Encarnacion v. 40th Centruy Ins. Co.

Filed 9/27/07 Encarnacion v. 40th Centruy Ins. Co. CA2/1

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION ONE

APPEALS from judgments of the Los Angeles Superior Court, Stephen Czuleger and John Shepard Wiley, Judges. Affirmed with directions.

Barger & Wolen, Kent R. Keller, Larry M. Golub, San-Chuen Lau, Michael A. S. Newman, Vivian I. Orlando; Demler, Armstrong & Rowland, Terry A. Rowland, Robert W. Armstrong and James P. Lemieux for Defendant and Appellant.

Law Offices of Ian Herzog, Ian Herzog and Evan D. Marshall for Plaintiffs and Appellants.

____________________

INTRODUCTION

In case number B179825 (Super. Ct. L.A. County, 2004, No. BC174047), decided by Judge Stephen Czuleger, defendant 20th Century Insurance Company (20th Century)[1]appeals from a judgment in favor of plaintiff Cecilia Encarnacion, individually and as guardian ad litem for her children Nubia Cecilia Gonzalez, Marcos A. Gonzalez, Jr. and Hilda Cecilia Gonzalez (collectively Encarnacion). 20th Century claims legal and evidentiary errors, as well as insufficient evidence to support the judgment.

Encarnacion appeals from the same judgment, claiming the trial court erred in denying her leave to amend her complaint.

In case number B182737 (Super. Ct. L.A. County, 2005, No. BC320312), decided by Judge John Shepard Wiley, Jr., Encarnacion appeals from a judgment of dismissal entered after the court sustained 20th Centurys demurrer without leave to amend. She claims error in sustaining the demurrer on several grounds.

This is the second time the parties have come before us on appeal. In Los Angeles County Superior Court No. BC174047, Encarnacion appealed from a summary judgment in favor of 20th Century. In Encarnacion v. 20th Century Insurance Company (May 8, 2000, B127594) [nonpub. opn.] (Encarnacion I), we reversed the summary judgment and remanded the case for trial.

On this appeal, we affirm both judgments. We also remand case number B182737 for further proceedings.

FACTS

The Killing of Marcos Gonzalez

Ramon Aguilera (Aguilera) moved to Los Angeles in 1967 and bought a property on Camulos Street in East Los Angeles. There were two houses on the property. In addition, a garage had been converted to a living unit. In 1989, Aguilera retired and moved to Valinda. He then rented out the two houses on the Camulos Street property. The main house was rented to Teresa De La Rosa, while the other house was rented to Marcos Gonzalez (Gonzalez) and Encarnacion, who lived there with their three children.

Aguilera considered the tenants his friends. He visited them and attended social events at their houses. He also acted as his own handyman and went to the Camulos Street property on Tuesdays or Thursdays to do work. When Aguilera went to the property at night, he would take his gun with him because he believed East Los Angeles was a dangerous area at night.

At the end of February 1994, Gonzalez and his family had been living at the house for about a year and were about six months behind in their rent.[2] Aguilera had made an agreement with Gonzalez in December that Gonzalez and his family would not have to pay the back rent and instead could use the money to move out. During January and February, Aguilera kept checking to see when they were going to move out, but they were still looking for a place. In mid-February, Aguilera told both Gonzalez and Encarnacion that he needed them to move out so his daughter and her children could move in. They told him they already had their things packed and would move out by March 1.

Around 4:00 or 5:00 in the afternoon on March 1, Aguilera drove to the Camulos Street property. He took his gun with him because he would be out at night. When he arrived, Aguilera heard noises coming from the Gonzalez house. He was surprised to find that Gonzalez and his family had not moved out. When Aguilera knocked on the door, Encarnacion answered the door and told him that Gonzalez had gone out with their children.

Aguilera decided to wait for Gonzalez and went to sit in his car. Walking away from the house, he saw the tenant who lived in the garage unit and said to him, I am going to wait for that cabron if I have to wait all night long.[3]

Instead of waiting in his car, Aguilera decided to walk to a nearby store on Eighth Street. He grabbed his gun, put a bullet in the chamber, put on the safety and put the gun in his waistband. He went to the store, bought something, and then talked to some friends who lived across the street from the store. After about an hour or an hour and a half, Aguilera walked back to Camulos Street. By that time, it was dark.

Aguilera saw Encarnacion standing at the front door. When she saw Aguilera, she went inside and a moment later, Gonzalez came to the door.

Encarnacion heard Gonzalez and Aguilera arguing about the rent. Aguilera asked Gonzalez why they didnt move out. Gonzalez replied that he didnt have money to feed his children, much less to move out. Aguilera responded that he wasnt a public benefit for anybody. Gonzalez made some offensive comments and then angrily told Aguilera, Either you kill me [or] Ill kill you. He then turned and went back into the house, slamming the screen door.

Aguilera turned to leave but heard the door open again. According to Aguilera, he panicked. He remembered turning around and pulling out his gun but not pointing the gun at Gonzalez or pulling the trigger. The gun went off and Aguilera heard Gonzalez say, Oh, God; oh, God; oh, God. Aguilera went toward the house and saw Gonzalez lying by the door. He turned around and left, walking down the street between some apartments on Eighth Street. On the way he threw his gun in a trash can. Aguilera called for a taxi and went to a friends house in Downey. About six days later, Aguilera turned himself in to the police.

According to Encarnacion, Gonzalez said to Aguilera, Pull it. Aguilera turned around, pulled a gun out of his waistband with his right hand and aimed it at Gonzalez. His hands and his legs were shaking, and he had to steady the gun with his left hand. She believed that Aguilera shot Gonzalez on purpose. Gonzalez died of his wounds.

