ZEPHYR PARK v. SUPERIOR COURT, 213 Cal.App.3d 833 (1989)

262 Cal.Rptr. 106

Docket No. D010472.Court of Appeal of California, Fourth District, Division One.
August 30, 1989.

Page 834COUNSEL

Hillyer Irwin, Donald L. Cupit and Brown B. Smith for Petitioners.

No appearance for Respondent.

McInnis, Fitzgerald, Rees, Sharkey McIntyre, Thomas E. Sharkey and Robert W. Buckley for Real Party in Interest.

OPINION

FROEHLICH, J.

This petition tests the applicability of the ruling i Moradi-Shalal (Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287 [250 Cal.Rptr. 116, 758 P.2d 58] to “bad faith” claims brought under Insurance Code section 790.03, subdivision (h),[1] by first party, as distinguished from third party, plaintiffs. (1) We hold Moradi-Shalal
determined that section 790.03(h) cannot be used as the basis for a private action, whether brought by “first parties” or “third parties,”[2] but that the

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Supreme Court’s ruling of nonretroactivity for pending bad faith cases is applicable to “first party” as well as “third party” actions. We therefore conclude the trial judge’s granting of the defendant’s motion for judgment on the pleadings was in error, and grant the writ.

THE PLEADING
Petitioners are the owners and operators of a “wind farm” — an installation of wind turbine generators utilized to produce electricity which is sold to a public utility. Petitioners purchased a property damage insurance policy from the predecessor in interest to real party in interest, Allstate Insurance Company. Property damage was suffered which was covered by the insurance, but the claim was paid only after years of litigation. This lawsuit represents petitioners’ claim for damages resulting from allegedly unfair claims settlement practices utilized by Allstate’s predecessor. The second cause of action of the complaint, which is the subject of the motion for judgment on the pleadings herein, alleged a cause of action based upon breach of section 790.03(h).[3]

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THE ISSUES
Before the ruling in Moradi-Shalal, and based upon the decision in Royal Globe Ins. Co. v. Superior Court (1979)23 Cal.3d 880 [153 Cal.Rptr. 842, 592 P.2d 329], it was judicially accepted that a private cause of action for unfair settlement practices by an insurance company could be based upon prohibitions contained in section 790.03(h). Moradi-Shalal
overruled Royal Globe and established that, insofar as third party claimants were concerned, section 790.03(h) did not provide a private cause of action. Petitioners herein are first party, rather than third party, claimants. The first issue to address, therefore, is whether the rule of Moradi-Shalal should be limited to third party claims, or should be applied as well to first party claims.

When the Moradi-Shalal court issued its ruling it also concluded that the newly enunciated rule precluding use of section 790.03(h) as a basis for private claims should not be completely retroactively applied. The court exempted from the ruling’s effect all “Royal Globe actions that already have been filed or litigated, but are not yet final.” (Moradi-Shalal, supra, at p. 305.) If Moradi-Shalal is applicable to first party as well as third party claims, we must then determine whether that application, as with third party claims, should apply only prospectively as to pending litigation. Petitioners’ claims were filed and remained pending at the time of the decision in Moradi-Shalal. If, therefore, the rule of nonretroactivity is applied to first party claims, the second cause of action should have been upheld.

DISCUSSION Applicability of Moradi-Shalal to First Party Claims
We search the Supreme Court opinion to ascertain whether it was intended to be limited to the specific type of claim before it — a third party claim —

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or whether its rationale bars also first party claims. The court’s discussion of treatment of the issue by other jurisdictions is not limited to the question of third party claims. Noting that the California statute was derived from a model act which was then adopted by 48 states, the court finds that “only two states other than California recognize a statutory cause of action for private litigants.” (46 Cal.3d at pp. 297-298.) In the discussion of scholarly criticism of Royal Globe, and in review of legislative history, the references are consistently to “private rights of action” in general, rather than to third party claims alone. (Id. at pp. 298-300.) Although reference is made to the particularly “unfortunate” consequence of imposing a duty by insurers directly to third parties (id. at p. 302), the general thrust of the court’s discussion does not suggest limitation of its reasoning to third party cases.

