Stone v. Fidelity National Ins.

Filed 10/29/07 Stone v. Fidelity National Ins. CA2/3

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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 THREE

APPEAL from a judgment of the Superior Court of Los Angeles County, Daniel J. Buckley, Judge. Affirmed in part, reversed in part and remanded with direction.

Hennelly & Grossfeld, John J. Hennelly and Susan J. Williams for Defendant and Appellant.

The Ehrlich Law Firm, Jeffrey Isaac Ehrlich; Shernoff Bidart & Darras, Michael J. Bidart and Ricardo Echeverria for Plaintiffs and Respondents.

INTRODUCTION

Plaintiffs and appellants Larry Stone (plaintiff Stone) and Linda Della Pelle (plaintiff Pelle) (collectively plaintiffs) sued defendant and appellant Fidelity National Insurance Co. (Fidelity) for breach of an insurance contract and for bad faith for allegedly undervaluing damage to plaintiffs home, which was damaged during a fire. Upon a loss, the insurance policy required Fidelity to pay actual cash value until plaintiffs completed repair of the home within a certain time period, at which point, the policy required Fidelity to pay replacement cost value.

Following a jury trial, the trial court entered judgment awarding plaintiffs $160,956.42 in economic damages, which amount represented the difference between the actual cash value amount actually paid by Fidelity and the amount of actual cash value the jury determined that Fidelity should have paid. The jury also awarded plaintiffs $5,163,217 in punitive damages. In the judgment, the trial court awarded plaintiffs $64,382.56 for attorney fees pursuant to Brandt v. Superior Court (1985) 37 Cal.3d 813 (Brandt), leaving costs for a later determination.

The trial court then granted plaintiffs motion to vacate the judgment. The court found that because Fidelity breached the contract with respect to payment of actual cash value, plaintiffs were excused from the contractual condition precedent of repairing the home and thus entitled to the difference between the amount actually paid by Fidelity and the jurys determination of replacement cost value. The trial court denied Fidelitys motion for new trial conditioned on plaintiffs agreeing to a remittitur reducing the punitive damages award to $1,600,000, which plaintiffs accepted.

The trial court entered a second judgment awarding plaintiffs $197,939.56 in economic damages, which amount represented the jurys determination of replacement cost value minus the amount Fidelity actually paid. The trial court also awarded plaintiffs $1.6 million in punitive damages; $79,175.82 in Brandt attorney fees; and $23,776.48 in costs, together with interest from the date of entry of judgment.

Fidelity appeals from both judgments. We affirm in part, reverse in part, and remand the matter to the trial court to enter a new and different judgment consistent with this opinion.

We affirm the award of economic damages awarding plaintiffs the difference between the amount Fidelity paid and the jurys determination of actual cash value. We reverse the award of economic damages awarding plaintiffs the difference between the amount Fidelity paid and the jurys determination of replacement cost value. The trial court erred by finding that plaintiffs were excused from the condition precedent of repairing the home prior to making a claim for replacement cost value.

We affirm the awards of punitive damages and Brandt attorney fees. Plaintiffs presented substantial evidence that Fidelity breached the covenant of good faith and fair dealing. Plaintiffs also presented substantial evidence that Fidelity acted with deliberate disregard for the rights of plaintiffs sufficient to support an award of punitive damages under Civil Code section 3294. Moreover, the punitive damages award as reduced by the trial court to $1.6 million does not violate Fidelitys constitutional right to due process as articulated in State Farm Mut. Automobile Ins. Co. v. Campbell (2003) 538 U.S. 408 (State Farm) and Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159 (Simon). In addition, the trial courts jury instruction defining reprehensibility did not constitute legal error. Moreover, plaintiffs counsel did not engage in prejudicial misconduct during closing argument. Lastly, the award of Brandt attorney fees constitutes a sufficient award of tort damages to support an award of punitive damages.

With respect to the Bandt fees, there is no evidence that the trial court awarded plaintiffs an amount greater than the fees incurred to obtain the policy benefits under the contract of insurance.

Finally, the trial court did not abuse its discretion by ruling that if Fidelity intended to produce an out-of-state witness for its case-in-chief, it must also produce the same witness for plaintiffs case-in-chief.

FACTUAL AND PROCEDURAL BACKGROUND

1. Plaintiffs House

At the time of the 2003 wildfires, plaintiffs owned a 3582 square foot house located in Claremont, California. The house was built in 1964 and remodeled in 1984. It consisted of a two-story section on a concrete foundation and a one-story section on a raised foundation.

Fidelitys contractors described the residence as a premium grade home in a nicer area. It had granite counter tops, custom cabinets, and expensive Pella windows.

2. Plaintiffs Insurance Policy With Fidelity

In August 2003, Fidelity issued plaintiffs a homeowners policy. The policy provided dwelling coverage (Coverage A) of up to $320,000.^[1]

With respect to the Coverage A dwelling coverage, an endorsement amended the policy. The endorsement provided an additional 150 percent of the amount of coverage under Coverage A if a loss exceeded the Coverage A limits, for a total of $800,000 in coverage.

Section B(3) of the endorsement provided: We will pay no more than the actual cash value of the damage until actual repair or replacement is complete.

Section B(4) of the endorsement provided: You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss to the building on an actual cash value basis. You may then make [a] claim for any additional liability on a replacement cost basis, provided you notify us of your intent to do so within 180 days after the date of loss.

The policy defined actual cash value as: the lesser of repair or replacement cost, exclusive of sales tax, at the time of loss less applicable depreciation for physical deterioration and obsolescence and applicable contractors profit and overhead.

