Carroll v. Pacific Specialty Ins.

Filed 7/20/06 Carroll v. Pacific Specialty Ins. CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEAL from orders of the Superior Court of San Diego County, Wayne L. Peterson and Richard E. L. Strauss, Judges. Reversed and remanded.

I.

INTRODUCTION

In this procedurally convoluted case, plaintiffs Timothy and Luz Carroll (collectively Carroll) seek review of a number of orders the trial court entered with regard to Carroll's uninsured motorist and bad faith claims against his automobile insurer, defendant Pacific Specialty Insurance Company (PSIC). After Carroll filed his complaint, PSIC moved to compel arbitration of Carroll's uninsured motorist cause of action. Without hearing oral argument on the motion, the court entered an order requiring that the parties arbitrate Carroll's entire complaint, and dismissed the action, reserving jurisdiction only to enter judgment post-arbitration. The trial court refused to entertain Carroll's request for an ex parte hearing to obtain clarification of the order. Carroll contends on appeal that the trial court erred in ordering that his bad faith claim be arbitrated.

The parties subsequently settled Carroll's uninsured motorist claim through mediation, but did not resolve the bad faith claim. Carroll returned to the trial court to request that the dismissal be vacated so that he could pursue his bad faith claim in court. A different trial court judge held a hearing on the matter and denied Carroll's request to vacate the dismissal. The judge concluded that the court did not have jurisdiction to vacate the dismissal, since it had reserved jurisdiction only to enter judgment after arbitration was completed. After the trial court ruled, PSIC indicated to Carroll that it had no intention of arbitrating Carroll's bad faith claim.

Carroll then renewed his request to vacate the dismissal, on the basis that an appellate court opinion on which the trial court had relied in denying his first request had since been accepted for review by the Supreme Court. As an alternative to vacating the dismissal, Carroll requested that the court appoint an arbitrator so that the arbitration of his bad faith claim could proceed. The trial court denied Carroll's renewed request to vacate the dismissal and also denied his petition to appoint an arbitrator, on the ground that the court did not have jurisdiction to do so since the case had been dismissed, and also because the bad faith claim was not arbitrable.

Carroll contends that the trial court's order is contrary to the original order sending his entire complaint to arbitration. He asserts that if the original order compelling arbitration is not reversed, then the order denying his petition to appoint an arbitrator must be reversed, or he will be deprived of any opportunity to litigate his bad faith claim.

We conclude that both of the trial judges erred in their rulings in this matter. Specifically, the first judge erred in ordering that both of Carroll's claims be arbitrated and dismissing the case in its entirety, since the bad faith claim was not properly subject to arbitration. The second judge erred in concluding that the court did not have jurisdiction to vacate the erroneous dismissal of Carroll's bad faith claim.

The uninsured motorist claim, which was the only arbitrable claim, has been settled. Only the nonarbitrable bad faith claim remains. We reverse the order granting PSIC's motion to compel arbitration of Carroll's bad faith claim and dismissing the action, and remand the matter to the trial court with directions to vacate the dismissal and allow Carroll to pursue his bad faith claim against PSIC in a judicial forum.

II.

FACTUAL AND PROCEDURAL BACKGROUND

In January 2001, Timothy Carroll suffered severe bodily injury as the result of a hit-and-run motorcycle accident. Carroll submitted an uninsured motorist claim to his insurer, PSIC. PSIC denied coverage, asserting that Carroll had allowed his policy to lapse by failing to timely pay premiums on the policy. Carroll provided PSIC with credit card statements establishing that he had in fact paid the policy premiums on time. However, PSIC continued to assert that the policy had lapsed. PSIC later apparently acknowledged that Carroll's policy had not lapsed and that his claim was covered under the policy. According to Carroll, despite this acknowledgement, PSIC did not offer to pay the policy limits for another five months.

