NICHOLAS ZEITOUNIAN v. FARMERS INSURANCE
||COURT OF APPEAL OF CALIFORNIA, FOURTH APPELLATE DISTRICT, DIVISION ONE
||1994.CA.18156, 30 Cal. Rptr. 2d 882, 25 Cal. App. 4th 929
||June 8, 1994
||NICHOLAS ZEITOUNIAN, PLAINTIFF AND RESPONDENT
FARMERS INSURANCE GROUP ET AL., DEFENDANTS AND APPELLANTS
||Appeal from a judgment of the Superior Court of San Diego County. Super. Ct. No.
614535. Hon. Harrison Hollywood, Judge. .
||Hughes & Nunn; Horvitz & Levy, Daniel J. Gonzalez and Frederic D. Cohen for
Defendants and Appellants.
||Jeff A. Lesser; Richard Amerian; Esner, Marylander, Zakheim & Higa, Stuart B.
Esner, Billie Ann U. Higa and Rosalyn S. Zakheim for Plaintiff and Respondent.
||Froehlich, J.; Huffman, Acting P.j., and Nares, J., concurring.
||The opinion of the court was delivered by: Froehlich
||This is an appeal from a judgment confirming a jury verdict in favor of an insured
against his insurance company and its agent. Damages for negligence were awarded against
the agent, and substantial damages were awarded against the insurance company as follows:
$1,117,825 in contract damages, an additional $350,000 in compensatory damages based on
tortious bad faith refusal to honor the contract, and $4,000,000 in punitive damages. The
trial focused principally upon the issue of contractual breach by the insurance company in
failing to pay policy benefits, and the related contention of tortious bad faith in the
claims procedures. Our examination of the record of the trial reveals erroneous
evidentiary and instructional rulings which we cannot find nonprejudicial, occurring both
with respect to the contract and the tort claims. We therefore reverse and order a new
trial as to both these fundamental issues. We also reverse, for reasons stated hereunder,
the judgment against the agent. In that a new trial is to be held, we deem it necessary to
review all contentions of error, even though our new trial order could have been based on
what we conceive to be only the most central issues. Since we are reversing the judgment
based on bad faith, it is similarly not technically necessary for us to address the
question of punitive damages. In anticipation of retrial of the case, however, we will
comment upon what we perceive to be the severe difficulty of establishing punitive damages
in this factual situation.
||The factual analysis pertaining to principal subparts of this opinion will be
elaborated therein. The essential facts, which can be recited without transgressing facts
in dispute, are as follows. Plaintiff has been in the oriental rug business for a number
of years. In 1979 he opened a small rug store in La Jolla, which engaged not only in the
sale of rugs but also in the installation, repair and cleaning of rugs. In 1986 plaintiff
contacted James Heldoorn (Heldoorn), who was an independent agent for Truck Insurance
Exchange (Truck). *fn2 A "business
insurance" policy was purchased with a $200,000 policy limit, which was appropriate
for the inventory then carried by plaintiff. Plaintiff's operation over the years had not
been very profitable. While occasionally selling hand-made expensive oriental rugs, most
of his income came from selling and installing less expensive machine-made rugs.
||In November 1987 plaintiff decided to mount a three-month year-end sale of expensive
rugs. Since he did not have an adequate inventory of hand-made rugs to support the sale,
he contacted other rug dealers and made arrangements for the transportation of rugs to his
shop. These were acquired on consignment, permitting return after the sale if the rugs
remained unsold. Plaintiff discussed this increase in inventory with Heldoorn and on
November 25 increased his insurance coverage to $900,000. Subsequently an increase in the
number and value of rugs received on consignment convinced plaintiff that additional
insurance should be acquired, and he contacted Heldoorn with a request to increase the
policy limits to $1.2 million, which request plaintiff's evidence indicated Heldoorn
confirmed. (Truck disputed the alleged increase in policy coverage from $900,000 to
$1,200,000, which is the reason for the alternative claim of negligence against Heldoorn.)
||Sometime in the evening of December 23, 1987, plaintiff's shop was burglarized.
