Filed 1/16/01

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIFTH APPELLATE DISTRICT

APPEAL from a judgment of the Superior Court of Fresno County. Franklin P. Jones, Judge.

McCormick, Barstow, Sheppard, Wayte & Carruth and James P. Wagoner for Defendant and Appellant.

Georgeson and Belardinelli and Richard A. Belardinelli for Plaintiff and Respondent.

Industrial Indemnity Company (Industrial) appeals from a judgment holding it liable for insurance bad faith on the ground it mishandled a "courtesy defense" and refused to indemnify its insured, Keith Melton. In the underlying action, Melton was found by the Workers’ Compensation Appeals Board (WCAB or the Board) to have fired an injured employee, Edward Martin, in violation of Labor Code section 132a (section 132a or simply 132a) because Martin expressed an intention to file a workers’ compensation claim.

The duty of good faith and fair dealing assertedly arose under any one of several theories advanced by Melton. He maintained his liability was covered, or was at least potentially covered, under his workers’ compensation and employers’ liability policy with Industrial. Alternatively, he argued Industrial had waived its coverage defenses, or was estopped to assert them, because it provided the defense without a reservation of rights. Finally, Melton contended the duty of good faith and fair dealing attached irrespective of the policy’s application once Industrial undertook to provide a defense. The trial court ruled there was no coverage, no potential for coverage, and no estoppel to deny coverage, but it permitted the case to go to the jury on the theories of implied waiver and a duty undertaken. The jury returned a verdict for Melton and awarded him compensatory and punitive damages totalling $650,000.

In the published portion of this decision, we will conclude Melton’s liability was covered under the workers’ compensation portion of his policy notwithstanding the fact the firing was an intentional act. We will hold in particular that, given the nature of the workers’ compensation system in California, neither the language in the policy limiting coverage to "accidents," nor the general public policy against furnishing insurance for willful acts, relieved Industrial of its responsibility to defend and indemnify Melton. We will hold further that Industrial was estopped to deny coverage on the ground Melton fired Martin after the policy expired.

In the unpublished portion of the decision, we will conclude the evidence fails to support the jury’s award of compensatory damages with respect to certain of the economic losses Melton claimed to have suffered as a result of Industrial’s bad faith. We will reject Industrial’s objection to the jury’s punitive damages award, as well as its numerous other contentions challenging the judgment on several additional grounds. Accordingly, we will affirm the judgment of liability but vacate the award of compensatory damages and remand the matter for a new trial on that issue alone unless Melton consents to a reduction of the award.

This case began in April of 1984 when Edward Martin fell off a ladder while working for Sierra Signs, a small sign company in Visalia owned by Keith Melton. A few months later Martin suffered disabling back pains that he attributed to the fall, and that caused him to miss several weeks of work. By the time Martin was able to return to his job, Melton had replaced him with someone else.

Martin subsequently filed an injury claim with Industrial, Melton’s workers’ compensation carrier. Melton disputed the claim, arguing Martin’s fall was not the cause of his back problems, and Industrial denied the claim for this reason. Martin then filed an "Application for Adjudication of Claim" with the WCAB. After a brief investigation, Industrial offered to settle Martin’s claim for $4,200. With this offer still pending, the matter was set for a hearing on August 27, 1985.

On August 14, nearly a year after he was discharged and two weeks before the hearing on the "normal issues" (issues involving injury and disability), Martin filed a petition with the WCAB alleging Melton had fired him in violation of section 132a for having made known his intention to file a workers’ compensation claim. Discrimination of this sort, if proved, entitles a worker to recover additional compensation equal to one-half his or her injury award, as well as to job reinstatement and lost wages. In response to the petition, Melton denied any discriminatory intent, instead asserting he had replaced Martin because he was an undependable worker.

Industrial’s position with regard to 132a petitions, as set out in its internal claims manual, was that an employer’s liability for discriminatory acts was not covered by the standard workers’ compensation policy. Nonetheless, the company customarily provided the employer with a "courtesy defense" in 132a cases in conjunction with its defense of the normal issues. Usually the two matters were resolved together; Industrial would agree to pay a little more than it otherwise might to settle the normal issues, in exchange for the employee’s agreement to dismiss the petition.

In advance of providing a courtesy defense, Industrial’s internal manual directed its claims department to send the employer a standardized "132a letter" setting out the company’s no-coverage position but offering "as a service to you" to pay for an attorney selected by the employer (usually from a list of two or three attorneys suggested in the letter). In this instance however, Industrial neglected to send the 132a letter. Whether or not Melton was made aware of Industrial’s position in some other way, and when, would become the primary factual issues in this case.

Up to this time, Melton and Industrial had been jointly represented on the normal issues by Industrial’s Fresno staff counsel, Timothy Lickness. But Lickness was unable to attend the August 27 hearing and so referred the defense to Richard Yrulegui, an attorney with the firm of Emerson, Yrulegui and Igoa, who often handled workers’ compensation cases for Industrial. Soon after he received Melton’s file, Yrulegui got a phone call from Mark Deutinger, Martin’s attorney, accepting Industrial’s outstanding $4,200 settlement offer. Accordingly, the matter was taken off calendar and, after some further negotiations, the normal issues were settled by way of a compromise and release approved by the workers’ compensation judge (WCJ).

In a departure from Industrial’s usual practice, the 132a was not resolved with the normal issues. Nor did Lickness or Yrulegui consult with Melton about the compromise and release, or discuss its future effect on his 132a liability (and possibly on his insurance premiums). Moreover, the settlement left unresolved the question of whether Martin had suffered, in workers’ compensation parlance, an injury "arising out of and in the course of the employment" (AOE/COE). (See § 3600.) For all these reasons and more, the manner in which the normal issues were handled would become important later on in the controversy over the 132a.

Two disputed telephone conversations during this same period, both allegedly made to Melton on August 26, 1985, underlie Industrial’s claim he was aware from the outset of the case that any 132a liability he might incur would not be covered under his policy. One of the calls came from Valerie Souza, the Industrial claims representative assigned to Melton’s file at the time, and the other came from Richard Yrulegui. Both Souza and Yrulegui testified they explained to Melton, and he seemed to understand, that he would be personally responsible for any 132a award. Melton, on the other hand, asserted he was not told anything of the sort until more than two and a half years later.

Although Yrulegui was aware of the discrimination claim at this point, Industrial had retained him for the normal issues only. During these same two disputed telephone conversations, Melton reportedly agreed to hire Yrulegui for the 132a as well. Yrulegui asked Souza for written confirmation. But Souza was transferred to a different caseload the same day and never followed up on the request. Nor did her replacement, who closed the Melton file in October once settlement of the normal issues was complete. Yrulegui also closed his file. As a result, several months went by during which no one represented Melton on the 132a. He assumed, by his account, that it had been resolved along with the injury claim.

Industrial’s oversight became apparent in January of 1986 when Martin’s attorney, Deutinger, contacted Yrulegui and Industrial to arrange for Melton’s deposition. With Melton’s approval, or at least with his acquiescence, Yrulegui was then hired to defend the 132a claim. Just who Yrulegui was representing—Melton or Industrial, or both—was a matter of considerable confusion during the remainder of the proceedings. There were several reasons for this uncertainty: Industrial was named as a defendant in most of the pleadings; Yrulegui often identified himself as Industrial’s representative in pleadings and correspondence, and before the WCAB; he regularly shared information about the case with Industrial, sometimes to the exclusion of Melton; and without consulting Melton, Yrulegui made settlement offers to Martin on Industrial’s behalf.

The situation grew even murkier late in 1986. In November, Yrulegui attended a workers’ compensation seminar where he learned for the first time of a legal argument in favor of coverage for an employer’s 132a liability. On this basis, Yrulegui recommended to Industrial that it pay for Cumis counsel (San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358) to represent Melton on the coverage issue. Industrial agreed. Yrulegui then met with Melton, explained there was a "potential coverage dispute," and gave him the names of two attorneys (both of whom ordinarily represented applicants rather than employers). Melton selected John Mitchell. He was now represented by Yrulegui with regard to his 132a liability, and by Mitchell on the matter of coverage should he be found liable. Significantly, although coverage had once again become an issue, Industrial still did not send Melton a 132a letter.

Yrulegui also suggested to Industrial that it attempt to settle the 132a in lieu of paying the additional cost of a Cumis attorney. Industrial agreed and authorized Yrulegui to offer up to $6,000. Yrulegui made the offer in early December but Martin rejected it, first demanding $8,000 and then $13,000. Yrulegui did not tell Melton at the time about these negotiations, nor did he suggest to Melton that he contribute some of his own money toward the settlement.

Yrulegui did, however, have such a conversation with Melton some three months later on March 6, 1987, the date of the 132a hearing. The parties’ positions remained the same: Martin wanted $13,000 to settle the case but Industrial was willing to pay no more than $6,000. Melton declined to come up with the difference because, he testified later, he believed Industrial would pay any award. Sometime later that same day Martin raised his demand to $23,000. Since he was working only sporadically, the value of Martin’s claim was increasing with time as his lost wages at Sierra Signs continued to accrue.

The 132a hearing was concerned only with Melton’s liability, i.e., whether Martin had suffered a work-related injury and whether Melton had fired him for pursuing a workers’ compensation claim. Although the issue of insurance coverage could have been litigated as well, none of the parties chose to raise it. Consequently, given the subject of the hearing, it was Yrulegui rather than Mitchell who prepared and presented Melton’s defense. But, for what he described as tactical reasons, Yrulegui stated his appearance at the hearing on behalf of Industrial.

Like Melton, Mitchell testified it was his impression during this period that Industrial would pay any 132a award. This was so, he believed, because Industrial had not taken a formal coverage position (in the form of a 132a letter), because Industrial had made settlement offers to Martin, and because Yrulegui had said several times he thought Industrial would pay. Mitchell, in turn, conveyed his impression to Melton. Yrulegui, on the other hand, denied telling Mitchell Industrial would or might pay the entire award, only that it might contribute some money toward it. From the time he was hired, Mitchell had little direct contact with Industrial but relied instead on Yrulegui to communicate with the company.

Soon after the 132a hearing, Mitchell wrote to Yrulegui asking that Industrial renew its previous settlement offer. Yrulegui relayed the request to an Industrial claims representative who told him not to renew the offer lest it provide "more argument Mitchell will use to make us pay if [we] lose." Yrulegui evidently complied with these instructions, but he would later tell Mitchell he was continuing to discuss a settlement with Deutinger.

The WCJ’s decision in June of 1987 found no 132a violation and ordered Martin’s petition dismissed. But the decision was based on a narrow interpretation of the statute later rejected by the WCAB. The Board granted Martin’s petition for reconsideration on this ground and remanded the case. The reconsidered decision in December favored Martin. The WCJ found that Martin had suffered an injury AOE/COE, and that Melton had discharged him for making known his intention to file an injury claim. Melton (but not Industrial) was ordered to pay Martin $2,100, i.e., one-half the compensation already paid him on the normal issues, plus an amount yet to be determined for Martin’s back wages, less any amounts he had earned since his discharge. In addition, Melton was directed to reinstate Martin to his former job as a sign repairman.

