Civil Procedure section 128.5 “to pay any reasonable expenses, including attorney’s fees” always serve an important deterrent goal, regardless of the need for compensation, which makes them in some ways analogous to an award of punitive damages. ( In re Marriage of Flaherty, supra, 31 Cal.3d at pp. 648-649.) This deterrence function would, obviously be vitiated if a litigant could simply engage in bad faith tactics without fear of the consequences, by shifting any court-imposed sanctions onto his insurer. (See Papadakis v. Zelis (1991) 230 Cal.App.3d 1385 , 1389 [ 282 Cal.Rptr. 18 ] [Court-imposed sanctions may not be avoided by the expedient of filing a bankruptcy petition.].)

Further, Martocchio’s proposed analogy to malicious prosecution cases does not withstand analysis because, as Justice Molinari ruled in Maxon v. Security Ins. Co. (1963) 214 Cal.App.2d 603 , 615, Insurance Code section 533 also bars coverage for a malicious prosecution action arising from the “wilful” act of an insured. A bad faith action or tactic sanctioned under Code of Civil Procedure section 128.5 is, as we have pointed out, “wilful” per se. Martocchio can only respond by urging that Maxon should not be followed on its interpretation of section 533; he also attempts to distinguish Maxon because the policy in that case did not specifically cover malicious prosecution claims, as his policy purports to do. Maxon, however, correctly held that section 533 bars insurance recovery for any willful acts—as a matter of statutory, not contractual, interpretation. (Accord, J. C. Penney Casualty Ins. Co. v. M. K., supra, 52 Cal.3d at pp. 1020, fn. 9, 1021.)

Martocchio also cites a number of cases in which (although the issue was not explicitly raised for decision) courts apparently assumed coverage might extend under some circumstances to claims made in whole or in part for malicious prosecution. (See, e.g., City Products Corp. v. Globe Indemnity Co. (1979) 88 Cal.App.3d 31 , 35, 34 [ 151 Cal.Rptr. 494 ] [§ 533 barred recovery of punitive damages imposed for malicious prosecution (citing Maxon v. Security Ins. Co., supra, 214 Cal.App.2d 603 ); the insurer had already paid the much smaller compensatory award, apparently without

protest.]; cf. also Harbor Ins. Co. v. Central National Ins. Co. (1985) 165 Cal.App.3d 1029 ,1043 [ 211 Cal.Rptr. 902 ] [A malicious prosecution did not occur within the policy coverage because it happened prior to the policy’s issuance.]; accord, Zurich Ins. Co. v. Peterson (1986) 188 Cal.App.3d 438 , 448 [ 232 Cal.Rptr. 807 ].) These cases do not assist Martocchio, since none of them endorsed his argument; in fact, their rationales are consistent with our conclusion that Insurance Code section 533 bars coverage where the insured’s own “wilful act,” as opposed to a negligent act, is the basis of liability.

Next, Martocchio argues that summary judgment might have been improper since there was no proof he filed his frivolous action with a wrongful intent. He cites cases which analyzed the issues without the benefit of our Supreme Court’s recent decision in J. C. Penney Casualty Ins. Co. v. M. K., supra, 52 Cal.3d 1009 —such as State Farm Fire & Casualty Co. v. Eddy (1990) 218 Cal.App.3d 958 , 972 [ 267 Cal.Rptr. 379 ], which held that there might be insurance coverage for herpes contracted during consensual sexual intercourse, if the insured did not know he had herpes and did not act with intent to harm his partner. Needless to say, that case is readily distinguishable. The act of consensual sexual intercourse is not, as bad faith actions or tactics here are, always wrongful and harmful, rather the reverse: Only if the insured knew he had contagious herpes would his act causing damage have been “wilful” within the meaning of Insurance Code section 533.

Equally unavailing is Martocchio’s citation to United Pacific Ins. Co. v. McGuire Co. (1991) 229 Cal.App.3d 1560 , 1566-1567 [ 281 Cal.Rptr. 375 ], a case which held there may be coverage for “mental distress” suffered by an employee upon his discharge, subject to the requirement of Insurance Code section 533 that the infliction of severe mental distress not be willful, expected, or intended. (But cf. B & E Convalescent Center v. State Compensation Ins. Fund, supra, 8 Cal.App.4th at pp. 98-99 [After the Supreme Court’s decision in J. C. Penney, section 533 bars coverage for an employer’s willful act in wrongfully discharging an employee for proscribed discriminatory reasons.].) Whatever may be the case with the allegedly wrongful discharge of an employee, as we have observed, the bad faith filing of a frivolous lawsuit is always intentional, wrongful, and harmful; and is, hence, “wilful” within the meaning of section 533. (See J. C. Penney Casualty Ins. Co. v. M. K., supra, 52 Cal.3d at p. 1025 [There is no need to prove that a child molester acted with intent to injure his victim, since child molesting is always wrongful and willful as a matter of law.].)

Additionally, the record in this case independently shows the trial court imposed sanctions for bad faith actions by Martocchio which could in no

way be, as he suggested, characterized as merely negligent. The finding of bad faith conclusively excludes negligence as the cause of the actions sanctioned under Code of Civil Procedure section 128.5. As our prior opinion recounted, it was uncontested that Martocchio was, in fact, under investigation by federal authorities for arson at the time the news report claimed he was under investigation. It was uncontested that more than a dozen suspicious fires occurred on properties owned by Martocchio and his associates, and that Martocchio received large insurance proceeds for damage caused by those fires. It was uncontested that a close business associate of Martocchio also had accused Martocchio of committing arson, and had recounted a specific method Martocchio and his associates used, involving fumes from paint thinner, in order to avoid detection. Martocchio also resisted, without good cause, the legitimate attempts of Chronicle in the prior action to conduct discovery as to the circumstances of the fires. Martocchio was repeatedly sanctioned by the trial court for this bad faith resistance to discovery in the lawsuit he himself brought, but Martocchio persisted in his behavior. He presented absolutely no timely evidence to the trial court which would indicate he had been libeled, nor any evidence indicating a good faith belief in the merit of his claims. The evidence also showed he threatened to blow out the brains of a witness if the witness did not change his story, and forced the witness to recant at gunpoint. These facts and activities, which amply supported the trial court’s order imposing sanctions, were necessarily known to Martocchio and necessarily willfiil and intentional, not negligent; no trial court could reasonably conclude to the contrary—and the trial court here plainly did not.

Finally, Martocchio argues that providing insurance coverage for a sanctions award would serve to increase the compensation available to parties damaged by frivolous lawsuits. Any marginal benefit to be achieved by providing a solvent insurer, as a target behind a litigant who is too impecunious to pay sanctions but not too impecunious to have insurance, is well outweighed by the loss of deterrence which would occur if parties believed they could engage in spiteful and frivolous litigation without worrying about any financial consequences to themselves. (Cf. Bank of the West v. Superior Court (1992) 2 Cal.4th 1254 , 1267 [ 10 Cal.Rptr.2d 538 , 833 P.2d 545 ] [“If insurance coverage were available for monetary awards under the Unfair Business Practices Act, a person found to have violated the act would simply shift the loss to his insurer . . . .”].) We reject an extension of the scope of insurance coverage so as to foist upon the insurers of this state a duty to respond in damages for the bad faith frivolous litigation conducted by their insureds in California courts.

The judgment is affirmed.

Kline, P. J., and Smith, J., concurred.

On January 29, 1993, the opinion was modified to read as printed above.