Plaintiff, with the assistance of Robert James, a public adjuster, calculated the loss of
rugs at $1,117,825, and on January 15, 1988, made claim upon Truck. Because of the large
claimed loss and the very recent substantial increase in the policy limits, coupled with
what were regarded as suspicious circumstances surrounding the burglary, Truck's San Diego
claims adjuster concluded expert assistance would be required to evaluate the claim. Truck
retained (1) an independent appraiser of oriental rugs, (2) a certified public accountant,
(3) an independent private investigator, and (4) outside special legal counsel.
||The work done by these several experts resulted in reports to the independent counsel
which suggested that it was doubtful a burglary had occurred; the value of the rugs, if
indeed lost, had been overstated; and plaintiff's books had been altered following the
loss. Considering these and other factors, independent counsel advised Truck to deny the
claim. The formal denial letter was sent on January 5, 1989.
||During the period of investigation plaintiff retained legal counsel and it was
apparent to Truck that suit would be filed. Truck made an offer to settle the claim for
$250,000. *fn3 The offer was not accepted and
suit followed, leading to the judgment we now review. We approach the several issues on
appeal in the same order as presented by appealing defendants.
||1. Instruction on Burden of Proof
||[NOT CERTIFIED FOR PUBLICATION]
||2. Exclusion of Defense Evidence: Lack of Ownership Documentation
||Plaintiff testified that he had received consignments of hand-made oriental rugs from
other rug dealers named Minassian, Tabakian and Zahiri, as well as a shipment of newer and
less valuable rugs from Emser International. None of the less expensive rugs was lost in
the burglary, the losses being confined to the rugs supplied by Minassian, Tabakian and
Zahiri. In pretrial proceedings the rug dealers were subpoenaed and asked to produce
documentary evidence of "your purchase of rugs consigned to [plaintiff]." The
only documentation the rug dealers produced was their written consignment agreement with
||Plaintiff by pretrial motion in limine asked the court to rule that Truck be precluded
from asking the rug dealers questions about their lack of documentation of ownership of
the consigned rugs. The court denied the motion. In opening statement counsel for Truck
advised the jury that one of the defenses would be the establishment of fraud on the part
of plaintiff, and that as evidence of that fraud it would be shown that the consigning rug
dealers had no documentation of their ownership of the rugs supposedly consigned.
||As the trial progressed, however, the court at the urging of plaintiff's counsel began
to have reservations about its ruling. It thought that the issue of lack of documentation
had not been raised during Truck's investigation of the claim, and hence could not be a
ground for claiming lack of bad faith in its claim denial. The court also seemed to be
concerned that the evidence would implicate Minassian et al. in a conspiracy to defraud
when they had not been made parties to the lawsuit. The court ultimately granted
plaintiff's motion to exclude the evidence of lack of documentation, stating for the
record that the ruling was based on Evidence Code *fn4
section 352, but also indicating it considered the evidence to be irrelevant. *fn5
||The court's ruling was in error. The evidence sought to be introduced was plainly
relevant. The only documentation of prior ownership turned up by the investigation was
that of new rug dealer Emser International, whose rugs were not stolen. It is curious that
the dealers whose rugs were purportedly stolen would have no record of their acquisition.
Common sense dictates the conclusion that a professional rug dealer owning hundreds of
thousands of dollars of antique rugs would have a record as to where and when they had
been purchased and what they had cost. The logical (and relevant) inference from this
thought is that the rugs may not have existed, and that the consignment documentation and
subsequent allegations of theft were fabrications. Obviously, such fabrications, if they
existed, would involve the fraudulent cooperation not only of Minassian et al. but also of
||That this evidence was not only relevant but crucial is illustrated by questions
received from the jury during the course of the trial. Responding to the court's policy of
allowing written questions from the jury during the trial, the jury asked: "With all
the research done for this case, have the original documents for the rugs shown up?"
The following day a similar question was asked: "To prove the rugs are real is there
a certificate or document to show the value or the fact that it is an original?" The
court answered these questions by suggesting that the evidence yet to be received would
||The trial court of course has broad discretion to control the order and manner of the
introduction of evidence and to exclude evidence which is cumulative, prejudicial or of
little probative value. (See generally, 3 Witkin, Cal. Evidence (3d ed. 1986) Introduction
of Evidence at Trial, § 1729 et seq., p. 1684 et seq.) Particularly when the court
excludes evidence on the basis of section 352, the appellate court must defer to its
judgment unless the appellate court can conclude that an abuse of discretion has occurred
which has resulted in a miscarriage of justice. (Travelers Ins. Co. v. Lesher (1986) 187
Cal. App. 3d 169, 193, 231 Cal. Rptr. 791.) Another court has phrased the test in terms of
our determining whether, in the absence of the error in evidentiary ruling, "a result
more favorable to the complaining party would likely have occurred." (Wanland v. Los
Gatos Lodge, Inc. (1991) 230 Cal. App. 3d 1507, 1523, 281 Cal. Rptr. 890.)
