Petition for Writ of Certiorari — Nationwide Mutual Insurance v. Superior Court of California

BK -FALR

No. | FEB

IN THE "| yoses

SUPREME COURT eet

OF THE UNITED STATES

October Term, 1985

NATIONWIDE MUTUAL INSURANCE

COMPANY, a corporation,

Appellant,

vs.

SUPERIOR COURT OF THE STATE OF

CALIFORNIA FOR THE COUNTY OF SAN

BERNARDINO,

Appellee.

MARY DENISE MITCHELL, LEON

MITCHELL,

Real Parties in Interest.

ON APPEAL FROM

CALIFORNIA COURT OF APPEAL,

FOURTH APPELLATE DISTRICT, DIVISION TWO

JURISDICTIONAL STATEMENT

SIMON, BUCKNER, HAILE

& MIGDAL

STUART L. BRODY

4640 Admiralty Way, #214

Marina del Rey, CA 90292

(213) 823-8515

PARKER, STANBURY, McGEE,

BABCOCK & COMBS

1200 No. Main St., #716

Santa Ana, CA 92701

(714) 547-7103

Attorneys for Appellant

Lawyer’s Brief Service, Inc. / Legal Publishers / (213) 383-4457

QUESTIONS PRESENTED

l. Is it repugnant to the 14th

Amendment for a state to enact a statute

imposing tort and punitive damage

liability on a liability insurer and in

favor of a third party claimant for

providing the insured a defense in an

adversary proceeding and failing to settle

in advance of trial?

(a) Can a statute impose tort

and punitive damage liability for refusing

to waive the constitutional right to

notice of hearing, hearing, and judgment

prior to being deprived of property and

exercising the fundamental right to access

to the courtroom to defend yourself?

(b) California Insurance Code

§790.03(h)(5) imposes third party liability

on the insurer not for improper actions

taken in the defense of a suit by the

third party against the insured, or

for damages incurred by the insured,

but for the basic act of defending the

suit at all, i.e., exercising the right to

notice of hearing, hearing and proper

order before being dispossessed of prop-

erty; does this statute's imposition of an

extreme penalty (tort and punitive

damages) to deter the right to access to

the courtroom comply with the requirements

of due process guaranteed by the 14th

Amendment?

be Does a statute imposing tort and

punitive damage liability for defending a

lawsuit on only insurers and no other

defendant in any civil proceeding violate

the equal protection clause of the 14th

Amendment? California does not permit a

cause of action for malicious defense;

said statute excepts only insurers and no

other litigant from that rule and imposes

tort liability not for acting maliciously,

but on the lesser standard of unreasonably

wits

defending a lawsuit brought by a third

party adversary against the insured to

whom there is a separate obligation to

provide a defense.

3. Does a statute imposing tort

and punitive damage liability on the

attorney defending a personal injury suit

for conspiring with his client not to

settle said suit (and making appellant

liable therefore) violate the due process

clause of the 14th Amendment? The tight

to counsel in a civil proceeding at one's

own expense is a California state consti-

tutional right. Attorneys representing

insured defendants in civil suits must

temper their representation because they

are subject to tort liability for con-

Spiring with their clients to violate

Insurance Code §790.03(h)(5), thus chill-

ing the representation and depriving the

insured of the effective assistance of

counsel.

-iii-

4. Does a statute imposing tort

and punitive damage liability for conspir-

ing not to settle a lawsuit only on

attorneys defending insured defendants,

and insurers, but no other attorneys

violate the equal protection clause of the

14th Amendment? Only attorneys represent-

ing insured defendants and insurers, and

no other defense attorneys, are subject

to tort liability for conspiring with a

client not to settle a case whereby the

client would have to pay money.

-iv-

TOPICAL INDEX

Page

JURISDICTIONAL STATEMENT............- l

PEERED DEM s ccc cesecesecesscescencer l

FOMEDORGE EG Cob ccereccssesesesresisers 3

DEMEUERS ENVOUUERs oc cccesccccseseseces 3

STATEMENT OF THE CASE......cccccccecces »)

