Gordon Vann v. Travelers Indemnity Company

GORDON VANN,	                       )	NO.: A078272

                                       )

Plaintiff, Cross-Defendant and         )

Respondent,	                       )

                                       )

v.                                     )       (Alameda County

TRAVELERS INDEMNITY COMPANY            )  	 Super. Ct. No. 727815-4)

et al.,                                )

                                       )

Defendants, Cross-Complainants         )

and Appellants.	                       )

_______________________________________)

Appellants the Travelers Indemnity Company and the Travelers Indemnity Company of Rhode Island (Travelers) appeal a judgment by jury trial in favor of respondent Gordon Vann (Vann) in Vann's action for bad faith based on Travelers' refusal to defend him in an underlying environmental pollution action. Travelers asserts instructional and evidentiary error, and excessive damages.

From at least 1954 until 1992 Vann rented the property on which he operated an auto body repair business. Travelers issued liability policies for the business between 1980 and 1984. The policies provided generally that Travelers (1) would "pay all sums [Vann] legally must pay as damages because of . . .property damage to which this insurance applies caused by an accident and resulting from garage operations," and (2) had a "duty to defend any suit asking for these damages." The policies contained an exclusion for "property damage caused by dumping, discharge or escape of irritants, pollutants or contaminants," but the exclusion was inapplicable to "sudden and accidental" discharges. (Original emphasis changed to italics.) Vann's policies identified Insurance Associates of Northern California (Insurance Associates) as Travelers' issuing agent.

In July 1991 Vann was sued by his lessor for hazardous waste contamination of the premises (the Williamson action). He contacted an attorney, Thomas Titmus, who wrote to Insurance Associates and asked it to notify Vann's insurers. Titmus's letter identified Progressive Casualty Insurance Company as Vann's insurer. Insurance Associates replied that Vann had not been its client for many years, and it had no records of his coverage. It suggested contacting Progressive Casualty directly. The present record does not disclose whether Vann or Titmus did so.

In February 1992 Titmus withdrew his representation because Vann was unable to pay his outstanding attorney fees. In February 1993 Vann retained another attorney, Leandro Duran. Duran recontacted Insurance Associates, which then found the records of Travelers' policies issued to Vann. On July 19, 1993, Duran tendered the Williamson action to Travelers and informed it of a scheduled July 28, 1993, settlement conference and August 20, 1993, trial. In its July 26 reply, Travelers stated that its Special Liability Coverage Unit (SLCU) would verify the existence of any policies issued to Vann and investigate the Williamson action to determine whether the policies afforded coverage. To expedite its "indemnity evaluation," it asked for, inter alia, detailed information about Vann's tenancy of the premises, types of chemicals used in his business, and manner of disposal.

At the July 28, 1993, settlement conference the court vacated the scheduled trial date. In August 1993 Travelers asked Vann for additional information and documentation about the conduct of his business since 1960. It informed him it could not determine whether defense and/or liability obligations existed under the policies until it completed its coverage investigation. In response, Duran invited Travelers to review his files, copy documents and take a statement from Vann. He informed Travelers that Vann's lack of funds to defend the Williamson action was causing Vann financial and emotional strain, and asked that Travelers provide "pre-tender defense costs." Travelers replied that a statement was unnecessary and asked that Duran's files be forwarded to Travelers, which would pay copying costs.

In September 1993 Duran wrote to Travelers' attorney outlining the lack of cooperation from Travelers. He explained that by demanding 30 years of detailed records of Vann's business, Travelers was placing burdensome demands on Vann, who was 72 years old, had been evicted from his business, and had a seriously ill wife.

In November 1993 Vann's attorney again tendered the Williamson action defense to Travelers, citing Montrose Chemical Corp. v. Superior Court (1993) 6 Cal. 4th 287 (Montrose), a recent California Supreme Court case concerning an insurer's duty to defend. In December 1993 Travelers denied coverage and refused to provide a defense, contending the damage alleged in the Williamson action was not covered. Vann then filed the present action against Travelers, alleging that Travelers provided coverage for the environmental claims asserted in the Williamson action, thereby obligating it to defend and indemnify him therein.

Travelers obtained summary judgment on the ground that it had no duty to defend because the damage claimed in the Williamson action was not covered under any exception to the pollution exclusion clause in Vann's policies. We reversed because the record revealed disputed issues of material fact concerning the possibility of coverage, which triggered Travelers' duty to defend. (Vann v. Travelers Companies (1995) 39 Cal. App. 4th 1610 (Vann I).) Travelers then undertook Vann's defense, and settled the Williamson action in April 1996 for $50,000.

In the present bad faith action Travelers conceded its duty to defend Vann and its liability for contractual damages, but claimed that its refusal to defend was in good faith. The jury found by special verdict that Travelers breached its implied covenant of good faith and fair dealing, and committed the breach with oppression, fraud and malice. It awarded Vann $1,460,000 in compensatory damages and $25 million in punitive damages. Travelers' motion for new trial on various grounds, including excessive damages, was denied. . .. [Text omitted]

The jury's finding here that Travelers breached the covenant of good faith and fair dealing as well as its finding of fraud are amply supported by substantial evidence.