||We believe the error in this case was prejudicial. The circumstances of the claim
would create in the mind of any reasonable person the suspicion of fraud. The evidence
sought to be introduced (notably on cross-examination) bore directly on that suspicion. It
related to the core and substance of Truck's defense. Based upon the jury's written
questions directly on the point, it is our view that a jury verdict different from the one
rendered likely would have been reached had this evidence been permitted.
||3. Exclusion of Defense Evidence: Inadequate Storage Space
||[NOT CERTIFIED FOR PUBLICATION]
||4. Evidence of Truck's Settlement Offer
||As indicated previously, prior to the plaintiff's filing of his lawsuit Truck had
offered to settle the claim for $250,000. Truck made a motion in limine to preclude
evidence of this offer in compromise, or in the alternative to try the contractual phase
of the case separately from the tort action, precluding evidence of the compromise offer
during the initial contract phase. The court denied both motions. During the liability
phase of the trial, therefore, counsel for plaintiff vigorously examined Truck's
independent counsel concerning the $250,000 offer in compromise.
||Truck contends this conduct was contrary to section 1152, subdivision (a), which
provides: "Evidence that a person has, in compromise ... furnished or offered or
promised to furnish money ... to another who has sustained or will sustain or claims that
he or she has sustained or will sustain loss or damage, ... is inadmissible to prove his
or her liability for the loss or damage...." This rule is based upon the premise that
the law favors compromises, and that "a person is entitled to endeavor to 'buy his
peace' without fear that his offers of compromise for such purpose will be used against
him if not accepted." (People ex rel. Dept. Public Works v. Forster (1962) 58 Cal. 2d
257, 263, 23 Cal. Rptr. 582, 373 P.2d 630.)
||Plaintiff and apparently the trial court support the admission of this evidence on the
authority of White v. Western Title Ins. Co. (1985) 40 Cal. 3d 870, 221 Cal. Rptr. 509,
710 P.2d 309. White was a case involving a claim for breach of contract and breach of the
covenant of good faith against a title insurance company. The contractual liability issue
was tried first, to the court. After the court ruled the defendant liable, the other
issues, including liability for breach of the covenant of good faith, were tried to a
jury. (Id. at p. 879.) During the course of the jury trial evidence of an offer to settle
made by the insurance company was admitted. The Supreme Court held this did not violate
section 1152 because "the language of this section does not preclude the introduction
of settlement negotiations if offered not to prove liability for the original loss but to
prove failure to process the claim fairly and in good faith." (White, supra, at p.
887.) The Supreme Court found the trial court's handling of the privilege issue to have
been correct, since "the trial court bifurcated the trial, and admitted the offers
[of settlement] into evidence only on the issue of liability for breach of the
covenant." (Id. at p. 889.)
||We must note that the facts of White are supportive of that court's conclusion that
the offer to settle was solely related to claims other than tort bad faith claims. The
defect in the defendant's title research resulted in the failure to disclose a somewhat
minor cloud on title -- the existence of an easement for the construction of wells and
water lines. The original complaint against the title company contained only two causes of
action: breach of contract and negligence. The jury's eventual finding of damage in the
sum of $8,400 illustrates that the claim did not relate to a monumental injury. The offers
of settlement admitted in White were in the amounts of $3,000 and $5,000, made only with
reference to the then pending lawsuit for contract and negligence damages. It was after
these claims were rejected that the plaintiff obtained leave of court to amend the
complaint to state a cause of action for breach of the covenant of good faith and fair
dealing. (White v. Western Title Ins. Co., supra, 40 Cal. 3d at p. 879.) Post-amendment,
the defendant's offer was increased to $15,000, reinforcing the conclusion that the
earlier offers did not relate to tort claims.
||In White, therefore, it was justifiably assumed that the offer of settlement was made
solely with relation to the basic issue of liability on the policy. It appears not to have
been argued otherwise. This conclusion is supported by the Supreme Court's reliance on
Fletcher v. Western National Life Ins. Co. (1970) 10 Cal. App. 3d 376, 396, 89 Cal. Rptr.
78, in which the plaintiff "did not offer the [compromise] letter to prove liability
under the policy but, rather, as a part of his proof of the instrumentality of the tort.