FEDERAL QUESTIONS ARE SUBSTANTIAL.... 13

wt we jit PPP rerrrrLerrererrrTrrrr TT rrr 27

APPENDIX A

Order of the California

Covrt of Appeal

APPENDIX B

Order of the California

Supreme Court

APPENDIX C

Notice of Appeal

TABLE OF AUTHORITIES

Page

STATUTES AND TREATISES

California Code of Civil Procedure

§437c, subparagraph (1)........+.-- 2,10

California Insurance Code 2-4,8-10,12

6€790.03(Ch) (5). cccccccccccces 16,23,25,27,

28

Rule 56, F.R.Civ.P.ccccccccsescscseses 10

Rul2 408, F.R.Civ.Peccccccccccscccces 28

14th Amendment to the United

States Constitution... ...eseee0. em se,

Rules of Supreme Court of the United

States, Rules 12 and 15.....ceseeeeees l

Rules of Supreme Court of the United

States, Rule 28(C)..cccccccccsssccees ll

28 8.8.6. SLZSTCArdccccdteecsedceesesess 3

McCormick, Damages (1935) §88,

DP. B1B-319. .. cece ncn ereeenenneceuees 20

CASES

Aetna Life Ins. Co. v. Lavoie,

WSS No. BSG-LOUL. cccccccccescsccccess 20

Bell v. Burson, 402 U.S. 535, 91

S.Ct. 1586. 29 L.Ed.2d 90 (1971)..... 15

Bertero v. National General Corp.,

I3 c.30 43, 52. IIS C.R. 184,

529 P.2d 608 (1974). cccccccccscveses 23

-vi-

Brooks v. Small Claims Court, 8

C.3d 661, 105 C.R. 785, 504 P.2d

Lee Bee eet adeetcth ensue seecdhns

Capeluto v. Kaiser Foundation

Hospitals, 7 C.3d 889, 893, 103

C.R. 856, 500 P.2d 880 (1972)......

Cleveland Bd. of Educ. v. Loudermill,

4/0 U.S. 106 S.Ct. » 84

lcM@eee Gow. ChOOOD ckweeecessscciues

Dun & Bradstreet, Inc. v. Greenmoss

Builders, Inc., FF "

105 S.tt. 2939, ~" L.&d.2d

CEFR D Je cccccocscceccscccccscccce

Eastin v. Bank of Stockton, 66

Ge Bats © Us BOO Cheat céceccecece

Electrical Workers v. Foust, 44

U.S. 42, 50-51, 99 S.Ct. ZI21, 60

8. Me.) >» Rr eee

Fraternal Mystic Circle v. Snyder,

22/7 U.S. 497, 33 S.Ct. 292, 57 L.Ed.

OEE CEPR SP occccceccteccsscvesescoces

Fuentes v. Shevin, 407 U.S. 67,

S92 S.Ct. I983, 3Z L.Ed.2d 556

(Resp cekekesedansaacucaunee 15,16,21,

In Re Kathy P., 25 C.3d 91, 102,

157 C.R. 8/4, 599 P.2d 65 (1979)...

Li v.Yellow Cab Co., 13 C.3d 804,

wR. : -2d 1226 (1975).

Life & Casualty Co. v. McCray, 291

U.S. 366, 54 S.Ct. 482, 78 L.Ed.

FOE CEPSePccvccccecccccscseccceses 18,

19

15

20

Maloney v. Rath, 69 C.2d 442,

445- ; KR. 897, 445 P.2d

Cg. ° a 19

Mendoza v. Small Claims Court, 49

C.2d 668, 321 P.2d 9 (1958)........ 25

Mullane v. Central Hanover Bank &

Trust Co., 339 U.S. 306, 70 S.Ct. 652,

y= eo Bs. | ee 15

Murphy v. Allstate Ins. Co., 17

ch she I3Z C.R. 424, 553 P.2d

OB Rr eT eer TT Tere ee 5,11

Parratt v. Taylor, 451 U.S. 526, 101

S.ct. 908, Ee L.Ed.2d 420 (1981).. 15

Pray v. Foremost Ins. Co., 76/7 F.2d

Reasoner v. Aetna Life Ins. Co.,

600 F.Supp. 278 (S.D. Cal., T984).. 24

Roval Globe Ins. Co. v. Superior

Court, 23 0.30 880, 153 me B42

SOF P.2d 329 (1979)...eeeceee 4,5,11,12,27

Seffert v. Los ange, Transit Lines,

. ‘ - ‘ . . 51,

3O0 Bae Sal. Cumenneéeés cect sceatess 19

Smith v. Wade, 461 U.S. 30, 59, 103

S.Ct. 1625, 75 L.Ed.2d 632 (1983).. 20,29

Sniadach v. Family Finance Corp.,

395 U.S 337 B72 - a 1820.

23 L.Ed.2d 349 (1969).......cccecee 15,16

-viii-

’ . a’ 2

ych v. Insurance Co. of Nortt

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Ary " fh ,% Pe

Amer i i 3 A. 3d I4e ee

~Gs

el 4 5 )

wTWTrWwTRetwekeewiermeeweeeyreRePRRER RR Se SB SG ‘

White v. Western Title Insurance

Company. 40 €.3d 870 a

‘ . . . .

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, a c

r.ZQ Qt). >>) FFrrrePrrrrTrrriireTri$r d

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WO Irict ' OTp. V.« nited TV 1

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IT Goethe BRO CIFSS) ccccccccccccceccs

JURISDICTIONAL STATEMENT

Pursuant to Rules 12 and 15 of the

Rules of Supreme Court of the United

States, appellant Nationwide Mutual

Insurance Company files this statement on

the basis upon which it contends that the

Supreme Court of the United States has

jurisdiction to review the judgment

entered by the California Court of Appeal,

Fourth Appellate District, Division Two in

this case and should exercise such juris-

diction herein.