The Insurance Policy

Aguilera had a homeowners policy issued by 20th Century. Section I of the policy addresses coverages. In the Section I exclusions, the policy provides: We do not cover loss resulting directly or indirectly from any of the following, whether or not any other cause or happening contributes concurrently or in any sequence to the loss:

1. Intentional or criminal acts of any insured, if the loss that occurs:

a. is a foreseeable result of such act; or

b. is in fact the intended result of such act.

Section II of the policy contains personal liability and medical payment coverages. In the Section II exclusions, the policy provides that these coverages do not apply to:

a. bodily injury or property damage which is a foreseeable result of an intentional or criminal act of any insured or which is in fact intended by any insured;

b. bodily injury or property damage arising out of business pursuits of any Insured or the rental or holding for rental of any part of any premises by any insured.

The Criminal Prosecution and Wrongful Death Action; Discussions Regarding a Plea, Insurance Coverage and Settlement

A felony complaint charging Aguilera with murder while personally using a firearm (Pen. Code,  187, subd. (a), 12022.5, subd. (a)) was filed on or about March 9, 1994. Aguilera retained attorney Jay Jaffe (Jaffe) to defend him in the criminal case. Jaffe believed there was evidence to support a claim of self-defense. In addition, Jaffe had Aguilera examined by neurologist Arthur Kowell, M.D. Dr. Kowell concluded that Aguilera was suffering from organic brain damage which prevented him from forming an intent to kill.

On April 25, 1994, Encarnacion filed a civil action against Aguilera, alleging causes of action for wrongful death, intentional infliction of emotional distress, and negligence (wrongful death action). After Aguilera was served with the complaint, criminal defense attorney Jaffe forwarded the papers to 20th Century, demanding that 20th Century defend and indemnify Aguilera.

Encarnacion was represented in the wrongful death action by attorney Paul deMontesquiou (deMontesquiou). On May 4, 1994, he spoke to 20th Centurys claims adjuster, Jamie Brown (Brown). He told her that after speaking to Encarnacion and Jaffe, it appeared that the case was one of negligence. Brown advised him that there was a coverage issue. If Aguileras act was negligent, there would be coverage, but if it was deemed intentional, there would be no coverage. Brown reiterated this in subsequent conversations. She never spoke of a criminal act, only referring to an intentional versus a negligent or accidental act.

At that time, Brown believed an important issue in determining coverage was whether Aguileras act was intentional versus negligent or accidental. Brown wrote to her supervisor, Janet Julien (Julien), questioning whether 20th Century should deny coverage based on an intentional act. On May 23, 1994, Brown indicated that she did not feel they had enough information at that point to deny a claim, so she recommended that 20th Century handle [the] case under reservation of rights at this time until more details are learned.

In further conversations, deMontesquiou questioned Brown as to whether there might be an additional umbrella policy providing excess coverage. He was concerned, because Brown said that 20th Century would only pay the policy limits of $100,000. Brown said she would look into that. She also mentioned that 20th Century would be obtaining counsel to represent Aguilera.

By letter dated June 9, 1994, 20th Century informed Aguilera that it was accepting his claim subject to a full reservation of rights. The letter, from the division claims manager, David C. Lane (Lane), mentioned at least four possible grounds for denying coverage: (1) the Sections I and II exclusions for intentional or criminal acts; (2) Insurance Code section 533, which precludes indemnity for willful acts;[4](3) the Section II exclusion for bodily injury arising out of business pursuits; and (4) the Section II exclusion for bodily injury arising out of the rental of premises owned by an insured.

The letter specifically advised, among other things, that should any of the allegations outlined in the complaint be deemed an intentional act, Exclusion 1(a) on page 5 of your Homeowners policy would apply. It also advised that Insurance Code section 533 prohibits indemnity for willful acts of an insured.

Aguilera showed the letter to his son, who did not understand it and suggested that he show the letter to criminal defense attorney Jaffe. At one of his court appearances in June, Aguilera showed the letter to Jaffe who looked at it and returned it to Aguilera. Jaffe did not remember seeing the reservation of rights letter, however.

20th Century sent information regarding the wrongful death action to the law firm of Hill, Genson, Crandall & Wade (Hill Genson) for defense of the action. Attorney Thomas W. Shaver (Shaver), who ordinarily would have handled the matter, was going on vacation and asked attorney Todd Michael Castronovo (Castronovo) to handle it. Castronovo spoke to claims adjuster Brown on June 27, 1994. She told him about 20th Centurys reservation of rights. He told her he would meet with Aguilera to learn more about the case and to obtain the appropriate Cumis[5]waivers. After speaking with Brown, it was Castronovos understanding that an intentional act on Aguileras part, versus an accidental act, would create a conflict of interest, triggering the need to appoint independent Cumis counsel.[6]

Castronovo spoke to Jaffe on June 28, 1994 to schedule a meeting with Aguilera. Castronovo then spoke to Hill Genson attorney Robert E. Murphy (Murphy), who would be going to the meeting with Jaffe and Aguilera. Castronovo told Murphy there was a reservation of rights letter, although Hill Genson did not have a copy of it. Castronovo also told Murphy that an intentional act would trigger a conflict of interest and the need for Cumis counsel.

After Shaver returned from his vacation, he spoke to Encarnacions attorney, deMontesquiou. Shaver explained that there needed to be a plea or a finding of something less than second degree murder . . . because the issue is whether it was intentional versus negligent, and second degree murder and above would be intentional and below that would be nonintentional. If there was such a plea, 20th Century would cover the loss and Encarnacion would have access to the policy limits of $100,000. Shaver added that deMontesquiou should get rid of intentional torts and refine [the complaint in the wrongful death action] to negligence so that would improve [his] clients opportunity to be insured if in fact he were to be insured or covered.[7]

Shaver believed that the critical issue was intent. Had he believed that a plea to any criminal act would exclude coverage, he would have advised Aguilera to that effect.