Section 1152, therefore, did not preclude its admission." (White v. Western Title
Ins. Co., supra, 40 Cal. 3d at p. 887.)
||Plaintiff in this case reads White as standing for the proposition that offers of
settlement, while not admissible to prove contractual liability, are always admissible to
prove tort liability -- that is, breach of the covenant of good faith and fair dealing. We
cannot accept this proposition. Section 1152 is not limited to offers made to compromise
contract liability claims. An offer to compromise a tort claim -- even an intentional tort
such as assault and battery -- is inadmissible in the action on the tort. (See Boyes v.
Evans (1936) 14 Cal. App. 2d 472, 479, 58 P.2d 922.) If an action or claim is pending
based on a theory of bad faith violation of the covenant of good faith and fair dealing,
and an offer to compromise the claim is made, we have no doubt that the offer would not be
admissible in the subsequent lawsuit (unless some ground for admission could be
established other than to show liability on the claim). (See Fieldson Associates, Inc. v.
Whitecliff Laboratories, Inc. (1969) 276 Cal. App. 2d 770, 772, 81 Cal. Rptr. 332.)
||How, then, does the White precedent and our understanding of section 1152 apply to the
facts of this case? Preliminarily, we must suggest that we consider the factual setting of
White to be atypical of insurance litigation. It was a case involving a minor claim with
disputed issues of liability. The offers in compromise were made after the bases of the
claim had been identified by filed litigation, and were of an insubstantial amount which
mirrored the litigation. It was undisputed that the offers related only to the contract or
negligence claims, and had no bearing on the bad faith claims which were subsequently
||This is not the usual course of insurance litigation. We need no statistical or
historical analysis to state that the modern form of insurance litigation almost
invariably results in joined claims for contract, negligence and bad faith damages. This
case is an example of the genre, in which the initial complaint was for "breach of
contract, negligence, breach of duty of good faith and fair dealing, breach of statutory
responsibilities [and] fraud." As Justice Kaus remarked in footnote 2 to his
concurring and dissenting opinion in White (White v. Western Title Ins. Co., supra, 40
Cal. 3d at p. 900), "It seems ... that attorneys who handle policy claims against
insurance companies are no longer interested in collecting on those claims, but spend
their wits and energies trying to maneuver the insurers into committing acts which the
insureds can later trot out as evidence of bad faith."
||It can be predicted with assurance, therefore, that whenever an insurance company is
prone to deny a claim, and expects litigation to follow, its offer in compromise will be
for a total release, embracing not only the contract but also all possible tort causes of
action. We cannot imagine that any competent adjuster or attorney representing an
insurance company would contemplate settling the contract or negligence phase of insurance
litigation without also settling the potential bad faith claim.
||Certainly that must have been the situation in this case. There is no evidence or
suggestion that Truck's offer to compromise plaintiff's claim for $250,000 was an offer
directed only to the contract claim. When the offer was made plaintiff was represented by
counsel and demands and threats of suit had been made. Truck's independent counsel
testified that the offer in compromise was not made simply to resolve the loss claim, but
was made after the claim had been denied, during the prelitigation stage in negotiations,
when defense counsel was "constantly getting threats of litigation."
||We therefore conclude that the introduction of the $250,000 compromise offer was
error. The offer was made not only to compromise the plaintiff's contract claim but also,
probably to the greatest extent of the offer, to get rid of a potential and threatened bad
faith claim. As such, the offer should not have been admitted in either the contract or
bad faith phase of the lawsuit, and certainly was inadmissible in a non-severed trial of
||Plaintiff contends on appeal that this approach to White and to the concept of
admissibility of offers in compromise was not raised at trial and not argued by Truck to
the court. Quoting section 353, subdivision (a), plaintiff reminds that "[a] verdict
... shall not be set aside ... by reason of the erroneous admission of evidence unless ...
there appears of record an objection ... that was timely made and so stated as to make
clear the specific ground of the objection...." The error in admission of this offer
in compromise, now seemingly so clear, appears to have eluded all counsel and the court at
the time this matter was considered. Truck did object and argue strenuously respecting
admission of the settlement offer, but always upon the theory that the offer could be
admitted in the bad faith part of the trial. The trial court was never alerted to the
proposition that the offer, obviously a combined offer for both contract and tort
compromise, was totally inadmissible. The reason for the section 353, subdivision (a) rule
is "that the judge may understand the question raised, and that the adversary may
have an opportunity to remedy the defect if possible." (Baron v. Sanger Motor Sales
(1967) 249 Cal. App. 2d 846, 855, 57 Cal. Rptr. 896.) The judge here was not afforded that
opportunity. Plaintiff characterizes this situation as one of "waiver,"
contending that the issue cannot now be raised on appeal.