The policy defined replacement cost value as the actual cost of repairing or rebuilding the damaged structure to its pre-loss condition.^[2]

The policy also contained an appraisal clause. The clause provided that if the parties failed to agree on the amount of the loss, either party could demand an appraisal. Each party could designate an appraiser, and the appraisers could designate an umpire.

The policy also provided that any waiver of a policy provision had to be in writing.^[3]

3. Fire Damages Plaintiffs House

At 3:30 a.m. on October 26, 2003, plaintiff Stone woke up to discover that his house was on fire caused by a wild fire. Plaintiffs left immediately, without time to gather any belongings.

Plaintiffs returned the following day. The entire top story of the house had been destroyed. Debris was everywhere in the house, the windows were broken, and everything was soaking wet. Anything that had not burned had smoke damage.

The damaged areas on the first floor included the kitchen, a nook room, the dining room and the living room. Upstairs, in the bedroom area, the entire roof had collapsed, all the roof framing had burned, and the sky was visible from the first floor living room.

Plaintiff Pelle testified at trial that a City inspector told her the home was 90 percent destroyed. According to Pelle, a contractor, Oakwood Construction Insurance Restoration Specialists (Oakwood), agreed with the Citys damage estimate.

Fire fighting efforts saturated the house with water. Plaintiffs understood that as of November 2003, the house needed to be demolished, except for a concrete slab and the garage. Plaintiffs noted that this was why plaintiffs and Fidelitys initial contractor, Oakwood, did not tarp the majority of the house to keep out any rain or moisture. In addition, an Oakwood representative and an independent adjuster retained by Fidelity informed plaintiffs that the suggested course of action was demolition.

By December 2003, mold was evident throughout the house and continued to spread.

4. Fidelity Accepts Coverage and Begins Processing Claim

Plaintiffs submitted a claim through their insurance agent. Fidelity accepted coverage and assigned the claim to claims adjuster Steven Pursley (adjuster Pursley) in the Santa Barbara office. Adjuster Pursley contacted plaintiffs on October 27, 2003, and sent them funds for emergency expenses.

Fidelity retained a firm called American Claims Experts (ACE), an independent adjusting firm, to process plaintiffs claim. ACE assigned Lou Harris (Harris) to the claim. Harris inspected the property on October 28, 2003. According to plaintiffs, by November 2003, Harris advised plaintiffs that the house needed to be demolished.

5. Inspections of the House

After the fire, plaintiffs needed a contractor to board up the property, tarp the portions that could be saved and remove the debris. Upon a neighbors recommendation, plaintiff Stone contracted with Oakwood to do the immediately necessary work to protect the house, remove the debris, and clean and inventory the house contents.

On October 31, 2003, Harris of ACE met with plaintiff Stone and Jim Benson of Oakwood to inspect the property. At trial, Harris testified the house had suffered major structural damage, but that it was only 70 percent destroyed. Harris took photographs of the damage to the home. According to adjuster Pursleys Activity Log, which is a written record of contemporaneous incidents related to the claim, Harris reviewed the claim with Fidelitys adjuster Pursley, and discussed setting Coverage A reserves at $250,000.

Oakwood Construction used a structural engineer, Hansen Hokama Structural Engineers (Hansen Engineers), to inspect the house. Fidelity eventually retained Hansen Engineers.

On November 5, 2003, Hansen Engineers sent its engineer, Michael Hokama (Hokama), to inspect the house. Hokama concluded that the roof was completely destroyed. He also concluded that there was framing and wall damage. He further concluded that the concrete foundation was undamaged. He based the conclusion on his observation that the fire had burned down to the middle of the wall that connected with the concrete foundation. Hokama did not believe that the concrete foundation needed to be tested.

Hansen Engineers concluded that the house was not a total loss and that portions of the structure were useable. The firm completed structural engineering plans dated December 4, 2003, to restore the house to its pre-fire condition. The plans were ready for submission to the City of Claremont. The plans showed foundation details, walls to remain, walls to be replaced, ceiling framing and a new roof. Fidelity paid the firm $5,790 for its work.

On November 13, 2003, ACEs Harris and Oakwoods Jim Bensen inspected the house to determine the work to be done.

6. Fidelity Re-Assigns Claim to Omaha, Nebraska Office

On December 9, 2003, Fidelity re-assigned the claim to claims adjuster Michael Madrigal (adjuster Madrigal), who worked in Fidelitys Omaha, Nebraska office.

Madrigal documented the processing of the claim in his Activity Log. Because the claim had been handled by two offices, there were two Activity Logs. The Omaha Activity Log indicated that Madrigal had a conversation with Harris from ACE on December 11, 2003. The Log indicated that Harris explained that the house [was] a total loss . . . and that Harris] estimated that the repairs will exceed $480,000 and the contents will exceed the limit as the insured has a lot of high-end property.^[4]

After speaking with adjuster Madrigal, on December 11, 2003, Harris of ACE completed a preliminary estimate. That day, Harris sent a written report to Fidelity recommending that it set Coverage A reserves at $350,000.

7. Estimates Regarding the Damage to the Home

On December 19, 2003, Harris submitted an estimate of the replacement cost value of the house in the amount of $314,140.69 The estimate, however, left open items for framing, subcontractor bids items and roofing for which Harris did not estimate a replacement cost.

Harris started with the replacement cost value and then deducted an amount for depreciation to compute the actual cash value of the property at the time of the loss. He deducted $16,952.02 for depreciation to compute an actual cash value of $297,188.67. He did not deduct sales tax and contractors profit and overhead, which Fidelitys policy allowed him to do. Harris sent the estimate to Fidelity. Fidelity did not object to the manner in which Harris calculated actual cash value.