Melton did in fact reinstate Martin in January of 1988. But the question of who would pay the monetary portion of the award, Melton or Industrial, remained in question. Mitchell wrote to Yrulegui in February to say that Melton was willing to contribute to a settlement but was facing bankruptcy. In March, the WCAB denied Melton’s petition for reconsideration of the second 132a decision. A few days later, Mitchell made a formal demand on Industrial for payment of the award. The demand went to Dennis Rossi, the claims supervisor overseeing Melton’s file.

On April 5, 1988, after referring the matter to the home office for review, Rossi responded by sending Melton the equivalent of a 132a letter. Rossi stated Melton’s 132a liability was not covered under his policy because the policy applied only to events resulting in bodily injury, and because insurance companies are prohibited by law from insuring losses caused by willful conduct. This letter, according to Melton, was the first time Industrial told him he would be personally responsible for the 132a award. It was, without dispute, the first time Industrial told him so in writing.

A supplemental hearing followed in December to determine Martin’s lost wages. The decision in March of 1989 initially indicated the 132a award was against Industrial, but it was amended a few days later to identify Sierra Signs as the responsible party. It is not clear how or why this change was made, and specifically whether Yrulegui had some hand in it, but the possibility Yrulegui had intervened with the WCAB on Industrial’s behalf would later be cited by Melton in an effort to show a conflict of interest. Based on the amended hearing decision, Melton eventually borrowed money on his house and paid Martin a total of $42,772.42.

In the meantime, notwithstanding Industrial’s 132a letter, Mitchell continued to try to convince Industrial to provide coverage or at least to pay a part of the 132a award in lieu of defense costs. Industrial refused. Faced with the prospect of having to pay the entire award, Melton contacted Attorney Richard Belardinelli to discuss a possible legal action against Industrial for insurance bad faith.

In February of 1989, Belardinelli sent Industrial a detailed 74-page letter, with exhibits, challenging Industrial’s denial of coverage as set out in Rossi’s April 5, 1988, letter. Belardinelli argued Industrial’s policy afforded coverage for 132a violations, or at least could be interpreted reasonably to do so. Alternatively, he maintained Industrial had waived its coverage defenses, or was estopped to assert them, because it had led Melton to believe to his detriment that it would pay the 132a award. Finally, Belardinelli also claimed Industrial was liable for the award because it had been a named defendant in the 132a action. Notably, Belardinelli did not rely on the argument that had given rise two years earlier to the "potential coverage dispute."

Industrial referred Belardinelli’s letter to Andre Hassid, an attorney in its home office. Hassid wrote back to Belardinelli the next month disputing each of his arguments and once again denying coverage. Hassid’s response, which represented Industrial’s final coverage position, would itself become controversial as Melton later alleged it was based in part on confidential information provided to Hassid by Yrulegui.

On May 19, 1989, Melton initiated the present proceedings by filing a complaint against Industrial and Yrulegui in which he asserted 12 causes of action: breach of contract (against Industrial only), breach of the covenant of good faith and fair dealing (against Industrial only), "waiver/estoppel," "fraud/deceit," negligent misrepresentation, violations of California law, negligence, intentional and negligent infliction of emotional distress, constructive fraud, breach of fiduciary duty, and violations of the Insurance Code.

Melton alleged generally that Industrial was obligated to defend and indemnify him with respect to the 132a either because his insurance policy afforded coverage or because the doctrines of waiver and estoppel operated to negate the policy’s coverage defenses. On this premise, he alleged Industrial breached its contractual obligations, as well as the implied covenant of good faith and fair dealing, by mishandling his defense and refusing to pay the discrimination award. In addition, he alleged that Yrulegui, and Industrial to the extent Yrulegui was acting on its behalf, breached various other duties owed to him by failing to represent him properly. Melton claimed he suffered physical injury, emotional distress, and financial losses as a result of these acts and omissions.

A 60-day trial began on September 24, 1991, and was initially taken up with numerous in limine and other motions seeking generally to define and limit the issues before the court and jury. The court’s rulings on these motions will be discussed below as they relate to the specific issues raised on appeal. But some of them bear mentioning here because they help to put the eventual outcome into some better perspective.

Among other things, Industrial moved to have the court decide two questions of law: whether Melton was collaterally estopped to relitigate the WCAB’s factual findings with respect to his 132a liability, and whether Industrial’s workers’ compensation policy afforded coverage for such liability. Industrial also asked the court to decide two other issues it characterized as equitable: whether Industrial should be estopped to assert its coverage defenses under the policy, and whether Industrial had impliedly waived these defenses.

In connection with the first issue, collateral estoppel, the court took judicial notice of the entire WCAB file in the Martin case, but it denied the bulk of Industrial’s request to take judicial notice of various facts purportedly established by the record. However, it did take notice of the WCJ’s two express findings in the 132a action, namely that Martin had suffered an injury arising out of and in the course of his employment by Sierra Signs, and that Melton had discriminated against Martin by discharging him for having made known his intention to file a claim based on the injury. The court ruled Melton was collaterally estopped to contest these two findings. Accordingly, it instructed the jury at the outset of the trial to accept them as true for all purposes.

The practical effect of this ruling was that Melton was precluded from arguing he had been provided with an inadequate defense insofar as Industrial and Yrulegui failed to fully investigate the facts behind Martin’s injury and discrimination claims. The court granted Industrial’s in limine motions to this effect. It was Melton’s position that a proper investigation would have shown, just as he had claimed all along, that Martin was actually injured in a fight or motorcycle accident, and that he was an undependable worker who was replaced when he failed to return to work as promised. Alternatively, if a more thorough investigation had disproved these claims (and if he had been made aware he would be personally liable for a 132a award), Melton sought to argue he had lost the opportunity to settle the 132a at an early stage of the proceedings when the amount of Martin’s accrued back wages still was relatively small.

Melton was eventually given the opportunity to make these arguments much later in the trial when the court, on its own motion, reconsidered and modified its collateral estoppel decision. The court ruled Melton was still precluded from relitigating his 132a liability but he could attempt to show he would have prevailed on the 132a had he been provided with a more effective defense. In keeping with its revised ruling, the court instructed the jury it must accept as true only that Martin had been "adjudged" by the WCAB to have suffered an industrial injury and to have been fired by Melton as a consequence. The court also reversed its prior rulings on Industrial’s in limine motions relating to the investigation of Martin’s claims.

The second significant question addressed by the court was whether Industrial’s workers’ compensation policy provided coverage for an employer’s 132a liability. The court initially concluded the issue had a factual component and deferred a decision until the evidentiary phase of the trial. The court was concerned particularly with whether Melton could have violated section 132a negligently or accidentally. This question was effectively resolved once the court took judicial notice of the WCAB’s finding that Melton discharged Martin because Martin had made known his intention to file a workers’ compensation claim. For this reason, the court revisited the coverage issue in connection with Industrial’s motion for judgment on the pleadings, and concluded there was no coverage. It relied primarily on a provision in the policy limiting its application to injuries "(1) by accident occurring during the policy period, or (2) by disease .…" (Italics added.) It relied to a lesser degree on a statutorily-declared public policy against insuring losses caused by willful acts, and noted too that Martin was discharged after the policy expired. The court later instructed the jury that Industrial’s policy did not cover Melton’s 132a liability for the first two of these three reasons.

Finally the court addressed the questions of estoppel and implied waiver. Given their factual nature, it deferred a decision on both issues until all the evidence had been presented. Then at the conclusion of the trial, the court ruled Industrial was not estopped to assert its coverage defenses because, notwithstanding the lack of a 132a letter, Melton was aware of Industrial’s coverage position and did not detrimentally rely on a belief Industrial would pay the 132a award. More importantly for purposes of this appeal, the court concluded these two estoppel findings did not necessarily resolve the related but distinct issue of waiver, a legal rather than an equitable question the court therefore allowed to go to the jury. The court likewise concluded its estoppel findings did not necessarily dispose of several other causes of action that presumed Melton had been misled as to Industrial’s coverage position.

Nine of the original twelve causes of action survived. As instructed by the court, the jury was allowed to find a breach of contract on the premise Industrial had impliedly waived its coverage defenses (the "contract by waiver" theory). It could find a breach of the covenant of good faith and fair dealing premised either on the contract by waiver theory or on the theory that Industrial, once it undertook to defend Melton, had a duty to do so fairly and in good faith irrespective of the application of the insurance policy. The court denied Industrial’s motion for nonsuit with respect to Melton’s causes of action for "fraud/deceit," negligent misrepresentation, negligence, negligent infliction of emotional distress, constructive fraud, and breach of fiduciary duty. The court granted the motion with respect to intentional infliction of emotional distress. The two causes of action for violations of California law had been dismissed earlier in the trial.

The jury deliberated for approximately ten hours over three days. On January 7, 1992, by a vote of nine to three, it returned a general verdict against both Industrial and Yrulegui, and awarded Melton compensatory damages in the amount of $630,000. In response to special interrogatories, the jury indicated $380,000 of this amount was for Melton’s attorney fees, recoverable as damages on account of Industrial’s breach of the covenant of good faith and fair dealing. Also in response to the special interrogatories, the jury found that Industrial’s (but not Yrulegui’s) conduct giving rise to its liability was committed with malice, fraud, or oppression. The jury then awarded Melton an additional $20,000 in punitive damages as against Industrial only. Thus, Yrulegui’s liability for the award extended only to the $250,000 in compensatory damages, exclusive of the allocation for Melton’s attorney fees.

Before judgment was entered on the verdict, Yrulegui reached a settlement with Melton and moved the court for a determination of good faith. The count granted the motion over Industrial’s vigorous opposition and, after further hearing, set the value of the settlement at $130,000 as an offset against Industrial’s liability. The verdict against Yrulegui was then set aside. On June 24, 1992, judgment was entered in favor of Melton and against Industrial for $520,000 plus costs. Industrial’s motions for judgment notwithstanding the verdict and new trial were denied, whereupon it filed a timely notice of appeal.

In the fall of 1983, Melton hired Edward Martin as the second sign repairman. About six months later, on April 24, 1984, Martin was working by himself cleaning a sign mounted on a pole some 20 or more feet in the air. To reach the sign he climbed an extension ladder mounted in the bed of a company truck. As he did, a gear slipped and the upper extension slid back down the ladder, throwing him off. Martin landed on his right side in the truck bed, bounced off, and fell three more feet to the ground. A bystander who witnessed the fall offered to take Martin to the hospital, but Martin declined and went back to work. He completed the job before returning to the shop about an hour later. There was a cut on Martin’s right arm, and a few days later his right leg was bruised from hip to knee.

Back at the shop, Martin told Melton of the fall and asked about the procedure to see a doctor. By Martin’s account, Melton was hostile and uncooperative; he ridiculed Martin for being stupid, accused him of misusing the ladder, and said he deserved to fall. Unwilling to pay for the visit himself, Martin did not go to a doctor.

Martin was sore for about two weeks after the accident but continued to work and eventually felt better. Then in late July, fully three months after he fell, Martin woke up one day with such severe back pain he was unable to get out of bed. He phoned Melton to say he would not be coming to work. The pain persisted and Martin eventually went to see a chiropractor, Dr. Steven Wong, on August 3. Dr. Wong attributed Martin’s back pain to his fall from the ladder, and urged Martin to seek workers’ compensation benefits. Martin went to Sierra Signs with his mother the same day to get the name of Melton’s insurance carrier. Again Melton reportedly was angry and accusatory, but gave Martin the name of his insurance broker, Lloyd Ellis. Ellis, in turn, referred Martin to Industrial.