||A review of the trial arguments presented by counsel suggests less of a concept of
"waiver" of the issue, as urged by plaintiff on appeal, than of the existence of
a tacit understanding of the nature and effect of the offer. At no time did Truck contend
that the offer was made to settle tort claims. As a matter of fact, trial testimony
appears intentionally to have skirted this possibility, special counsel contending that
the $250,000 was made to avoid costs, travel expenses, attorney fees and "many
considerations." The court's ruling was made, therefore, upon what might almost be
considered a stipulation: that the $250,000 offer was made solely to settle the insurance
contract claim. This approach became the "theory of the trial," and hence
governs, also, the issues which can be raised on appeal. (9 Witkin, Cal. Procedure (3d ed.
1985) Appeal, § 316, pp. 327, 328.) The question presented to us, then, is whether it was
error to permit introduction of an offer to compromise contract liability in a
non-bifurcated trial of both contract and tort liability. As to this issue, the court was
thoroughly and accurately advised.
||We recognize that the decision whether to bifurcate causes of action for trial is one
within the discretion of the trial court, reversible only upon abuse of discretion.
(Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co. (1987) 189 Cal. App. 3d 1072,
1086, 234 Cal. Rptr. 835.) We are not in a position to declare that it is impossible for a
trial court to admit an offer to compromise contract liability in a trial which joins
contract with tort claims. We do believe, however, that the likelihood of prejudice is so
great that it will be the extraordinary case in which such may be possible.
||Preliminarily we should note that the White decision is grounded on a foundational
predicate that the evidence of offer was admitted in a bifurcated trial, after liability
for contract had been determined. (White v. Western Title Ins. Co., 40 Cal. 3d at p. 889.)
We have previously concluded, in a parallel context, that the permissive introduction of
settlement offers set forth in White should be limited to bifurcated trials, in which
contract liability has first been established. (California Physicians' Service v. Superior
Court (1992) 9 Cal. App. 4th 1321, 1330.) We have been cited no case, and our research has
revealed none, in which the admission of such compromise offers in a non-bifurcated trial
has been approved. If a trial setting exists in which such may be possible, it would be
one in which the treatment of the limited use of the evidence of offer in compromise would
be so clearly explained to the jury as to remove all possibility of misuse. That was not
the case here.
||The court at the end of the trial did provide a correct instruction concerning the use
of the questioned evidence, stating that it could not be considered to determine
contractual liability, but only in relation to "the claims handling . . . and the
allegations" of bad faith. This distinction was not followed, however, in any other
portion of the trial. The existence of the settlement offer was utilized, not only in
evidentiary presentation and argument but also in the court's comments, to establish the
liability of Truck for breach of the covenant as well as for contractual breach.
Plaintiff's counsel's case presentation relied heavily on the existence of the compromise
offer, and was clearly directed to linking the offer with the conclusion on the part of
the jury that it constituted an admission of liability. Illustrative of this approach is
the following examination of Truck's independent counsel, the party who made the offer:
||"Q. Was the opinion that this was a fraudulent claim as you understood it shared
by others in the company handling the matter?
||Q. Your testimony is that even though your opinion -- that of the persons in the
opinion, was that this claim was a fraudulent claim, meaning the loss didn't occur as
represented or that the inventory wasn't there and through your office an offer to resolve
the matter was made; is that correct?
||A. Ultimately, that's correct.
||Q. $250,000; is that correct?
||A. That's correct.
||Q. I think that's about a quarter of a million dollars; is that right?
||A. It would appear to be.
||Q. You're going to allow your client, Farmers Insurance
Group, to pay to a guy who is perpetrating a fraud; is that right?
||The clear import of this line of questioning, it seems to us, is to establish that
there was an inconsistency in Truck's saying on the one hand that it was not liable for
the insurance proceeds because of the plaintiff's fraud, and on the other hand offering to
pay $250,000. That this was to be the theory of plaintiff's case was confirmed by final
argument. Plaintiff's counsel, referring to the offer, stated:
||"If this case was a fraud, if the loss was staged, if it was not a legitimate
break-in, if the inventory wasn't there, who would pay $250,000? Who would offer that kind
of money? Even on this, who would offer that? It is just not practical. Something
happened. Berard asked for follow-up. Meetings were held. Immediately afterwards,
discussions were held with Mr. James. Something took place. We don't know what it is.