8. Oakwoods Estimate

On December 19, 2003, Oakwood Construction completed an estimate. Oakwood calculated the replacement cost value at $355,131.32, and actual cash value at $288,837.32. The estimate, however, did not account for damage from later rainstorms. It also did not account for mold because Benson of Oakwood did not observe mold when he inspected the house. Oakwood provided the estimate to plaintiffs and Madrigal at Fidelity.

In January 2004, plaintiff Stone told Harris of ACE that he was not satisfied with Oakwoods estimate on the basis that it was incomplete, and because of Oakwoods efforts to have Stone sign a contract without a price. Stone was also not satisfied with the Oakwood estimate because it identified prices for items such as home fixtures which were lower than what the items had cost prior to the fire. Stone told Harris that he did not want Oakwood involved with providing an estimate.

Robert Rettig, an adjuster retained by plaintiffs, testified at trial that the Oakwood estimate was outrageously low. He testified that the house could not be rebuilt for the amount of the estimate. The estimate left open the costs of plumbing, architectural costs, engineering fees, supervision, building permits, code upgrades and mold abatement. The estimate also contained calculations based upon removal, but not replacement of carpets, and subflooring that was left exposed.

At trial, Oakwoods president, testified that he knew that the $355,131.32 estimate was not the actual cost number given the open items. He testified that the actual cost to completely repair the home was between $531,000 and $556,000.

9. Harris of ACE Revises Estimates of Damage to the Home

In January 2004, Harris of ACE prepared a second estimate. There, he calculated the replacement cost value at $331,602. Harris deducted $20,100.44 in depreciation to determine actual cost value.

Harris testified that he felt good about this estimate and that he wanted to get an agreed price for it from a contractor. According to Harris, an agreed price is when the adjuster and contractor agree that a given price is a fair price for a job, and that is the price that the insurance company will pay.

Harris ultimately made five estimates of replacement cost value. His final estimate, dated May 11, 2004, calculated replacement cost value at $435,601.38.

10. Plaintiffs Retain Their Own Consultant

In January 2004, plaintiffs hired adjuster Rettig to prepare an estimate. Rettig was a licensed contractor. At that time, he had prepared approximately 3,000 estimates.

Rettig requested that plaintiffs complete a questionnaire to obtain information about the house prior to the fire. The questionnaire asked for details about the quality of the cabinets, the finishes, and the carpets. Harris, Oakwood, and Har-Bro Construction, Fidelitys other construction company hired to prepare an estimate, did not ask plaintiffs for similar details about the house prior to the fire. Rettig testified that the questionnaire was necessary to have a realistic representation of what was lost. Parts of the house were gone and other parts were covered in debris.

In April 2004, one of Rettigs independent contractors, Dan Pfeifer, inspected the house. He noticed spalling and cracking in the concrete foundation. Based on this inspection, Rettig anticipated that the foundation would be tested to determine its condition. Rettig began preparing an estimate. To be cautious, Rettig prepared an estimate calling for a complete tear-down of the house because of the problems observed in the concrete foundation.

11. Har-Bro Construction Estimates the Damage to the Home

After plaintiff Stone rejected Oakwood, Harris of ACE hired Har-Bro Construction to prepare an estimate. Har-Bros first estimate, dated April 13, 2004 calculated replacement cost value at $460,462.07. On April 30, 2004, Har-Bro submitted a revised estimate for $467,033.92.

Har-Bros estimate contained a number of open items, including the cost of framing, code upgrades, architectural services, engineering services, permits and mold abatement. The estimate included costs for partial painting and texture, but did not guarantee that it could match existing painting or texture. In addition, there was no labor cost for installation of doors and windows.

At trial, Har-Bros estimator, Jorge Reza, testified that the $467,033..92 replacement cost value estimate would have gone higher depending upon the ultimate cost of the items left open in the estimate.

12. Plaintiffs May 22, 2004 Letter to Adjuster Madrigal

On April 22, 2004, plaintiffs sent a letter to adjuster Madrigal disputing Fidelitys determination of actual cash value. There, plaintiffs explained to Madrigal that the City of Claremont had listed the home as destroyed. Plaintiffs stated that this was printed in a local newspaper. In addition, plaintiffs explained that Oakwood and Harris of ACE both told plaintiffs that the house was 90 percent destroyed.

At trial, adjuster Madrigal testified that he called plaintiffs on April 28, 2004 and told them that he did not agree that the house was 90 percent destroyed. He also stated that the City of Claremont had not declared the house a total loss. He informed plaintiffs that Harris of ACE had concluded the house was repairable.

13. Harris of ACE Revises Estimate

After Har-Bro submitted its second estimate, Harris of ACE prepared his fourth estimate, which calculated replacement cost value at $431,465.32. In early May 2004, Harris emailed the estimate to Har-Bro and Oakwood and asked if they could do the work for that amount. Har-Bro informed Harris that the Har-Bro estimate was tight and that there was no room to negotiate.

Harris knew that plaintiff Stone did not want to work with Oakwood. Nevertheless, after Har-Bro refused to reduce its estimate, Harris contacted Oakwood to determine an agreed price. Harris testified that an agreed price with a contractor did not mean that the insured had to use the contractor.

On May 5, 2004, Oakwood agreed to perform the repairs for $431,465.32. At trial, Fidelity adjuster Madrigal testified that Oakwood was salivat[ing] at the chance to repair the house for the approximate $431,000 amount.

Fidelity never informed plaintiffs that it was seeking an agreed price from Oakwood. In any event, Fidelity obtained Oakwoods agreement to perform the work for the $431,000 amount.