On July 12, Jaffe and Aguilera met with Hill Genson attorney Murphy at Jaffes office. At that time, based on conversations with Shaver and deMontesquiou, Jaffe believed that if Aguileras shooting of Gonzalez was negligent, there would be coverage under the 20th Century policy. Therefore, if Aguilera pled guilty to an act which was negligent, there would be coverage, but if he pled guilty to an intentional act, there would be no coverage. Jaffe understood that if Aguilera pled guilty to a negligent act, the civil case would be settled for the $100,000 policy limits and therefore there would be no conflict of interest requiring independent counsel for Aguilera. Jaffe believed that the two cases could be resolved within a month. Jaffe explained this to Aguilera. Aguilera signed a waiver of conflict of interest. The waiver provided, however: This waiver shall be valid for 30 days only after which time this waiver shall be revoked pending further decision on whether an unconditional waiver will be executed.

Thereafter, Jaffe, deMontesquiou and Shaver discussed talking to the district attorneys office to arrange a plea to an involuntary charge. After numerous contacts with the district attorneys office, deMontesquiou spoke with a senior deputy district attorney, Kenneth Wullschleger (Wullschleger). He urged that Aguilera be allowed to plead guilty to involuntary manslaughter to allow the victims family to receive insurance money. Wullschleger advised deMontesquiou that he would need to persuade Gonzalezs other family members to agree to the plea bargain. Many of them were very upset and wanted Mr. Aguilera to be hanged. DeMontesquiou had a meeting with all the members of Gonzalezs family, and they agreed to allow Aguilera to plead to involuntary manslaughter so that Encarnacion and the children would receive the insurance money.

On July 25, 1994, Shaver wrote to claims adjuster Brown that [Jaffe] informs me that he has worked out a tentative arrangement with the District Attorney whereby the case may be settled. He made a demand on behalf of the insured that 20th Century pay the $100,000.00 policy limits to plaintiffs to attempt to settle the case. He believes a settlement might help with the criminal hearing.

Jaffe confirmed in a letter to Brown on August 2, 1994 that he was optimistic that the District Attorneys office will accept the plea to what would amount civilly as gross negligence. As you have been informed in the past, my client suffers organic and inorganic brain dysfunction which clearly demonstrates that he did not have any criminal intent in killing Marcos A. Gonzalez on March 1, 1994.

My client was validly covered by a policy of insurance . . . . Even though you sent a Reservation of Rights letter, it is clear through investigation that I have provided you that the Reservation of Rights letter should not have been sent. My client fully admits that he was negligent in shooting and killing Mr. Gonzalez, but did not intend to do so. Therefore, since a very clear conflict has arisen between 20th Century and my client, I feel it necessary to fully protect my client and your insureds interest by compensating my office . . . as independent counsel for Mr. Aguilera in this civil matter. Jaffe withdrew Aguileras previous Cumis waiver.

The following day, August 3, 1994, deMontesquiou wrote to Shaver to confirm that if 20th Century offered the policy limit of $100,000, Plaintiffs will accept this offer, provided that an asset check and investigations concerning other applicable insurance coverage are fruitless. In exchange, Plaintiffs will dismiss the entire [wrongful death] action, including the intentional and negligent causes of action. The offer would be kept open for 120 daysuntil December 1, 2004.

On August 4, 1994, Aguilera pled guilty to involuntary manslaughter. He did so because of the agreement that the [insurance] money would be given to Mrs. Gonzalez [Encarnacion] if he did.

Shaver then wrote to Brown notifying her that Jaffe had informed him that Aguilera had pled guilty to involuntary manslaughter. He also notified her of deMontesquious offer.

20th Centurys Denial of Coverage

According to Carol Brennan (Brennan), one of 20th Centurys claims attorneys, [t]here had been a long standing issue over the criminal and intentional acts exclusion. Specifically, a number of policy holders and their attorneys had been raising the question of whether the criminal acts exclusion was a standalone exclusion or if it was modified by intentional acts. As Brennan understood the exclusion, however, it covered any criminal act, whether intentional or negligent.

At the beginning of June 1994, Brennan had 20th Century retain attorney Michael Leahy (Leahy) of Haight, Brown & Bonesteel to provide it with advice on coverage issues. On June 3, Brennan wrote to Leahy, outlining the situation. She stated: We ask that you monitor the criminal proceedings and keep us informed of whether Mr. Aguilera is convicted of, or pleas to any criminal charge. Depending on the outcome of the criminal action, we may wish to consider bringing a Declaratory Relief action, based on the intentional/criminal acts exclusion. [] Apart from the intentional/criminal acts issue, we have discovered that the loss took place on the Insureds rental property. The rental is not listed as an Insured location on the Policy. The Insured did not purchase Option R, which extends liability to a separate dwelling listed in the Declarations. Because the liability extension was not purchased, we believe that the business pursuits exclusion may apply. Brennan asked Leahy to review the policy and make specific recommendations for further handling.

On July 5, 1994, Leahy wrote back to Brennan, informing her that Aguileras preliminary hearing had been continued, and that [b]oth Mr. Jaffe and the Deputy District Attorney . . . stated that there would be a possible disposition in the matter. . . . [] . . . We will continue to monitor the matter, so as to determine what disposition there might be. Obviously, if he pleads to a lesser offense the Criminal Acts exclusion should take this matter out of coverage.

Brennan did not send a copy of Leahys July 5 letter to Shaver. Brennan understood that if Shaver or any of the Hill Genson attorneys knew that a plea to a criminal charge would exclude coverage, the attorney would have an obligation to inform Aguilera of that fact. She explained that she would have expected that Shaver understood 20th Centurys coverage position and given that information to Aguilera.[8]

20th Century had a form which was used when a claims adjuster had a coverage question. The adjuster would fill out a coverage questionnaire giving the facts of the case and the issue to be resolved. The questionnaire would be routed from the adjuster to the supervisor, then to the unit manager, then to the manager, and finally to the claims attorney unit at the home office. Each person would give his or her opinion about the coverage issue and make a recommendation as to what should be done.