OPINIONS BELOW

The opinion of the California Court

of Appeal, Fourth Appellate District,

Division Two is included herein as Appen-

dix A. The order of the California

Supreme Court denying appellant's Petition

for Review is included herein as Appendix

B. Appellant petitioned the California

Court of Appeal and later sought review in

the California Supreme Court pursuant to

California Code of Civil Procedure §43/7c,

subparagraph (1), authorizing review of

orders on summary judgment motions by

prerogative writ rather than by appeal.

A ground of the writ was the unconstitu-

tionality under the 14th Amendment to

the United States Constitution of Cali-

fornia Insurance Code §790.03(h) (5) which

provides that a third party claimant and

adversary party may sue a liability

insurer in tort and for punitive damages

for not settling the lawsuit brought by

said claimant against the insured. The

judgment constitutes a ruling on the

merits. The California Supreme Court

denied review on 13 November 1985. There

is no trial court opinion.

JURISDICTION

The appeal herein is from a final

judgment of the California Court of Appeal

upholding the constitutional validity of

California Insurance Code §790.03(h) (5).

The Supreme Court of the United States has

jurisdiction to review the final judgment

by direct appeal pursuant to 28 U.S.C.

§1257(2).

The judgment was made and filed 26

September 1985. Review by the California

Supreme Court was denied 13 November 1985.

Notice of Appeal was filed on 23 January

1986. The Notice of Appeal is included

herein as Appendix C.

STATUTES INVOLVED

California Insurance Code §790.03(h)

(5) provides:

"The following are hereby defined as

unfair methods of competition and

unfair and deceptive acts or prac-

tices in the business of insurance.

"Knowingly committing or performing

with such frequency as to indicate a

general business practice any of the

following unfair claims settlement

practices:

"(5) Not attempting in good

faith to effectuate prompt,

fair, and equitable settle-

ments of claims in which

liability has become

reasonably clear."

Said statute has been definitively

interpreted by the California Supreme

Court in Royal Globe Ins. Co. v. Superior

Court, 23 C.3d 880, 153 C.R. 842, 592 P.2d

329 (1979). As interpreted by Royal

Globe, id., Insurance Code §790.03(h) (5)

provides a cause of action in favor of a

third party claimant who is the plaintiff

in a personal injury lawsuit against the

liability insurer of the defendant in said

personal injury lawsuit, for failing to

settle said suit. Simply put, the plain-

tiff can obtain a judgment or a settlement

within policy limits against an insured

defendant and then file a separate suit

against the liability insurer in tort for

tort and punitive damages for failing to

settle the first suit. This cause of

action is solely a creature of statute; as

interpreted by the California Supreme

Court, no such action lies in favor of a

stranger to the insurance contract at

common law, but only by reason of statute.

(Royal Globe, id.; Murphy v. Allstate Ins.

Co., li €.34. 937, 132 C.R. 424, 333 P.2e

584 (1976).) This statutory cause of

action is permitted in diversity actions.

(Pray v. Foremost Ins. Co., 767 F.2d 1329

(C.A. 9, 1985).)

STATEMENT OF THE CASE

Appellant was the liability insurer

for Paul Clement Wilson. Real party Mary

Denise Mitchell was the driver of an

automobile owned by her father, real

party Leon WMeeheke On 27 June 1981,

Mitchell and Wilson were involved in an

automobile accident. Mitchell suffered

personal injuries.

The Mitchells made demand on appel-

lant for policy limits. When no settle-

ment offer was made, at the end of 1981,

suit was filed against Wilson, the

insured. In approximately January, 1982,

Egan, Harrison & Bawden, attorneys at law,

by Charles A. Harrison, Esq., were re-

tained by appellant to defend the insured

in the lawsuit. The Mitchells, contending

that liability for the automobile accident

was clear, demanded either policy limits

of $250,000.00 or $200,000.00 from com-

mencement of suit up to the settlement

conference on the eve of trial.

Wilson's defense conducted discovery,

developed a potential defense to

I7 When used in the singular, "Mitchell"

refers to Mary Mitchell, the driver

involved in the automobile accident.

~

liability and the defense of comparative

liability.

At the settlement conference on 26

April 1983 the case settled for $200,000.00.

A settlement and release was executed by

the Mitchells which expressly acknowledged

that Wilson's "legal liability and damages

are disputed and denied"; there is no ad-

mission of liability in the settlement.—

2/ Summary judgment was brought Largely on

the allegations of the Complaint. Although

evidence below indicated that there was a

possible defense, and liability was not

"reasonably clear," for purposes of this

Statement we assume that the circumstances

are sufficient to sustain the technicalities

of the state cause of action that although

the insured's "liability" was reasonably

clear to the insurer, the insurer, by

itself and in conjunction with its attorney,

failed to attempt to settle with tte

plaintiff. The issue is the constitution-

ality of the statutory imposition of tort

and punitive damage liability. Therefore

we do not attempt by this factual summary

to demonstrate the incorrectness of

Mitchell's version of the facts other than

the admitted settlement expressly disputing

and denying liability. The standard

[footnote continued ]

After completion of the settlement,

the Mitchells turned around and on 6 June

1984 filed an action in appellee Superior

Court for tort and punitive damages for

violation of Insurance Code §790.03(h).

