Declarations and Exclusions

Dancin' to the Courthouse Rock

In litigation involving the rock band Third Eye Blind* and its dispute with its former lead guitarist, the 1st District Court of Appeal in San Francisco asks the musical question:

When an insured sues its insurer for coverage and also brings negligence claims against its business manager and insurance broker for failing to advise about a policy exemption and failing to obtain additional coverage, are the negligence claims barred as a matter of law if the court rules in the insured’s favor on the coverage claim?

The Court concludes that the answer is "no."  The broker can still be held liable for its claimed negligence, even though the client eventually obtained coverage from the insurance company.  Among the recoverable damages: the attorney's fees incurred by the insured to obtain that favorable ruling on the coverage dispute.

The background: Third Eye Blind, through its business manager, retained insurance broker Near North Entertainment Insurance Services to obtain liability insurance for the band.  Near North obtained a policy from North American Specialty (NAS).  That policy included a "Field of Entertainment Limitation Endorsement" (FELE) that purported to restrict or eliminate coverage for a variety of claims, including invasion of privacy, infringement on copyright or trademark, defamation, and so on.  It was later claimed that Near North did not call this limitation to the band's attention, or offer to procure additional coverage to protect against the potentially excluded claims.

Creative differences later arose between guitarist Kevin Cadogan and the rest of the band, resulting in Cadogan being fired.  Cadogan fired back with a lawsuit, including claims that the band's continuing use of the name "Third Eye Blind" constituted trademark infringement under the Lanham Act.  The defense to was tendered to NAS,but it declined coverage citing the FELE.  The band defended the suit at its own expense, eventually reaching a settlement with Cadogan.

The band then filed suit against NAS -- alleging that the FELE was ambiguous and unenforceable to bar coverage -- and against Near North -- alleging that it was negligent not to point out the potential problems associated with the FELE and not to recommend obtaining additional errors and omissions insurance to fill the potential gap in coverage.  Ultimately, the trial court agreed that the FELE was ambiguous and ruled that NAS should have defended the band in the Cadogan action.  The band and NAS eventually settled.

Near North then sought judgment in its favor, arguing that it could not be held liable for negligence when the policy it obtained (the NAS policy) was ultimately held to provide the necessary coverage.  The trial court agreed, but the Court of Appeal reversed the judgment in favor of Near North.  The appellate court reasons that the questions of NAS' coverage and of Near North's negligence present independent issues, and that a ruling on one does not resolve the other:

Although the trial court, in ruling on a motion for summary adjudication, concluded NAS had breached its duty because there was a potential for coverage under appellants’ CGL policy, this ruling could not absolve [Near North] of liability for their own alleged negligence in failing to advise [the band] about the need for errors and omissions insurance.

(Italics added.)

While the ultimate finding of coverage might limit the amount of the damage caused by Near North's oversight, it does not eliminate that oversight or reduce the amount of the resulting damage to zero.  Among other things, the band would not have had to incur the cost of suing NAS to obtain coverage if Near North had obtained the additional errors and omissions policy.  Near North remains potentially liable to the extent that its errors contributed to the overall detriment sustained by the band.  Accordingly, the Court of Appeal reverses the judgment in favor of Near North and returns the case to the trial court for further proceedings.