The Carrolls filed a complaint alleging causes of action for breach of the insurance contract and insurance bad faith on December 13, 2002. In response to the complaint, PSIC filed a petition to compel arbitration and to stay court proceedings. On April 18, 2003, the trial judge, the Honorable Wayne L. Peterson, issued a telephonic ruling granting PSIC's petition and dismissing Carroll's complaint. The court's ruling stated, in part: "The Motion of Defendant Pacific Specialty Insurance Company to Compel Arbitration of Plaintiffs' Complaint is granted. [Citation.] [¶] The Court hereby dismisses this action in its entirety and reserves jurisdiction to vacate the dismissal to enter judgment Nunc Pro Tunc." The court's ruling informed the parties that the court would "not entertain oral argument" on the motion, and that the telephonic ruling "is the Order of the Court as of April 18, 2003," such that "[n]o formal subsequent Order is required."

After receiving the court's telephonic ruling, Carroll's attorney attempted to schedule an ex parte hearing to obtain "clarification of the court's order." According to Carroll's attorney, the court's clerk denied the request for an ex parte hearing on the ground that the plaintiffs were attempting to avoid the "no oral argument" portion of the court's telephonic ruling.

In July 2003, the parties agreed to an arbitrator for this matter.

In September 2003, PSIC paid Carroll $15,000, the uninsured motorist limit in Carroll's policy, to resolve Carroll's claim for breach of the insurance contract.^[1] The letter that accompanied PSIC's payment informed Carroll's attorney that "[w]ith respect to any unresolved issues in this matter, [the arbitrator] has advised that she is amenable to act as either arbitrator or mediator," but that "[s]he prefers, however, mediation."

The parties apparently attempted to mediate Carroll's remaining bad faith claim, but these attempts failed some time in April 2004.

In October 2004, Carroll filed a motion to vacate the dismissal of his complaint and sought to restore the action to the court's active calendar. PSIC opposed the motion on the ground that the court did not have jurisdiction to vacate the dismissal in order to restore the case to the active calendar.

On January 7, 2005, the Honorable Richard Strauss presided at a hearing on Carroll's motion to vacate dismissal of the action.^[2] Immediately prior to the hearing, a bailiff provided the parties with a copy of the court's tentative ruling denying Carroll's motion to vacate the dismissal. The court then heard oral argument from the parties. At the conclusion of oral argument, the court confirmed its tentative ruling denying Carroll's motion to vacate the dismissal.

In late January, Carroll's counsel prepared and circulated a proposed order. The court signed the proposed order on April 5, 2005. Carroll served opposing counsel with notice of entry of the order on April 12.

In the meantime, in late March 2005, Carroll proposed a new list of arbitrators to PSIC. On April 7, PSIC informed Carroll that it would not participate in arbitration of Carroll's bad faith claim.

On or about April 15, 2005, Carroll filed a motion for reconsideration of the court's order denying his motion to vacate the dismissal. As an alternative, Carroll also filed a petition for an order appointing an arbitrator.

On May 27, 2005, after oral argument, Judge Strauss denied Carroll's motion for reconsideration of the order denying the motion to vacate the dismissal of his bad faith claim on the ground that the motion was untimely, and because Carroll had not presented new or different facts, circumstances or law warranting reconsideration. Judge Strauss also denied Carroll's petition for an order appointing an arbitrator on two grounds: (1) that the trial court lacked jurisdiction to make such an appointment as a result of Judge Peterson's earlier order dismissing the case; and (2) that Carroll's bad faith claim was not covered by the arbitration clause in Carroll's insurance contract.

Carroll filed a notice of appeal on June 1, 2005. Carroll subsequently filed a petition for a writ of mandate pertaining to the same issues he raises in his appeal. On August 29, 2005, this court issued an order informing the parties that Carroll's appeal and writ petition would be considered together.

III.

DISCUSSION

As the result of several erroneous rulings, the trial courts have effectively prevented Carroll from obtaining any consideration of the merits of his bad faith claim against PSIC. The procedural problems in this matter originate from Judge Peterson's order sending both of Carroll's claims to arbitration and dismissing Carroll's entire complaint. These initial errors were compounded by Judge Strauss's later ruling. Judge Strauss acknowledged at least part of the error in Judge Peterson's earlier order, but concluded that the court lacked jurisdiction to vacate Judge Peterson's erroneous dismissal. As a result of these errors, Carroll's bad faith claim is in procedural limbo.