The claim is for violation of statutory

that liability is reasonably clear is clearly

inadequate. California is a comparative

liability state. (Li v. Yellow Cab Co.,

13 C.3d 804, 119 C.R. 858, 532 P.2d 1226

(1975).) Assuming the insured's liability

is clear, there still must be a determina-

tion of the plaintiff's negligence, the

percentages of liability and the amount of

damages. Defendant and its insurer were

entitled to notice, hearing and order on

those issues too. If a defendant believes

he is liable, he is still entitled to a

determination of the amount by appropriate

hearing and order. It is next to impos-

sible in an automobile personal injury

suit with disputed facts for both 100% of

the Liability and a liquidated amount of

damages to be objectively clear. The

evidence below also shows that the amount

and percentage of liability were in

dispute in the Mitchell v. Wilson suit.

That there was a substantial issue of the

amount of comparative liability is clearly

inferable by the fact that although there

were $100,000 in medical damages, the case

nevertheless settled for $200,000, which

was $50,000 under the limit of liability

of Wilson's policy.

oii.

as ceseeenieaiaamaa anette

duties owed directly to appellees, the

adversaries in the first suit, and not for

any failure of performance to Wilson, the

insured.

Through various pre-trial motions,

all causes of action other than Insurance

Code §790.03(h)(5) were disposed of. Only

Insurance Code §790.03(h)(5) Liability to

a third party claimant is at issue in the

trial court.

The instant lawsuit is also against

Christopher Keller, a claim representative

of appellant, and Egan, Harrison & Bawden

and Charles A. Harrison, the attorneys

hired to defend Wilson in the Mitchell v.

Wilson lawsuit. Their liability is also

predicated on the breach of the statute

under constitutional attack herein.—

3/ None of the other defendants has

appeared in the Superior Court suit.

[footnote continued ]

Appellant filed a Motion for Summary

Judgment in appellee Superior Court. Said

motion was denied.

Appellant then filed a Petition for

Writ of Mandate in the California Court of

Appeal. Pursuant to specific statutory

provisions in California equivalent to

Rule 56, F.R.Civ.P., proceedings on summary

judgment motions which do not result in a

judgment are not appealable, but instead

are specifically made subject to review by

prerogative writ. (California Code of

Also they were not parties at all to the

writ proceedings from which appeal

is taken; it is considered an original

proceeding in the California Appellate

Court and they are not parties to this

appeal. Since appellant is charged with

either respondeat superior or conspiracy

liability for the acts of the other

Superior Court defendants which violate

§790.03(h) (5), their liability is also

raised herein to destroy vicarious lia-

bility contentions.

4/

Civil Procedure §437c, subparagraph (1).)—

Even though State Supreme Courts do

not like to have attorneys present arguments

that, in effect, the court itself created

an unconstitutional cause of action,

appellant raised state and federal constitu-

tional questions and also contended that a

4/ The Superior Court is a party and

satisfies U.S.S.C. Rule 28(c). Mary

Denise and Leon Mitchell are the only

other parties.

5/ As a statement of the California

tules of statutory interpretation, in our

opinion Royal Globe leaves much to be

desired. It makes more sense as a delib-

erate misreading of the statutes in order

to advance the common law. As a decision

imposing new common law liability it

merits serious consideration. Neverthe-

less, California faithfully follows the

distinction between common law and statu-

tory liability. Liability to third party

claimants is permitted only pursuant to

statute and not at common law. Murphy v.

Allstate, supra, remains the law regard-

ing the cause of action for breach of the

implied covenant of good faith and fair

dealing; liability to a third party

claimant pursuant to Royal Globe, supra,

is applicable only for a statutory action.

Hence this appeal rather than a Petition

for Certiorari.

afte

determination or admission of the

insured’s liability is a prerequisite to

a Royal Clobe action by a third party

claimant for breach of a liability in-

surer's obligations under Insurance Code

§790.03(h)(5). (E.g., a liability insurer

has no obligation to pay a third party

claimant if, in fact, the insured is not

liable (Sych v. Insurance Co. of North

America, 173 C.A.3d 32, C.R.

(1985): in this case the plaintiffs

settled and dismissed the insured and now

attempt to prove the insured's liability

in the suit with the insurer.) The

statutory interpretation contention was

not accepted. Appellant :.pecifically

argued in the California Court of Appeal

and in the Supreme Court that Insurance

Code §790.03(h)(5)'s authorization of a

suit by a third party claimant against the

defendant's insurer and attorney violated

the due process and equal protection

at@e

ee |

clauses of the 14th Amendment. (Petition

for Writ of Mandate, page 16; Petition for

Review, pages 15-16.)