14. Harris of ACE Again Revises Estimate

After obtaining Oakwoods agreement to perform the work for approximately $431,000, on May 11, 2004 Harris of ACE revised his estimate to include additional items. His last estimate of replacement cost value was in the amount of $436,601.38.

15. Fidelity Calculates Actual Cash Value Payment to Plaintiffs

Because Har-Bro would not reduce its estimate, Fidelity based its payment to plaintiffs on the ACE estimate of replacement cost value, and determined replacement cost value to be $433,195.45. This was the estimate to which a contractor, Oakwood, had agreed. Fidelity informed plaintiffs that if they were not satisfied with the payment, they could invoke the appraisal clause in the insurance policy.

On May 18, 2004, Fidelitys adjuster Madrigal sent plaintiffs a letter explaining Fidelitys payment and its determination of actual cash value. The letter stated that Fidelity would issue plaintiffs a check for $405,797.88 as actual cash value. Specifically, Madrigal started with the replacement cost value of $433,195.45 and then deducted $26,397.57 for depreciation and $1,000 for the plaintiffs deductible.

In the May 18, 2004 letter, Madrigal calculated the actual cash value payment Fidelity intended to pay plaintiffs. On page 2 of the letter, Madrigal quoted the policy definition of actual cash value as the lesser of repair or replacement cost, exclusive of sales tax, at the time of the loss less applicable depreciation for physical deterioration and obsolescence and applicable contractors profit and overhead.

Despite the policy definition of actual cash value, page 4 of Madrigals May 18, 2004 letter shows in writing that Fidelity in practice defined actual cash value as replacement cost value minus only depreciation, which came to $405,797.88. In other words, Fidelity did not use the policy definition of actual cash value to determine the amount owed to plaintiffs. If Fidelity had used the policy definition of actual cash value, it would have also subtracted amounts for sales tax and contractors profit and overhead to determine actual cash value.

The letter also contained a Replacement Cost form indicating that plaintiffs could seek additional coverage amounts once the repairs were completed.

On May 27, 2004, Fidelity sent plaintiffs a check for $405,797.88. Fidelitys Coverage A payments equaled $418,446.05.^[5]

16. Correspondence Following Payment to Plaintiffs

On July 9, 2004, adjuster Madrigal sent plaintiffs a letter responding to some of plaintiffs concerns about the claim adjustment process. There, Madrigal wrote that plaintiffs had the right to disagree with Fidelitys evaluation of the repairs to the house. Specifically, Madrigal advised them of the right to initiate the appraisal process pursuant to the insurance policy.

In addition, Madrigal stated that Fidelity would do what was necessary to evaluate and remedy any mold condition. Finally, Madrigal agreed that Fidelity had miscalculated the amount of sales tax and sent plaintiffs a check for $1,338.40.

Madrigal also wrote to explain Fidelitys definition of estimates: An estimate is our determination of the approximate cost or an approximate calculation of the cost to repair a structure. We consider our estimate to be an accurate reflection of the damage and cost of repair. However, if there are damages discovered that we were not aware of and/or have not taken into consideration, we will consider those damages.

17. Rettig Finishes First Estimate

Plaintiffs adjuster, Rettig completed his first estimate on August 23, 3004, for Coverage A dwelling coverage. He calculated replacement cost value as $679,000.

Plaintiffs submitted Rettigs estimate to adjuster Madrigal, who testified at trial that he did not review it in detail once he saw that the estimate was based upon a complete tear down. Madrigal did not ask Harris of ACE, Oakwood or Har-Bro to review Rettigs estimate. He did not call Rettig to discuss the estimate. Instead, Madrigal recommended to his superiors that Fidelity reject the estimate.

In his activity log, Madrigal noted: I am unable to approve this estimate as we have demonstrated through our inspections that the dwelling can be repaired. Madrigal testified that he did not have information indicating that the house was a complete tear-down.

On August 31, 2004, Madrigal responded to plaintiffs in writing concerning the Rettig estimate. In the letter, Madrigal stated that he could not approve a complete tear down and rebuild pursuant to the Rettig estimate. Madrigal wrote: As we explained in our prior letters, your dwelling has been inspected by our independent adjuster, Lou Harris, your original contractor, Oakwood Construction, H.C. Hansen Structural engineering and [Har-Bro] Construction which they have all agreed the house is repairable and have completed plans and estimates to repair your home. Madrigal offered to submit the matter to an appraisal.^[6]

On September 4, 2004, Madrigal sent a letter to plaintiffs offering to resolve any disputes through mediation before the Department of Insurance.

On October 5, 2004, Madrigal spoke with plaintiffs. He again informed that he could not approve the Rettig tear down estimate. He offered to participate in the mediation process. His Activity Log indicated that plaintiffs agreed to mediate, but that they wanted additional information about the mediation process.

18. Plaintiffs File Suit

On October 21, 2004, plaintiffs filed this lawsuit. Pursuant to a second amended complaint, plaintiffs alleged causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, promissory fraud, fraudulent misrepresentation, negligent misrepresentation, reformation and professional negligence.

Plaintiffs alleged that Fidelity unreasonably withheld benefits under the policy and that Fidelity conducted an inadequate investigation into plaintiffs losses. Plaintiffs sought compensatory damages, punitive damages and attorney fees.

19. Rettig Prepares Second Estimate

In August 2005, plaintiffs adjuster, Rettig, re-inspected the house. He prepared a second estimate, which did not call for a complete tear-down. Rettig concluded that the foundation and the floor slab could be retained. At trial, Rettig testified that he no longer considered his initial tear down estimate to be valid. Rettig testified that with respect to the tear down estimate, it was based upon the fact that testing of the concrete slab had not been accomplished. Rettig testified that by the time of the 2005 estimate, he believed that the concrete slab no longer needed to be tested.