There have been rulings in the case. We don't have that, we don't know. But you're
entitled to consider that offer as how it relates to the concept of claims handling. Here
is a full, final and irrevocable denial on a letter that's in front of you. On that letter
they're telling you, it says, 'We deny the claim on fraud.' Then they offer $250,000. So
you have to say, if the letter says it is denied based on fraud, is $250,000 consistent? I
||Finally, the court itself in commenting on objections referred, at least ambiguously,
to "the reasons why the company changed its mind on this" and made an offer to
settle. The strong implication of this comment, whether intended or otherwise, was that
the company offer was the result of a changed assessment of contract liability, thus
constituting an invitation to the jury to infer that it could be utilized in determining
the contract cause of action.
||We therefore conclude it is reasonably probable that the jury improperly utilized the
settlement evidence in the contract portion of the case, following numerous suggestions
during trial to do so, and that it did not limit its consideration solely to the bad faith
aspect of the trial. Such misuse of evidence is prejudicial error. (Shepherd v. Walley
(1972) 28 Cal. App. 3d 1079, 1084, 105 Cal. Rptr. 387; Granville v. Parsons (1968) 259
Cal. App. 2d 298, 303-304, 66 Cal. Rptr. 149.) It likely resulted in a verdict more
favorable to plaintiff than would otherwise have been the case, and hence we must reverse
and remand for retrial. (See 9 Witkin, Cal. Procedure (3d ed. 1985) Appeal, § 353, pp.
||5. Refusal to Instruct on Defense of Advice of Counsel
||Truck retained independent counsel to investigate and advise with respect to
plaintiff's claim. It is undisputed that this counsel worked diligently on the case,
considered the reports of other experts, and rendered detailed legal advice, the upshot of
which was to recommend denial of the claim. At trial, Truck relied upon the defense of
advice of counsel, both to defend the bad faith case itself and to defend against punitive
damages. Truck requested that the court instruct on these defenses. The court refused to
do so, orally stating that the instruction was "not true," and indicating by
notations in the record that the instructions sought were "covered by BAJI 12.90 and
||A party has a right to have the jury instructed as to the law applicable to all its
theories of the case which are supported by the evidence. (Fish v. Los Angeles Dodgers
Baseball Club (1976) 56 Cal. App. 3d 620, 633, 128 Cal. Rptr. 807.) A denial of an
insurance claim based upon good faith reliance on advice of legal counsel is a defense to
a claim of bad faith. BAJI Nos. 12.90 and 12.92, which are bare bones instructions
defining the obligation of good faith administration of insurance claims, clearly do not
cover, or even inferentially refer to, the possible defense of advice of counsel. Failure
to give an instruction which effectively removes a valid theory of defendant's case is
inherently prejudicial. (Estate of Mann (1986) 184 Cal. App. 3d 593, 614, 229 Cal. Rptr.
225.) Why, then, should we find this failure not to be prejudicial error? Plaintiff
suggests several reasons:
||(a) Inadequate proposed instructions. Truck submitted the following instructions:
||"An insurance company's reasonable belief that benefits are not owed is 'proper
cause' for denying a claim.
||An insurance company's reasonable reliance upon the advice of counsel is 'proper
cause' for denying a claim.
||An insurance company's reliance upon the advice of counsel is reasonable if:
||(1) The insurance company acted on the opinion and advice of counsel;
||(2) Counsel's advice was based on full disclosure of all facts by the insurance
company or the advice was initiated by counsel based on counsel's familiarity with the
||(3) The insurance company's reliance on the advice of counsel was in good faith."
||This instruction was modeled after statements of the elements of the defense of
"advice of counsel" contained in malicious prosecution cases: Bertero v.
National General Corp. (1974) 13 Cal. 3d 43, 53-54, 118 Cal. Rptr. 184, 529 P.2d 608 and
Melorich Builders, Inc. v. Superior Court (1984) 160 Cal. App. 3d 931, 936-937, 207 Cal.
