MacGregor Yacht Corp. v. State Compensation Ins. Fund

Opinion

MacGregor Yacht Corporation (MacGregor) sued its workers’ compensation insurer, State Compensation Insurance Fund (SCIF), to

MacGregor’s experience modification factor, which is used to set its insurance premiums, was higher than the industry average. MacGregor blamed its high experience modification factor, and thus its high premiums, on SCIF’s improper overestimates of the amounts necessary for claims reserves and on SCIF’s inefficient and substandard handling of claims. MacGregor’s complaint alleged, inter alia, breach of contract, tortious breach of the implied covenant of good faith and fair dealing, and negligence. After the trial court dismissed the tort causes of action on the basis of the statute of limitations, it permitted MacGregor to amend its complaint to include a contractual claim for breach of the implied covenant of good faith and fair dealing. The parties then proceeded to a nonjury trial on the two contract claims, breach of express contract and breach of the implied covenant.

SCIF on appeal complains at various points about the purported misapplication of facts and disputes the significance of some of the facts adduced at trial, and MacGregor replies that substantial evidence supports the judgment. Nonetheless, as SCIF essentially raises legal issues and does not specifically contend on appeal that the judgment is not supported by substantial evidence (except as to one aspect discussed hereinafter), a detailed recitation of witness testimony and other evidence is unnecessary.

It is thus sufficient to quote the following from the trial court’s findings and reasoning in its statement of decision: “Plaintiff has established by a preponderance of the evidence that the defendant breached its contract with him by the way in which certain claims were handled during the term of his insurance contracts. In some of the instances, the reserves were set unreasonably high. In some cases, reserves were set at high amounts after the cases had been settled for substantially lessor [szc] amounts or after the defendant knew or should have known that the cost of the case would not merit the high amount of the reserve. Investigation of some of the claims was poorly done. There was no follow up investigation on many of the claims. Many of the claims were ‘post-termination’ claims where an employee never made any complaint of injury while employed but after having been laid off or fired claims various workers compensation injuries. These cases were eventually either abandoned by the employee claimant or settled for very small amounts of money by the defendant SCIF. Nevertheless, very

Breach of Express Contract

SCIF contends that its failure to investigate, defend or settle claims properly cannot as a matter of law support a theory of liability based on breach of an express contractual duty. It is undisputed that the terms of the insurance contract between the parties obligate SCIF to defend at its expense any workers’ compensation claim and give SCIF the right to investigate and settle these claims. However, contrary to SCIF’s incorrect assumption, its contractual obligations do not merely begin and end with a defense of any sort followed by payment of claims, regardless of the adequacy and promptness of its investigation of claims.

SCIF’s entire argument rests upon the following out-of-context sentence from this court’s opinion in Security Officers Service, Inc. v. State Compensation Ins. Fund (1993) 17 Cal.App.4th 887 , 894 [ 21 Cal.Rptr.2d 653 ]: “Because the policy language granting and imposing these rights [to defend, investigate and settle] and duty [to defend claims] says no more about how they are to be carried out, SCIF correctly argues that its challenged practices do not violate that language.” However, Security Officers also emphasized, in pertinent part, the following: “The policy specifically requires SCIF to ‘pay promptly when due to those eligible under this policy the benefits required [of plaintiff] by the workers’ compensation law.’ SCIF contends this language prescribes only a duty to disburse payments that have become due (presumably by and after adjudication or settlement), and therefore plaintiff’s allegations of slow and expensive claims resolution do not describe a breach of the obligation. That may or may not be true. Another facially permissible construction of the ‘prompt payment’ obligation is that it accrues when a sufficiently definite case of workers’ compensation liability is made out. Under that interpretation, plaintiff’s allegations of delay in resolving claims may signify violations. At this stage, the policy cannot necessarily be said to bear the more restricted meaning.” (Id. at pp. 893-894, italics added.)

As this court subsequently reiterated in Lance Camper Manufacturing Corp. v. Republic Indemnity Co. (1996) 44 Cal.App.4th 194 [ 51 Cal.Rptr.2d 622 ], “In regard to the insured’s express and implied contract claims, we concluded in Security Officers that these survived demurrer. [T]he insurer’s alleged ‘pattern of failing to pay claims promptly, defend them diligently, or assign them reasonable reserves, followed by improperly failing to pay plaintiff dividends’ (17 Cal.App.4th at p. 893) could amount to a breach of the policy’s express terms.” (Lance Camper, supra, at p. 201, italics added;

■As in the above cited cases, MacGregor not only challenged in its cause of action for breach of implied covenant the manner in which SCIF mishandled claims, but. also by its cause of action for breach of express contract challenged SCIF’s failure to perform. Indeed, for example, the trial court found there was “no follow-up investigation of many of the claims,” and in some instances SCIF neglected to deny the claims within the statutory 60 days. Obviously, the failure to investigate and the failure to deny claims when it should have reflected breaches of the contract, as opposed to the duty imposed by law that the insurer act fairly and in good faith.

