Low, Ball & Lynch’s

WEEKLY LAW RESUME

July 13, 2006  Issue  By: Ray Coates

 

Bad Faith - Recovery of Attorney Fees Upon Assignment of Claim

 

Essex Insurance Company v. Five Star Dye House, Inc.

(July 6, 2006)

 

California Supreme Court

 

In Brandt v. Superior Court (1985) 37 Cal. 3d 813, the California Supreme Court held that in a bad faith action against an insurer, an insured may recover attorney fees that are incurred in obtaining policy benefits that the insurer wrongfully withheld. Those fees, now referred to as Brandt fees, are recoverable as tort damages. In this case, the California Supreme Court examined whether Brandt fees are recoverable in a situation where an insured assigns a claim for bad faith, and the assignee successfully brings a tort action against the insurer for wrongfully withholding policy benefits.

 

Luis Sanchez (Sanchez) owned a  trucking business. Sanchez contracted to deliver two commercial dryers to  Five Star Dye House, Inc. (Five Star), a designer jeans manufacturer. One of the dryers was allegedly damaged during transport. Five Star refused to accept the damaged dryer and sued Sanchez for negligence. Sanchez tendered defense of the action to his liability insurance carrier, Essex Insurance Co. (Essex). Essex denied coverage and refused to defend Sanchez. At trial, Five Star prevailed and was awarded $1.35 million.

 

Sanchez then assigned to Five Star all potential claims and causes of action against Essex. In exchange, Five Star agreed to delay execution on its judgment against Sanchez, until the claims against Essex  were exhausted. Essex then filed a declaratory relief action against both Five Star and Sanchez. Essex argued it owed no duty to Sanchez. Pursuant to the assignment from Sanchez, Five Star cross-complained against Essex for breach of contract and tortious breach of the covenant of good faith and fair dealing. The trial court found Essex to be in bad faith and awarded Five Star $1.6 million in damages. The trial court denied Five Star’s request for Brandt fees.

 

The Court of Appeal affirmed the trial court’s judgment against Essex, but held that Five Star, as a proper assignee, was entitled to recover Brandt fees. The Supreme Court granted Essex’s petition for review to determine whether assignment of a bad faith tort action against an insurer includes the right to recover attorney fees. The Supreme Court concluded that an assignee may recover Brandt fees.

 

In its decision,  the Supreme Court re-affirmed the general proposition that actions for bad faith are assignable. This includes claims for breach of the duty to defend. While purely personal damages (e.g. emotional distress and punitive damages) are not assignable, all other damages arising out of a claim for bad faith are assignable. In this case, Five Star merely sought to recover as tort damages, the monetary  value of the policy benefits wrongfully withheld by Essex. Fees incurred to retain an attorney to obtain the benefits due under a policy are economic damages proximately caused by the tort.  

 

The Supreme Court rejected Essex’s argument that because Brandt fees are tort damages, they are only  recoverable if incurred by the insured personally. The Court reasoned that if this argument were accepted, the assignment would be rendered meaningless. Further, the court held that to disallow recovery of Brandt fees would serve as a windfall to insurers, whose liability for tortious conduct would be reduced because of the “fortuitous circumstance” of the assignment of a bad faith action. The Supreme Court therefore affirmed the Court of Appeal’s judgment in favor of Five Star.

 

COMMENT

 

The California Supreme Court held that an assignee may recover attorney fees (Brandt fees) that are attributable to efforts to recover policy benefits that an insurer has wrongfully withheld. This case will encourage parties to consider assignment of potential bad faith actions.

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