Brown had filled out such a questionnaire in May 1994, framing the issue as should we deny coverage based on an intentional act? Julien, Browns supervisor, noted that a criminal action was pending and wrote: I agree with handling under an ROR [reservation of rights] for intentional act, business exclusion, rentals may be primary business. Bob Grabot (Grabot), the unit manager, added that our insureds intent may be difficult to prove here as far as murder goes. The reservation of rights may be proper as we may not be indemnifying the insured if the acts are found to be intentional. The manager agree[d] with recommendation to accept defense under a comprehensive reservation of rights, intentional act, coverage R, business pursuits. Brennan then recommended that 20th Century defend under a reservation of rights based on the intentional acts exclusion, Insurance Code section 533, and a lack of coverage for punitive or willfully caused damage.

Brennan did not contact any of the people who had filled out the questionnaire before her to ask them about their focus on an intentional act, as opposed to a criminal act. Brennan also had read the claims adjusters notes; this was something she normally did so that she could advise the adjuster as to whether the adjuster was making correct statements to insureds or claimants regarding coverage. From these notes she knew that Brown was in contact with Aguileras and Encarnacions attorneys. Brennan did not talk to Brown regarding the representations she had made as to coverage or exclusions, however.

Brennan dictated the June 9, 1994 reservation of rights letter for Brown, who prepared the letter for division claims manager Lane. Brennan stated that the reservation of rights was based on an intentional act.

Brennan sent a copy of Leahys July 5, 1994 letter to 20th Centurys claims department on July 11. Grabot, Julien, Lane and Brown all received copies of the letter. On the same day Brown noted receipt of the letter in her log, July 13, she also noted Aguileras upcoming preliminary hearing date.

Lane saw no reason why the letter or its contents should have been communicated to Aguilera. He believed the reservation of rights letter was sufficient. Additionally, since Leahy used the terms if and should, Lane believed the letter was not definitive as to coverage, and there was no reason to forward it to Aguilera or his attorneys. Lane acknowledged that he understood the likelihood that if Aguilera pled guilty the criminal acts exclusion would apply. He additionally stated that [b]y sending this letter to Mr. Aguilera, we might adversely affect his plea bargain with the District Attorneys office. He explained further that if Aguilera thought 20th Century would disclaim coverage as a result of the plea bargain, then he might reject the plea bargain, be convicted of a more serious charge and serve more time in prison.[9]

On August 8, 1994, after Aguilera pled guilty to involuntary manslaughter, Brennan wrote a memorandum to Lane, notifying him of the plea, that 20th Century was going to deny coverage, and that Haight, Brown & Bonesteel would write the denial letter. She requested that Lane notify her if Aguilera took exception to the denial.

Leahy wrote to Aguilera on August 8, 1994 that [s]ince the death of Marcos Gonzalez was the foreseeable result of the criminal act of Mr. Aguilera, Exclusion 1.a. of the policy applies . . . because the exclusion applies to bodily injury which is a foreseeable result of an intentional or criminal act of any insured. [] Because Mr. Aguilera has pled guilty to a felony out of which the civil action arose, Exclusion 1.a. of the policy is effective and no coverage is available under the 20th Century policy to defend or indemnify Mr. . . Aguilera. Consequently, 20th Century has asked that I advise you that it regretfully cannot defend you in this action, nor can it indemnify you for any damages which may be awarded [to] the heirs of Mr. Gonzalez. (Italics omitted.)

Leahy also wrote to deMontesquiou on August 8, 1994. He stated that his office represented 20th Century, who had asked him to advise deMontesquiou of its position with regard to Aguileras claim. He stated that since Gonzalezs death was the foreseeable result of Aguileras criminal act, the intentional or criminal act exclusion applied, and there was no coverage under the policy.

On August 9, 1994, deMontesquiou responded to Leahy that Leahy had misinterpreted Penal Code section 192, subdivision (b). He explained Aguilera was engaged in the lawful act of collecting rent but did so negligently, resulting in involuntary manslaughter but no intentional conduct. He concluded that [s]ince the insured has admitted negligence and has demanded that 20th Century tender the policy limit, your clients failure to pay constitutes first and third party bad faith. A copy of the letter also was sent to Shaver. Leahy forwarded a copy of the letter to Brennan, pointing out that deMontesquiou apparently [was] not recognizing the criminal act aspect to the exclusion, and focusing solely on the intentional act aspect thereof.

Jaffe, upon learning of 20th Centurys position, wrote to Leahy. He stated his position that the intentional or criminal act exclusion only applies to foreseeable results of an intentional act not amounting to a crime, or a criminal act where the result is directlyintended or foreseeable as a result of intentional conduct. He also withdrew his request to act as Aguileras independent counsel.

After further correspondence, Leahy wrote to Brennan on August 11, 1994, forwarding letters from deMontesquiou and Jaffe and stating: While I disagree with the strained analysis set forth by both of these gentlemen, it does not appear as though they want to let this matter drop. The question, therefore, becomes how you wish to proceed with this matter. The obvious would be to merely stick with our denial and hope that these people go away, recognizing that if they do not, you will undoubtedly be faced with a bad faith case . . . . As suggested by Mr. demontesquiou [sic], that judgment might be in excess of the policy limit. [] The second way to proceed would be to file a declaratory relief action now to determine the effectiveness of the criminal acts component of the exclusion, which I continue to feel will be upheld.

In addition to contacting Leahy, deMontesquiou called Shaver and asked him if he knew about the criminal acts exclusion and that Leahy had been laying [in] the weeds all along. Shaver denied knowing anything about Leahy and told deMontesquiou that he felt victimized as well. In response, deMontesquiou told Shaver that he needed to press . . . upon 20th Century that the shooting was a negligent act.