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The decision in Third Eye Blind, Inc. v. Near North Entertainment Insurance Services, LLC (March 29, 2005), Case No. A102803, can be accessed at these links in PDF and Word formats.
[Note: Links expire approximately 120 days following issuance of the opinions; the opinions should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

~~~

*For Further Reading:  In the thumbnail history of Third Eye Blind at Rock On The Net, interested readers can follow the band's success in the late '90s, including their total of 5 weeks with #1 singles ("My Semi-Charmed Life" and "Jumper") in 1997 and 1998.  Intriguing trivia: in 2003, the band appeared on the NBC series American Dreams, portraying . . . The Kinks.  The official Third Eye Blind Web site is 3EB.com.

Emotional Rescue: Appellate Court Remains Skeptical Toward Emotional Distress Recovery in Legal Malpractice Cases

Under current California law, emotional distress damages are generally not permitted in legal malpractice cases because the courts regard most such claims [rightly, in the view of Decs&Excs] as involving purely economic losses.  An innocent criminal defendant, wrongly convicted through the defense attorney's negligence, is virtually the only victim of legal malpractice permitted to recoup damages for the emotional consequences of a lawyer's errors [again rightly, in the view of Decs&Excs].

But what about cases in which the emotional content runs unavoidably high, such as bitter marital dissolutions?  Can't the attorney be held liable for the emotional damage to the client that may inevitably arise from the mishandling of that sort of case?  Not under current law, and the most recent indication is that that rule is not about to change:

Walter Olson at Overlawyered points to a report on an unpublished order of the First District Court of Appeal in San Francisco, declining to make an exception to the usual rule on non-recovery for emotional distress, even in a divorce case in which the client alleged that the attorney had "made mistakes that turned his life upside-down and left him wondering if his new marriage was legitimate."

[The client,] Rinaldi accuses [his former attorney] Pisano of giving him bad advice and failing to serve his first wife with certain papers during their divorce proceedings. On top of at least $147,000 in compensatory damages, he sought unspecified damages for emotional distress in his suit, which was filed in August. The turmoil arose, Rinaldi says, when his first wife went to court to revisit the division of property -- two years after their 2001 divorce and a year after Rinaldi had remarried. He and his then-pregnant new wife 'were extremely concerned that they were not legitimately married and that their baby was illegitimate,' asserted Rinaldi's malpractice attorney, Meis & Alexander associate Quinton Cutlip, in his briefs.

Procedurally, the trial court denied the attorney-defendant's motion to strike out the claims for emotional distress.  The defendant petitioned the Court of Appeal for a writ of mandate to require the trial court to grant the motion.  The appellate court has issued an alternative writ, essentially ordering the trial court to grant the motion and to strike out the emotional distress claims unless the trial court -- or more likely the attorneys for the client-plaintiff -- persuade the Court of Appeal there is good cause not to do so.  Opposition to the writ is scheduled to be filed by February 1, at which point the appellate court can either issue its final order or set the matter for argument.  In either case, the Court may still issue a published decision.

The argument in favor of permitting emotional distress damages will likely focus in the proposition that certain types of cases, such as marital dissolutions, are so inherently emotional that it is compellingly foreseeable to the attorney that his or her mistakes may be emotionally devastating to the client.  That sort of foreseeability argument has generally been rejected in recent California decisions, as aptly summarized in Lawson v. Management Activities, Inc. (1999) 69 Cal.App.4th 652, 656:

To borrow a phrase from Blake, if tort damages were available for anything which could foreseeably cause our fellow human beings emotional distress, then ‘who can stand?’ No one, saint or sinner, can go through life without ‘negligently’ inflicting emotional distress on others.

Interested readers can follow the progress of this newest case [Pisano v. Superior Court, Appellate Case No. A108300] on the Court of Appeal's docket.

Addendum: David Giacalone comments (scroll to bottom of post).

Not an "Honest Broker" -- Insurer May Sue Broker Responsible for Falsehoods on Policy Application

As discussed below, an insurance "broker" usually represents -- and owes his or her primary duties to -- the insurance buyer, not the insurance company from which the coverage is obtained.  Can a broker be held liable to the insurance company for fraud or negligence in presenting an application supported by false statements and forged documents?  The Court of Appeal concludes the answer is "yes."