A. Appealability

As a threshold matter, we address the issue of appealability. PSIC contends that the time for appealing Judge Peterson's April 18, 2003 order has passed, or, in the alternative, that because that order includes an order compelling arbitration, it is not appealable. PSIC also challenges the appealability of Judge Strauss's January 7, 2005 order denying Carroll' motion to vacate the dismissal. We agree that the orders from which Carroll appeals would normally not be directly appealable.^[3] However, we conclude that under the particular circumstances of this case, the trial court's most recent order should be construed as a final judgment.

With certain exceptions, an appeal may generally be taken only from a final judgment that terminates the trial court proceedings by completely disposing of the matter in controversy. (See Code Civ. Proc., §§ 904.1, 904.2.)^[4] This is commonly

known as the "one final judgment" rule. The "one final judgment" rule is premised on the theory that piecemeal disposition and costly multiple appeals burden the courts and impede the judicial process. (Doran v. Magan (1999) 76 Cal.App.4th 1287, 1293.) Public policy favors waiting to review intermediate rulings until final disposition of the case. (Griset v. Fair Political Practices Commission (2001) 25 Cal.4th 688, 697 (Griset).)

However, on occasion, an order of the trial court that is not a final judgment may be construed as such for purposes of appeal. "[W]e may consider orders a final judgment for purposes of appeal when . . . they have all the earmarks of a final judgment." (Estate of Miramontes-Najera (2004) 118 Cal.App.4th 750, 755.) Thus, even a seemingly nonappealable order may be appealable as a final judgment if it has the legal effect of a final judgment. (Bank of California v. Thornton-Blue Pacific, Inc. (1997) 53 Cal.App.4th 841, 845 (Bank of California).)

Whether an otherwise nonappealable order may be considered a final judgment for purposes of appeal generally depends on whether, and to what extent, there remain issues to be decided in the lower court and whether there is or will be another opportunity to seek review of the order by appeal. (See Bank of California, supra, 53 Cal.App.4th at pp. 845-846 [order was effectively a final judgment where there remained nothing for judicial consideration, the order was the only judicial ruling on the issue, and there was no other opportunity to review the order by appeal].) "When . . . a trial court's order from which an appeal has been taken disposes of the entire action, the order 'may be amended so as to convert it into a judgment encompassing actual determinations of all remaining issues by the trial court or, if determinable as a matter of law, by the appellate court, and the notice of appeal may then be treated as a premature but valid appeal from the judgment.' [Citations.]" (Griset, supra, 25 Cal.4th at p. 700 [noting with approval that appellate court implicitly construed an order denying a plaintiff's motion for a peremptory writ of mandate as a final judgment].)

Here, it is apparent that there are no remaining issues that require further consideration by the trial court. Judge Strauss's last order is, for all intents and purposes, the end of the line for Carroll's bad faith claim. It is clear from that order that, from Judge Strauss's perspective, the trial court's involvement in this case ended after Judge Peterson sent both of Carroll's claims to arbitration and retained jurisdiction only to enter judgment on any arbitration award.^[5] In theory, Carroll could wait until after arbitration proceedings to return to the trial court to seek a final judgment. However, Carroll will

never have the opportunity to arbitrate his bad faith claim; the trial court denied his request to appoint an arbitrator, despite the earlier order sending Carroll's complaint to arbitration, and PSIC has refused to engage in arbitration of Carroll's bad faith claim.^[6] Carroll will never be able to obtain a true final judgment from the court. Judge Strauss's last order is thus effectively the final disposition of Carroll's claim.

Under these circumstances, we conclude that it is appropriate to construe Judge Strauss's May 27, 2005 order as an appealable final judgment.^[7] We do so keeping in mind the strong public policy favoring consideration of legal controversies on their merits: "'It is well settled that appellate courts have always been and are favorably disposed toward such action upon the part of the trial courts as will permit, rather than prevent, the adjudication of legal controversies upon their merits.' [Citation.]" (Zamora v. Clayborn Contracting Group, Inc. (2002) 28 Cal.4th 249, 255-256.)

Because we construe Judge Strauss's May 27, 2005 order as a final judgment, an appeal from that order allows us to review any other intermediate ruling by the court. (See § 906 [appellate court "may review . . . any intermediate ruling, proceeding, order or decision"].) Thus, we may review Judge Peterson's April 18, 2003 intermediate order sending Carroll's entire complaint to arbitration and dismissing the action.