Jordan Stanzler testified as an expert for Vann. Stanzler is an attorney specializing in insurance coverage of pollution claims and has studied hundreds of such claims presented to Travelers, together with Travelers' manuals for handling pollution and contamination claims. He has also published numerous articles on insurance law and lectured extensively on the subject. In 1986 Travelers established the SLCU to handle coverage issues in environmental claims, and Vann's tender of defense was referred to and handled by the SLCU. Prior to formation of the SLCU in 1986 Travelers covered groundwater contamination claims, taking the position that the "sudden and accidental" policy exclusion meant unintended and unexpected. Since formation of the SLCU, Travelers commenced a pattern of refusing coverage for hazardous waste claims like Vann's. Stanzler opined that the SLCU was established to deny coverage, based on its pattern of denying hazardous waste claims, a "180-degree" change from its previous practice of many years. Based on Stanzler's study of the SLCU's handling of pollution claims, he opined that its position in Vann's case was consistent with its position in similar cases. Stanzler testified that Travelers' claims manuals required it to defend Vann in the Williamson action, but that Travelers did not follow its own manuals' examples of pollution coverage, nor its method of handling claims such as Vann's.

Bernard Martin, an independent insurance claims adjuster, also testified as an expert for Vann. In Martin's opinion Travelers' refusal to defend Vann was wrong, unreasonable and without proper cause because it was "obvious" from Travelers' file on the Vann claim and the testimony of Travelers' personnel, that it approached his request for defense "with the mindset to deprive him of [his] policy benefits, and that any consideration that was given to the claim . . . had as its focus the motivation to deprive him of a defense, and that there was never a serious thought of providing him a defense."

The bases of Martin's opinion were: (1) the lack of "documentation" in the Vann file, i.e., notes of Travelers' activities on his claim and reasons for its decisions; (2) Travelers should have recognized that the Williamson action revealed the potential for property damage from the threat to groundwater; (3) Travelers took an "unduly restrictive interpretation" of Vann's policy by taking the position that there could be no property damage thereunder, "when it was quite clear that the threatened contamination of groundwater would constitute a potential for established property damage"; (4) Travelers' various grounds for denying coverage were meritless; (5) Travelers applied an improper industry standard in denying Vann's claim on the ground the damages alleged in the Williamson action did not fall in the "sudden and accidental" exception, because California's insurance community recognized that a release of contaminants could be sudden or accidental; (6) Travelers violated the industry practice against abusive and coercive practices by requiring Vann to submit unnecessary and irrelevant paperwork before it considered his right to a defense; (7) the SLCU should have used Travelers' manual for handling claims; and (8) review of five other Travelers' files on claims similar to Vann's also demonstrated a motivation to deny a defense in such cases.

Marc Van Vooren was a Travelers vice-president and head of the SLCU, and was ultimately responsible for denying Vann's claim. Van Vooren recognized Vann's tender of his claim as a request for legal assistance and knew that trial on the Williamson action was imminent. The SLCU received the Vann policies and a copy of the Williamson complaint by August 23, 1993. Van Vooren could not determine from the complaint whether the contamination alleged therein was intentional, sudden or accidental, but acknowledged there could be groundwater contamination from an accident in Vann's garage which would give rise to a possibility of coverage, and thus the duty to defend. He also acknowledged that as of August 23, 1993, "Travelers did not need the extensive information requested in its August 24, 1993, letter to determine the possibility of coverage. Specifically, he acknowledged that a "proof of claim," one of the requested documents, was inapplicable to liability coverage and had no relevance to Vann's tender of claim.

In attempting to justify its denial of a defense for Vann in the Williamson action, Travelers presented only Van Vooren's testimony that he did not think the policy provided coverage. Although he testified that he discussed Vann's tender of the Williamson action defense with legal counsel, he did not indicate what legal advice he received, and there is no evidence that Travelers relied on any legal advice for its decision to deny Vann's tender of defense. This testimony was elicited by Travelers' counsel in his direct examination of Van Vooren, and left the jury with the inference that the legal advice did not support Travelers' decision to deny Vann a defense.

Van Vooren acknowledged that Travelers had liability claims manuals with guidelines for the duty to defend and for declining coverage, but he neither consulted nor followed them regarding Vann's claim. The SLCU had no internal written procedure for evaluating third party claims such as Vann's.

In November 1993, before Travelers made its decision not to defend Vann, Montrose, reiterating the long-standing California rule of an insurer's broad duty to defend, was decided by our Supreme Court. Travelers was a defendant in Montrose and Van Vooren was familiar with the Montrose opinion, but did not think it applied in Vann's case. He thought Travelers' decision denying Vann's tender of defense was correct. He maintained this position even after "The appellate court [in Vann I] disagreed with our position and told us we were wrong." He had not read Vann I, but disagreed with the opinion and thought it was "wrong." He did not explain his ability to analyze the opinion without reading it. Nor did he explain why, in light of his undisclosed advice from legal counsel and his review of Montrose, which held that a duty to defend arises upon a "bare `potential' or `possibility' of coverage" (6 Cal.4th at p. 300), and his own opinion that Vann's claim carried a "possibility of coverage," Travelers refused to defend Vann. Remarkably, Van Vooren further testified that if presented with the same claim again, it would refuse to follow Vann I, and that the SLCU has not changed its approach or adopted any procedures since Vann I or Montrose were filed. Although Van Vooren denied Stanzler's testimony about the SLCU's purpose in responding to pollution claims, when asked for any details about those claims he repeatedly answered "I don't know, sir." On the other occasions, Van Vooren's memory was preferentially selective when asked about his recollection of events at the time Vann's tender of defense was denied. Travelers knew that Vann was elderly, that his wife was in poor health, that Vann could not afford to defend the Williamson action, and that at that time Vann was represented by Duran, a young, inexperienced and under-financed attorney.

