Opinion ID: 2636865
Heading Depth: 2
Heading Rank: 2

Heading: The California Bad Faith Litigation

Text: Kransco initiated this bad faith action against AES in January 1992, alleging AES had breached the implied covenant of good faith and fair dealing by rejecting Hubert's offer to settle his lawsuit against Kransco for a sum within the AES policy limits despite a substantial risk of a verdict greatly in excess of those limits. Among other claims, Kransco sought recovery of $11.6 million, the amount by which the Hubert judgment exceeded the AES policy limits and Kransco's self-insured retention. [4] AES answered with a general denial and the assertion of various affirmative defenses. As one affirmative defense, AES alleged that Kransco had failed to exercise ordinary care for its own safety and that such failure on its part proximately contributed to and was the sole proximate cause of all the loss and damage complained of by [Kransco], if any there were. AES further alleged that any recovery by [Kransco] is barred or limited by the unreasonable conduct and comparative bad faith actions of [Kransco] and/or its duly authorized agents and representatives with respect to the matters alleged in its First Amended Complaint herein. At the trial of the bad faith action, AES argued that Kransco was itself largely at fault for the excess verdict (i.e., the large Hubert compensatory and punitive damages award) as a consequence of its having given false interrogatory answers during pretrial discovery in the Wisconsin products liability action. The Court of Appeal characterized the claim and relevant supporting facts as follows: Kransco submitted an incorrect interrogatory answer in the underlying Hubert action and AES contends that this act constituted breach of the covenant of good faith and fair dealing or negligence in handling the Hubert action. Early in the case, Hubert served an interrogatory asking Kransco if it knew of any similar injury accidents predating his own injury in 1987. Kransco replied, in July 1990, that it had no notice of any adult cervical injuries from backyard water toys before 1987. The interrogatory answer was wrong. A Kransco product development vice-president knew of two adult cervical injuries on the Slip `N Slide that had occurred when the water slide was made by another toy manufacturer before Kransco acquired that manufacturer's assets and reintroduced the toy in 1983. One of those injuries resulted in quadriplegia, the other in death.[ [5] ] Kransco's general counsel neglected to ask the product development vice-president about prior injuries before answering the interrogatory.[ [6] ] Kransco's counsel in the Hubert action learned of the vice-president's knowledge of prior injuries when preparing him for his December 1990 deposition, and immediately informed Hubert's counsel of the error. Kransco amended its interrogatory answer several months before trial to disclose this information, although the amendment itself was inaccurate because it stated that one of the accidents occurred approximately 30 years earlier when it was really closer to 20 years earlier. AES was fully informed of the previous Slip `N Slide injuries well before trial and receipt of Hubert's settlement offer, but complains that the excess verdict is attributable in substantial part to Kransco's pretrial discovery blunders which were exploited by Hubert's counsel at trial. Hubert's counsel argued to the jury that Kransco's original and amended interrogatory responses were an untruth followed by a half-truth and suggested that there may be other Slip `N Slide accidents never disclosed. Of course, the extended argument to the jury included a great many points unrelated to Kransco's interrogatory answers, including the central claim that Kransco should never have reintroduced an injury-producing toy discontinued by its predecessor and did so without adequate warnings of danger in callous pursuit of $5 million annual gross profit. But AES maintains that the accusation of lying leveled against Kransco was explosive to a jury considering punitive damages, and invokes principles of comparative bad faith and comparative negligence to demand that Kransco's damages be reduced in proportion to its posited fault in causing the excess verdict. The trial court instructed the jury on both of AES's comparative fault theories. Regarding comparative bad faith, the trial court instructed the jury: I have already described the implied covenant of good faith and fair dealing that the law implies in every insurance contract. Because that implied covenant of good faith and fair dealing applies to both the insurer and the insured, Kransco had a duty to AES not to do anything that would injure AES's right to receive the benefits of their agreement. To do so would constitute bad faith on Kransco's part. [¶] Comparative bad faith does not relieve AES of its obligations or bar a recovery by Kransco against AES, but the total amount of damages to which Kransco would otherwise be entitled shall be reduced in proportion to the amount of comparative fault attributable to Kransco, Kransco's attorneys, or Kransco's agent. Regarding comparative negligence, the trial court instructed the jury: Comparative negligence is the failure, if any, on the part of Kransco to exercise ordinary care, which when combined with AES's breach, if any, of its obligations of good faith and fair dealing contributed to cause Kransco's injury. [¶] The negligence referred to here is not any lack of care or breach of any legal duty owed by Kransco to Michael Hubert or other Hubert plaintiffs involved in the 1991 Wisconsin trial. It is the negligence, if any, of Kransco in the preparation and trial of the Hubert v. Kransco case, and then only if it was a legal cause of the plaintiffs verdict in the amount returned and entered. [¶] Comparative negligence, if any, on the part of Kransco does not bar a recovery against AES, but the total amount of damages to which Kransco would otherwise be entitled shall be reduced in proportion to the amount of fault attributable to Kransco. Upon evidence not challenged by AES on appeal, the jury returned a special verdict finding AES had breached its duty of good faith and fair dealing toward Kransco in its handling of Hubert's personal injury claim. However, the jury also found Kransco had breached the duty of good faith and fair dealing owed to AES or had failed to exercise ordinary care for its own safety, or both, in its handling of Hubert's claim before the verdict. The jury assessed compensatory damages at over $13.6 million, apportioning fault for these damages at 90 percent to Kransco and 10 percent to AES. The jury further found Kransco did not act unreasonably in agreeing to the postverdict settlement with Hubert. Kransco moved for judgment notwithstanding the verdict (Code Civ. Proc., § 629) or, in the alternative, for new trial ( id., § 657) on the ground, among others, that the trial court had erred in instructing on both theories of comparative fault: comparative bad faith and comparative negligence. The trial court reconsidered and agreed, concluding comparative negligence was wholly inapplicable to the case and that its instruction on comparative fault should have been limited to whether Kransco contributed to AES's failure to settle by impairing its assessment of the risk of a substantial likelihood of an excess judgment. The court found the jury's verdicts finding comparative fault were unsupported by the evidence because AES presented no substantial evidence that Kransco's failure promptly to convey to AES its knowledge of prior cervical injuries contributed to AES's failure to recognize the substantial likelihood of excess judgment. Accordingly, judgment was entered in favor of Kransco for the full amount of damages as calculated by the jury, plus prejudgment interest and costs.