Dr. Wong estimated Martin would not be able to return to unrestricted work until Monday, August 20, and Martin passed this information on to Melton. Martin went back on that date to see Dr. Wong, who did in fact release him for work. By then it was midday, so Martin waited until the next morning to go to the shop. Melton was not there when he arrived. But Vic Durham, the other sign repairman, indicated to Martin that Melton was upset and intended to fire him for pursuing a workers’ compensation claim. When Melton arrived, he told Martin he had been replaced because he was an unreliable worker.

Melton later would testify he fired Martin because he had failed to show up for work as promised on August 20, and because he had missed a lot of work in the past. Melton would also accuse Martin of misusing company credit cards, pilfering supplies, drinking on the job, and "chewing some kind of mushroom." As for Martin’s injury, Melton claimed to have heard reports Martin had been hit in the back with a two-by-four in a fight, and had also been injured in a motorcycle accident, within the period between his fall from the ladder and the onset of his back pains. In fact, according to Melton, Martin admitted to him his back injury was not work-related and said the workers’ compensation claim was all Dr. Wong’s idea. Martin denied having suffered any other injury to his back after the ladder incident.

On August 28, 1984, a week after Martin was fired, Industrial’s Fresno claims office received a "DOCTOR’S FIRST REPORT OF OCCUPATIONAL INJURY OR ILLNESS" (dated "8/5/84") from Dr. Wong regarding Martin’s back injury. The Martin claim was assigned on September 6 to Valerie Souza, a new claims representative who had just completed a 60-day training period. In accord with Industrial’s internal procedures, Souza recorded her activities in the case on a "CASE MANAGEMENT ANALYSIS/PLANNING FORM" or "C-MAP."

Dr. Wong’s report erroneously indicated Martin was injured on August 3, 1984, three days after Industrial’s policy expired. For this reason, Souza initially rejected Martin’s claim and referred him instead to the subsequent carrier. Once Souza realized her mistake, she opened a claim file and undertook an investigation into the circumstances of Martin’s injury. In the process she talked to Melton, who told her of his conviction Martin’s injuries were not job-related. On November 14, 1994, Souza wrote to Martin denying his claim because "‘there is no evidence that your current complaints are related to any injury suffered while working for Sierra Signs.’"

Martin then retained attorney Anthony Ross who, on December 18, 1984, filed an "APPLICATION FOR ADJUDICATION OF CLAIM" with the WCAB on Martin’s behalf. Souza answered the following month for Industrial and denied most aspects of Martin’s claim, including his assertion he had suffered an injury AOE/COE.

Souza referred Industrial’s defense of Martin’s injury claim, i.e., the "normal issues," to Timothy Lickness, the lone staff counsel in the Fresno office. After taking Martin’s deposition, Lickness gave Souza the following assessment of the case: "If the applicant [Martin] has a witness … who will testify that he saw the applicant fall and if your insured [Melton] comes across as poorly as he does in his statements then I think that we are not going to be successful in defending this claim." Lickness repeated his concern about Melton’s demeanor a few days later after talking to him on the phone: "I fear that your insured is going to be difficult to control if we have to call him as a witness." For these reasons Lickness, with Souza’s authorization, offered to settle the case for $4,200 at a rating conference in May of 1985. Martin evidently was agreeable to this sum but did not formally accept the offer, so the matter was set for a hearing on August 27, 1985. Around the same time, Attorney Mark Deutinger took over responsibility for Martin’s case from Anthony Ross. In his trial testimony, Deutinger recalled that by the time he entered the case an agreement had already been reached between Lickness and Ross to settle the normal issues for $4,200 "subject to our filing a 132a."

On August 14, 1985, Deutinger filed with the WCAB a "PETITION FOR DISCRIMINATION AGAINST AND WRONGFUL DISCHARGE OF EMPLOYEE PURSUANT TO LABOR CODE SECTION 132(a)," naming as defendants both Sierra Signs and Industrial Indemnity. The petition alleged inter alia:

This language (referring to "agent … and representatives") would become significant in the present action insofar as it could have been interpreted at the time to allege that Industrial was implicated directly in Martin’s discharge, and thus to explain why Industrial was named as a defendant throughout the 132a proceedings.

Section 132a, as it read in 1984, provided in part:

Martin’s 132a petition sought all forms of relief allowed by the statute, i.e., additional compensation, costs and expenses, reinstatement, lost wages, and attorney fees.

Industrial’s position with respect to handling 132a petitions was set out in its "WORKERS COMPENSATION CLAIM TECHNICAL MANUAL." Comparing an employer’s liability for a 132a violation to that for serious and willful misconduct (see § 4553), the claim manual stated in part:

The form letters attached as exhibits 15A and 15B set out Industrial’s no-coverage position, explained that an insured’s "exposure" in a 132a case was not covered under the policy, offered to pay reasonable and normal legal expenses in defense of the action, and provided the names and addresses of two or three outside attorneys.

Copies of the 132a petition were served on Lickness and Souza, who were both still assigned to Martin’s injury claim then set for a hearing two weeks later on August 27. Souza noted receipt of the petition in a C-MAP entry: "Ap atty filing a 132A - await def atty [Lickness] reaction - review w/ supervisor." Souza had had little or no experience with 132a petitions in the year she had been working for Industrial. She did not consult the claims manual nor send Melton a 132a letter.

Lickness, too, had never before handled a discrimination claim and was unfamiliar with the claim manual’s provisions regarding 132a letters. He understood, however, that he could not represent Melton on the 132a, so he asked Souza to contact Melton and advise him to obtain independent counsel. On August 16, Souza wrote a note to Rossi saying: "Tim [Lickness] is bugging me about this file re: 132 A question.…We go to full trial in 2 wks. (in all other issues) … Please advise!" Rossi wrote back: "The answer is that Tim has been substituted out & Rich Yrulegui will be handling the case." Rossi later conceded his response was at best unclear as to which part of the case Yrulegui would be handling.

In fact, Yrulegui had been assigned the normal issues only. At about the same time the 132a petition was filed, Lickness realized he had a calendar conflict and would not be able to attend the August 27 hearing on the normal issues. So he referred that portion of Melton’s defense to Yrulegui.

It was not uncommon for Industrial to refer cases to Yrulegui. By Rossi’s estimate, some 60 percent of Industrial’s referrals to outside counsel during this period went to Yrulegui. Yrulegui acknowledged Industrial was a "significant client" comprising 10 to 15 percent of his legal practice.

Lickness, Rossi, and Yrulegui signed a substitution of attorneys form on August 20. The next day Lickness sent his file to Yrulegui’s office with a note that said: "Hearing on normal issues set for 8-27-85 at 9:00. 132a recently filed. Employer has agreed to appear and testify re AOE/COE. Employer is a loser as is the issue of AOE/COE." By this "loser" comment, Lickness testified he meant to alert Yrulegui that "we’re going to lose, we got a witness we can’t control." Yrulegui called Melton on August 23 to confirm his appearance at the hearing. Melton once again was adamant Martin had not been injured on the job.

August 26, 1985, the day before the hearing on the normal issues, is perhaps the single most significant date in this case. The precise sequence of events on that day is somewhat difficult to discern from the record. But it appears everything began with a phone call to Yrulegui from Mark Deutinger, Martin’s attorney, accepting Industrial’s $4,200 settlement offer. After confirming with Souza that the offer was still open, Yrulegui (or his secretary) phoned Deutinger, Melton, and the WCJ to say a tentative settlement agreement had been reached. The matter was then taken off calendar while the parties worked out additional details of the agreement.

Deutinger’s acceptance of the settlement offer was limited to the normal issues. Thus, according to Yrulegui, the subject of the still-pending 132a claim came up during his August 26 conversation with Melton. Melton reportedly said he wanted Yrulegui to represent him on that claim too. Yrulegui was willing to do so but wanted a written confirmation first. He explained this to Melton, and to Souza. Souza, according to Yrulegui’s notes, responded "she’ll advise re 132A representation." In her C-MAP entry for the same day, Souza wrote in part: "Recommend Rich for the 132A - await agent & insd response - agent called to go-ahead - refering [sic]." As it turned out, Souza did not refer the 132a defense to Yrulegui because she was transferred the same day to a different caseload. Her successor failed to notice that the 132a was still pending and so closed the entire file two months later after the settlement of the normal issues was approved. Without a referral letter, Yrulegui also closed his file.

Several consequences flowed from these events: Martin’s injury claim was settled without any significant input from Melton; the question whether Martin had suffered an industrial injury was left unresolved; there was little or no opportunity to settle the 132a along with the normal issues; and Melton went for several months without representation on the 132a. The facts surrounding these developments will be discussed in greater detail shortly. But first it is important to more closely examine the August 26 conversations, or alleged conversations, between Souza and Melton and between Yrulegui and Melton. Both Souza and Yrulegui testified they explained to Melton that he would be personally responsible for paying a 132a award. The court relied in large part on their testimony in ruling Melton was aware of Industrial’s no-coverage position from the outset of the 132a proceeding. It rejected Melton’s insistence he knew nothing of Industrial’s position until he received Rossi’s April 5, 1988, letter some two and a half years later.

Souza’s entire C-MAP entry for August 26 reads as follows:

According to Souza, the last portion of this entry reflects a telephone conversation she had with Melton (although the entry mentions only Melton’s insurance agent) in which she verbally gave him essentially the same information he would have received from a 132a letter. She testified she could recall her conversations with Melton "quite clearly" because he took an unusual amount of interest in the case and had very strong opinions about Martin. Souza said she called Melton on or near August 26 to tell him about the settlement of Martin’s injury claim. She continued:

Asked to explain this last remark, Souza said Melton did not seem to appreciate the possibility he might lose in the 132a proceeding.

Despite this uncertainty, Souza did not follow up her conversation with Melton with a 132a letter because she did not feel it would have served any purpose at that point.

Melton testified he could not recall having had any such conversation with Souza in August of 1985, and maintained he knew nothing about the 132a until several months later when he was subpoenaed to appear for his deposition. Melton’s insurance broker, Ellis, also had no recollection of a conversation with Souza on August 26.

Donna Campbell, Yrulegui’s secretary, called Sierra Signs on August 26 to tell Melton he need not appear at the hearing the following day because Martin’s injury claim had been settled. Melton was out but called back. According to Campbell’s note to Yrulegui describing her conversation with Melton, " … I told him everything - not to show up - & he says he has a s&w [serious and willful] now - I told him you would call him." Yrulegui’s handwritten notation on the same piece of paper indicates he did call Melton the same day "re 132H [sic] - I’ll be hired." It was during this last conversation on August 26 that Yrulegui said he first told Melton he would be personally responsible for a 132a award.

Yrulegui was aware of the 132a at that point, but had only skimmed the petition without giving it much thought. He did not represent Melton with regard to the 132a and so did not feel it was his duty to explain its ramifications. And he assumed Industrial had already sent Melton a 132a letter. Therefore, Yrulegui had what he described as a "pretty minimal" and "offhand" discussion with Melton about the 132a, in which he avoided any use of the term "coverage." Yrulegui testified:

Melton recalled that Campbell told him on August 26 not to appear for the next day’s hearing because "the whole thing had been taken care of and that it had been settled for half." He understood this to mean all Martin’s claims had been resolved. Melton denied having had a separate conversation with Yrulegui later that day during which the 132a claim was discussed.