Rptr. 47. The elements of the defense for malicious prosecution are parallel, if not
congruent, with the defense as it relates to the tort of bad faith denial of insurance
benefits. (See Kornblum, Kaufman & Levine, CAL.PRAC.GUIDE:BAD FAITH (TRG 1990) §§
10:102, 10:103.) The defense as utilized in bad faith cases was succinctly stated by our
court in State Farm Mut. Auto Ins. Co. v. Superior Court (1991) 228 Cal. App. 3d 721, 725,
279 Cal. Rptr. 116 as follows: "An insurer may defend itself against allegations of
bad faith and malice in claims handling with evidence the insurer relied on the advice of
||Plaintiff contends the proffered instructions were erroneous because (1) they
suggested that "advice of counsel" was a complete defense, and (2) the
instructions were in any event incomplete. The question of whether a ground of defense can
be "complete" or is only a basis upon which, considering all other evidence, a
jury can find no liability, is to our minds a semantic rather than substantive
distinction. The tendered instructions simply indicated that "advice of counsel"
could constitute a defense, and did not imply any absolute or immutable quality to the
||As to the completeness of the instructions, plaintiff contends that certain elements
of the defense which were crucial to its effectiveness were omitted. We have reviewed the
several authorities plaintiff cites suggesting they require additional components to the
instruction, and find none persuasive. *fn6
||Assuming, however, for purposes of discussion, that the instruction on the defense of
advice of counsel, as offered by Truck, could have been more complete, we are faced with
the question of whether the court was obliged to make an effort to obtain a better version
of it, rather than denying the instruction out of hand. We deal here with two conflicting
principles: first, that "it is the responsibility of the trial court to instruct the
jury on the controlling legal principles applicable to a case" (Roberts v. City of
Los Angeles (1980) 109 Cal. App. 3d 625, 632, 167 Cal. Rptr. 320); and second, that
"where a portion of a proposed instruction is erroneous, misleading or incomplete,
the court may properly refuse the entire instruction, there being no duty on the court to
cull out what is proper from what is not." (Fibreboard Paper Products Corp. v. East
Bay Union of Machinists (1964) 227 Cal. App. 2d 675, 717, 39 Cal. Rptr. 64.) This conflict
was reviewed in Wank v. Richman & Garrett (1985) 165 Cal. App. 3d 1103, 211 Cal. Rptr.
919, and we paraphrase that court's conclusion (on p. 1114) as follows: (1) If a defect
can be cured by a minor change engineered by the trial judge, in an instruction important
to the case, the change should be made; (2) If major changes are required, however, it is
not up to the judge to serve as advisory counsel and he may simply reject a seriously
defective instruction. To these conclusions we would add a third: (3) Where an instruction
is vital to a party's case the court may not, on a peremptory and erroneous ground, deny
the instruction when an indication by the court as to the nature of the instruction's
defect, and a request for correction by counsel, would likely produce a correct and
complete instruction. (Cal. Rules of Court, rule 229(c); Wank v. Richman & Garrett,
supra, 165 Cal. App. 3d at p. 1114.) As stated in Laird v. Moss (1959) 173 Cal. App. 2d 48
at page 53, 342 P.2d 463, "trivial inaccuracies do not justify the refusal of an
instruction where the result would be to leave the jury inadequately instructed on a
material issue in the case."
||(b) Adjuster Services Rendered, Not Attorney Services Plaintiff contends that advice
of counsel as a defense is inapplicable in this case because the attorney served as an
"adjuster" rather than an attorney. Initially, we note that Mr. Berard, the
attorney, was not and never had been the employee of Truck. Hence cases such as Casselman
v. Hartford A. and I. Co. (1940) 36 Cal. App. 2d 700, 98 P.2d 539, which deal with
attorneys who were employees of the insurance company, are inapplicable. More to the
point, we find it difficult to conclude that an attorney's advice somehow is undermined as
"legal advice" when it is mixed with conclusions of a factual nature resulting
from that attorney's or some other expert's investigation. Legal counsel not infrequently
perform some portion of a case's investigatory aspects, and certainly weigh and counsel
respecting factual as well as legal matters in issue. While a menial factual investigator
not employed to render legal advice probably cannot furnish the basis for an "advice
of counsel" defense, we see no merit in attempting to limit the defense to advice
received from armchair lawyers who do not go into the field to investigate facts. (Cf.