In deMontesquious mind, Hill Gensons and Shavers continued defense of Aguilera indicated that Leahy was playing games. If there was no coverage, there would have been a substitution of attorney or a declaratory relief action. Additionally, Leahy sent deMontesquiou a letter brief with authority which deMontesquiou considered extremely weak, in that the cases cited on the issue of reasonable expectation of coverage were from states that were not as progressive as California.

About a year after Leahys August 8, 1994 letters, deMontesquiou spoke to Leahy. Leahy continued to deny coverage but offered to settle the case for $50,000 to $60,000. This offer confirmed deMontesquious belief that Leahy was playing games and that 20th Century was not being genuine about their coverage position. Wanting to give 20th Century every reasonable opportunity to change its mind, deMontesquiou wrote letters asking 20th Century to pay the policy limits and sought Shavers help in convincing the company to pay the claim.

It was deMontesquious belief that 20th Centurys position violated the notion of reasonable expectations of coverage. In his view, [t]here is no way a homeowners policy would exclude every criminal act because there would be an inordinate number of . . . technical violations and technical criminal acts . . . that would void coverage. Shaver agreed with deMontesquiou that 20th Centurys position was wrong. Shaver felt that according to the language of the policy, the criminal acts exclusion did not apply and there was coverage for Aguilera.

The Wrongful Death Action Proceeds

In light of 20th Centurys refusal to pay the policy limits, the wrongful death action proceeded. Despite Leahys August 8, 1994 letter, Shaver continued to provide Aguilera with a defense.

Before the wrongful death action went to trial, Shaver transferred the case to Hill Genson partner Thomas Scutti (Scutti).[10] Encarnacions attorney deMontesquiou spoke with Scutti. According to deMontesquiou, Scutti said that 20th Century should have paid the claim and acted in bad faith.[11] 20th Century now wanted Scutti to find a way to protect Aguilera and proposed that Aguilera and Encarnacion enter into a stipulated judgment. The problem with this proposal, as deMontesquiou saw it, was that it would not be binding on 20th Century, only on the parties to the transaction. Scutti testified that he was trying to work out a covenant not to execute with Mr. deMontesquiou to protect Mr. Aguilera. He never got to the point of suggesting a stipulated judgment, in that deMontesquiou was unwilling to enter into a covenant not to execute.

On May 9, 1995, Leahy sent letters to Aguilera and Shaver, stating that effective June 8, 20th Century would be withdrawing from the defense. The trial was scheduled to begin less than two weeks after the June 8 effective date. In response, deMontesquiou wrote to 20th Century, accusing it of unethical conduct in abandoning Aguilera on the eve of trial. On May 25, Shaver notified Aguilera that 20th Century had reconsidered its position and had decided to continue the defense, although 20th Century still took the position that it would not indemnify Aguilera for any damages awarded.

The wrongful death action thus proceeded to trial. On July 10, 1995, the jury returned a verdict in favor of Encarnacion for $5.6 million. Judgment was entered on September 6, 1996. Thereafter, Aguilera assigned his rights against 20th Century to Encarnacion.

PROCEDURAL BACKGROUND

Case Number B179825

On July 3, 1997, Encarnacion and Aguilera filed the instant action against 20th Century, Hill Genson,[12]Shaver and Scutti. The first cause of action was by Encarnacion against 20th Century for breach of contract. The second cause of action by all plaintiffs against 20th Century was for breach of the implied covenant of good faith and fair dealing. The third cause of action was by Aguilera against Hill Genson, Shaver and Scutti for legal malpractice.

20th Century filed an answer and a cross-complaint for declaratory relief, seeking a declaration that it had no duty to defend Aguilera in the wrongful death action or to indemnify him for damages in that action. Aguilera and Encarnacion filed answers to the cross-complaint and asserted a number of affirmative defenses, including unclean hands, waiver, and estoppel.

20th Century filed a motion for summary judgment. The trial court granted the motion. It explained that Aguilera at least partly acted like a landlord during the relevant times, as to which the business exclusion applies. In addition, [i]n light of the dispositive issue involving the business exclusion, the Court need not reach the issues of estoppel and the exclusion for criminal acts.

Aguilera and Encarnacion appealed. In Encarnacion I, [w]e conclude[d] that the doctrine of estoppel require[d] reversal of the judgment. (At pp. 9-10.) We pointed out that an insurer may lose a contractual right through estoppel, when the insurers conduct reasonably causes an insured to rely on it to his detriment. (Id. at p. 10, citing Chase v. Blue Cross of California (1996) 42 Cal.App.4th 1142, 1151.) In order to establish estoppel, a party must prove four elements: (1) The party to be estopped must know the facts; (2) he must intend that his conduct shall be acted upon, or must so act that the party asserting the estoppel had the right to believe that it was so intended; (3) the party asserting the estoppel must be ignorant of the true state of facts; and, (4) he must rely upon the conduct to his injury. (Spray, Gould & Bowers v. Associated Internat. Ins. Co. (1999) 71 Cal.App.4th 1260, 1268, internal quotation marks omitted.) (Encarnacion I, at p. 10.)

The instant case, we observed, presents the classic situation where a partys left hand does not know what its right hand is doing. 20th Centurys corporate counsel, Carol Brennan, and its coverage counsel, Michael Leahy, determined at the outset that if Aguilera pleaded guilty to any crime, there would be no coverage. Meanwhile, 20th Centurys claims adjuster, Jamie Brown, and its panel counsel, Thomas Shaver, were telling deMontesquiou, counsel for the Encarnacion plaintiffs, that 20th Century would pay the policy limits as long as Aguilera did not plead guilty to an intentional criminal act. With that understanding, deMontesquiou and Shaver negotiated a global settlement with the District Attorneys Office, the Encarnacion plaintiffs, and Aguilera. (Encarnacion I, at pp. 10-11.)