On September 5, 1985, Yrulegui wrote to Souza discussing the pending resolution of the normal issues. In the letter he referred to his conversation with Melton on August 26. A settlement of Martin’s injury claim, Yrulegui told Souza, would leave only two "loose ends" in the case: a lien by the Employment Development Department against Martin’s recovery for his injury, and the 132a petition. In anticipation of being retained to defend the 132a, Yrulegui assessed the claim as follows:

Questioned at trial about the highlighted portion of this letter, Yrulegui disputed the implication Melton had not yet been told a 132a award would come out of his pocket. Yrulegui testified:

Notably, Yrulegui did not send Melton a copy of his September 5 letter. This was so, Yrulegui explained, because he did not represent Melton on the 132a at that point, and because the letter merely said in writing what Yrulegui had already told Melton directly. Yrulegui dismissed as poor drafting his use of the word "ours" to refer to responsibility for a 132a award.

As noted, Deutinger called Yrulegui on August 26, 1985, to accept Industrial’s outstanding $4,200 settlement offer. As things stood then, Yrulegui had undertaken the defense of the normal issues about a week earlier, and the 132a petition was nearly two weeks old. No one represented Melton with respect to the 132a, and no one would for several more months. Valerie Souza had just left the Melton file and would be replaced by Tina Rauch (then known as Tina Andrews).

It was Industrial’s practice when a 132a petition was filed in connection with an injury claim to attempt to resolve them both at the same time. Rossi, Souza, Rauch and others were careful to say, however, that Industrial did not "settle" 132a claims. Rather it would offer to pay an additional amount toward the injury claim, equal to the nuisance value of the 132a, in exchange for the petitioner’s agreement to dismiss the 132a. This approach generally worked in the typical case where the two claims were filed concurrently and the 132a was intended mainly as "leverage." But since the circumstances here did not fit this pattern, neither experience nor policy provided Industrial’s claims representatives with any clear guidance on how to proceed. Consequently, Industrial departed from its customary practice in two significant ways: it did not attempt to resolve the 132a with the normal issues, and it offered to pay money directly toward the 132a itself long after the normal issues had been settled.

Yrulegui’s handwritten notes of his August 26 telephone conversation with Deutinger, as best Yrulegui could decipher them at trial, said: "settlement at rating pretrial agreed on 4200 for C & R.… Is petition for 132a … so settlement would not include.… [w]hole thing would [or could] settle." Yrulegui could not recall what he meant by the last sentence. But he said Deutinger made it clear to him soon afterward that Martin was not interested in settling the 132a. Deutinger testified he had as yet conducted no discovery on the discrimination claim and was not in a position to advise Martin regarding its possible settlement.

In any event, the possibility of settling the 132a with the normal issues received little or no attention. According to Yrulegui, "… I wasn’t representing anybody on the 132a at that point and I didn’t pursue it." "… [I]t was not something that I was focusing on at that point. I was sent the normal issues. That was not part of the normal issues directly."

The same day he talked to Deutinger, Yrulegui sent him a copy of a proposed compromise and release. Deutinger sent it back a few days later with two changes: he added language specifically exempting Martin’s 132a claim from the agreement, and he changed the wording in another sentence to say that Martin had been "disabled" from work rather than "laid off" from work in July of 1984. Yrulegui accepted these changes without further discussion, and forwarded the signed document to the WCAB for approval.

One other change in the settlement agreement would also become controversial. The proposed compromise and release Yrulegui sent to the WCAB requested a Thomas finding, after Thomas v. Sports Chalet, Inc. (1977) 42 Cal.Comp.Cases 625. Pursuant to Thomas, the Board will not approve a settlement relieving an employer of liability for vocational rehabilitation benefits unless it finds "there is a good faith issue which if resolved against the applicant would defeat the applicant’s claim for all benefits," as where a legitimate issue of injury AOE/COE exists. (Id. at p. 627.) The proposed compromise and release declared there to be such an issue in this case. But the WCJ wrote to the parties the following month to say that a Thomas finding was not warranted "[o]n the record so far submitted." The WCJ proposed to approve the compromise and release without the finding unless good cause to the contrary could be shown within 10 days. Yrulegui referred the matter to Tina Rauch, who told him to accept the settlement without a Thomas finding. As a consequence, Martin would still be potentially eligible for rehabilitation benefits in the future, subject to a five-year statute of limitations. But more important from Melton’s point of view, Industrial elected to forego this opportunity to present additional evidence to show Martin had not been injured on the job. The WCJ approved the compromise and release, without a Thomas finding, in October of 1985.

Lickness, Souza, and Yrulegui were aware that the amount paid in settlement of the injury claim would affect the size of any award Melton might later be required to pay on the 132a. They also knew the settlement could cause Melton’s insurance premiums to increase. Nonetheless, they made no effort to include him in the settlement discussions because they believed Industrial had an absolute right under the policy to settle the injury claim as it saw fit.

Melton was upset when he learned Industrial was going to settle Martin’s injury claim. He did not believe Martin’s back problems were job-related, and he wanted the opportunity to prove as much at the August 27 hearing. Yrulegui, on the other hand, felt Melton was unlikely to prevail on the issue.

In summary, Melton’s chief complaint about Industrial’s handling of the normal issues was that it deprived him of the opportunity to resolve the 132a at an early stage of the proceedings, without the additional stress and expense he would incur over the next several years. He maintained neither Lickness nor Yrulegui had in fact explained to him that he was likely to lose on the issue of Martin’s injury AOE/COE; no one looked after his interests in the settlement of the normal issues or told him the 132a was still pending; and no one advised him he would be personally responsible for paying a 132a award. If he had known these things, he would have tried to the settle the 132a with the normal issues.

When the compromise and release was approved by the WCJ in October of 1985, Rauch paid the settlement and then closed the Melton file. She testified she would not have done so had she known there was a 132a claim still pending. She acknowledged she had not reviewed the file very thoroughly up until then, nor had she discussed it with Souza. For this same reason apparently, Rauch failed to follow up on Yrulegui’s request for written authorization to represent Melton on the 132a. Therefore Yrulegui also closed his file in October.

In January of 1986, Deutinger contacted Rauch, Yrulegui, and Melton to schedule Melton’s deposition in the 132a action. Once she realized the 132a had not been resolved, Rauch addressed a C-MAP entry to her supervisor Rossi asking: "Do we owe defense if only issue is 132A? Please advise." Rossi could not recall how he responded, but he testified it was Industrial’s practice at the time to furnish a defense in such circumstances.

When Yrulegui received the deposition notice, he wrote to Deutinger to say he did not represent Melton on the 132a. He sent a copy of the letter to Industrial with a note explaining he had never received written authorization. At this point Rauch realized "there was an obvious problem" and she phoned Lloyd Ellis, Melton’s insurance broker. On February 10, 1986, Rauch sent an authorization letter to Yrulegui in which she wrote in part: "I have been in contact with Lloyd Ellis, the agent, who has confirmed the authority extended by Insured Keith Milton [sic] to represent their interests."

Ellis recalled his conversation with Rauch somewhat differently. He understood Rauch to say Industrial had already hired Yrulegui to handle the 132a, and that Melton could choose to have Yrulegui represent his interests as well (at Industrial’s expense) or he could hire a different attorney (at his own expense). Ellis, in turn, relayed this information to Melton, who agreed to accept Yrulegui. Similarly, Melton recalled he simply went along with the lawyer provided by Industrial. And Melton testified the deposition notice was his first indication there was a 132a claim pending against him.

Rauch also discovered upon reviewing the file that Souza had not sent Melton a 132a letter. She did not send him one herself, however, because she concluded he was already aware the 132a was not covered. She based this conclusion on Souza’s August 26 C-MAP entry, on Yrulegui’s September 5 letter, and on a phone call she had with Yrulegui in connection with the upcoming deposition during which he told her about his August 26 conversation with Melton.

The deposition was held on February 18, 1985. Yrulegui met with Melton briefly beforehand to go over his testimony. During this meeting, Yrulegui did not tell Melton in so many words there was no "coverage" for his 132a liability. But Yrulegui testified that, in an effort to impress upon Melton the need to maintain his composure, he warned Melton it would cost him money if he lost. "… [M]y handle, so to speak, in getting him under control to testify in the deposition was to point out to him that if he lost it or blew his temper that it could have a financial impact on him. He understood that very clearly." Melton recalled the general conversation, but not any discussion about coverage.

Soon after the deposition, Yrulegui sent a letter to Industrial in which he wrote: "Mr. Melton made an excellent witness in our behalf and I think adequately demonstrated that the reasons for applicant’s termination from Sierra Signs had literally nothing to do with the alleged workers’ compensation claim." (Italics added.) The same day, Yrulegui also wrote to Melton requesting Martin’s earnings records. He began the letter by saying: "We represent you and your Workers’ Compensation insurance carrier in the above entitled matter." Yrulegui acknowledged this language may have caused Melton to believe Industrial was a party to the 132a action; he characterized the sentence as a "clerical mistake."

In March of 1986, Yrulegui filed an answer to the 132a petition on behalf of Sierra Signs. No answer was ever filed on Industrial’s behalf.

Tina Rauch was transferred to a different caseload in April of 1986 and replaced by Rose Schwarer (then known as Rose Taylor). Schwarer reopened the Melton file and reestablished a reserve. Her C-MAP entry on April 7+

stated in part: "Case needs to be re-opened for filing of 132a.…[¶] We will provide a Def." Although it was Schwarer’s practice to review new files, she could not recall if she reviewed Melton’s file or, if so, whether she noticed it did not contain a 132a letter.

The remainder of 1986 was taken up with discovery in preparation for the 132a hearing, which was initially scheduled for October 30. Yrulegui filed several "status reports" with Industrial during this period in which he described his activities with respect to Martin’s discrimination claim. Some of the reports, he later acknowledged, may have given the impression he was defending Industrial as well as Melton. For example, on April 21 Yrulegui wrote to Rossi and Melton to report on the deposition of Victor Durham (Martin’s coworker at Sierra Signs). Yrulegui noted he had been at Durham’s deposition "representing your interests." He later conceded this was a "poorly drawn sentence." He ended the same letter by saying he would schedule Martin’s deposition "[a]bsent objection from you." This was "not the best phraseology," he admitted at trial, inasmuch as it suggested he was seeking Industrial’s approval to act in the case.

In May, Deutinger wrote to Yrulegui regarding Martin’s upcoming deposition. Yrulegui made a handwritten note on the letter to forward a copy "To client." He (or his office) subsequently sent a copy to Industrial, but not to Melton.

And in July, Yrulegui wrote to Rossi (but not to Melton) reporting on Martin’s deposition. He said he had been present at the deposition representing the interests of Sierra Signs. Then, after recounting Martin’s testimony, Yrulegui went on to discuss the potential financial "exposure" in the case, and expressed his opinion that "we are in excellent shape." Yrulegui could not explain at trial why he would have discussed potential exposure with Rossi since, in Yrulegui’s mind, Industrial was not a party to the 132a, he did not represent the company, and "[t]hey really wouldn’t have much interest in it, truthfully." He testified, however, that he had explained to Melton several times that any 132a award would come out of his pocket, and Melton was "very much aware" of this by the time of Martin’s deposition. Yrulegui concluded the letter: "I have little doubt that the case will go to trial simply because I don’t believe that the applicant would accept a nuisance value settlement and I doubt seriously if the employer would pay even that amount."

