California Insurance - Assignee of Insured’s Bad Faith Claim Against Insurer is Entitled to Recover Attorneys’ Fees Incurred in Pursuing Policy Benefits
In Essex Ins. Co. v. Five Star Dye House, Inc., No. S131992 (Cal. Sup. Ct., July 6, 2006), the Supreme Court of California unanimously held that an insured’s assignment
of a bad faith claim includes the right to recover attorneys’ fees incurred to pursue policy benefits that were wrongfully withheld.
Essex was an insurance coverage dispute arising out of damages suffered when a commercial dryer was damaged during delivery. The insured deliveryman tendered the suit to his liability insurer, and the insurer
denied coverage. Judgment in the amount of $1.35 million plus costs was entered against the deliveryman, who then assigned his insurance claims to the third party claimant. The insurer filed suit against the third party
claimant seeking a declaration that it did not have a duty to defend its insured in the underlying action, and the claimant cross-complained for, inter alia, breach of contract and bad faith. The trial court found
that the insurer breached its policy obligations and acted in bad faith. The court awarded the claimant $1.6 million in damages, but denied the claimant’s request for attorneys’ fees incurred pursuing the policy
benefits (known as “Brandt fees”).
The California Court of Appeal affirmed the judgment, but reversed the denial of Brandt fees, holding that Brandt fees are assignable. The Court of Appeal expressly disagreed with Xebec Development Partners, Ltd. v. National Union Fire Ins. Co.,
15 Cal. Rptr. 2d 726 (Cal. Ct. App. 1993), which held that an assignment of a tort action against an insurer does not include the right to recover Brandt fees. In Xebec, the court reasoned that attorneys’
fees incurred by the assignee of the insured did not qualify as tort damages because the assignee, not the insured, pursued the policy benefits.
The Court of Appeal in Essex relied on more recent appellate decisions holding that all claims for tort damages are assignable except those of a purely personal nature. It reasoned that Brandt fees are
economic damages and not personal in nature, and therefore, it found that the right assigned by the insured was the right to recover the policy benefits in full, including the attorneys’ fees incurred in pursuing those benefits.
The California Supreme Court agreed. The court acknowledged that some damages potentially recoverable in a bad faith action, e.g., emotional distress and punitive damages, cannot be assigned because they are
purely personal. It concluded, however, that Brandt fees constitute an economic loss caused by the insurer’s tortious conduct. Rejecting the insurer’s argument that Brandt fees are only
recoverable by the insured, the court relied on the principle that the assignee stands in the shoes of the assignor, taking both his rights and remedies. The court noted that if it accepted the insurer’s argument, the
insured would “no longer be assigning the right to recover the policy benefits in full.” Finally, the court noted that precluding assignment of Brandt fees would (1) result in a windfall for
the insurer, whose liability would be “significantly reduced” because of the “fortuitous circumstance of the assignment of the bad faith claim”; and (2) discourage assignment of bad faith claims against
insurers contrary to public policy favoring assignability of causes of action.