Although Travelers voir dired Stanzler on his qualifications, it did not cross-examine him and did not question Martin's qualifications as an expert, nor did it call any expert witnesses on its behalf. Travelers limited itself to Van Vooren's opinions concerning the validity and application of the Montrose and Vann I opinions, and Van Vooren's interpretation of Vann's policies and the legal principles applicable to the duty to defend, although Van Vooren is not an attorney and indicated no legal education, training or experience.

The evidence that Travelers refused to abide by California law, insurance industry standards, and its own coverage policies and procedures in evaluation Vann's claim is sufficient to support the jury's finding that in denying Vann a defense, Travelers acted oppressively, maliciously and fraudulently. We reiterate that both parties emphasized during their closing arguments that to prove a breach of the covenant of good faith and fair dealing Vann had to prove that Travelers acted unreasonably and without proper cause in denying him a defense.

In addition, the court erroneously excluded relevant testimony of Gregory Wank, a member of Travelers' SLCU who worked on the Vann file under the direct supervision of Van Vooren. Wank had died prior to trial, but in his deposition he revealed that although he recalled denying other Travelers' insureds' requests for a defense, he could not "recall a single time" that Travelers agreed to provide a defense. This bolstered Stanzler's testimony that the SLCU was embarked on a program of denying all claims regardless of their merit.

Given the state of this record, we conclude the instructional error was harmless. Under the facts of this particular case, in which substantial evidence supports the jury's findings both of bad faith and fraud and oppression, it was the fraudulent and oppressive conduct that constituted the bad faith. Under such circumstances, fraud and oppression cannot be characterized as other than unreasonable. We do not think this jury was misled. . . . [Text omitted]

A significant motive for purchasing liability insurance is to obtain the security and peace of mind that, in the event of a third party claim, the insured may "call on the insurer's superior resources for the defense of" that claim. (Montrose, supra, 6 Cal.4th at p. 295.) Vann was an elderly businessman who had entrusted the protection of his small business to Travelers by purchasing liability insurance. He was 72 years old with an ailing wife, and in danger of losing his livelihood when Travelers refused to come to his aid. Travelers knew that the claim against Vann had a potential for coverage, and therefore that it had a duty to defend him. Instead, Travelers bombarded him with requests for unnecessary information and generally gave him the runaround. Under these circumstances, the failure to promptly provide him with the defense he believed he had purchased was highly reprehensible. As the Supreme Court of Idaho noted, "Buying a[n] . . . insurance policy is significantly different form buying a [car]. Marketing a car that may not be quite as pretty as it should be is a long way from marketing . . . insurance upon which people rely for their financial security." (Walston v., Monumental Life Ins. Co., (Idaho 1996) 923 P.2d 456, 468 [approving a ratio of punitive to compensatory damages of 26 to 1].)

Gore characterized the reprehensibility of the defendant's conduct as "the most important indicium of the reasonableness of a punitive damages award" (116 S.Ct. at p. 1599), noting that "repeated misconduct is more reprehensible than an individual instance of malfeasance." (Id. at pp. 1599-1600.) "[E]vidence that a defendant has repeatedly engaged in prohibited conduct while knowing or suspecting that it was unlawful [provides] relevant support for an argument that strong medicine is required to cure the defendant's disrespect for the law." (Id. at p. 1599.) The evidence here is that Travelers' refusal to defend Vann was not an isolated incident. Vann's expert, Stanzler, testified that since the formation of its SLCU, Travelers had a nationwide practice of refusing to honor claims arising from environmental damage. Travelers did not bother to cross-examine Stanzler or offer any contrary evidence, except for the weak testimony of Van Vooren, which seemed designed to produce a verdict for Vann. In November of 1993, while Travelers was deciding whether to defend Vann, our Supreme Court restated the well-settled California law on the duty to defend in Montrose, a case in which Travelers itself was a defendant in an action by one of its insureds seeking a defense to a third party hazardous waste action. Despite being the direct target of this fresh reiteration of the obligation to defend, Travelers denied Vann a defense, stated it would not act differently if presented the same claim today, and had not revised its procedures for handling environmental claims, which means the SLCU was continuing to ignore Travelers' own claims handling manuals which, if followed, required that it defend Vann.

Travelers' behavior toward Vann, personally, and as indicative of a broader recalcitrance to honor contractual obligations and the rule of law, manifests a high degree of reprehensible conduct. . . . [Text omitted]