There were several other instances like these during the 132a proceedings when Yrulegui consulted or shared information with Industrial about various aspects of the case, sometimes to the exclusion of Melton. In addition, the pleadings usually identified Industrial as a defendant in the action, and Yrulegui announced his appearance at the 132a hearing on Industrial’s behalf (for reasons discussed below). Yrulegui’s actions in this regard were the subject of much argument at trial insofar as they tended to establish not only his own liability but, more importantly for purposes of this appeal, Industrial’s liability as well. First, they arguably showed Yrulegui was acting as Industrial’s agent so that Industrial might be found liable to Melton based on Yrulegui’s conduct. Melton’s principal allegation, generally stated, was that Industrial, by way of Yrulegui, led him to believe it would cover his 132a liability. The question of agency, as noted, was a factual one for the jury to decide. Second, Yrulegui’s actions gave at least the appearance that Industrial was a party to the 132a. This, in turn, could have been interpreted to mean either that Industrial was itself liable along with Melton for discriminating against Martin, or alternatively, and more plausibly, that Industrial had accepted coverage for Melton’s 132a liability. The court would later instruct the jury the evidence had been admitted for this second purpose only.

Yrulegui testified that, unlike the injury claim where he represented both Melton and Industrial, he represented only Melton on the 132a; that Industrial was not a party and had no interest in the case beyond paying for the defense. He explained he provided Industrial with status reports simply to justify his billing charges. As for those instances where he referred to Industrial as a defendant, or as his client, he generally attributed the mistake to habits he developed in the course of representing Industrial on numerous other normal issues cases where this was true.

The 132a hearing originally scheduled for October of 1986 was rescheduled for December 5. As previously noted, Yrulegui attended a workers’ compensation seminar in November where he learned for the first time of a legal argument in support of coverage for an employer’s 132a liability. Yrulegui met with Rossi and Schwarer on December 3, told them about the seminar, and advised them of the need to provide Melton with Cumis counsel. Neither Rossi nor Schwarer had ever worked on a case involving Cumis counsel, and neither fully understood why one was necessary in this case. Nonetheless, Rossi accepted Yrulegui’s advice and authorized a second attorney to represent Melton.

Yrulegui testified his advice to Rossi, in retrospect, was based on a "pretty generous interpretation" of the Cumis decision. He explained:

Also on December 3, shortly after he talked to Rossi and Schwarer, Yrulegui drove to Visalia and met with Melton. According to Melton, Yrulegui told him: "Well, there was a potential coverage dispute, and that I—I don’t understand attorney stuff. I just was instructed that I should have to get another attorney because of a conflict." Yrulegui sent Melton a letter three weeks later, on December 23, in which he described their meeting this way:

Yrulegui gave Melton the names of two local attorneys: John Mitchell and Gary Spain, both of whom normally represented applicants rather than employers. Melton contacted and hired Mitchell the same day.

About this same time, the 132a hearing then set for December 5 was rescheduled once again, this time for March 6, 1987.

Between the time he was retained in December and the 132a hearing in March, Mitchell had several conversations with Yrulegui about Melton’s case. According to Yrulegui, he explained the coverage argument to Mitchell "very thoroughly." Mitchell, on the other hand, testified he and Yrulegui did not discuss the basis for the coverage dispute in any depth, but that he (Mitchell) understood the dispute to relate to the lack of a provision in the insurance policy specifically excluding coverage for a 132a. Further, by Mitchell’s account, Yrulegui expressed the opinion around this time that Industrial would pay any 132a award. Mitchell understood Yrulegui was not stating Industrial’s coverage position, and in fact believed Industrial had not yet taken a formal position. That is, Mitchell knew Industrial had not sent Melton a 132a letter, and he had been told by Melton no one had explained to him his 132a liability would not be covered.

Mitchell recalled having a face-to-face meeting with Melton sometime soon after being retained. Melton seemed already to understand he was charged with discriminating against Martin, that there would be a financial penalty imposed if the charge were proved, and that he would be personally responsible for paying the penalty if it were not covered under his policy with Industrial. Their discussion focused primarily on this latter issue of coverage. Mitchell explained Industrial might or might not cover the 132a, and Melton "understood that somewhere along the lines [sic] he may have to write out a check." However, Melton "was of the impression after meeting with Mr. Yrulegui in December … that there would probably be coverage." Nonetheless, Mitchell advised Melton the coverage issue might need to be litigated.

Rossi assumed primary responsibility for the Martin case once the coverage issue arose, although Schwarer remained on the file and made occasional C-MAP entries. Rossi was under the impression then that Melton believed the 132a was covered. Nevertheless, he did not send Melton a 132a letter because he felt sure that Yrulegui and Mitchell knew the 132a was not covered (and presumably had conveyed this information to Melton).

On November 26, 1986, shortly after he returned from the seminar, Yrulegui contacted Deutinger to solicit a settlement demand from Martin. Deutinger called Yrulegui back on December 1. Yrulegui’s notes of their conversation reflect that Deutinger told him: "‘Back wages 21,000. Total value 23,000, approximately. Demand $8,000.’" Yrulegui called Industrial the same day and talked either to Rossi or Schwarer. He described the seminar, explained Industrial was "on the hook for Cumis counsel," and suggested it offer some money to resolve the case in lieu of additional attorney fees. Rossi and Schwarer authorized Yrulegui to offer up to $6,000. Yrulegui offered $4,000 on December 1 and $6,000 on December 2. On December 3, Deutinger left a message with Yrulegui’s office saying Martin would accept no less than $13,000.

Yrulegui had little further direct contact with Melton regarding settlement once Mitchell was hired. At his deposition, Yrulegui expressed some uncertainty about his continuing role in the case:

Mitchell, on the other hand, considered himself merely an "observer" at the time. That is, he understood he had been retained to represent Melton only with respect to coverage, but coverage would become an issue only if Melton lost on the 132a claim. Since the general expectation was that Melton would not lose the 132a, there was little for Mitchell to do. He took no part in the preparation for the 132a hearing, but left that entirely to Yrulegui.

The subject of settlement came up again briefly during a meeting between Melton, Yrulegui, and Mitchell just prior to the 132a hearing in March of 1987. According to Melton, it was at this meeting where he learned for the first time that Industrial and Martin had been engaged in settlement discussions. Yrulegui asked Melton if he would be willing to put up some of his own money to help resolve the 132a. Melton declined because he did not have any money to contribute, because he believed he would win, and because he had been advised by Mitchell that Industrial would "take care of it," meaning it would pay the 132a award if he lost. Mitchell, in turn, based this advice on what Yrulegui had told him. In addition, in Melton’s mind the fact Industrial was offering its own money to settle the claim was a further indication it would pay any 132a award. No one at the meeting explained to Melton that he might be personally liable for the award, or that he could be required to reinstate Martin.

Later that same morning, but still before the 132a hearing, Martin increased his demand from $13,000 to $23,000.

The 132a hearing was held as scheduled on March 6, 1987. As noted, Yrulegui announced his appearance at the hearing on behalf of Industrial only; Mitchell appeared on behalf of Melton. Yrulegui explained later this was a tactical decision he made with Mitchell so both of them could cross-examine Martin’s witnesses. However Mitchell could not recall having made this arrangement, and was surprised by Yrulegui’s announcement. Up until the hearing, Mitchell believed Yrulegui was representing only Melton; afterward he assumed Yrulegui was acting in a dual capacity as the attorney for both Industrial and Melton. In any event, Yrulegui handled the bulk of the defense and Mitchell played only a minor role at the hearing.

The hearing was concerned primarily with the reason Melton fired Martin, i.e., whether, as alleged in the 132a petition, it was based on Martin’s apparent intention to file a workers’ compensation claim or whether, as Melton asserted, it was based instead on Martin’s poor work habits. Two other issues are also worth mentioning in connection with the 132a hearing: whether Martin had suffered an injury AOE/COE, and whether Melton’s potential 132a liability was covered under his policy.

The first issue, Melton’s reason for firing Martin, turned in large measure on the testimony of Victor Durham, Martin’s coworker at Sierra Signs. According to Martin, he encountered Durham at Sierra Signs a few days before he was fired and Durham told him something to the effect of "‘Gee, I feel sorry for you because Keith is going to fire you because he’s afraid you’re going to make a Workers’ Comp claim.’" Melton denied having said anything of the sort to Durham. Durham testified at the 132a hearing that he could not remember if Melton told him this or not. Durham also testified that Martin was a sloppy worker, made crude remarks to women, humiliated Durham about his religion, often missed work, and liked to fight.

As explained above, the question of whether Martin had suffered an injury AOE/COE was left unresolved by the compromise and release of the injury claim, although significantly Industrial had failed to make a showing in that regard sufficient to justify a Thomas finding. The issue therefore became a part of the 132a hearing on the premise an industrial injury is a prerequisite for a valid discrimination claim. The evidence presented at the hearing on this subject was brief and consisted largely of the medical reports and Martin’s testimony about his fall from the ladder. However, Martin also reportedly acknowledged he had been in a fight after the fall during which he was hit with a two-by-four.

Although Yrulegui and Mitchell were aware the question of insurance coverage, including the issues of waiver and estoppel, could be litigated before the WCAB, neither raised it at the 132a hearing. Yrulegui explained it was not his job to do so because he did not represent either Industrial or Melton with respect to coverage, notwithstanding the fact he stated his appearance at the hearing on Industrial’s behalf. When Yrulegui appeared for Industrial without raising the coverage question, Mitchell took that as an indication Industrial did not intend to contest coverage, and so thought to himself "we’ve got it made." On the other hand, Mitchell did not look to Yrulegui as Industrial’s spokesman on coverage.

Mitchell himself did not raise the coverage issue because he did not believe it was necessary at that point; Industrial had not yet taken a coverage position, it was offering to settle the case, and Mitchell had been told by Yrulegui that Industrial would probably pay an award. Under these circumstances, Mitchell saw no tactical reason to bring up an issue that might eliminate Industrial’s "deep pocket."

At the conclusion of the 132a hearing, both Yrulegui and Mitchell thought it had gone very well for Melton, and told him so.

Martin put on no evidence at the hearing implicating Industrial in his discharge. For this reason, Mitchell concluded that Industrial was not a party to the 132a even though it had been and would continue to be named as a defendant in various documents related to the case.

On March 17, 1987, Mitchell wrote to Yrulegui requesting that Industrial renew its settlement offer to Martin. Yrulegui forwarded the letter to Industrial where it was routed to Schwarer. Schwarer was unaware settlement offers had already been made, but it was her practice in any event not to settle 132a cases. So on April 16, she phoned Yrulegui and told him not to make an offer. Schwarer’s C-MAP entry for that date read: "P/C TO RICH. DISCUSSED CASE. TO NO [sic] MAKE OFFER, RATHER WAIT RESULTS OF HEARING. HE AGREES." By "he agrees," Schwarer meant only that Yrulegui agreed to abide by her decision, not that he agreed with the decision itself. Yrulegui gave the entry a similar interpretation.