Crosby Insurance was a broker acting for Baroco, a building contractor, and obtained a policy for Baroco from Century Surety.  Baroco was sued for construction defects as the general contractor on a single-family home and demanded that Century defend and pay the claim.  After first accepting the defense, Century discovered that the application for insurance had significantly misrepresented Baroco's past loss history (using a letter forged on the prior insurer's letterhead) and misrepresented the nature of Baroco's business (specifically denying that Baroco ever acted as other than a drywall subcontractor).  The misrepresentations were allegedly traceable to the Crosby Insurance employee who prepared the applications. 

Century withdrew from Baroco's defense; Baroco sued Century; Century counter-sued and also filed suit against Crosby based on theories for fraud and negligence in the presentation of the falsified insurance application.  Crosby obtained a dismissal on the grounds that it could not be held to owe any legal duty to the insurer, since it acted only as the representative of the insured, Baroco.  On appeal, that dismissal has been reversed.

After analyzing current California law, the Court of Appeal ruled that there is no reason why insurance brokers should be "exempt . . . from the consequences of their own fraud."  The Court observed that "it would be an unreasonable, if not perverse, result if the law allowed an insurer no remedy against a broker who has, as is alleged in the cross-complaint, actively forged documents to support an insurance application."

On the issue of negligence, Crosby argued that any duties of care that it owed were owed only to its client, Baroco, and not to the insurer.  The Court disagreed.  Analogizing the case to others in which a professional may owe duties to third parties as well as to the professional's client, and applying the five-step analysis typically used to determine when a duty of care may be owed, the Court concluded that it is reasonable that an insurance broker should owe a duty to prospective insurers not to present knowingly inaccurate information in an insurance application:

First, the transaction of applying for an insurance policy is intended to benefit the insurer as well as the insured and is designed to influence the insurer’s conduct in issuing an insurance policy.  Second, harm from misrepresentations in an insurance application, such as the precise harm alleged to have occurred in this case, is easily foreseeable.  Third, injury is certain in that the insurer incurred costs in defending an insurance claim on a policy that would not have issued but for the misrepresentations in the application.  Fourth the misrepresentations in the application were material to the insurer’s decision to issue the policy and thus were closely connected to the ensuing injury.  Fifth, under the circumstances alleged, the factor of moral blame supports a finding of duty. Finally, imposing liability on insurance brokers for misrepresentations in insurance applications would act as a deterrent in preventing future harm.

The decision in Century Surety Co. v. Crosby Insurance (Nov. 17, 2004), Case No. E033550, 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.]

Battery Not Included: Doctor is Not Liable for Innocently Exceeding Scope of Consent to Treatment

Seven-month old Rey Piedra sustained permanent severe brain damage as the result of cardiac arrest while under the care of Dr. J.M. Dugan at Fountain Valley Regional Hospital.  Following the injury, Rey’s parents sued Dr. Dugan alleging claims of medical malpractice, battery, and failure to obtain their informed consent to certain of the treatment administered to their child.  At trial, the court granted Dr. Dugan’s motion for a nonsuit on the battery claim; the jury thereafter found on the merits that Dr. Dugan’s treatment had not been negligent, and that there was no lack of informed consent.  The Court of Appeal has affirmed those decisions.

Under general principles of medical malpractice law, a doctor who administers a treatment different from that to which the patient (or a child’s parents or guardians) has given consent may be liable for the tort of battery, i.e., harmful, unconsented or unprivileged physical contact.  The evidence at trial showed that Rey’s parents had given consent to treatment conditioned on their being consulted prior to administration of any drugs or medications.  The evidence also showed that the consent had been obtained, and the conditions on that consent communicated to, Hospital staff, but that the conditions had not been conveyed by the staff to Dr. Dugan. 

The decisions Dr. Dugan made concerning medication were shown not to be unusual or controversial under the circumstances, so that this liability was dependent on whether or not he should have obtained the parents’ consent before administering those medications.  The appellate court concludes that Dr. Dugan’s lack of knowledge that the prior consent was conditional relieved him of any potential liability for battery:

This case differs from any reported California case on conditional consent in the context of medical battery because it is undisputed (1) Rey’s parents never informed Dr. Dugan directly of the alleged condition on their consent and (2) Dr. Dugan did not otherwise learn of the condition. Battery is an intentional tort. [Citation.] Therefore, a claim for battery against a doctor as a violation of conditional consent requires proof the doctor intentionally violated the condition placed on the patient’s consent. [Citation.] Dr. Dugan could not have intentionally deviated from the scope of the consent because he was unaware of any condition on that consent. There is no authority for imputing knowledge of Fountain Valley employees to Dr. Dugan on the claim for medical battery. Given the evidence, the jury could not have found Dr. Dugan had knowledge of Rey’s parents’ conditional consent, and therefore could not have found him personally liable for battery, an intentional tort.