B. The trial court erred in granting PSIC's motion to compel arbitration and

dismissing the case in its entirety

1. The order granting the petition to compel arbitration should have been

limited to Carroll's uninsured motorist claim

Judge Peterson erred in granting PSIC's petition to compel arbitration of Carroll's entire complaint.

In his complaint, Carroll asserted two causes of action. In the first cause of action, Carroll alleged that PSIC had breached the insurance contract by failing to pay Carroll benefits due under the contract. In the second cause of action, Carroll alleged that PSIC breached its duty of good faith and fair dealing through its unreasonable actions in handling Carroll's claim for benefits.

Rather than filing an answer, PSIC responded to Carroll's complaint by filing a petition to compel arbitration. In its memorandum of points and authorities, PSIC asserted that an arbitration agreement in the insurance contract required that "all disputes arising under the policy with respect to uninsured motorist benefits must be arbitrated."

The arbitration clause in the contract provided:

"If we and a person insured do not agree as to whether he or she is legally entitled to recover damages from an Uninsured Motorist of [sic] the amount of such damages, then upon written demand of either, the disagreement shall be submitted to a single neutral Arbitrator for decision, in accordance with the law of California. All other issues between us and any person insured, including the existence or limits of coverage, may not be decided by the Arbitrator, but must be decided by a Court of competent jurisdiction."

According to PSIC, the arbitration agreement meant that "this controversy should be decided in arbitration and the court proceedings should accordingly be stayed." In its initial briefing, PSIC did not distinguish between Carroll's two causes of action, and appears to have sought arbitration of both claims.

Carroll opposed the petition, arguing both that it was untimely, and that his claims did not fall within the scope of the arbitration clause. Specifically, Carroll argued that the issue of whether PSIC had acted unreasonably in failing and refusing to pay him the benefits owed to him under the policy (i.e., PSIC's "bad faith") fell within the "all other issues" exception in the contract's arbitration clause.

In reply, PSIC admitted that "[t]he arbitration clause contained in standard automobile liability policies limits arbitration to whether an uninsured motorist caused the insured damage and the amount of damages that may be caused by such uninsured motorist." However, PSIC again urged the court to compel arbitration of the entire matter, omitting any discussion of Carroll's bad faith allegations and whether his bad faith claim should be included in any arbitration proceeding.

Without hearing oral argument on the matter, Judge Peterson issued a telephonic ruling in which he granted PSIC's motion to compel arbitration. The order required that both of Carroll's claims be sent to arbitration. This was improper.

"[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." (United Steelworkers of America v. Warrior & Gulf Nav. Co. (1960) 363 U.S. 564, 582.) The existence and scope of an agreement to arbitrate is determined under standard rules of contract law. (Badie v. Bank of America (1998) 67 Cal.App.4th 779, 787 ["The initial step in determining whether there is an enforceable ADR agreement . . . involves applying ordinary state law principles that govern the formation and interpretation of contracts in order to ascertain whether the parties have agreed to some alternative form of dispute resolution."].)

In this case, the arbitration clause is mandated by California statute. Pursuant to Insurance Code section 11580.2, subdivision (f), all automobile liability insurance policies must provide for arbitration of uninsured and underinsured motorist coverage claims. That provision provides in part: "The policy or an endorsement added thereto shall provide that the determination as to whether the insured shall be legally entitled to recover damages, and if so entitled, the amount thereof, shall be made by agreement between the insured and the insurer or, in the event of disagreement, by arbitration." (Italics added.) The arbitration clause in Carroll's policy tracks the language of the statute.

Based on the arbitration agreement at issue in this case, it is clear that Carroll and PSIC agreed to arbitrate only two matters: (1) whether Carroll was "legally entitled to recover damages from an Uninsured Motorist" and (2) if Carroll was entitled to such damages, what "the amount of such damages" would be. Carroll's claim that PSIC's conduct amounted to a breach of the implied warranty of good faith and fair dealing is not covered by the arbitration agreement. Thus, Judge Peterson should have granted the motion to compel arbitration only as to Carroll's uninsured motorist claim, leaving the bad faith claim to be tried by the court. (See California State Auto Association, Inter-Insurance Bureau v. Superior Court (1986) 184 Cal.App.3d 1428, 1433 [arbitration of issue of amount of damages may proceed before trial on cross-complaint asserting insurer's bad faith].)