The second estimate, dated August 15, 2005, calculated replacement cost value at $600,296.23. Deducting $33,417.27 for depreciation, Rettig calculated actual cost value at $566,878.96. Based upon the mold in the structure and the potential for asbestos and lead based paint, Rettig believed that the estimate could go five percent higher for an additional $30,000. Rettig also testified, however, that had the construction work commenced in December 2003 before the development of the mold, he would have reduced the approximate $600,000 estimate by $10,000 to $20,000.

20. Motion Practice

Fidelity filed a motion for summary judgment/summary adjudication. In response, plaintiffs voluntarily dismissed a number of causes of action. Ultimately, the case went to trial on plaintiffs causes of action for breach of contract and breach of the covenant of good faith and fair dealing.

21. Motions in Limine

Prior to trial, plaintiffs filed a motion in limine for an order allowing them to defer closing their case-in-chief until Fidelity produced its out-of-state employee, adjuster Madrigal, to testify as a live witness. Fidelity filed an opposition and asserted that if Fidelity called Madrigal as a defense witness, plaintiffs must nevertheless present Madrigals testimony in their case-in-chief via prior deposition testimony of Madrigal.

The trial court denied the motion without prejudice. The trial court explained that Fidelity had a choice to make. If Fidelity intended to call Madrigal as a live witness, Fidelity must allow plaintiffs to call him as a live witness. The court stated: Im not going to have the jury sit through that deposition and then the live testimony. The court noted that if Madrigals testimony became necessary for plaintiffs to avoid a non-suit, Fidelity would have the choice of producing him to testify in plaintiffs case-in-chief or both parties would have to present his testimony via Madrigals prior deposition.

22. Trial Commenced

The trial commenced in October 2005. The trial was bifurcated into two phases, liability and punitive damages.

During trial, Fidelity made an offer of proof that under the policy, it was obligated to pay only actual cash value until the home was repaired and that repair would not be completed by May 2006, because plaintiffs intended to build a new home. In response, plaintiffs asserted that the jury should determine actual cash value and replacement cost value so that if plaintiffs completed the rebuild by May 2006, the amount of the difference between actual cash value and replacement cost value would be known. Plaintiffs also asserted that a jury finding of breach of the implied covenant would excuse the policy requirement that repairs must be completed within two years.

The trial court ruled that the jury would determine replacement cost value to determine actual cash value. The trial court then stated that plaintiffs breach of contract damages would be the difference between actual cash value and the amount paid by Fidelity. Plaintiffs responded that in the event of a finding of bad faith, the jury verdict would have no line item for tort damages, because the only tort damages would be Brandt attorney fees, which the parties agreed the trial court would determine after trial. The trial court agreed with this procedure.

In addition, during trial, Fidelity sought to introduce plaintiffs financial condition as relevant to plaintiffs claim of emotional distress. In response, plaintiffs withdrew any claim for emotional distress damages. The trial court then ruled that evidence of plaintiffs financial condition would be excluded.

23. Stipulation that House Was Not Repaired and Motion for Non-Suit

At the conclusion of the evidence, the parties stipulated that plaintiffs had not completed repair or replacement of the damage to the house. Fidelity filed a motion for non-suit on plaintiffs claim for punitive damages, which the trial court denied.

24. Plaintiffs Insurance Coverage Expert

At trial, plaintiffs presented the testimony of David Peterson, an expert witness on coverage disputes and insurance bad faith. Peterson testified that in this case he reviewed the entire claim file to evaluate how Fidelity investigated the claim, how it communicated with plaintiffs, how it evaluated coverage, how it settled with plaintiffs, and how management resolved issues that arose during the claim process.

As to the claim investigation, Peterson testified that Fidelitys investigation of the claim based upon the initial December 19, 2003 Harris estimate in the amount of $314,000 for replacement cost value was significantly below the standard and unreasonable relating to getting enough information to provide the insured with a reasonable, accurate estimate for the repair of the . . . home. Peterson categorized this estimate as the first of a series of low-ball estimates, which he defined as not bearing any rational relationship to the total damage that was suffered by the insured.

Peterson concluded that this first December 2003 estimate did not properly calculate the replacement cost of the home. He noted that: Harris did not ask plaintiffs to identify all the improvements to the home, he did not ask plaintiffs to provide receipts or documents showing the floor plan, and he did not obtain information from the city related to the cost of permitting in relationship to necessary code upgrading. Peterson explained that the Harris estimate did not include replacement of the Pella windows, the custom cabinetry, the library, or the home theater and speaker system.^[7]

Peterson commended Fidelity for hiring a structural engineer early in the claim process, but was critical of the fact that neither Fidelity nor the engineer tested the concrete foundation.

Peterson also testified about Fidelitys managements response to the December 2003 estimate: I thought that management stuck their head in there and looked at the estimate and put a stamp of approval on it, and I thought that that was below standard and unreasonable because there were so many items that were missing. Finally, Peterson was critical of the fact that Fidelity did not send a copy of the December 2003 estimate to plaintiffs.

Peterson explained that the claim file showed that adjuster Madrigal requested Harris of ACE to provide a revised estimate, which Harris did in the amount of $331,000 for replacement cost value. About the revised estimate, Peterson testified that the deficiencies in this estimate were the same as existed for the first estimate.