This same conversation was also the subject of a handwritten note in Yrulegui’s file. Referring to Schwarer, the note said: "doesn’t want to make offer per Mitchell, realizing this if done more argument Mitchell will use to make us pay if lose." Schwarer’s call was the first indication Yrulegui had received that Industrial was no longer willing to pay money to resolve the 132a, and it was contrary to what he had been saying to Mitchell. Nonetheless Yrulegui did not convey this new information to Mitchell. To the contrary, Yrulegui would write Mitchell some six months later: "I have contacted Mr. Deutinger several times to try to settle this case and his client simply will not consider a settlement at any amount." Deutinger could not recall having had any settlement discussions with Yrulegui after the 132a hearing, and none were reflected in Yrulegui’s billing records. Yrulegui, on the other hand, testified he was still prepared to discuss settlement but Deutinger could not get Martin to commit to a figure.

According to Mitchell, had he been aware of Schwarer’s decision it would have made a "substantial difference" in the way he handled Melton’s case, i.e., he would have attempted immediately to settle the case on Melton’s behalf.

Mitchell also expressed the belief, for reasons that will appear, that the opportunity for settlement was much better right after the 132a hearing than it would be a year later when Industrial finally sent Melton a no-coverage letter.

The WCJ issued his "FINDINGS AND ORDER" on June 18, 1987. He found "The employee had not filed or made known his intention to file an application for adjudication with the appeals board prior to his termination on August 21, 1987," and he therefore ordered that Martin’s 132a petition be dismissed. Thus, the decision relied on a strict interpretation of section 132a requiring proof an applicant had filed or expressed the intention to file an application for adjudication of claim with the WCAB, as opposed simply to an injury claim filed with the employer or the employer’s insurance carrier.

Deutinger filed a petition for reconsideration with the WCAB challenging this interpretation. Mitchell thereafter wrote to Yrulegui expressing his opinion the petition probably would be granted. Mitchell also told Yrulegui of a recent encounter with the WCJ during which the WCJ said that aside from his interpretation of the statute, he felt the facts were sufficient to uphold Martin’s petition on the merits. For these reasons, Mitchell suggested to Yrulegui that "your client" reopen settlement negotiations before the WCAB ruled on the reconsideration petition. Yrulegui forwarded a copy of Mitchell’s letter "To client," meaning Industrial. The letter was routed to Schwarer, who by then had closed the Martin file again. Schwarer did not respond to Mitchell’s suggestion. Yrulegui subsequently filed an answer to Martin’s petition on behalf of both Melton and Industrial.

In September of 1987, the WCAB granted Martin’s petition for reconsideration, rescinded the WCJ’s decision, and returned the case for further proceedings. The WCJ issued new "FINDINGS AND AWARD" on December 22. He found, inter alia:

In his "OPINION ON DECISION," the WCJ explained the second finding in this way:

On this basis, an award was made in favor of Martin and against Sierra Signs (but not Industrial) equal to one-half Martin’s injury compensation (i.e., $2,100) plus back wages and expenses in an amount yet to be determined. In addition, Melton was ordered to reinstate Martin to his job. Neither Mitchell nor Deutinger objected to the fact that the award was not also made against Industrial.

As soon as he received this second 132a decision, Mitchell sent a letter to Yrulegui in which he wrote: "Please immediately advise my office of the position of your office, Industrial Indemnity Company, as to whether they are going to pay this award under their policy or if you plan on filing a Petition for Reconsideration." Mitchell sent a copy of the letter to Melton with the following postscript:

Mitchell’s "understanding" was based on a telephone conversation he had with Yrulegui around the same time in which Yrulegui reportedly said "he was of the opinion that they [Industrial] would probably go ahead and adjust the award." Therefore, Mitchell sought to reassure Melton, who he described as "extremely upset" by the 132a decision. At this point, according to Mitchell, Industrial still had not taken a formal coverage position, and Melton knew there was a chance Industrial might refuse to pay the award. Mitchell had already talked to Melton about the possibility of litigation should this happen.

Yrulegui, for his part, denied ever telling Mitchell that Industrial would adjust or settle Martin’s 132a claim.

The following month, January of 1988, Yrulegui prepared to file a petition for reconsideration challenging the second 132a decision and asked his assistant, William Hostetter, to write a statement of facts. Hostetter sent Yrulegui a memo on January 7 in which, in addition to outlining the evidence in the case, he proposed to "cut our losses" by offering to settle the case for $30,000. He estimated Martin’s accumulated back wages, less earnings, were by then about $37,800.

Hostetter also sent a copy of his memo to Rossi, who made a note to himself: "We need to meet with insured and John Mitchell." Rossi wanted to determine what it would take to resolve the case and he was willing to pay some money toward a settlement, but not as much as Hostetter proposed. As it turned out, however, Rossi never actually met with Mitchell and Melton in this regard.

On January 15, 1988, Yrulegui filed a petition for reconsideration on behalf of both Sierra Signs and Industrial. Among other things, the petition argued reinstatement was an inappropriate remedy under the circumstances.

Melton was especially concerned after the second 132a decision about the prospect of having to rehire Martin. But Mitchell eventually convinced him reinstatement was advisable in order to mitigate future damages in the form of Martin’s back wages, and so Martin returned to work at Sierra Signs on January 25, 1988. He was reinjured on the job soon afterward and filed a claim with Melton’s subsequent workers’ compensation carrier.

The WCAB denied the petition for reconsideration in March.

On February 22, 1988, while the petition for reconsideration was pending, Mitchell wrote Yrulegui informing him of Martin’s reinstatement and once again urging Industrial to settle the 132a claim.

Yrulegui forwarded a copy of Mitchell’s letter to Rossi. On March 18, soon after the WCAB denied reconsideration, Rossi telephoned Yrulegui seeking his opinion regarding coverage for the 132a award. Yrulegui, by his account, refused to discuss the subject with Rossi and told him to consult some other attorney instead. Yrulegui’s notes of the conversation also include the statement: "‘He has decision to make re pay or deny.’" Asked at trial to explain the statement, Yrulegui responded:

Also on March 18, Mitchell called Yrulegui inquiring whether Industrial would pay the 132a award. Yrulegui returned the call on March 21. He recounted his earlier conversation with Rossi, and told Mitchell Industrial had not yet made a decision about the 132a. And he explained to Mitchell that he was not advising Industrial on coverage.

Rossi also sought the advice of Neil Piethe, the workers’ compensation claims manager at Industrial’s home office. He sent Piethe a copy of Mitchell’s February 22 letter with the notation: "Please review & then lets [sic] discuss." Rossi was particularly concerned about the italicized portion of Mitchell’s letter quoted above. "I needed some advice as to what course we should be taking as I have had--had never been faced with this type of exposure before." Rossi subsequently notified Mitchell he was deferring a decision on payment or settlement of Martin’s 132a claim pending the home office review.

At the home office, Piethe referred the matter to Richard Sullivan, then a senior director of workers’ compensation claims. On March 22, Rossi wrote a memo to Sullivan in which he proposed that Industrial attempt a settlement. According to Rossi, he also sent the entire claim file to Sullivan; Sullivan, however, testified he received only Rossi’s memo. After providing a brief history of the case, the memo set out Rossi’s concerns as follows:

By "our opinion," Rossi was referring to Neil Piethe and Tina Rauch in addition to himself.

Notably, Rossi made no mention in the memo of the fact Industrial had not sent Melton a 132a letter. The reason he did not, he testified later, was because he believed Souza, Yrulegui, and Mitchell had told Melton verbally there was no coverage for the 132a. The memo, however, also failed to inform Sullivan that Melton had received any such verbal notification.

Rossi’s purpose in sending the memo to Sullivan was "to get some guidance as to whether or not we were in any way liable for payment of any benefits." He was seeking a home office determination whether the 132a was covered under the policy, or whether Industrial was estopped to rely on its coverage defenses.

A C-MAP entry by Tina Rauch for March 28 reflects the following phone call from Sullivan: "DICK IS OF POSITION WE DO NOT OWE ANYTHING OTHER THAN DEFENSE COSTS ON ANY 132A, BUT WILL BE CONTACTING E & Y [Emerson & Yrulegui] DIRECT FOR FURTHER CLARIFICATION PRIOR TO CONFIRMING HIS RECOMMENDATION." Sullivan, however, testified he never talked to anyone at Industrial other than Rossi. In any event, he told Rossi essentially the same thing as was reflected in Rauch’s C-MAP. In addition,

Sullivan did not discuss Melton’s financial predicament with Rossi because "I’m [n]ot concerned with those things." Similarly, he did not address Rossi’s concern about an estoppel. "My position was that, you know, we don’t owe anything on this type situation, so we shouldn’t be paying anything and that’s it. All the other is just a matter of speculation."

Sullivan also had a second telephone conversation with Rossi in which Rossi said Yrulegui was suggesting Industrial pay the 132a award. Sullivan then called Yrulegui to find out "where in the hell he was coming from."

Sullivan testified:

Yrulegui, on the other hand, testified he gave Sullivan no more than a factual history of the case; he was adamant he did not discuss coverage. In his notes from the conversation, Yrulegui wrote: "background of case - refused to discuss coverage & he didn’t ask."

On April 5, 1988, reportedly per Sullivan’s instructions, Rossi sent the following letter to Yrulegui, Melton, and Mitchell setting out Industrial’s coverage position in writing for the first time.

Except for the absence of language offering the insured a choice of attorneys, Rossi’s letter generally tracked the sample 132a letter contained in Industrial’s claims manual. According to Rossi, his letter contained all the reasons he was aware of for denying coverage in this case. Notably, it made no mention of the fact Melton fired Martin after the policy had expired.

Two days later, on April 7, Mitchell wrote to Industrial acknowledging Rossi’s letter and inquiring whether, given Melton’s financial circumstances, Industrial would be willing to contribute money toward a settlement in lieu of paying additional defense costs to seek review of the 132a decision. Rossi wrote back agreeing to pay the additional costs. As for making a contribution, Rossi wrote: "Insofar as the bulk of the legal fees have been paid in the defense of this case, we can’t see our savings on future costs as being a real incentive or much of a contribution in getting this case resolved." By this he meant only that the amount Industrial might be willing to contribute would be relatively small in comparison to the total award, not that Industrial was unwilling to contribute anything. "[I]f it came down to sitting down and making a--an offer, I’m sure that we would have been willing to throw in some money."

On April 12, 1988, Deutinger filed a petition with the WCAB requesting a supplemental hearing to determine the amount of Martin’s back wages due as part of the 132a award.

In anticipation of the supplemental hearing, Mitchell again wrote Rossi requesting that Industrial review its coverage position and consider paying the 132a award or settling the case. Rossi sent a copy of the letter to Sullivan, who instructed Rossi to deny the request. Rossi sent Mitchell a letter in October in which he wrote that, given the lack of coverage, "we will not entertain any type of settlement offer."

The supplemental hearing was held on December 9, 1988. At issue was Martin’s work history between August 21, 1984, when he was discharged by Melton, and January 25, 1988, when he was reinstated to his job at Sierra Signs. Once again, the minutes of the hearing reflect that Yrulegui appeared for Industrial and Mitchell appeared for Melton.

The WCJ issued his "SUPPLEMENTAL FINDINGS, AWARD AND ORDER" on March 24, 1989. As had most of the other documents in this case, the decision listed both Sierra Signs and Industrial as defendants. The WCJ found Martin was entitled to recover back wages calculated at the rate of $264 per week, less $6,395 in earnings and unemployment benefits he had received in the period prior to his reinstatement. Award in this amount was made in favor of Martin and against Industrial (but not against Sierra Signs). When she received a copy of the decision on March 27, Schwarer forwarded it to Rossi with the notation "Dennis Help!" Rossi phoned Yrulegui and asked him to take action to have Industrial’s name removed. According to Rossi, Yrulegui agreed to write a letter to the WCJ. The next day, March 28, the WCJ issued an order amending the award to show it was against Sierra Signs rather than Industrial. The order continued to list Industrial as a defendant. Neither Mitchell nor Deutinger objected to the change.