The decision in Piedra v. Dugan (Nov. 12, 2004), Case No. G032653, 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.]

Good, But Not Good Enough: Successful Class Action Attorneys Potentially Liable For Not Pursuing Additional Claims

Proving once again that there’s no pleasing some people, the Court of Appeal has permitted a suit for legal malpractice to proceed on a theory that the attorneys should have been even more successful than they were in an earlier case. The court summarizes the claim and its holding:

Plaintiff seeks to impose liability on attorneys who produced a class action recovery of some $90 million, claiming they were negligent because they failed to obtain a still larger recovery. While we may share the attorneys’ dismay that their efforts have been rewarded with this lawsuit rather than with the kudos they no doubt expected, and perhaps deserve, we are nonetheless constrained to hold that plaintiff’s claim cannot be rejected out of hand. While it may well be that the attorneys did not breach their duty of care in failing to proceed under an alternative theory that would have produced a greater recovery, we cannot say, as did the trial court, that there simply was no duty for the attorneys to breach.

In the prior litigation, the attorneys represented a class of claims representatives for Farmers Insurance Exchange, who claimed (successfully) that they had improperly not been paid overtime compensation. In the current case, one of the members of the original class is suing the attorneys for malpractice, claiming that a different theory -- under California’s Unfair Competition Law -- would have yielded an even larger recovery. The trial court dismissed the malpractice case, on the ground that the attorneys can have had no duty to pursue claims that were not included in the class certification order in the previous case. The Court of Appeal has ruled that the malpractice case should be allowed to proceed on the ground “that the attorneys’ obligations may extend beyond the claims as certified to related claims arising out of the same facts that class members reasonably would expect to be asserted in conjunction with the certified claims.”

The court declines to hold that a class action attorney can build a fortress of the class certification order, and thereby be relieved of considering the pursuit of other theories, drawing an analogy to an attorney’s obligations to bring to a client’s attention legal problems or issues that fall outside the explicit scope of a retainer agreement. While the court accepts that there may have been perfectly good reasons for the attorneys to decide not to pursue the alternate theory, so that the attorneys may not in fact be liable for malpractice, it concludes that it is not possible to find as a matter of law that the attorneys were not negligent, so that a dismissal at the pleadings stage is premature. The case is remanded to the trial court to move forward on its merits, whatever they may ultimately prove to be.

The opinion in Janik v. Rudy, Exelrod & Zieff (June 22, 2004), Case No. A102513, can be read at these links in PDF and Word formats.

Update: Additional comment on this case in the context of California's Unfair Competition Law (Business & Professions Code 17200, the claim what was not pursued) is available at Overlawyered.

There "But For" the Court of Appeal Go I -- Clients Must Prove They Would Have Been Better Off Absent Transactional Attorney's Negligence

When an attorney acts negligently when representing a client in litigation, the client can bring an action against the attorney for professional negligence or malpractice. The client can only prevail on the malpractice case by proving that the result of the original litigation would have been more favorable but for the attorney's negligence. In Viner v. Sweet (2003) 30 Cal.4th 1232, the California Supreme Court ruled that the same principle applies when a lawyer is negligent in handling negotiations or other business transactions: the client must prove that some additional measurable benefit would have been achieved if the attorney had not been negligent in the representation.

The Supreme Court remanded the case before it to the Court of Appeal, which has now ruled that the judgment against the attorney defendants must be reduced, as a matter of law, from $13,291,532 to $515,760. The attorneys involved admitted that their negligence caused the reduced amount of damage; the Court of Appeal concludes that there was no substantial evidence to establish that any of the other damage amounts represent profits or benefits that necessarily would have come to the plaintiffs in the absence of the attorneys' errors.