Judge Strauss acknowledged the fact that Carroll's bad faith claim was not properly subject to arbitration when he denied Carroll's request to appoint an arbitrator, stating, "[T]he arbitration clause at issue in this matter does not encompass Plaintiffs' bad faith claim against Defendant Pacific Specialty Insurance Company." Judge Strauss was correct on this point.^[8] However, Judge Peterson had already erroneously ordered that the bad faith claim be arbitrated. Thus, Judge Strauss's conclusion that the claim was not arbitrable, combined with his failure to attempt to correct the earlier ruling by vacating the dismissal of the bad faith claim, has left Carroll with a bad faith claim that he cannot pursue, either through litigation or arbitration.

In response to Carroll's argument on this point, PSIC half-heartedly contends that Judge Peterson did not actually order that Carroll's bad faith claim be arbitrated. That argument is patently incorrect. Judge Peterson's order clearly grants PSIC's motion to compel arbitration as to Carroll's entire complaint.

Judge Peterson erred in compelling arbitration of both of Carroll's claims. We therefore reverse that portion of the order requiring Carroll to arbitrate his bad faith cause of action.

2. Dismissal was improper

Judge Peterson erred not only in requiring that Carroll arbitrate his bad faith claim against PSIC, but also in dismissing the action. (See Muao v. Grosvenor Properties, Ltd (2002) 99 Cal.App.4th 1085, 1093 (Muao).)

A court must grant a stay where it has ordered arbitration of the issue involved in the litigation, not dismiss the case. (§ 1281.4.) Section 1281.4 provides in pertinent part:

"If a court of competent jurisdiction, whether in this State or not, has ordered arbitration of a controversy which is an issue involved in an action or proceeding pending before a court of this State, the court in which such action or proceeding is pending shall, upon motion of a party to such action or proceeding, stay the action or proceeding until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies."

The use of the word "shall" indicates that imposition of a stay is mandatory upon the motion of a party requesting a stay. (See Common Cause of California v. Board of Supervisors (1989) 49 Cal.3d 432, 443 [the word "shall" is ordinarily construed as mandatory, while "may" is ordinarily construed as permissive].) PSIC very clearly requested that the trial court stay the court proceedings when it sought to compel arbitration, filing a document entitled, "Defendant's Verified Petition to Compel Arbitration and Stay Court Proceedings." Upon PSIC's request, the trial court should have ordered the proceedings stayed, and should not have dismissed the action.

In Muao, supra, 99 Cal.App.4th at page 1093, the appellate court addressed circumstances similar to this case. In Muao, the trial court ordered arbitration of the plaintiff's claim for wrongful termination and then dismissed the action. (Id. at p. 1087.) The plaintiff appealed from the order compelling arbitration and dismissing the claim, but challenged only that portion of the court's order sending his claim to arbitration, and did not challenge the dismissal. (Ibid.) The appellate court rejected the plaintiff's argument that his claim was not arbitrable, concluding that an appeal from an order compelling arbitration lies only after judgment entered after the arbitration is completed, or, in exceptional circumstances, by way of writ of mandate. (Id. at pp. 1088-1089.)

However, despite the fact that the plaintiff had not separately challenged the court's dismissal of the action, the appellate court exercised its discretion to "correct the erroneous dismissal of the action by remanding the matter to the trial court with direction to vacate the dismissal and enter an order granting [defendant's] motion to stay the action pending arbitration." (Muao, supra, 99 Cal.App.4th at p. 1093.) Here, the trial court erred in dismissing the action rather than staying it. In order to correct that error, we remand the matter to the trial court with directions to vacate the dismissal of the bad faith claim. (See Ibid.)

IV.

