Your Assignment, Should You Choose to Accept It, May Include Attorneys' Fees

Resolving a split between appellate districts, the California Supreme Court has ruled that the recipient of an assigned claim for breach of the implied covenant of good faith and fair dealing receives with the assignment the right to claim recovery so-called Brandt attorney fees. 

In February, 2005, Decs&Excs reported on the Court of Appeal's decision in the case of Essex Insurance Co. v. Four Star Dye House, summarized this way:

When an insured prevails against an insurer on a claim for 'bad faith,' the attorneys’ fees that the insured incurred in recovering the unpaid insurance benefits can be awarded as an element of the insured’s damages under the so-called Brandt Rule.  [Brandt fees have been discussed previously here and here.]   Now a panel of the Second District Court of Appeal has ruled that an insured is permitted to assign the right to recover Brandt fees.

As noted then, the Second District in Essex rejected a contrary view -- that Brandt fee claims are not assignable -- adopted by of the Sixth District Court of Appeal in Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501.  Because of the disagreement among the state's appellate courts, it is no surprise that the California Supreme Court accepted a petition to review Essex and to sort out the conflict.  After examining the question, the Court has now adopted the Essex view as the rule in California. 

Writing for a unanimous Court, Justice Kennard gets right to the point:

The issue here is this: When an insured assigns a claim for bad faith against the insurer, and the assignee brings a tort action against the insurer that includes a claim for wrongfully withheld policy benefits, may the assignee recover Brandt fees?  Our answer is “yes.”

Following a lengthy and informative discussion of the general law on recovery of attorneys' fees and on assignability of claims, and of the rationale of the original Brandt decision, Justice Kennard ultimately sides with the claimants on practical grounds:

We reject Essex’s argument that because Brandt fees are tort damages, they are recoverable only if incurred by the insured personally, rather than by the assignee. . . .  Had Sanchez [the insured] brought the bad faith action against Essex, his right to recover Brandt fees would be unquestioned.  As the assignee of Sanchez’s claim against Essex, Five Star stands in his shoes, and so may assert his right to recover any Brandt fees incurred in prosecuting the assigned claim.  We agree with the Court of Appeal here that the right that Sanchez assigned to Five Star was the 'right to recover the policy benefits in full, undiminished by the attorney fees incurred in bringing the action to recover those benefits.'  Were we to accept Essex’s argument, Sanchez would no longer be assigning the right to recover the policy benefits in full.

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Disallowing recovery of Brandt fees in cases such as this would result in a windfall for the insurer, whose liability for tortious conduct would be significantly reduced because of the fortuitous circumstance of the assignment of the bad faith claim.  As we have recognized, recoverable Brandt fees may exceed the contract benefits wrongfully withheld.  [Citation omitted.]  Disallowing recovery of Brandt fees incurred by assignees would also tend to discourage assignment of bad faith claims against insurance companies, contrary to the public policy favoring transferability of causes of action. 

The California Supreme Court's decision in Essex Insurance Co. v. Five Star Dye House, Inc. (July 6, 2006), Case No. S131992, can be accessed at these links in PDF and Word formats.

[Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

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UPDATE [1023 PDT]: 

J. Craig Williams has additional thoughts on the case at May it Please the Court.