It can perhaps be argued that we read too fine in looking for implied meaning in the discussion section of the court’s opinion, and that we need search only for the court’s final and literal ruling. That ruling was: “Neither section 790.03 nor section 790.09 was intended to create a private civil cause of action against an insurer that commits one of the various acts listed in section 790.03, subdivision (h).” (46 Cal.3d at p. 304.) A literal adherence to this pronouncement mandates the exclusion of all private causes of action, whether first or third party.[4]

Were we, however, to concede that the ruling in Moradi-Shalal
does not directly address first party claims, and that to the extent it does it is dictum; and that the obligation of determining the survival of first party section 790.03 claims is squarely upon our shoulders, we would nevertheless reach the same conclusion. There is less reason to be concerned about depriving first parties of their use of section 790.03 as a basis for claims, than exists for third parties. First parties are in privity with the insurance carrier and typically have regular contract claims, including common law “bad faith” claims, which can be pursued.[5] Section 790.03(h) has been termed “a codification of the earlier tort of bad faith, which historically is a breach of the duty of good faith and fair dealing which is implied in every contract

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Retroactivity
We consider whether our ruling should have retroactive effect, or as in the Moradi-Shalal decision should be applied only to cases not yet filed prior to the date the Moradi-Shalal
decision became final. We first look to the Moradi-Shalal
decision itself for possible guidance. In its discussion of possible retroactivity to then pending cases, the Supreme Court referred generically to “Royal Globe actions.” It stated: “. . . [W]e hold that our decision overruling [Royal Globe] will not apply to those cases seeking relief under section 790.03 filed before our decision here becomes final. In the following part of this opinion, we turn to an analysis of the principles that will govern recovery in surviving Royal Globe cases, such as the present one, brought by third party claimants.” (Moradi-Shalal, supra, at p. 305.)

The end of this quoted passage refers to the surviving Royal Globe cases, “such as the present one, brought by third party claimants.” (Moradi-Shalal, supra, 46 Cal.3d at p. 305, italics added.) The subsequent extended discussion

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which follows (id. at pp. 305-313) deals exclusively with matters related to third party claims. These aspects of the opinion possibly suggest an intention to defer applicability of the new ruling only as to third party cases.

However, at the beginning of its discussion of retroactivity the court states: “The question arises whether our decision should apply to Royal Globe actions that already have been filed or litigated, but are not yet final.” (46 Cal.3d at p. 305.) Of course, cases had been filed and litigated as “Royal Globe” (i.e., causes of action based on alleged violation of section 790.03(h)) which were first party claims. (See, e.g. Carter v. Superior Court (1987) 194 Cal.App.3d 424
[239 Cal.Rptr. 723]; Bodenhamer v. Superior Court (1987)192 Cal.App.3d 1472 [238 Cal.Rptr. 177]; California State Auto Assn. Inter-Ins. Bureau v. Superior Court (1986) 184 Cal.App.3d 1428
[229 Cal.Rptr. 409].) One might infer, therefore, that the use of the generic term “Royal Globe actions” was intended to mean all actions based upon section 790.03(h), whether first party or third party claims.

We find it is not possible to determine conclusively, from th Moradi-Shalal opinion itself, whether the Supreme Court intended to include first party cases within its nonretroactivity ruling. We therefore look to general principles stated elsewhere. A comprehensive restatement of the law of retroactivity of rulings is found in Peterson v. Superior Court (1982)31 Cal.3d 147 [181 Cal.Rptr. 784, 642 P.2d 1305]. The general rule is that decisions which overrule prior precedent are given retroactive effect, but exceptions are made when “considerations of fairness and public policy preclude full retroactivity.” (Id. at pp. 151-152.) Such considerations include (i) whether retroactivity would impair vested contract or property rights, (ii) how the purpose of the new standard would be affected by retroactivity, (iii) the effect on the administration of justice by retroactive application, and (iv) the extent to which reliance has been placed on the old standard, and the ability of litigants to foresee the coming change in the law. (Id. at pp. 152-153.)