Breach of the Implied Covenant of Good Faith and Dealing

SCIF contends that its reserving practices, its claims handling practices, and its restriction of employer access to claims files did not violate the implied covenant of good faith and fair dealing. Such assertions are without merit.

“ ‘Because the powers so confided in SCIF’s discretion will impact the degree of plaintiff’s primary burden under the policy, it appears logical that the covenant of good faith and fair dealing indeed requires SCIF to conduct its claims resolution and reserve allocation processes with good faith regard for plaintiff’s interests.’ ” (Tricor California, Inc. v. State Compensation Ins. Fund, supra, 30 Cal.App.4th at p. 240.) “[T]he alleged mishandling of claims by an insurer occasioned by the hiring of inadequate legal and medical advisers and insufficient defense investigation and resolution of pending claims implicates the insurance policy’s implied covenant of good faith and fair dealing, which ‘imposes limits on the insurer’s latitude in discharging its contractual right or duty to defend, investigate and settle claims.’ ” (Lance Camper Manufacturing Corp. v. Republic Indemnity Co., supra, 44 Cal.App.4th at pp. 201-202.)

Improper Reserving Practices by SCIF

As to SCIF’s reserving practices, it argues that it is entitled to wide latitude because adequate reserves are essential to its solvency and it must prudently avoid the risk of “under reserves” and unlawful practices, and that the liberal nature of the local WCAB cannot be ignored when setting reserves. We acknowledge that “courts are unqualified to second-guess the determinations made by an insurer . . . as to the amount of funds that are reasonably necessary to assure adequate funds to cover catastrophic

SCIF also contends that its unique “maximum probable potential” reserving language was reasonable, and that the failure to disclose to MacGregor its change in reserving language was irrelevant. Substantial evidence, from the testimony of SCIF’s government liaison officer, established that in changing its reserving philosophy, SCIF gave no consideration to the interests of its insureds. This was improper. (Silberg v. California Life Ins. Co., supra, 11 Cal.3d at p. 460.)

Moreover, without any specific evidence that SCIF’s reserves were somehow inadequate to cover its obligations, in July 1989 SCIF approved and adopted a new company policy which modified the concept of adequate reserves. Previously adequate reserves were reserves based on “a realistic evaluation of all information in the file which reflects the reasonably anticipated final costs.” Such an approach satisfied SCIF’s obligation, pursuant to Insurance Code section 923.5, to have a reserve for “all losses and claims for which the insurer may be liable.”

However, SCIF’s new reserving language defined adequate reserves as the “maximum probable potential cost.” And, in “questionable cases” under the new policy (e.g., where there is an issue as to whether the injury arose out of the course of employment), “estimates should reflect full liability until a W.C.A.B. judge has ruled that [SCIF] has less than full liability.” The “maximum probable potential” standard means that the adjuster reserves for the absolute most SCIF may have to pay without any exercise of discretion or judgment as to the realistic value of each claim. The unreasonableness of such a policy and its adverse impact on insureds are highlighted by SCIF’s admission that the greater the claim reserves, the greater the insured’s loss history, which in large part determines the insured’s experience modification factor—which in turn is used by SCIF to calculate the insured’s premium. Claim reserves also impact whether an insured receives a dividend or not.

Improper Claims Handling Practices by SCIF

As to SCIF’s claims handling practices, it challenges the sufficiency of the evidence to support the court’s finding that SCIF breached the implied covenant of good faith and fair dealing by failing to investigate, defend and settle claims reasonably. SCIF improperly attempts to rehash conflicts in the evidence, ignoring the well established principle that an appellate court may not reweigh the evidence or determine the credibility of witnesses where the evidence at trial was in conflict. (See Western States Petroleum Assn. v. Superior Court (1995) 9 Cal.4th 559 , 571 [ 38 Cal.Rptr.2d 139 , 888 P.2d 1268 ].) To the extent the evidence gives rise to conflicting reasonable inferences, which SCIF in large part acknowledges in its footnote discussions of contrary evidence, the trial court’s finding supported by substantial evidence is binding on an appellate court. (Rubin v. Los Angeles Fed. Sav. & Loan Assn. (1984) 159 Cal.App.3d 292 , 298 [ 205 Cal.Rptr. 455 ].)