Yrulegui’s records indicate he had a telephone conversation with Rossi on March 28 regarding the "status" of the case. Yrulegui denied they discussed the supplemental hearing decision, and denied any knowledge of why the decision was changed. Neither the WCAB file nor Yrulegui’s file contains any record of a contact between Yrulegui and the WCJ on March 28.

Industrial maintained at trial that the first supplemental award, made against it rather than Melton, was a clerical error corrected by the WCJ without any intervention by Yrulegui. In support of this position, Industrial requested the court instruct the jury on the power of a workers’ compensation judge to correct clerical errors on his or her own initiative. We will address below Industrial’s contention the court erred by giving only a modified instruction.

In April of 1989, based on the WCJ’s supplemental findings and award, Deutinger obtained a judgment in favor of Martin and against Sierra Signs in the amount of $47,802.60 for back wages, plus $6,251.11 in interest for a total of $54,053.71. Deutinger then wrote to Mitchell demanding payment of this amount. After some discussion between the parties about alternative ways to satisfy the judgment, and after considering bankruptcy, Melton eventually borrowed money against his house and paid Martin $47,772.42. It appears Melton’s obligation to pay interest on this amount was still in dispute at the time of trial.

Melton had begun a year earlier, soon after receiving Rossi’s no-coverage letter in April of 1988, to look into the possibility of filing suit against Industrial for insurance bad faith. Mitchell, aware he probably would become a witness in such an action, referred Melton to Richard Belardinelli. On February 6, 1989, Belardinelli wrote a 74-page letter to Rossi, accompanied by numerous exhibits, requesting that Industrial accept coverage for Melton’s 132a liability and pay him damages as well. Among other things, Belardinelli argued that Industrial had waived its coverage defenses, or was estopped to assert them, because it had misled Melton into believing it would pay any 132a award.

Belardinelli’s letter was referred to Andre Hassid, manager of the claims counsel department in Industrial’s home office. In preparing a response, Hassid did some legal research and spoke with Yrulegui, Souza and/or Rauch, and perhaps with Sullivan about the case. On March 17, 1989, Hassid wrote back to Belardinelli disputing each of his arguments and reasserting Industrial’s no-coverage position. With regard to Belardinelli’s waiver/estoppel argument in particular, Hassid claimed Yrulegui had informed Melton at the outset of the case that he would be personally liable for a 132a award. Hassid did not mention, and indeed was unaware of, Souza’s conversation with Melton on August 26, 1985, in which she purportedly told him the 132a was not covered.

Hassid’s letter would subsequently generate some controversy during the trial for two reasons. First, Hassid’s no-coverage letter, like Rossi’s letter the year before, did not rely as a reason for denying coverage on the fact that Melton had discharged Martin after the expiration of Sierra Signs’s policy with Industrial. Hassid testified it was Industrial’s practice to provide a courtesy defense in 132a cases based upon the date of the injury that gave rise to the discriminatory act, rather than on the date of the discriminatory act itself. The court would later instruct the jury that an insurance company that relies on specified grounds for denying a claim waives the right thereafter to rely on other grounds discoverable through a reasonable investigation.

Second, Hassid’s assertion Melton was aware Industrial’s no-coverage position was based largely on what, according to Hassid, Yrulegui had said about his conversation with Melton on August 26, 1985. Melton (who denied having talked to Yrulegui on that day) argued at trial that Yrulegui had breached client confidentiality by disclosing the substance of the conversation to Hassid. Yrulegui denied discussing the conversation with Hassid. The court ultimately ruled there had been no breach of confidentiality because Yrulegui was jointly representing both Melton and Industrial when the conversation allegedly occurred, and because Yrulegui was entitled to respond to the allegations in Belardinelli’s letter. The jury was instructed accordingly.

Melton filed his bad faith complaint on May 19, 1989, two months after receiving Hassid’s letter.

As for each of Melton’s other causes of action, Industrial maintains the court’s estoppel findings effectively negated one or more of the elements necessary to establish liability.

Finally, Industrial contends the trial court gave the jury an incomplete and erroneous special verdict form; the court committed many other evidentiary and instructional errors requiring reversal; and the evidence fails to support some elements of the jury’s damages award.

The trial court concluded Industrial’s policy did not cover Melton’s 132a liability because the policy, by its terms, applied only to "injury … by accident occurring during the policy period" (italics added), and because the public policy expressed in sections 533 of the Insurance Code and 1668 of the Civil Code precludes coverage for an insured’s willful acts. This conclusion, of course, was based on the premise Melton’s discharge of Martin was a willful act, an issue Melton has not conceded.

Although Industrial prevailed on the coverage question at trial, it has raised it again on appeal, arguing there is no coverage for the same reasons cited by the court, as well as for two additional ones. In the course of our review of this question, we asked the parties to submit supplemental briefing regarding the accident limitation. In its response, Industrial now contends the matter of coverage is not properly before us except indirectly insofar as it relates to the jury’s implied finding of contract by waiver. That is, Industrial notes Melton has not cross-appealed from the judgment to challenge the court’s adverse coverage ruling, nor does Melton contend the court’s error, if any, in submitting the contract by waiver theory to the jury was harmless because coverage existed under the policy.

In a related argument, Industrial seems to contend, in effect, that we may not affirm the jury’s verdict, but must remand for retrial, if we find coverage existed on any ground other than a "contract by waiver." This is so, it reasons, because the jury did not have the opportunity to consider any other grounds. We will briefly address these two contentions.

As a general rule, an appellate court will not review an error committed against a nonappealing party. (9 Witkin, Cal. Procedure (4th ed. 1997) Appeal, § 323, p. 361.) We may, however, at the respondent’s request, review any of the trial court’s intermediate rulings "for the purpose of determining whether or not the appellant was prejudiced by the error or errors upon which he relies for reversal or modification of the judgment from which the appeal is taken." (Code Civ. Proc., § 906; Erikson v. Weiner (1996) 48 Cal.App.4th 1663, 1671.) Here, the trial court ruled there was no coverage for Melton’s 132a liability but it permitted the case to go to the jury on a contract by waiver theory (as well as the theory Industrial assumed a duty of good faith and fair dealing irrespective of policy coverage once it undertook to provide Melton with a courtesy defense). Industrial challenges the jury’s contract by waiver verdict on several grounds, including an argument that waiver cannot create coverage where none existed before. Thus, it is precisely to show prejudice that Industrial raises the coverage issue on appeal. And, although Melton does not phrase it in such terms, his counter-argument in favor of coverage, if successful, would show that the jury’s reliance on the contract by waiver theory, if erroneous, was not prejudicial. Accordingly, we may review the trial court’s coverage ruling.

Industrial’s second contention is difficult to follow, but seems to be based on the premise the particular legal theory under which coverage was found to exist was critical to the jury’s finding of bad faith. That is, the argument appears to assume the jury, given the trial court’s ruling of no coverage, found Industrial’s preeminent act of bad faith was its ultimate refusal to acknowledge it had waived its coverage defenses. So Industrial contends in effect that, if coverage existed from the beginning, a new trial is required to determine whether Industrial’s initial denial of coverage was reasonable, e.g., whether it was based on a genuine or debatable issue of law. This contention, if we understand it correctly, confuses the contract theory giving rise to a duty of good faith with the acts constituting a breach of the duty.

The jury’s verdict was not based on Industrial’s failure to extend coverage on any particular ground. In essence, the jury found Industrial had acted in bad faith by failing unreasonably to honor its obligations under the insurance policy to defend and indemnify Melton against Martin’s 132a claim. The verdict supposed Industrial had a contractual obligation to Melton and looked to Industrial’s acts and omissions in performance of that obligation, not to the specific contractual term or legal theory under which the obligation arose. Here the jury found that Industrial, although it could have, chose by implication not to assert its legitimate coverage defenses and, in effect, accepted coverage. If, on the other hand, the court had ruled there was coverage, the jury would not have needed to consider the contract by waiver theory, but its task would have been the same with regard to bad faith.

With this in mind, we turn to the matter of coverage. We begin with an overview of the workers’ compensation system in California and the requirement that an employer insure itself against liability for workers’ compensation benefits.

The workers’ compensation law is contained principally in division 4 of the Labor Code (§§ 3200-6002). Where the conditions of compensation exist, an employer is liable, regardless of fault, for the compensation provided under division 4 for "any injury" sustained by an employee arising out of and in the course of the employment. (§ 3600.) As we will explain, this liability extends to some intentionally-caused injuries, including those arising from a wrongful termination. With certain exceptions, the right to recover such compensation is the sole and exclusive remedy of the employee against the employer. (§ 3602.)

The workers’ compensation law must, among other things, make "full provision for adequate insurance coverage against liability to pay or furnish compensation; full provision for regulating such insurance coverage in all its aspects …; [and] full provision for otherwise securing the payment of compensation .…" (Cal. Const., art. XIV, § 4.) Accordingly, every employer except the state is required to "secure the payment of compensation" either by purchasing insurance or by self-insuring against its statutory liability. (§ 3700.) Employers who comply with the insurance requirement are relieved of liability for compensation, which is assumed by the insurance carrier. (Employers Mutual Liability Ins. Co. v. Tutor-Saliba Corp. (1998) 17 Cal.4th 632, 638.) An employer who does not meet the requirement is subject to severe sanctions. Failure to comply is a misdemeanor (§ 3700.5) and exposes the employer to civil liability for the employee’s injury (§ 3706). (See also §§ 3715, subd. (a); 4555; 5600.) The employer may be prohibited from using employee labor until it complies with section 3700. (§ 3710.1.) And, when an employer’s failure to comply is willful, the amount of compensation otherwise recoverable is increased by 10 percent. (§ 4554.)

Workers’ compensation insurance includes insurance against loss from liability imposed under the workers’ compensation law. (Ins. Code, § 109.) Chapter 2 of part 3 of division 2 of the Insurance Code (Ins. Code, §§ 11630-11663) regulates the content of workers’ compensation insurance policies. "‘The terms of workers’ compensation policies issued in California are strictly governed by statute, and each policy is conclusively presumed to contain all the provisions required by law.’ [Citation.]" (La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th 27, 36.)

For the period from August 1, 1983, to August 1, 1984, Melton was insured by Industrial under a "STANDARD WORKERS’ COMPENSATION AND EMPLOYERS’ LIABILITY POLICY," subject to an amendatory endorsement for California. Under the heading of "INSURING AGREEMENTS," Industrial agreed:

As discussed below, this last provision, part IV, was amended by the endorsement with respect to coverage A.

The next section of the policy, entitled "EXCLUSIONS," makes no reference directly or indirectly to an employer’s liability under section 132a. By contrast, the endorsement expressly excludes coverage for the additional compensation imposed on an employer under section 4553 for injuries resulting from the employer’s serious and willful misconduct.

The policy expressly incorporates all the provisions of the workers’ compensation law with respect to coverage A, and provides that any policy term in conflict with the law is amended to conform to it.