In precluding retroactive application (as to cases on file but not concluded) for third party claims, the Moradi-Shalal court referenced its desire to accord fairness “to the substantial number of plaintiffs who have already initiated their suits in reliance on Royal Globe.” (Moradi-Shalal, supra, 46 Cal.3d at p. 305.) The court then resolved the “predetermination” question by ruling that a final judgment in the underlying action is necessary, rather than mere settlement of the claim, as had been held by certain Court of Appeal authority. The court’s concern for the large group of plaintiffs who have initiated suit in terms of nonretroactivity of its ruling is thus substantially moderated by excluding from the favored group those who had not perfected underlying final judgments.

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When one considers retroactivity for first party claimants, the question of finality of a judgment determining a defendant’s liability is not presented. (See Carter v. Superior Court, supra, 194 Cal.App.3d at pp. 427-428.) The principal reason for precluding trial of the third party bad faith case along with the underlying injury action was the rule of Evidence Code section 1155, which precludes evidence of the insurance of the defendant in a personal injury case. That problem does not arise in first party cases because the insurance contract is the basis of the action and is always admissible in evidence. The class of first party claimants hypothetically affected by the Moradi-Shalal
ruling is therefore not reduced by the prerequisite of conclusion of the prior liability case, and may in fact be greater in number and significance than the third party litigants. Should this consideration move us to grant retroactivity, or to deny it?

The Moradi-Shalal court noted that plaintiffs had filed suit “in reliance” on Royal Globe. Can it be said, equally, that the first party claimants filed “in reliance” on Royal Globe? As noted ante, many third party claims must rely solely upon the authority of section 790.03(h) as a basis for the cause of action, while most first party claims may be brought on other grounds. Reversing Royal Globe was truly significant only as to its effect on third party claims. It eradicated a right which the Supreme Court itself some nine years previous had created. While, as we have remarked above, first party claims have indeed been made based upon section 790.03(h) and referred to as “Royal Globe” claims, the real impact of Royal Globe was not as to first party claims. The shock of the bar, we believe, resulting from Moradi-Shalal was with respect to pending and anticipated third party cases. To ameliorate that shock the court provided partial exemption from the general principle of retroactivity. The reasons which we believe underlie this decision do not apply equally to first party litigation.

Nevertheless, we are persuaded that the preclusion of use of section 790.03(h) as a basis for private claims should be applied to first party claims in the same manner as imposed by the Supreme Court on third party claims. First party section 790.03(h) claims which were on file before the finality o Moradi-Shalal shall remain viable. Some motivation for this conclusion is that it creates symmetry in this window of surviving causes of action, which in itself may be desirable. A uniform rule may also be thought more appropriate in contemplation of the purpose of nonretroactivity, which is fairness. It is well argued that comparing the equities of third party claimants and first party claimants, we should not accord greater rights to the third parties. After all, the insurance company has direct contractual and fiduciary obligations to its insured. We should not show greater judicial concern for the rights of pending claimants who have no privity with the

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defendant, than we do for those to whom the insurer had clear contractual and common law obligations.

We rule, therefore, that the motion of Allstate for judgment on the pleadings should have been denied. An alternative writ or order to show cause would add nothing to the presentation. A peremptory writ is proper. (Code Civ. Proc., § 1088; United Nuclear Corp. v. Superior Court (1980) 113 Cal.App.3d 359
[169 Cal.Rptr. 827]9; Goodenough v. Superior Court (1971)18 Cal.App.3d 692, 697 [96 Cal.Rptr. 165].)

Let a peremptory writ issue ordering the superior court to vacate its ruling granting summary judgment on petitioner’s second cause of action, and requiring the reinstatement of the said cause.

Kremer, P.J., and Huffman, J., concurred.

The petition of real party in interest for review by the Supreme Court was denied November 2, 1989.

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