For the most part the claims that the appellate court disallowed arose from the clients' contention that the attorneys should have negotiated certain more favorable terms in the sale of the clients' successful audiobook business. The buyers' representatives testified at trial that they would not have agreed to those terms if they had been proposed, and might well have broken off negotiations altogether rather than accept them. Under those circumstances, the court concluded that the attorneys could not be held to make good their clients' loss of benefits that would not have been achieved even in the absence of the attorneys' negligence.

The Court of Appeal's decision in Viner v. Sweet (April 23, 2004), Case No. B138149 is available at these links in PDF and Word formats.

"I'd Go Back If I Were You" -- Attorney Who Continues Litigation After Discovering Absence of Probable Cause May Be Liable for Malicious Prosecution

Resolving a conflict between districts of the Court of Appeal, the California Supreme Court has held that an attorney who had probable cause to commence a lawsuit but who later "continues to prosecute it after learning it is not supported by probable cause" may be held liable to the defendant in that case in a later action for malicious prosecution.

In order to establish a claim against an attorney for malicious prosecution, the former defendant must generally prove (1) that the prior litigation ended in a manner favorable to the defendant on its merits, (2) that the prior action had been pursued as a result of malice, and (3) that the attorney lacked "probable cause" -- a reasonable belief that the claims were meritorious -- to pursue the action. The majority of California appellate courts had indicated that the presence or absence of "probable cause" should be determined as of the inception of the prior lawsuit. More recently, however, two appellate courts had indicated that an attorney who had probable cause to begin a lawsuit might still be liable for malicious prosecution if the attorney later discovered that the facts or law necessary to support the claim did not in fact exist, but still continued to pursue that now-unsupported claim. The Supreme Court has now adopted the latter view, which it concludes brings California law into consistency with the majority of other states that have considered the issue:

Just as it is without support in authority, the limitation defendants urge is also without support in principle. Malicious prosecution ‘is actionable because it harms the individual against whom the claim is made, and also because it threatens the efficient administration of justice.’ [Citation omitted.] Continuing an action one discovers to be baseless harms the defendant and burdens the court system just as much as initiating an action known to be baseless from the outset. [Citation omitted.] As the Court of Appeal in this case observed, ‘It makes little sense to hold attorneys accountable for their knowledge when they file a lawsuit, but not for their knowledge the next day.'

(Emphasis added.) The Court's opinion in Zamos v. Stroud (April 19, 2004), Case No. S118032, may be found at these links in PDF and Word formats.

Update: David Giacalone -- and others -- comment.

Real Estate Broker Does Not Owe Duty to Buyer's Child in Failing to Disclose "Toxic Mold" Condition

California requires by statute that sellers of residential real estate -- and their broker representatives -- must disclose to prospective buyers all those known or reasonably discoverable conditions of the property that might “materially affect the value or desirability” of the premises. The Fourth District Court of Appeal has held that this duty to disclose runs exclusively in favor of the actual buyer and does not benefit third parties, including members of the buyer’s family.

Maria Castaneda purchased a home; the seller was represented by Coldwell Banker Residential Brokerage Company Inc. Ms. Castaneda intended to live in the home with her minor child, Marcos Sawyer Salazar. After purchasing the home and moving in, Ms. Salazar discovered that the home contained a previously undisclosed “dangerous level of mycotoxins and mold spores.” Young Marcos Salazar is alleged to have developed asthma as a result of exposure to these conditions.

The ensuing lawsuit was filed on behalf of both Ms. Castaneda and the minor Salazar and against both the seller and the seller’s broker, Coldwell Banker, urging various theories arising from the (allegedly intentional) non-disclosure of the mold condition. The broker attempted to obtain an order dismissing the claims of Salazar, arguing that he was not the actual buyer of the home, not an intended beneficiary of the statutory disclosures, and not one to whom it had owed any duty in the transaction. The trial court refused to dismiss, but the Court of Appeal has held that the minor Salazar is not entitled to sue.

The appellate decision relies primarily on the explicit language of the relevant statute (italics added):

In accordance with the clear and unambiguous language of [Civil Code] section 2079, the inspection and disclosure duties of residential real estate brokers and their agents apply exclusively to prospective buyers, and not to other persons who are not parties to the real estate transaction. Only a transferee, that is, the ultimate purchaser, can recover from a broker or agent for breach of these duties. (§ 1102.13.) Where, as here, ‘“a statute enumerates the persons or things to be affected by its provisions, there is an implied exclusion of others . . . [and] the court is without power to supply an omission.”’ [Citation omitted.] Because Marcos was not a prospective buyer or a transferee, Coldwell Banker did not owe him a duty of care.