CONCLUSION

This case is a lesson to trial courts and litigants alike. If Judge Peterson had allowed the parties to present oral argument regarding his tentative ruling or if he had granted Carroll's request for an ex parte hearing to clarify the court's order, as requested, some--and possibly all--of the errors that occurred in this case could have been avoided. Further, if the parties had sought clarification from the appellate court by way of a writ petition upon noting the errors in Judge Peterson's order and being refused the opportunity to discuss the matter with the court, this matter could have been resolved much earlier.

IV.

DISPOSITION

The trial court's April 18, 2003 order compelling arbitration of Carroll's bad faith claim is reversed. On remand, the trial court shall modify the April 18, 2003 order by vacating the court's dismissal of the action. Appellant is to receive costs on appeal.

Carroll's petition for a writ of mandate is denied as moot.

AARON, J.

WE CONCUR:

BENKE, Acting P. J.

HUFFMAN, J.

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^[1] The record is unclear as to whether the parties engaged in any formal arbitration or mediation to settle the uninsured motorist claim.

^[2] Judge Strauss assumed this case after Judge Peterson retired from the bench.

^[3] PSIC does not challenge the appealability of Judge Strauss's most recent order of May 27, 2005. However, if we look to Judge Strauss's most recent order and his January 7, 2005 order, neither appears to be independently appealable. Generally, a motion for reconsideration, or renewal, under section 1008, is not independently appealable. (See Annette F. v. Sharon S. (2005) 130 Cal.App.4th 1448, 1458-1459.) Rather, an appeal lies from the order for which reconsideration is sought, as long as that order is itself appealable. (Ibid.) Here, Carroll sought reconsideration of the trial court's January 7, 2005 order denying his motion to vacate the dismissal and restore the case to the court's active calendar. An order denying a motion to vacate a judgment or dismissal is also not usually independently appealable, for the obvious reason that an appeal lies from the original judgment or dismissal. (See Scognamillo v. Herrick (2003) 106 Cal.App.4th 1139, 1146.) Further, the court's order on Carroll's petition to appoint an arbitrator does not appear to be one of the arbitration-related orders made appealable by Code of Civil Procedure section 1294. (See § 1294 [appealable orders include orders dismissing or denying a petition to compel arbitration, orders dismissing a petition to confirm, correct or vacate an award, orders vacating an award in the absence of rehearing, judgments entered pursuant to arbitration provisions, and special orders after final judgment].)

^[4] Further statutory references are to the Code of Civil Procedure unless otherwise indicated.

^[5] As to why Carroll did not lose his right to appeal when he failed to timely appeal from Judge Peterson's original dismissal of the action, that dismissal order was not appealable at the time it was rendered because it was not a final judgment. Specifically, Judge Peterson's order contemplated that the parties would return to the court to seek a final judgment after the arbitration was completed. Thus, the order, by its very terms, is clearly not a final judgment.

At first glance, there may seem to be little difference between Judge Peterson's original dismissal order, in which the court retained jurisdiction to enter judgment after completion of the arbitration process, and Judge Strauss's later order denying Carroll's motion to vacate the dismissal, in which the trial court acknowledged that it had retained jurisdiction only to enter judgment nunc pro tunc, but stated that it was otherwise without jurisdiction to act in the case. One could argue that neither order constitutes a final judgment, and that an appeal from the second is just as premature as an appeal from the first would have been. However, it is the court's denial of Carroll's motion to vacate the dismissal together with the court's refusal to appoint an arbitrator that renders this latter order equivalent to a "final judgment."

^[6] Judge Strauss was correct that the bad faith claim is not arbitrable. Sending the claim to arbitration would be a waste of time and resources because the original order sending the claim to arbitration would be susceptible to reversal on appeal by either party.

^[7] We would reach the merits of Carroll's claims in any event, as Carroll also filed a petition for a writ of mandate. Although we believe a direct appeal is appropriate in this situation, Carroll's petition for a writ of mandate provides a procedural vehicle by which this court could examine the trial court's orders even in the absence of an appealable order.

^[8] PSIC acknowledges that this claim is not arbitrable: "The arbitration clause in the insurance contract, as Carroll readily admits, did not encompass bad faith claims." PSIC further asserts that "If PSIC were compelled to arbitrate the bad faith claims as Carroll requests, PSIC would have grounds to set any award aside."