The Court of Appeal denied the

Petition for Writ of Mandate. Instead of

a discretionary denial, it cited case

authority on a point of substantive law,

so out of necessity considered constitu-

tional issues. The Californi. Supreme

Court denied discretionary review without

comment.

FEDERAL QUESTIONS ARE SUBSTANTIAL

,

Le It goes to the very heart of an

adversary system for a party to be invol-

untarily haled into court and then have

tort and punitive damages liability

imposed for refusing to voluntarily give

up the defense and pay money. The deci-

sions of this Court consistently hold that

a fundamental principle of due process of

law is that a person cannot be deprived

of property without notice of hearirg,

nite

hearing before impartial judge and jury,

and iidemwne = The analytical and

philosophical results of the statute

under review is to impose tort and punitive

damage liability for declining to waive the

federal constitutional right to due process

of law. In defense of the original lawsuit

of Mitchell v. Wilson, appellant had the

right not to be deprived of its property

(money) without notice of hearing, hearing

and appropriate judgment. A settlement is

a voluntary relinquishment of those rights.

A state by statute cannot impose tort and

punitive damage liability for the act

6/ There obviously are exceptions and

other nomenclature which may be used.

Common examples are: Ex Parte attachments

or temporary injunctions for short periods

of time when there is good cause; hearings

may have a judge, jury, arbitrator, or some

other person as a trier of fact or legal

officer; there may be orders short of or

called something different than a judgment.

The use of the terms hearing, trial, judge,

jury, judgment, etc. are not meant to be

exclusive, but rather illustrative.

ths

Mi

of refusing to waive federal constitu-

tional rights. The state cannot bar the

defendant from the courtroom.

In the original lawsuit of Mitchell

v. Wilson, it is settled and determined

that where a person has a property inter-

est, said person cannot be deprived of

that property interest without notice and

Opportunity to be heard. (Mullane v.

Central Hanover Bank & Trust Co., 339

0.8... 306,.. 70 S.Cb. 632; Me: 6.88. 860

(1950); Bell v. Burson, 402 U.S. 535, 91

S.Ct. 1586, 29 L.Ed.2d 90 (1971); Fuentes

v. Shevin, 407 U.S. 67, 92 S.Ct. 1983, 32

L.Ed.2d 556 (1972); Sniadach v. Family

Finance Corp., 395 U.S. 337, 82 S.Ct.

1820, 23 L.Ed.2d 349 (1969); Parratt v.

Taylor, 451 U.S. 526, 101 S.Ct. 1908, 68

L.Ed.2d 420 (1981); Cleveland Bd. of Educ.

v. Loudermill, 470 U.S. 106 S.Ct. ,

84 L.Ed.2d 494 (1985).) The principle

advanced by the statute under review

,

would, for example, impose liability on

the debtors in Fuentes, supra, and Snia-

dach, supra, for insisting on their

constitutional right to hearing. Until

such time as said hearing is held, appel-

lant was entitled to retain its money.

The use of money until culmination of the

suit is a protected property right.

(Sniadach, supra, 395 U.S. at 342 (con-

curring opinion of Harlan, J.); Fuentes,

supra, 407 U.S. at 86.)

The effect of §790.03(h)(5) is to

impose tort and punitive damage liability

for refusing to give up the right to a

trial determining liability and the amount

thereof, and the formal order imposing that

liability. Section 790.03(h)(5) imposes

tort and punitive damage liability when,

to use the instant example, the alleged

automobile driver-tortfeasor's liability

becomes reasonably clear to the person

obligated to pay for the tortfeasor's

se

damages. So what if liability is subjec-

tively reasonably clear to the tortfeasor

or the insurer? The defense still has the

constitutional right to a jury determina-

tion of that liability and the amount

thereof. So what if the tortfeasor or the

insurer believes the amount the jury would

award? They have a constitutional right to

a jury's determination of that amount and

are not required to rely on their own

subjective determination or a plaintiff's

demand based on a guess as to what a jury

would do. So what if an insurer retains

money and the use of the money until a

proper order is entered? In our country a

defendant in a lawsuit is entitled to keep

his money until there is a proper order

depriving him of it vis-a-vis the claims of

a stranger to the contractual obligation.