Peterson also noted that the claim file included an estimate from Oakwood in the amount of $355,000 for replacement cost value. He explained that the second Harris estimate and the Oakwood estimate were both above the policy limit of $320,000 which then invoked coverage under the endorsement. Peterson noted that plaintiffs and Fidelity disputed whether the endorsement provided coverage up to $480,000 or $800,000. Peterson was critical of Fidelity for not resolving this coverage question more quickly.

Peterson then testified that the claim file showed that Fidelity hired Har-Bro to provide a new estimate. Peterson explained that Har-Bro did not provide an estimate until April 2004, approximately six months after the fire. Peterson testified that the Har-Bro estimate in the approximate amount of $467,000 for replacement cost value was low because it left a number of open items, including estimates for upgrades, architect, engineering, permits and fees.

Peterson explained that Fidelity then requested a revised estimate from Harris of ACE. About the Harris and the Har-Bro estimates, Peterson testified that the Harris estimate had no[t] estimate[d] for the garage, the attic and the deck, and Har-Bros estimate was higher in 17 of 26 categories that Harris had estimated. Neither one had evaluated the upgrades. Neither one had gotten information from the insured on the extent of their upgrades. Peterson also noted that the Har-Bro estimate included a $60,000 amount for the windows and the cabinets, which he testified should have been in the original Harris estimate.

Peterson was critical of the fact that Fidelity used the final Harris estimate to calculate actual cash value, instead of the Har-Bro estimate, as well as the manner in which Fidelity communicated to plaintiffs its intentions to rely upon the Harris estimate. Peterson testified [t]hat when Harris did his estimate, he reduced Har-Bro in half of the areas. And think about that. Here is a non-contractor reducing an estimate of a contractor. Peterson also explained that the Harris estimate did not include amounts for code upgrades, permits or engineering fees, or work to the attic. Peterson noted that the claim file showed that Fidelity knew the house would require code upgrades.

According to Peterson, the claims file showed that at that point, Harris provided a fourth estimate in the approximate amount of $431,000 for replacement cost value. Fidelity then sent this fourth Harris estimate to Har-Bro, who refused to perform the work for that amount. Peterson noted, however, that Oakwood, the contractor rejected by plaintiffs, agreed to perform the work for the $431,000 amount. Peterson testified: I think Oakwood even agreed that estimate was low, that it would probably be at least a hundred to a [$]150,000 more if they actually undertook the work. Peterson was critical that the claim file showed that Fidelity did not inform plaintiffs that it was seeking from Oakwood an agreed price to perform the work.^[8]

Peterson also noted that by this time, the house showed mold contamination. He was critical of Fidelity for allegedly failing to investigate the mold problem.

Peterson concluded that basing the actual cash value payment on the Harris estimate was unreasonable. It did not include an estimate for upgrades, and because it did not properly calculate replacement cost value, the actual cash value number was not correct. He did acknowledge, however, that when Fidelity paid plaintiffs the amount for actual cash value, Fidelity advised plaintiffs that they could file supplemental claims for additional work necessary to repair the home.

Peterson also concluded that Fidelity acted unreasonably by claiming a work product privilege and not providing plaintiffs with everything in the claim file as they requested. Peterson testified that Fidelity acted unreasonably by failing to conduct any further investigations after receiving the first and second estimates prepared by Rettig, plaintiffs contractor. In Petersons opinion, an appraisal pursuant to the policy to determine whether Fidelity had underpaid actual cash value was unnecessary because the dispute between Fidelity and plaintiffs did not constitute a genuine dispute.

25. Jury Instructions

With respect to jury instructions, the trial court instructed the jury that the definition of actual cash value was provided by the 2004 amendments to the California Insurance Code. The instruction given to the jury provided: As of August 2004, California law provided that the measure of Actual Cash Value in this case is the amount it would cost the insured to repair, rebuild, or replace the dwelling, less a fair and reasonable deduction for depreciation.

Fidelity did not object to this instruction. Instead, Fidelity explained that it paid more then was required by the policy, because it made its actual cash value payment as stated by the foregoing jury instruction, instead of according to the definition set forth in the insurance policy. Fidelity explained that it would thus argue to the jury that because it paid an amount of actual cash value greater than what the policy required, it did not breach the contract.^[9] The trial court stated that Fidelity could seek to add language to the special verdict form on the issue of how to define actual cash value.

Fidelity presented an expert witness at trial, Craig Simon, on the issue of the methods for handling or processing insurance claims. Simon testified that his specialty was drafting language in insurance policies to make the language as clear as possible.

On cross-examination, Simon testified that part of his work history involved giving advice to insurance companies on how to adjust claims. Simon testified that he understood that replacement cost value equaled the cost to repair or rebuild after a loss. Simon further testified that the practice in the insurance industry was to define actual cash value as replacement cost less depreciation.

Counsel for plaintiffs then asked Simon: At this juncture, Im asking you for your opinion. And is it correct as an expert for Fidelity that it is your opinion that the better approach is [to] follow the statute and use the formula of the replacement cost less depreciation equals actual cause value; is that correct? Simon responded: Yes.

Plaintiffs counsel then queried: And in fact, when Fidelity made the payment to the insureds in May of 2004, thats precisely the formula that they used; correct? Simon responded: Yes.

26. Special Verdict Form

Plaintiffs filed a proposed special verdict form. The special verdict form required the jury to first determine replacement cost value, which is the amount to repair the home to its pre-loss condition. The jury was then to determine actual cash value in accordance with the jury instruction defining actual cash value, by subtracting depreciation from replacement cost value.

The special verdict form did not require the jury to determine how much Fidelity had actually paid on the claim. In addition, the special verdict form did not call for the jury to determine the amount of plaintiffs damages by subtracting the amount actually paid by Fidelity from the amount the jury determined to be actual cash value.