Since an attorneys knowledge is imputed to the client (Bennet v. Shahhal (1999) 75 Cal.App.4th 384, 391, fn. 3), we found that, [b]ased on the knowledge of Brennan and Leahy, . . . 20th Century knew the facts, i.e., it would deny coverage if Aguilera pleaded guilty to any crime. (Encarnacion I, at p. 11.) Next, we found that 20th Century intended that its conduct be acted upon or acted in a manner which led Aguilera to believe 20th Century had that intent. In several conversations, Shaver and Brown told deMontesquiou that negligent conduct was covered and that intentional conduct was not. They also told deMontesquiou that if Aguilera pleaded guilty to something less than second degree murder, 20th Century would pay the policy limits. Those discussions provided the foundation for the resolution of the cases. (Ibid.)

We found no evidence that Aguilera or his attorneys believed that a plea to involuntary manslaughter would strip him of coverage. (Encarnacion I, at p. 12.) As to detrimental reliance, we observed that Jaffe recommended that Aguilera plead guilty to involuntary manslaughter based on 20th Centurys promise to pay the policy limits to the Encarnacion plaintiffs. Similarly, Aguilera stated in his declaration that he agreed to plead guilty because 20th Century had agreed to pay the policy limits to settle the civil action. We [found] it clear that pleading guilty to involuntary manslaughter, as opposed to going to trial and arguing self-defense, constitutes a detriment. (Ibid., fn. omitted.)[13]

In reversing the summary judgment, we rejected a number of arguments raised by 20th Century. We rejected the argument that Aguileras estoppel claims was nothing more than a failed attempt to create coverage where none ever existed. (See Aetna Casualty & Surety Co. v. Richmond (1977) 76 Cal.App.3d 645, 652653.) (Encarnacion I, at p. 10, fn. 17.)

We also rejected the claim that Shaver and Brown lacked actual and ostensible authority to make representations about coverage. (Encarnacion I, at p. 13.) As to Shaver, we found that under the circumstances (Granco Steel, Inc. v. Workmens Comp. App. Bd. (1968) 68 Cal.2d 191, 205), an attorney in deMontesquious or Jaffes position would have relied on Shavers representations in attempting to settle the case. (Encarnacion I, at p. 13.) As to Brown, we found it clear that, as a claims adjuster, she had at least apparent authority to make representations regarding coverage. (Ibid., citing State Farm Mut. Auto. Ins. Co. v. Porter (9th Cir. 1951) 186 F.2d 834, 841842.)

Following our opinion, the case was returned to the trial court.[14] 20th Century moved for summary adjudication of the issue of its contractual duty to defend and indemnify. The trial court denied that motion. Aguilera dismissed his complaint as to Shaver and Hill Genson.

20th Century then moved for adjudication of the issue of the applicability of policy exclusions, raised by its cross-complaint, before trial of Encarnacions and Aguileras estoppel defenses. After extensive briefing by the parties, the trial court ruled: The Order of Proof shall proceed as follows: First, plaintiffs shall prove their cause of action for breach of covenant of good faith and fair dealing based on a promissory estoppel claim in a jury trial. Should defendants prevail, then judgment shall be entered for the defendant. Should plaintiffs prevail, then the jury trial shall proceed with the damage phase.

20th Century filed another motion for summary judgment. This was based on the claim that alleged misrepresentations by Shaver and Brown were absolutely privileged under Civil Code section 47. The trial court denied the motion.

Encarnacion filed a petition for writ of mandate challenging the trial courts ruling on the order of proof. She argued that the equitable issue of estoppel should be tried by the court, not a jury. On June 19, 2002, we issued an opinion and order granting the petition. (Encarnacion v. Superior Court (Jun. 19, 2002, B157545) [nonpub. opn.].) We agreed that the issue of estoppel must be tried by the court rather than by a jury.

20th Century filed a petition for rehearing and its own petition for writ of mandate, by which it challenged the trial courts denial of its motion for summary judgment. We denied the petition for rehearing on July 18, 2002, and 20th Century filed a petition for review. The Supreme Court denied the petition for review on August 14, 2002. We denied the petition for writ of mandate on June 27, 2002.

Thereafter, Encarnacion and Aguilera filed a motion for summary adjudication of equitable and bad faith issues. Specifically, they sought adjudication that 20th Century forfeited its right to assert any policy exclusions; 20th Century was equitably estopped to assert any policy exclusions; and 20th Century breached its duty of good faith and fair dealing.

While the motion for summary adjudication was pending, 20th Century filed a number of motions in limine. One was to limit the court trial of the equitable issues to promissory estoppel and not to allow Encarnacion and Aguilera to argue equitable estoppel or forfeiture.[15] The trial court denied this motion. It appears that it also denied plaintiffs summary adjudication motion.

The case proceeded to a court trial before Judge Czuleger. On September 26, 2003, the trial court issued a statement of decision. The court found that plaintiffs had met their burden as to all three equitable theories they proffered: forfeiture, equitable estoppel and promissory estoppel.

As to forfeiture, the trial court found that 20th Centurys employees conduct and their intention to rely on the [criminal acts] exclusion, despite representations to all involved that the exclusion would only apply to intentional criminal acts exhibits 20th Centurys subjective intent to mislead Aguilera, the policyholder. Hence, plaintiffs have established forfeiture and 20th Century, therefore, has forfeited its right to rely on the criminal acts exclusion. (Citing Chase v. Blue Cross, supra, 42 Cal.App.4th 1142, 1157.)

As to equitable estoppel, the trial court relied on both 20th Centurys affirmative representations as to coverage and its failure to meet its legal duty to represent its position on coverage clearly and to clarify that position when it appeared clear that Aguilera was operating under a misapprehension as to 20th Centurys position. By so doing, it caused Aguilera to rely on 20th Centurys representations and inaction to his detriment.