That is not to say that abuses do not

occur or that a state may not enact remedies

short of a final judgment in an underlying

wait.

automobile accident case. Nor does appel-

lant contend that sanctions may not be

imposed on a defendant for specific acts of

misconduct in the defense of a lawsuit. In

the early part of this century this Court

upheld the imposition of sanctions against

insurers for the bad faith defense of a

lawsuit with the insured, or where needed

to make the insured whole. (Life &

Casualty Co. v. McCray, 291 U.S. 566, 54

S.Ct. 482, 78 L.Ed. 987 (1934); Fraternal

Mystic Circle v. Snyder, 227 U.S. 497, 33

S.Ct. 292, 57 L.Ed. 611 (1913).) In doing

so, however, this Court emphasized that

these were penalties for failure to comply

with the contract in a suit with the

person to whom the contractual obligation

was owed; the amount is moderate; the

insurer is not penalized for taking the

matter to court; "The price of error may

be so heavy as to erect an unfair barrier

against the endeavor of an honest litigant

= =

EE

to obtain the judgment of a court. In

that event, the Constitution intervenes

and keeps the court room open." (Life

& Casualty, supra, 291 U.S. at 574-575.)

This statute involves the refusal to settle

- i.e., compromise ~ not with the insured

to whom there is a contractual obligation,

but an ordinary third party adversary. The

sum involved is standardless, ambiguous and

unliquidated and involves compensation for

such intangible non-economic damages as

pain and suffering and emotional distress;~—

7/ The California Supreme Court has long

recognized the reality of the shortcomings

of the law of negligence as the means of

compensating automobile accident victims

(Maloney v. Rath, 69 C.2d 442, 445-446, 71

C.K. ; ~2d 513 (1968)) and that

pain and suffering damages are subjective,

arbitrary, without true standard, which

can be translated into monetary loss only

with great difficulty (Capeluto v. Kaiser

Foundation Hospitals, 7 C.3d 889, 893,

103 C.R. 856, 500 P.2d 880 (1972), citing

Seffert v. Los Angeles Transit Lines, 56

G.20 495, IllesizZ, I53 C.K. 161, 364 P.2d

337 (1961) (dissenting opinion of Traynor,

[footnote continued ]

-19-

and it is compounded by punitive damages

and comparative negligence principles.

The effect of punitive damages on a first

party bad faith claim is apparently

already before this Court. (Aetna Life

Ins. Co. v. Lavoie, USSC No. 84-1601.)

General concerns with punitive damages

have been expressed by the Court and some

of its members. (Electrical Workers v.

Foust, 442 U.S. 42, 50-51, 99 S.Ct. 2121,

60 L.Ed.2d 698 (1979); Smith v. Wade, 461

U.S. 30, 59, 103 §.Ct. 31623, 72 bemesee

632 (1983) (Rehnquist, J., dissenting);

Dun & Bradstreet, Inc. v. Greenmoss

J.) and McCormick, Damages (1935) §88, pp.

318-319.) While the court elects to defer

to the legislature, the present court

ignores the counsel of one of its greatest

members and punishes insurers with tort

and punitive damages for failing to

liquidate by settlement a subjective,

arbitrary damage determinable only with

great difficulty. Since a factor regard-

ing the amount of punitive damages is its

relation to the amount of compensatory

damages, the house of cards is evident.

xT

Builders, Inc., SF # » _y 105 S.Ct.

2939, _L.Ed.2d (1985) (Brennan, J.

dissenting).) Tort and punitive damages

for refusing to settle an unliquidated

claim by a third party by relinquishing

the right to notice of hearing, hearing

and appropriate order is the essence of an

unfair barrier to access to the courts.

The Constitution does not permit a state

to enact a statute making boettous and

penalizing the basic act of defending the

lawsuit and putting a plaintiff to his

proof. Insisting on the constitutional

rights of notice of hearing, trial and

judgment and refusing to waive those

rights cannot form the basis for arbi-

trary, standardless tort and punitive

damage liability.

"It is enough to invoke the proce-

dural safeguards of the Fourteenth

Amendment that a significant property

interest is at stake, whatever the

ultimate outcome of a hearing on the

right to continued possession

and use of goods." (Fuentes, supra,

407 U.S. at 87.)

=2]-

A statute imposing liability for exercise

of the right to due process conferred by

the 14th Amendment clearly fails consti-

tutional sctntas =" It goes to the very

heart of the concept of due process; it

makes tortious the exercise of the consti-

9 /

tutional right to due process of law.—

8/ It has been suggested that what the

state is really doing is converting lia-

bility imsurance into first party coverage

for the plaintiff with tort damages as the

measure of indemnity. Even strict products

liability cases have not gone this far. No

such rationale has in fact been advanced.

It comes perilously close to an appropria-

tion of an insurer's assets without just

compensation rather than the regulation of

the business of insurance which Insurance

Code §790.03 purports to do.

9/ The trial in the action for breach of

statutory obligations does not satisfy the

requirements of due process. The original

lawsuit is against the insured, the

insured owes an obligation to cooperate

with the insurer, and the fact of insur-

ance is not disclosed to the jury. In the

suit for breach of statutory obligations,

the liability of the insured is tried when

the insured no longer owes an obligation

to cooperate with the insurer, and when

the suit is against an insurance company

as the named defendant.

Waivers of constitutional rights are dis-

favored and this case does not meet the\

standards therefor. (E.g., Fuentes,

supra, 407 U.S. at 95. If the contention

is that states can condition doing busi-

ness therein on an advance waiver of the

14th Amendement we will respond thereto in

a brief on the merits.)