Plaintiffs stated that the questions on the special verdict form would result in a later determination of damages by the trial court. Fidelity did not object to proceeding in this manner.

Fidelity requested, however, that the special verdict form require the jury to find the actual cash value of plaintiffs loss as defined in the insurance policy. The trial court denied the request. The trial court, however, granted Fidelity leave to argue to the jury that it was not in breach of contract because it paid more in actual cash value than was required by the policy.^[10] Counsel for Fidelity then requested that the court provide a jury instruction defining actual cash value as the term was defined in the insurance policy. The trial court denied the request.^[11]

In any event, the special verdict form completed by the jury set forth five questions. The first question asked: Did [Fidelity] breach the contract with plaintiffs? The jury answered Yes. The form then provided in pertinent part: If your answer to Question No. 1 is yes, please answer Question No. 2.

The second question on the special verdict form asked: What is the Replacement Cost Value of the loss? The jury calculated $616,385 as the amount.

The third question on the special verdict form asked: What is the Actual Cash Value of the loss? The jury calculated $579,402.74 as the amount.

The fourth question on the special verdict form asked: Did [Fidelity] breach the implied covenant of good faith and fair dealing? The jury answered Yes. The special verdict form then provided in pertinent part: If your answer to Question No. 4 is Yes, please answer Question No. 5.

Finally, in response to the fifth question on the special verdict form, the jury found that Fidelitys conduct constituted fraud, malice and oppression.

27. Punitive Damages Phase

On November 8, 2005, the trial court commenced trial on the punitive damages phase. The trial court denied Fidelitys motions for a directed verdict and a mistrial on the basis that the jury did not award tort damages. Finally, the trial court denied Fidelitys request to instruct the jury as to the amount of plaintiffs contract damages and that the jury awarded no other damages in the liability phase.

28. Punitive Damages Jury Instruction

The trial court provided the jury with an instruction as to how to determine reprehensibility. By stipulation, the court reported did not transcribe the instructions actually given to the jury.

The appellants appendix, however, contains a jury instruction as to how to determine the reprehensibility of Fidelitys conduct. That instruction provided:  In determining the reprehensibility of defendants conduct you must consider whether: [] the harm caused was economic and not physical; [] the conduct showed an indifference to or a reckless disregard of the health or safety of others; [] the [plaintiffs] provided evidence that they were financially vulnerable; [] the conduct involved repeated actions or was an isolated incident; [] the harm was the result of intentional malice, trickery or deceit, or mere accident. [] The absence of all these factors renders any award suspect. 

On appeal, Fidelity claims and plaintiffs do not dispute that the trial court inserted the word rights into the jury instruction as follows: In determining the reprehensibility of defendants conduct you must consider whether:  . . . the conduct showed an indifference to or a reckless disregard of the rights, health or safety of others. (Italics added, underscoring omitted.) As explained below in the Discussion, Fidelity asserts the trial court committed prejudicial error and allowed the jury to award an excessive punitive damages award.

29. Closing Arguments in the Punitive Damages Phase

Before closing arguments, as requested by Fidelity, the trial court ordered plaintiffs counsel not to refer to the testimony of adjuster Madrigal that there were 30 to 40 other wildfire claims.

Then, during closing argument, to support the assertion that Fidelitys conduct was reprehensible, plaintiffs counsel first read a portion of adjuster Madrigals testimony: Question: So with respect to the manner in which this file was handled, any insured of Fidelity could expect their claim to be handled in the same fashion; is that correct? [] Answer: I would say thats correct.

Plaintiffs counsel then stated to the jury: Now, what I want to do is stop and really put into perspective how important that is. We know that there [are] hundreds of claims out there that this company has. . . .  [] . . . [] And had [plaintiffs not put up a fight], they would have been shortchanged by $200,000. Thats one claim. You multiply that out by hundreds and hundreds of claims

At that point, the trial court sustained Fidelitys objection. Plaintiffs counsel continued: This practice had the potential of harming insureds so substantially that its almost unthinkable. There is a reason why low-balling exists . . . The trial court again sustained Fidelitys objection.

Later, during closing argument, the trial court sustained Fidelitys objection to plaintiffs counsels statement as follows: Now, they showed you the harm to [Stone and Pelle]. What that ignores is whats it going to take to prevent this for the future? Whats the potential harm for people? My God, the numbers are staggering when you apply them over a number of claims.

Fidelity also objected to the following statements by plaintiffs counsel in closing argument, which objections the trial court sustained: (1) the fact that Fidelity did not have a representative at trial; and (2) references to criminal penalties for fraudulent conduct.

The trial court denied Fidelitys motion for mistrial based upon plaintiffs counsel closing arguments.

30. Punitive Damages Verdict

On November 9, 2005, the jury awarded plaintiffs punitive damages in the amount of $5,163,217. The trial court directed plaintiffs to submit a proposed judgment.

31. Trial Court Enters Judgment

On February 15, 2006, the trial court entered judgment in favor of plaintiffs. The trial court awarded $160,956.42 in economic damages.^[12] The court also awarded $5,163,217 in punitive damages; and $64,382.56 in Brandt fees, leaving costs for a later determination.

32. Post-Judgment Motions

On March 17, 2006, plaintiffs filed a motion to vacate the judgment and enter a new and different judgment. Plaintiffs requested the trial award replacement cost value instead of actual cash value. In the motion, plaintiffs explained that because the jury determined that Fidelity breached the contract, plaintiffs were excused from the condition precedent of rebuilding the house in order to recover replacement cost value. Plaintiffs asserted that to hold otherwise would allow Fidelity to take advantage of the breach of contract by withholding policy benefits. According to plaintiffs, the judgment would force plaintiffs to sue and recover actual cost value, then rebuild and file a second lawsuit to recover full replacement cost value.