Finally, with respect to promissory estoppel, the trial court found [t]he evidence is murky because certain witnesses provided clearly contradictory testimony. However, [i]n the end, one thing is clear, much confusion was generated in participants knowledge and that confusion resulted from 20th Centurys actions including its representations, direct[ly] and indirectly, that coverage was still available. Specifically, 20th Centurys communications with Aguilera and the attorneys led them to believe that coverage turned on whether there was an intentional act. 20th Century at every opportunity engaged in conduct and made representations which would have caused any reasonable insured and his representatives to believe that a guilty plea would not foreclose coverage. Most importantly, 20th Century represented by word and action this promise of coverage, yet 20th Century knew that there would be no coverage. Therefore, 20th Centurys representations raise promissory estoppel to the exclusion of all policy defenses.

Encarnacion and Aguilera then moved for leave to file a first amended and supplemental complaint. They claimed amendment was necessary and appropriate to conform to proof and to clarify the right of the Encarnacion plaintiffs to recover damages in their own right and not simply as assignees for defendant 20th CENTURY INSURANCE COMPANYS breach of the duty of good faith and fair dealing. They sought to add a cause of action under Insurance Code section 11580 on behalf of Encarnacion as judgment creditor and third party beneficiary of Aguileras insurance contract.

The trial court denied the motion. It explained that the motion was untimely and that no explanation or excuse for the delay in filing the motion for leave to amend was given as the Encarnacions standing as judgment creditors has existed for over seven years, and leave to amend was only first sought after the Statement of Decision in the first phase of the bifurcated trial was completed. Additionally, the motion violated then-rule 327 of the California Rules of Court[16]by failing to include a separate declaration as to the effect of the amendment, why it was needed, when the facts on which it was based were discovered and why the motion was not brought earlier.

The same day as the hearing, 20th Century filed a motion for summary adjudication of Encarnacions claims for non-economic damages, emotional distress, punitive damages and Brandt attorneys fees.[17] Encarnacion then filed a petition for writ of mandate challenging the trial courts denial of the motion for leave to amend the complaint. We summarily denied her petition on December 19, 2003.

Thereafter, 20th Century filed a motion for summary judgment on the grounds that Aguilera and Encarnacion were not entitled to equitable relief, in that Aguilera was guilty of unclean hands and equitable relief was not necessary to avoid injustice. In turn, Encarnacion filed a motion for summary adjudication of the issue of duty.[18]

On 20th Centurys motion for summary adjudication of Encarnacions damages claims, the trial court granted the motion as to Encarnacions claim for punitive damages, on the ground punitive damages are not assignable. It denied the motion as to the other claims on the ground they were not the proper subject of a motion for summary adjudication. It did agree with 20th Century that these claims were not assignable to Encarnacion, however. 20th Century then filed its motion in limine no. 1 seeking to exclude all evidence as to Encarnacions claims for non-economic damages, emotional distress and Brandt attorneys fees.

Following a hearing on the pending motions, the trial court granted 20th Centurys motion in limine no. 1 to exclude damages evidence on the ground the claimed damages were personal and not assignable. It denied 20th Centurys motion for summary judgment. It granted Encarnacions motion for summary adjudication, ruling that 20th Century had a duty to pay the judgment in the underlying wrongful death action.

20th Century moved to clarify the remaining issues to be tried. At that point, the trial court indicated it intended to enter judgment in favor of Encarnacion. 20th Century then filed notice of intention to move for new trial or, in the alternative, for an order modifying the statement of decision, vacating the judgment and entering a new judgment in favor of 20th Century or, in the alternative, entry of judgment in favor of Encarnacion and Aguilera in the amount of $100,000 only. As grounds for this motion, 20th Century cited a long list of claimed errors.

On October 5, 2004, the trial court entered judgment in favor of Encarnacion and against 20th Century in the amount of the judgment in the wrongful death action, $10,519,602.58 plus interest and costs. Thereafter, the trial court denied 20th Centurys motion for a new trial. It found the motion raised no issues not previously disposed of by the court and did not demonstrate any error in the trial proceedings.

Subsequently, a jury trial was held on Aguileras claims against 20th Century. By special verdict, the jury found that 20th Century breached the implied covenant of good faith and fair dealing in relation to its handling of Encarnacions claim against Aguilera. The jury also found, however, that this breach did not cause Aguilera any damages. The trial court (Judge Wiley) therefore entered judgment in favor of Aguilera.[19]

Case Number B182737

In the meantime, on August 19, 2004, Encarnacion filed a second action for damages against 20th Century, alleging causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing. The gravamen of the complaint was that Encarnacion was a judgment creditor as to the judgment entered in the wrongful death action and thus a beneficiary of the insurance contract pursuant to Insurance Code section 11580, subdivision (b)(2). By 20th Centurys failure to pay the amount due under the judgment in breach of the insurance contract, Encarnacion was damaged in the amount of the judgment.

20th Century filed a demurrer based on the expiration of the statute of limitations and improper claim splitting. The trial court (Judge Wiley) sustained the demurrer without leave to amend on the ground the action violated the rule against claim splitting and was barred by res judicata. On March 18, 2005, a judgment of dismissal was entered.

CONTENTIONS

Case Number B17982520th Centurys Appeal

1. 20th Century contends the trial court erred in applying equitable estoppel and forfeiture offensively, in that they cannot form the bases of causes of action. Additionally, Encarnacion is judicially estopped from relying on equitable estoppel or forfeiture.

2. 20th Century further contends the trial court erred prejudicially in refusing to consider relevant evidence.

3. 20th Century asserts that there is no substantial evidence to support the judgment, in that there is no evidence of a promise on which a finding of promissory estoppel could be based. Additionally, there is no evidence of reasonable and detrimental reliance, and no evidence that 20th Century waived reliance on the business pursuits exclusion in the policy.

4. 20th Century adds that the conversations upon which the claim of promissory estoppel were based fell within the litigation privilege, requiring reversal of the judgment.

5. 20th Century assets that under any theory, Encarnacions recovery was limited to $100,000.