- Insurance Code §790.03(h) (5)

also violates the equal protection clause.

California does not now and for over 100

years has not permitted a cause of action

for malicious defense. (Bertero v.

National Generai Corp., 13 C.3d 43, 52,

118 C.R. 184, 529 P.2d 608 (1974); Eastin

v. Bank of Stockton, 66 C. 123, 4 P. 1106

(1884).) As stated in Bertero, supra, the

doctrine of no malicious defense protects

the right of a defendant involuntarily

haled into court to conduct a vigorous

defense. Insurance Code §790.03(h) (5)

|,

10

singles out Liability insurers 39/ as the

sole litigant in California excepted from

that rule. What is more the defense

does not have to be "malicious," only

unreasonable. Whatever the basis for

singling out insurers in general as

incurring tort liability for breach of

contract, there is no rational basis for

singling out Liability insurers when

engaged in the task of providing a defense

to the insured in an adversary proceeding.

There is no basis for saying by statute

that although defendants may defend a )

lawsuit, those defendants with Liability

insurance may not on pain of tort and

punitive damages liability.

10/ More than insurers are covered by the

section, although the exact extent is not

yet clear. The uncertainty of the law

regarding persons other than insurers is

demonstrated by the less than satisfactory

authority which allows the Mitchells to

sue Keller at all. (Reasoner v. Aetna

Life Ins. Co., 600 F.Supp. 278 (S.D. Cal.,

1984) .)

:

:

o2b-

3. In Californ.a, the right to

counsel in a civil proceeding at the

litigant's expense is a constitutionally

protected right. (In Re Kathy P., 25 C.3d

91, 102, 157 C.R. 874, 599 P.2d 65 (1979);

Brooks v. Small Claims Court, 8 C.3d 661,

105 C.R. 785, 504 P.2d 1249 (1973); Men-

doza v. Small Claims Court, 49 C.2d 668,

321 P.2d 9 (1958).) California holds,

however, that the attorney who defended

the insured in the underlying lawsuit may

be sued for conspiring with the insurer to

violate Insurance Code §790.03(h)(5).

(Wolfrich Corp. v. United Service Automo-

bile Assn., 149 C.A.3d 1206, 197 C.R. 446

(1983).) Accordingly, we see what has

occurred in this suit: Plaintiffs’

attorneys settle the lawsuit, take the

money, and then turn around and sue the

attorneys who defended the suit for

failing to settle it! What is particu-

larly obnoxious is not only does defense

32$-

counsel have ethical and legal obligations

in defense of the lawsuit, but the insurer

has duties to provide a defense which are

more extensive than the obligation to

indemnify. This court need not rule on

the right to an attorney in a civil

action; California has done that as a

state right. Having given that right to

appear by counsel, the state cannot pass a

statute so chilling that right by making

the defense counsel defend under the

threat of legal action by the adversary

for providing a vigorous defense. We are

going backwards towards the medieval days

when jurors were thrown in jail if the

judge did not like their verdict. A

statute placing defense counsel on the

chopping block of tort liability for

defending the case strikes at the heart of

Our adversary system.

4. Nowhere else in California law

is the attorney defending a lawsuit liable

=26-

in tort because his client does not settle.

As pointed out hereinabove, §790.03(h) (5)

makes insurers and no other defendant

liable in tort for refusing to settle

although the tort of malicious defense is

not recognized. Needless to say attorneys

defending an insured litigant are the only

attorneys threatened with tort Liability

for refusing to settle. Insureds and

insurers are singled out and relegated to

having lesser legal representation than

other litigants by a statute making only

their attorneys subject to suit. This

legislative discrimination against effec-

tive representation is repugnant to the

equal protection clause of the 14th

Amendment.

CONCLUSION

California Insurance Code §790.03(h)

(5), as interpreted by Royal Globe, supra,

is a major redefinition of settled and

determined concepts of due process of law.

Mtn

By statute, California has made it tortious

for there to be a vigorous defense of an

alleged tortfeasor involuntarily haled into

ll

court because he happens to be tenured A=!

l1l1/ Unfortunately, California's campaign

against insurers blazes new trails even as

we write this Jurisdictional Statement.

Insurance Code §790.03(h)(5) now includes

settlement negotiations and conduct in

this very lawsuit! (White v. Western

Title Insurance Company, ;

’

ote ; P.2d (1985).) No other ~

party to a lawsuit has this unique lia-

bility, not to mention the state's attempt

to subvert Rule 408, Federal Rules of

Evidence, in every diversity case involv-

ing an insurer. California is putting so

many tort penalties on insurers for

seeking its day in court and exercising

the right to due process of law, that it

becomes clear that, as intepreted by the

California Supreme Court, §790.03(h)(5) is

a statutory attempt to prevent an insurer

from defending a lawsuit for its insured

and for itself. In White, supra, Justice

Lucas (a former Federal District Judge) in

dissent, concluded that California was

discriminating against insurers and

depriving them of due process by depriving

them of the ability to fairly defend a

lawsuit. Appellant's constitutional

attack is not coming from left field, but

is part of a growing recognition of the

unfairness of the California decisions.