Fidelity filed an opposition to plaintiffs motion to vacate.

33. Fidelitys First Notice of Appeal

On March 30, 2006, Fidelity filed a notice of appeal from the February 15, 2006 judgment.

34. Trial Court Rules on Post-Judgment Motions

On April 10, 2006, the trial court denied Fidelitys motion for judgment notwithstanding the verdict. The trial court also denied Fidelitys motion for new trial, conditioned on plaintiffs accepting a remittitur reducing the punitive damages award to $1,600,000. The trial court ruled the award was excessive in relation to the award of compensatory damages. In response, plaintiffs filed a notice of acceptance of the remittitur.

In addition, on April 10, 2006, the trial court granted plaintiffs motion to vacate the judgment and enter a new and different judgment nunc pro tunc. The trial court found that Fidelitys breach of contract excused the requirement that plaintiffs rebuild within two years in order to recover replacement cost value. The trial court determined that plaintiffs damages should be based upon replacement cost value, and re-calculated plaintiffs damages.

35. Trial Court Enters New Judgment

Over Fidelitys opposition, on May 1, 2006, the trial court entered a new judgment against Fidelity. The trial court awarded plaintiffs $197,939.56 in compensatory damages, a sum representing the alleged underpayment of replacement cost value.^[13]

The trial court also awarded $79,175.82 in Brandt attorney fees with interest at the rate of ten percent per annum from the date of entry of judgment. The trial court explained: This sum represents 40% of the award of compensatory damages awarded in paragraph 1, above, in accordance with the fee agreement between plaintiffs and their counsel. Finally, the trial court awarded plaintiffs $1,600,000 in punitive damages plus interest, as well as $23,776.48 in costs, also awarded with interest.

36. Fidelitys Second Notice of Appeal

Fidelity timely filed a notice of appeal from: the May 1, 2006 judgment, the order granting plaintiffs motion to vacate, and the order denying Fidelitys motions for JNOV and new trial.

CONTENTIONS

Fidelity presents a number of contentions as to why the award of compensatory damages was erroneous: (1) The trial court committed legal error with respect to the jury instruction regarding the measure of actual cash value; (2) Plaintiffs failed to present substantial evidence that Fidelity breached its contractual duty to pay actual cash value; (3) The special verdict form was legally erroneous because it did not require the jury to determine every factual issue, including the amount paid by Fidelity or the amount of plaintiffs economic damages; and (4) With respect to the new and different May 1, 2006 judgment, the trial court erred by determining that plaintiffs were excused from rebuilding or repairing within two years from the date of loss.

Fidelity also presents a number of contentions as to why the award of punitive damages was erroneous: (1) Plaintiffs did not present substantial evidence that Fidelity breached the covenant of good faith and fair dealing because the evidence was insufficient that Fidelity breached the contract; (2) Plaintiffs did not show by clear and convincing evidence that Fidelity acted maliciously, oppressively, or fraudulently sufficient to support the award of punitive damages; (3) The trial court erred by permitting the jury to award punitive damages in the absence of an award of tort damages; (4) The trial court erred by giving an incorrect jury instruction defining reprehensible conduct; (5) The amount of punitive damages awarded violates the due process clause of the United States Constitution; and (6) Plaintiffs counsel committed prejudicial misconduct during closing argument of the punitive damages phase of the trial.

Finally, Fidelity contends that the trial court erred by awarding plaintiffs Brandt attorney fees and that the trial court erred by ruling that Fidelity must produce Omaha adjuster Madrigal to testify in plaintiffs case-in-chief or be precluded from presenting his live testimony.

DISCUSSION

We first address Fidelitys contentions regarding the award of compensatory damages. We then address Fidelitys contentions regarding the award of punitive damages. In the section of the opinion regarding whether the trial court erred by permitting the jury to award punitive damages in the alleged absence of an award of tort damages, we also address whether the trial court erred by awarding Brandt attorney fees.

I. Compensatory Damages

A. The Trial Court Did Not Err by Giving the Jury Instruction Defining Actual Cash Value

Fidelity asserts the trial court erred by giving the special jury instruction defining actual cash value as replacement cost value minus depreciation.^[14] Fidelity asserts that the trial court erred by failing to give an instruction defining actual cash value as it is defined in the policy. As stated, the policy defined actual cash value as the lesser of repair or replacement cost, exclusive of sales tax, at the time of loss less applicable depreciation for physical deterioration and obsolescence and applicable contractors profit and overhead.

We conclude that the trial court did not err. With full knowledge of the facts, Fidelity intentionally relinquished its right to a jury instruction defining actual cash value as stated in the policy. (See Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31 [  Waiver is the intentional relinquishment of a known right after knowledge of the facts. . . . The waiver may be either express, based on the words of the waiving party, or implied, based on conduct indicating an intent to relinquish the right. ]; and Gill v. Rich (2005) 128 Cal.App.4th 1254, 1264, fn. 10.)

It is undisputed that on May 18, 2004, Fidelitys adjuster, Madrigal, sent plaintiffs a detailed letter explaining how Fidelity determined actual cash value. In the letter, Madrigal quoted the policy definition of actual cash value. Significantly, however, Madrigal did not use the policy definition of actual cash value to determine the amount owed to plaintiffs. Instead, Madrigal explicitly and in writing calculated actual cash value by deducting only depreciation from replacement cost value, which determination was consistent with section 2051 of the Insurance Code and the special instruction