SCIF also complains about an alleged lack of causation as to damages. First, its reliance upon Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169 [ 231 Cal.Rptr. 791 ], for the notion that MacGregor should have conducted a “trial-within-a-trial” as to each worker’s compensation claim to establish that SCIF’s failure to investigate claims caused its damages, is misplaced. The trial-within-a-trial formula is applicable in a wide variety of professional malpractice cases predicated upon negligence. (Mattco Forge, Inc. v. Arthur Young & Co. (1997) 52 Cal.App.4th 820 , 831-837 [ 60 Cal.Rptr.2d 780 ].) “Because the present action is not predicated on negligence, it is not analogous to a professional malpractice action, and Lesher is not controlling.” (Amato v. Mercury Casualty Co. (1997) 53 Cal.App.4th 825 , 837 [ 61 Cal.Rptr.2d 909 ].)

Denial of Access to Claims Files

The final basis for SCIF’s breach of the implied covenant of good faith and fair dealing was its refusal to allow claim file audits. Although SCIF alleges the policy was designed to protect the privacy rights of injured workers, such solicitous concern was nowhere expressed in any of SCIF’s internal memos on the issue. The evidence established that SCIF’s managers were instructed that claim files could not be reviewed by an insured or its representative, and that if an insured sought claims file information, a meeting should be scheduled at which time “pattern-type questions” should be asked designed to “challenge the expertise” of the insured’s representative. SCIF admittedly made no effort to sort out which types of documents would be considered confidential and which would not. SCIF made no effort, for example, to redact and protect allegedly sensitive and private information not relevant to the insured’s inquiry, and then to disclose only the relevant information sought. The trial court was therefore reasonable in concluding as a matter of law that, despite any general privacy interests of the injured employees, the wholesale and indiscriminate refusal by SCIF in all cases “to permit the insured access to claim files or other relevant claims data” constituted a “breach of the implied covenant of good faith and fair dealing.”

The Damage Award Was Proper

At trial, an actuarial analyst testified that MacGregor was damaged by SCIF’s overreserving in the form of higher premiums and a deprivation of dividends in the sum of $367,359. He arrived at this figure by applying

The trial court remarked in its statement of decision that the actuary’s testimony was “subject to criticism for lack of specificity in the way by which he computed his numbers, [but] his testimony [was] generally credible. The fact of damage in this case is very clear, [but] the amount is more difficult to ascertain.” Thereafter, the trial court, awarding only $300,000, apparently reached its own conclusion as to the amount of damages and adopted a somewhat lower figure than that arrived at by the actuary.

SCIF’s effort to impeach the trial court with its remarks contained in the statement of decision is unavailing. An appellate court reviews the correctness of the trial court’s judgment or order, not the correctness of its reasoning. (See West Pico Furniture Co. v. Superior Court (1961) 56 Cal.2d 407 , 413-414 [ 15 Cal.Rptr. 119 , 364 P.2d 295 ]; Stewart Development Co. v. Superior Court (1980) 108 Cal.App.3d 266 , 275 [ 166 Cal.Rptr. 450 ].) Accordingly, SCIF’s contention that MacGregor failed to prove the amount of damages it suffered, despite the uncontradicted testimony of the actuary, is without merit.

Equally unavailing is the assertion that the damage award was excessive. SCIF notes that the actuary gave two possible damage numbers. The first, $367,359 ($433,983, with interest) included damages from SCIF’s alleged misreporting medical-legal claims. The second, $303,000 (excluding interest), did not. SCIF notes that the trial court indicated it was not ruling on the issue of medical-legal costs and thus reasons that court erred in using the higher figure which included approximately $64,000 in medical-legal reporting damages. SCIF therefore argues that the trial court should have reduced the $303,000 figure, not the $367,359 figure. However, the court’s final determination of $300,000 was obviously below both those figures, and we

Moreover, since substantial evidence supports a higher damage award, it certainly supports the lower amount awarded. Any error would be nonprejudicial.

Disposition

The judgment is affirmed. MacGregor is entitled to costs on appeal.

Fukuto, J., and Zebrowski, J., concurred.

A petition for a rehearing was denied April 29, 1998, and appellant’s petition for review by the Supreme Court was denied July 29, 1998.