California Supreme Court holds that claim assignees can recover Brandt fees
November, 2006
The California Supreme Court has held in Essex Insurance v. Five Star Dye House, Inc., 38 Cal.4th 1252 (2006) that when an assignee of insured's "bad faith" claim brings action for wrongfully withheld policy benefits, the assignee can recover attorney's fees incurred in recovering policy benefits.
Luis Sanchez was in the trucking business. Sanchez contracted to deliver two commercial dryers to Five Star Dye House, Inc. During transport, one of the dryers was damaged. Five Star sued Sanchez for negligence, seeking lost profits during repair of the dryer. Sanchez tendered defense of the suit to his liability carrier Essex Insurance Company. Essex denied coverage and refused to defend Sanchez. Five Star obtained a judgment against Sanchez for $1.35 million. In exchange for a delay of execution on the judgment, Sanchez assigned his claims against Essex to Five Star.
Thereafter, Five Star sued Essex to recover the allegedly owed policy benefits and attorney fees incurred. The trial court found that Essex had acted in "bad faith," but, relying on a prior decision by the Sixth District Court of Appeal, Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501, 15 Cal.Rptr.2d 726, denied Five Star's request for Brandt fees, i.e., attorney's fees incurred in seeking recovery of policy benefits, concluding that such fees are not assignable.
Essex appealed the finding of "bad faith," and Five Star cross-appealed challenging the denial of its request for attorney's fees. The Second District Court of Appeal affirmed the bad faith judgment against Essex, and, disagreeing with the Sixth District's conclusion in Xebec that Brandt fees were not assignable, reversed the denial of attorney's fees and awarded fees to Five Star.
The California Supreme Court granted review in Essex to resolve the conflict between the Second and Sixth District Courts of Appeal whether Brandt fees are assignable. Affirming, the Supreme Court answered "yes." After holding that all claims are assignable unless founded upon wrongs of a purely personal nature, the Court found that the claim assigned to Five Star was for tortious breach of contract, and not of a personal nature. The Court held that when an insurer's tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due to him, those fees are economic losses proximately caused by the tort. An insured may recover as damages attorney's fees incurred in recovering policy benefits wrongfully withheld; such attorney's fees do not possess any of the personal aspects that preclude assignment of other tort damages.
The Court noted that if Sanchez had sued Essex, Sanchez would have been able to recover attorney's fees. The Court found that Five Star, as the assignee of Sanchez's claim, stands in his shoes and may assert his right to recover any attorney fees incurred in pursuing the assigned claim. In so holding, the Supreme Court expressly disapproved of Xebec.
In light of Essex, insurers need to be extra wary of potential exposures for attorney's fees in connection with extracontractual claims brought by an insured's assignees. However, the Court did acknowledge, with approval, its earlier ruling in Murphy v. Allstate Ins. Co. 17 Cal.3d 937 (1976), which held that emotional distress and punitive damages are not assignable.