On other, common law theories, the appellate court is equally convinced that Marcos was not entitled to pursue a claim against the broker. In particular, as to claims of negligent or intentional misrepresentation, the court notes that an essential element of such claims is the claimant’s reliance on the allegedly false statements: as a minor, Marcos did not “rely” on anything, but simply moved into the house that happened to have been purchased by his mother.

The court’s decision in Coldwell Banker Residential Brokerage Company v. Superior Court (March 29, 2004), Case No. D042574, can be found at these links in PDF and Word formats.

Time Slips Away: Professional Negligence Claims Against Insurance Brokers Must Be Filed Within Two Years

Despite the best efforts of the plaintiff's attorneys to characterize them differently, the California Court of Appeal has concluded that all claims against an insurance broker for failure to purchase sufficient earthquake coverage for its client should be deemed to arise from "professional negligence." As a result, all those claims were barred because they were not filed within two years of the client's uninsured loss. The court summarizes its holding:

A company purchased earthquake insurance from a broker. The broker obtained insurance with less coverage than the company sought. After sustaining damage in the Northridge earthquake, the company submitted a claim under the insurance policy and was paid benefits in accordance with the policy as written.

The company filed this action against the broker to recover the additional benefits that would have been paid under the coverage as requested, alleging causes of action for negligence, breach of oral contract, negligent misrepresentation, and breach of fiduciary duty. The case was tried to the court, which found in the company’s favor on all causes of action and awarded compensatory damages, attorneys’ fees, prejudgment interest, and costs.

On appeal, the broker contends that the gravamen of this suit, regardless of how the causes of action are labeled, is a claim for professional negligence, and the suit is therefore barred by the statute of limitations applicable to malpractice claims against an insurance broker. We agree and reverse.

The policies of insurance in this case were purchased (or not purchased) in 1993. The Northridge earthquake occurred in January, 1994. The insurance company paid all that it owed according to the terms of its policies -- which was less than the amount of coverage that was supposed to have been procured by the broker -- in December 1994. The client's suit against the broker, asserting the various legal theories that are listed in the court's summary, was not filed until February, 1997.

In its 25-page decision, the appellate court concludes that all of the claims against the broker are subject to the general statute of limitations under Code of Civil Procedure section 339(1), which requires any "action upon a contract, obligation or liability not founded upon an instrument of writing" to be filed within two years. Whether the time is measured from the date of the earthquake itself or from the date of the insurance company's final payment of benefits, the two year period had expired by the time the complaint was filed.

The decision in Hydro-Mill Company, Inc. v. Hayward, Tilton and Rolapp Insurance Associates, Inc. (February 19, 2004), Case No. B1576765, is available at these links in PDF and Word formats.

Noted in Brief

Expert Witnesses; Medical Malpractice:
The need for expert witnesses to be able to articulate reasons for their opinions is emphasized in Jennings v. Palomar Pomerado Health Systems (January 8, 2004), Case No D040393 (opinion at these links in PDF and Word formats). In a medical malpractice case arising from a post-surgical infection, the court of appeal found that the plaintiff’s expert witness had no basis other than speculation for concluding that the infection in one location had been caused by the defendant’s negligent failure to remove a retractor from another, unrelated location.

Motion Procedure:
California’s 4th District Court of Appeal has disapproved language in one of its own earlier decisions and has reemphasized that parties have a right to a hearing and opportunity to present oral argument when any party presents a motion for summary judgment. No matter how thoroughly the trial court has considered the motion in coming to a tentative decision, that decision may not be made final without the opportunity for argument. Brannon v. Superior Court of San Diego County (January 13, 2004), Case No. D042907 (opinion at these links in PDF and Word formats).

Contracts; Entertainment Law:
In a dispute over the payment of merchandising royalties between the Walt Disney Company and Gary K. Wolf, the author of the book that formed the basis for Who Framed Roger Rabbit? the 2nd District Court of Appeal has vacated a partial summary judgment in Disney’s favor. The appellate court concludes that there are genuine factual issues requiring trial in order to determine which of the parties is correct concerning the interpretation of the term “gross receipts” in the royalty agreement. Wolf v. Superior Court of Los Angeles County (January 21, 2004), Case No. B169265 (opinion at these links in PDF and Word formats).