"A crisis now affairs are coming to." The

basic and fundamental ability to defend

yourself in a court of law is at risk in

California.

me

In Smith v. Wade, supra, one of the

points raised by the Court was that peti-

tioner's argument presented no good reason

to depart from common law rules. zs! (46

U.S. at 55.) The imposition of tort and

punitive damages liability on the liability

insurer and the attorney for the basic

act of a defendant involuntarily haled

into court of defending himself and

availing himself of due process rights

guaranteed by the Constitution is suffi-

cient and good reason to merit plenary

consideration by this Court. If a purpose

of tort and punitive damages is to deter

certain conduct, when that conduct is

protected by the Constitution the Court

12/ We refrain from briefing in this

Statement the common law rules regarding

punitive damages. After Smith v. Wade,

supra, it is like bringing coals to

ewcastle; the Court is sufficiently

familiar with those principles that such

an exercise may be deferred to the brief-

ing on the merits.

~~ e

is confronted with the question of how far

the state may go in enacting a statute to

deter the exercise of a basic constitu-

tionally protected right. This startling

and unique deviation from fundamental

principles must not be allowed to gain a

foothold. It represents a substantial and

important federal question requiring

resolution.

DATED: 2/7 January 1986.

Respectfully submitted,

STUART L. BRODY

SIMON, BUCKNER, HAILE &

MIGDAL

PARKER, STANBURY, MCGEE,

BABCOCK & COMBS

By

TUART L. DY

Attorneys for Appel

NATIONWIDE MUTUAL

INSURANCE COMPANY

» 30.

ALAR Chae ip AAEM TARO R TNE IR IN I mR RE TNS HR a

SC met yelper Seiohsins atmo

na

COURT OF APPEAL --- STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION TWO

NATIONWIDE MUTUAL INSURANCE )

COMPANY )

) E 002386

Petitioner, ) COUNTY NO.

) 223137

Ws )

) FILED

SUPERIOR COURT OF THE STATE )

OF CALIFORNIA FOR THE COUNTY) Keenan G.

OF SAN BERNARDINO, ) Casady,

) Clerk

Respondent. )

) Sept. 26

MARY DENISE MITCHELL, LEON ) 1985

MITCHELL, )

) COURT OF

Real Party in Interest.) APPEAL

) FOURTH

DISTRICT

THE COURT:

The petition for writ of mandate

is DENIED. (Rodriguez v. Fireman's Fund

Ins. Co., 146 Cal.App.3d 46, 54.)

McDANIEL, J.

Acting P.J.

APPENDIX A

APPENDIX B

ORDER DENYING REVIEW

AFTER JUDGMENT BY THE COURT OF APPEAL

4th District, Division 2, No. E002386

IN THE SUPREME COURT OF THE

STATE OF CALIFORNIA

IN BANK

NATIONWIDE MUTUAL INSURANCE COMPANY,

etc., Petitioner,

Vv.

SUPERIOR COURT OF THE COUNTY OF SAN

BERNARDINO, Respondent ;

MITCHELL, et al., Real Parties in Interest.

Petition for review DENIED.

Bird /s/

Chief Justice

SUPREME COURT

FILE

Nov. 13 1985

Laurence P. Gill, Clerk

J. Rogers /s/

Deputy

APPENDIX B

IN THE COURT OF APPEAL

FOURTH APPELLATE DISTRICT,

DIVISION TWO

NATIONWIDE MUTUAL 4th Civil No.

INSURANCE COMPANY, a E002386

corporation,

Appellant, RECEIVED

vs. 23 Jan. 1986

SUPERIOR COURT OF THE COURT OF

STATE OF CALIFORNIA APPEAL

FOR THE COUNTY OF

SAN BERNARDINO, FOURTH

DISTRICT

Respondent.

MARY DENISE MITCHELL,

LEON MITCHELL,

Real Parties

In Interest.)

ee ee ee ae ae a a a a _ __ _ o_o

Notice is hereby given that Nation-

wide Mutual Insurance Company, the peti-

tioner above named, hereby appeals to the

Supreme Court of the United States from

the final judgment of the California Court

APPENDIX C

of Appeal, Fourth Appellate District,

Division two, denying the Petition for

Writ of Mandate entered in this action on

26 September 1985.

This appeal is taken pursuant to

Title 28, U.S.C., §1257, subparagraph

(2).

DATED: 15 January 1986.

SIMON, BUCKNER, HAILE

& MIGDAL

STUART L. BRODY

By /s/

Attorneys for

Appellant NATIONWIDE

MUTUAL INSURANCE

COMPANY