Aetna Casualty & Surety Co. v. Superior Court, supra, 153 Cal. App. 3d at p. 476.)
||(c) Nonreliance in Denial of Claim. Finally, plaintiff contends the evidence does not
indicate that Truck relied on advice of counsel in denying plaintiff's claim. This
conclusion apparently is reached upon the basis that Truck's denial letter did not
specifically state it was based on counsel's conclusion that no loss had occurred. We see
no reason why an insured must be told in the denial letter that the insurance company is
relying on advice of counsel. The defense exists because of its relation to the state of
mind of the insurer, and has nothing to do with notice to an insured. The evidence in this
case amply supports the conclusion that Berard advised Truck that plaintiff had
misrepresented and concealed facts and that he had failed to prove his loss. These were
the grounds upon which the claim was denied. That these grounds were not referenced as
being derived from a lawyer's advice is of no consequence.
||(d) Conclusion. We find that the "advice of counsel" defense was appropriate
in this case, that instructions as to it should have been given, and that failure to give
such instructions constituted prejudicial error. (Williams v. Carl Karcher Enterprises,
Inc. (1986) 182 Cal. App. 3d 479, 490, 227 Cal. Rptr. 465.) We think the proffered
instructions were accurate and adequate, but if the trial judge thought otherwise he was
obligated to give counsel some clue as to his objection, and further to afford counsel the
opportunity of correcting the instructions to meet such objection.
||6. Punitive Damages
||[NOT CERTIFIED FOR PUBLICATION]
||7. Liability of Heldoorn
||[NOT CERTIFIED FOR PUBLICATION]
||8. Prejudgment Interest
||[NOT CERTIFIED FOR PUBLICATION]
||The judgment in favor of plaintiff and against both Truck and Heldoorn is reversed in
its entirety. The case is remanded for retrial. Defendants Truck and Heldoorn are entitled
to costs on appeal.
||HUFFMAN, Acting P.J., and NARES, J., concurring.
||2 Although Farmers Insurance Group was originally named a
defendant, and much of the documentation including jury instructions is framed in terms of
identifying Farmers as the defendant, the actual corporate defendant was a subsidiary of
Farmers, Truck Insurance Exchange. The case proceeded only
against Heldoorn and Truck, resulting in a judgment against Heldoorn for negligence and
against Truck for breach of contract and tortious bad faith.
||3 The record does not contain a copy of this offer, and hence we assume it to have
been made orally. A great deal of the difficulty in analyzing the terms and effect of this
offer results from the lack of any record of its precise terms, as we discuss below.
||4 All statutory references are to the Evidence Code unless otherwise specified.
||5 As noted on appeal by Truck, these rulings are inconsistent. Relevancy is the
concept of a logical relationship between the proffered evidence and the conclusion sought
to be proved. "The general test of relevancy of indirect evidence is whether it tends
logically, naturally, and by reasonable inference to prove or disprove a material
issue." (People v. Jones (1954) 42 Cal. 2d 219, 222, 266 P.2d 38.) The discretion
vested in a judge under section 352 is to exclude relevant evidence based on
considerations of prejudice, confusion or undue consumption of time. The court here
somehow entertained the conclusion (erroneous as we suggest in the text, above) that a
showing of conspiracy to defraud on the part of Minassian et al. would have no bearing on
a conclusion as to the participation therein of plaintiff. Further, although the court
stated its ruling was based on section 352, it cited only one ground which might support a
discretionary exclusion under section 352: "prejudice." However, the only
prejudice we can see here is the logical damage the evidence might do to plaintiff's case.
The prejudice involved in a section 352 determination is evidence which tends to incite an
emotional bias against a party for reasons unrelated to the issues of the case. (People v.
Yu (1983) 143 Cal. App. 3d 358, 377, 191 Cal. Rptr. 859.)
||6 Plaintiff points to the necessity of the instruction advising that the attorney was
fully informed of the facts, that the insurer actually relied on the counsel's advice, and
that the insurer was not aware there was anything illegal or improper about the advice --
i.e., that the reliance was in good faith. Our reading of the tendered instructions
reveals inclusion of each of these elements. The defense is not available when the insurer
in fact did not claim to have acted upon it in denying a claim. (Aetna Casualty &
Surety Co. v. Superior Court (1984) 153 Cal. App. 3d 467, 475, 200 Cal. Rptr. 471.) There
was no evidence in this case to support a conclusion of this kind. An insurer cannot rely
on advice when it is patently unsound. (Moore v. American United Life Ins. Co. (1984) 150
Cal. App. 3d 610, 640, 197 Cal. Rptr. 878 [physician's advice in that case].) That concept
is embraced, we believe, in the requirement in the proffered instruction that the reliance
by the insurer be "in good faith." Similarly, plaintiff's reliance on Allen v.
Allstate Ins. Co. (9th Cir. 1981) 656 F.2d 487, 489 is misplaced, the admonition of that
case also being satisfied by the "good faith" reliance requirement of the
instruction (reliance there on attorney's overly optimistic prediction of trial success