6. Finally, 20th Century contends that the trial court erroneously barred it from raising two defenses.

Case Number B179825Encarnacions Appeal

1. Encarnacion contends the trial court erred in ruling that Brandt fees are not assignable.

2. Encarnacion further contends the trial court erred in denying her leave to amend her complaint.

Case Number B182737Encarnacions Appeal

1. Encarnacion contends the trial court erred in sustaining 20th Centurys demurrer based on the rule against splitting a cause of action.

2. Encarnacion further contends her complaint is not barred by the statute of limitations.

3. Additionally, Encarnacion asserts that the denial of leave to amend in case number B179825 did not bar the filing of an independent action.

4. Finally, Encarnacion asserts that the appeal in case number B179825 has no bearing on this appeal.

DISCUSSION

CASE NUMBER B17982520TH CENTURYS APPEAL

1. Equitable Estoppel and Forfeiture

20th Century contends the trial court erred in applying equitable estoppel and forfeiture offensively, in that they cannot form the bases of causes of action. Additionally, Encarnacion is judicially estopped from relying on equitable estoppel or forfeiture. We find no error and no basis for applying judicial estoppel.

In support of its contention, 20th Century relies on the principle that, unlike promissory estoppel, equitable estoppel is available only as a defense, and it cannot form the basis for a cause of action for damages. (Tiffany, Incorporated v. W.M.K. Transit Mix, Inc. (Ariz. 1972) 493 P.2d 1220, 1225; accord, Money Store Investment Corp. v. Southern Cal. Bank (2002) 98 Cal.App.4th 722, 732.) The same rule would apply to forfeiture. A court cannot, under the guise of equity, confer substantive rights on a party who otherwise has none. (In re Marriage of Umphrey (1990) 218 Cal.App.3d 647, 658.)

The trial court did not violate this principle, however. Encarnacions two causes of action were for breach of contract and breach of the implied covenant of good faith and fair dealing. In its cross-complaint for declaratory relief, 20th Century sought a declaration that it had no duty under the contract. Encarnacion then asserted estoppel as an affirmative defense.

The trial courts statement of decision showed a recognition that recovery was based on the policy, not on equitable estoppel or forfeiture. The court noted that [u]nder ordinary circumstances, Aguileras commission of a crime like this would have cut off any claims against the policy. These are not ordinary circumstances. For the reasons set forth below, 20th Century Insurance Company is equitably barred from raising its ordinary policy-based defenses. (Italics added.) The court later concluded that plaintiffs have met their burden and established equitable bars against 20th Centurys policy exclusions. The court finds that 20th Century has forfeited its rights under the policy, and that it is equitably estopped from challenging plaintiffs claims against the policy . . . . (Italics added.)

This court has previously recognized that estoppel may be applied to provide coverage under the policy where there otherwise would be none. (Canadian Ins. Co. v. Rustys Island Chip Co. (1995) 36 Cal.App.4th 491, 498; see also Vu v. Prudential Property & Casualty Ins. Co. (2001) 26 Cal.4th 1142, 1152-1153; State Farm Fire & Casualty Co. v. Jioras (1994) 24 Cal.App.4th 1619, 1627-1628.) Forfeiture, too, may be applied to prevent an insurer from asserting its rights under the insurance contract. (Chase v. Blue Cross of California, supra, 42 Cal.App.4th at p. 1151.)

The trial court therefore did not apply equitable estoppel and forfeiture offensively, as the bases of causes of action. Rather, it properly applied them to preclude 20th Century from asserting defenses to Encarnacions contractual causes of action.

20th Century also asserts that Encarnacion is judicially estopped from relying on equitable estoppel and forfeiture based upon her commitment to try this case on the theory of promissory estoppel only. Where a party takes a position in one phase of the litigation and prevails, the party may be judicially estopped to take a contrary position in a later phase. (International Billing Services, Inc. v. Emigh (2000) 84 Cal.App.4th 1175, 1190-1191; Law Offices of Ian Herzog v. Law Offices of Joseph M. Fredrics (1998) 61 Cal.App.4th 672, 678-679.) Judicial estoppel is invoked to prevent a party from changing its position over the course of judicial proceedings when such positional changes have an adverse impact on the judicial process. . . . (International Billing Services, Inc., supra, at p. 1191.)

20th Century made a motion in limine below to limit the court trial to the issue of promissory estoppel. The basis of this motion was judicial estoppel.

The trial court denied the motion. It explained: Defendant argues that earlier representations by plaintiff made before Judge Recana made clear that only promissory estoppel was at issue and that they are now themselves estopped under theories of promissory, equitable and judicial estoppel from offering any evidence outside that one theory. [] Plaintiff responds that they never intended nor actually foreclosed the use of equitable . . . estoppel and forfeiture in addition to promissory estoppel as their theory.

A review of the record that I have made demonstrates at this time in my mind that no compelling grounds warrant limiting plaintiff only to a theory of promissory estoppel. . . . [] Furthermore, judicial estoppel does not in my mind apply here. Applying one of my favorite cases by one of my favorite authors, that would be International Engine Parts[, Inc. v.] Fedderson [& Co. (1998)] 64 Cal.App.4th, 345 beginning around page 350, the concept of judicial estoppel prevents a party from asserting a position in a judicial proceeding that is contrary or inconsistent with a position previously asserted in a prior proceeding. [] The purpose is to protect the integrity of the judicial process and not the parties of the lawsuit. Judicial estoppel is most commonly applied to bar a party from making a factual assertion as opposed to here which is a legal assertion in a legal proceeding which directly contradicts an earlier assertion made in the same proceeding or a prior one.

Judicial estoppel looks to the connection between the litigant and the judicial system . . . . [] It is a doctrine invoked by the courts in their discretion, and I am not inclined to invoke it. I do not believe there is any good reason to grant defendants motion in limine . . . .

We see no abuse of discretion in the trial courts order. The statements on which 20th Century relied in support of its motion were made during the course of argument of various