We are concerned here only with Industrial’s duty under coverage A "[t]o pay promptly when due all compensation and other benefits required of the insured by the workers’ compensation law." By its exclusionary terms, coverage B does not apply "to any obligation for which the insured or any carrier as his insurer may be held liable under the workers’ compensation or occupational disease law of [California] .…" Employers’ liability insurance (coverage B) written in conjunction with workers’ compensation policies "is intended to serve as a ‘gap-filler,’ providing protection to the employer in those situations where the employee has a right to bring a tort action despite the provisions of the workers’ compensation statute or the employee is not subject to the workers’ compensation law. [Citation.] Generally, these two kinds of coverage are mutually exclusive." (Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 916, fn. omitted.) Since Martin’s 132a claim sought to impose liability under the workers’ compensation law, Industrial’s obligations to Melton, if any, arose under coverage A. (See La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co., supra, 9 Cal.4th at pp. 42-43 [insurer’s duty to defend claim for workers’ compensation benefits is owed under workers’ compensation part of policy]; Transamerica Ins. Co. v. Superior Court (1994) 29 Cal.App.4th 1705, 1715 [where workers’ compensation liability exists, there is no coverage under the employer’s liability portion of policy].)

The interpretation of an insurance policy, as with any written contract, is primarily a judicial function. Unless the interpretation turns on the resolution of disputed factual issues, a reviewing court is not bound by the lower court’s determination. Rather, we exercise our own independent judgment regarding the meaning of the policy language. (Cooper Companies v. Transcontinental Ins. Co. (1995) 31 Cal.App.4th 1094, 1100; Merced Mutual Ins. Co. v. Mendez (1989) 213 Cal.App.3d 41, 45.)

"While insurance contracts have special features, they are still contracts to which the ordinary rules of contract interpretation apply." (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264.)

"‘An insurance policy provision is ambiguous when it is capable of two or more constructions both of which are reasonable.’" (Bay Cities Paving & Grading, Inc. v. Lawyers’ Mutual Ins. Co. (1993) 5 Cal.4th 854, 867.) An ambiguity is to be resolved by interpreting the ambiguous provision in the sense the promisor (i.e., the insurer) believed the promisee (i.e., the insured) understood it at the time it was made. (AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d at p. 822; Civ. Code, § 1649.) "This rule, as applied to a promise of coverage in an insurance policy, protects not the subjective beliefs of the insurer, but, rather, ‘the objectively reasonable expectations of the insured.’" (Bank of the West v. Superior Court, supra, 2 Cal.4th at p. 1265.) Only if application of this rule fails to resolve the ambiguity is it then construed against the insurer. (Ibid., Civ. Code, § 1654.)

Industrial argues the policy did not cover Melton’s 132a liability for four reasons: (1) a discriminatory discharge in violation of section 132a is not an "accident"; (2) the forms of relief afforded for a 132a violation do not constitute "compensation and other benefits" within the scope of coverage A; (3) the policy was not in effect when Melton discharged Martin; and (4) public policy precludes coverage for willful acts. The trial court concluded coverage did not exist for the first and fourth of these reasons. We address them in a somewhat different order.

Before considering any exclusions or limitations, we must first examine a policy’s coverage provisions to determine whether a claim falls within its terms. (Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at p. 16.) This is so for two reasons. First, where a claim clearly is not included within the insuring agreement, it need not be specifically excluded. Second, while limitations on coverage are narrowly construed and must be proved by the insurer, the burden is on the insured to bring the claim within the basic scope of coverage. (Ibid.)

Coverage A requires Industrial "[t]o pay promptly when due all compensation and other benefits required of the insured by the workers’ compensation law." The policy, by its terms, incorporates all provisions of the "workers’ compensation law" with respect to coverage A, and further provides that any policy term in conflict with the law is amended to conform to it.

"Compensation" is statutorily defined as "compensation under Division 4 [of the Labor Code] and includes every benefit or payment conferred by Division 4 upon an injured employee, including vocational rehabilitation, or in the event of his death, upon his dependents, without regard to negligence." (§ 3207.) Referring to the section 3207 definition, Industrial maintains coverage A applies only to compensation and other benefits required of an insured by division 4 of the Labor Code. It argues the remedy afforded by section 132a does not fall within this coverage because section 132a is in division 1 of the code, and because the remedy is in the nature of a penalty rather than compensation.

In determining the scope of coverage A, we look first to the language of the policy to ascertain if possible its plain meaning, or the meaning a layperson would ordinarily attach to it. (Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at p. 18.) Absent evidence the parties attached some special meaning to these words, we interpret them in their "ordinary and popular sense." (AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d at p. 822.)

In particular, we are concerned with the meaning of the phrase "all compensation and other benefits required of the insured by the workers’ compensation law." Industrial would have us read it to mean "all compensation required of the insured by division 4 of the Labor Code." We believe the more reasonable interpretation is "all compensation and other benefits recoverable in a workers’ compensation proceeding." (See La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity, Inc., supra, 9 Cal.4th at p. 42 [coverage under workers’ compensation policy for "benefits required of you by the workers’ compensation law" "is susceptible of no other objective construction than providing coverage solely for workers’ compensation benefits, or claims, proceedings, or suits for such benefits, and not for civil suits for damages"].) Although section 132a does not provide the exclusive remedy for discrimination based on a work-related disability, the specific remedies it affords can only be recovered in a proceeding before the WCAB. (City of Moorpark v. Superior Court (1998) 18 Cal.4th 1143, 1155-1156; § 5300.) It follows that section 132a is part of the general "workers’ compensation law" and anything it provides in the nature of "compensation" or "other benefits" therefore falls within the ambit of coverage A.

Industrial also contends a 132a award is really a penalty rather than a form of compensation. However, section 132a itself provides for increased "compensation." And a 132a award serves a remedial as well as a deterrent purpose. (Judson Steel Corp. v. Workers’ Comp. Appeals Bd., supra, 22 Cal.3d at p. 668 ["although one function of section 132a may be to deter employers from discriminating against industrially injured employees, the statute also serves a remedial function, by providing some compensation to the aggrieved worker for discrimination incurred as the result of his injury"]. Indeed, the workers’ compensation system only authorizes the payment of "compensation" for work-related injuries and does not permit the imposition of penalties. (Cf. State Dept. of Corrections v. Workmen’s Comp. App. Bd. (1971) 5 Cal.3d 885, 888-889.) Thus, while the 50 percent increase in compensation for discrimination under section 132a is sometimes characterized as a penalty, it has been held to be compensatory in two respects.

Finally, Industrial argues a section 132a award does not constitute "other benefits" because "that term necessarily has reference to other benefits awarded under the workers’ compensation system, such as vocational rehabilitation and death benefits." This position rests on the premise that "compensation" and "other benefits," as those terms are used in the policy, mean essentially the same thing. However, as noted, section 3207 defines "compensation" to include "every benefit or payment conferred by Division 4 upon an injured employee, including vocational rehabilitation, or in the event of his death, upon his dependents .…" (Ferguson v. Workers’ Comp. Appeals Bd. (1995) 33 Cal.App.4th 1613, 1619 [the broad language of section 3207 "leaves no doubt" compensation includes vocational rehabilitation and other nonindemnity benefits provided by division 4 of the Labor Code].) Thus, if Industrial’s position were correct, there would be no "other benefits" and the term would be entirely superfluous. This construction disregards the well-established rule that every term in a policy must be given effect whenever possible. (Martin Marietta Corp. v. Insurance Co. of North America (1995) 40 Cal.App.4th 1113, 1127.) Therefore the term "other benefits," if it is to have any meaning at all, must refer to workers’ compensation benefits not included within the definition of compensation, and so to benefits, if any, in addition to those provided in division 4 of the Labor Code.

Black’s Law Dictionary defines a benefit as an "[a]dvantage; profit; fruit; privilege; gain; interest.… Benefits are something to advantage of, or profit to, recipient." (Black’s Law Dict. (6th ed. 1990) p. 158.) The term is broad enough to include all the elements of a 132a award, i.e., increased compensation, the costs of recovery, reinstatement, and back wages and benefits, all of which redound to the advantage of a worker who suffers discrimination at the hands of his or her employer as the result of a work-related injury.

We find support for this conclusion in Burton v. Workers’ Comp. Appeals Bd., supra, 112 Cal.App.3d 85. The employee in Burton suffered a work-related injury for which he recovered ordinary workers’ compensation benefits, including temporary disability payments. The employer was also directed to pay a 50 percent increase in compensation for discriminating against the employee in violation of section 132a. The employer promptly paid the 132a award except for the portion based on the temporary disability payments. As a result, the employer was then assessed a 10 percent penalty under section 5814 for unreasonable delay or refusal to pay "compensation." The issue in Burton was whether the penalty should be assessed against the entire 132a award or only against the part attributable to the unpaid temporary disability payments. In concluding the penalty applied to the entire award, the court relied on Gallamore v. Workers’ Comp. Appeals Bd. (1979) 23 Cal.3d 815, where the Supreme Court held a section 5814 penalty "is to be computed by assessing 10 percent of the entire amount ultimately awarded for the particular class of benefit which has been unreasonably delayed or withheld." (Id. at p. 827, italics added.) The Burton court held it is the 132a award, rather than the unpaid temporary disability liability, that is the "class of benefit" to which this rule applies. As discussed above, the court held the increased compensation provided by section 132a is compensatory rather than punitive. First, it compensates the employee directly for damages caused by the employer’s discriminatory conduct. The court explained: "This aspect of the section 132a civil/administrative remedy clearly points to it being a separate ‘class of benefit.’" (Burton v. Workers’ Comp. Appeals Bd., supra, 112 Cal.App.3d at p. 90.) Moreover, a 132a award provides more nearly full compensation for the employee’s injuries and other detriment.

In summary, Burton found a 132a award, or at least the increased compensation required by the statute, to be a "class of benefit" (and indeed a form of compensation) as opposed to a penalty. Similarly, we believe it is entirely consistent with an insured’s objectively reasonable expectations to interpret the phrase "compensation and other benefits" under coverage A of the Industrial policy to include a 132a award, which is surely an "other benefit" if not also a form of "compensation."

The California amendatory endorsement to the standard form policy states in part:

Industrial maintains the discharge of an employee in violation of section 132a necessarily is an intentional act and therefore is excluded by this "accident" limitation. And in a related argument, it contends coverage A also incorporates sections 533 of the Insurance Code and 1668 of the Civil Code, both of which preclude coverage for willful acts as a matter of public policy. We consider these two arguments together.

Industrial cites us to a long list of insurance cases holding employment termination is an intentional act. Although this conclusion would seem to require little additional discussion, the context in which it was reached points up the difficulty in applying it here. The issue in most of the cited cases was whether an insurer had a duty under a general liability policy to defend an employer against a claim for bodily injury (i.e., emotional distress) resulting from wrongful termination. The policies generally limited coverage to injuries caused by an "occurrence," which in turn was defined as an "accident." In addition, the policies typically provided that the injury could have been "neither expected nor intended from the standpoint of the insured." That is, the policies looked both to the act that caused the injury and to the actor’s state of mind. The specific question then was whether an intentional act that resulted in unintended harm was an "occurrence." The cases uniformly held it was not because termination of employment is always an intentional act and therefore cannot be an "accident." There was no potential for coverage under the policy, in other words, regardless of whether or not the employer expected or intended the injury to occur. (Lipson v. Jordache Enterprises, Inc. (1992) 9 Cal.App.4th 151, 159; Loyola Marymount University v. Hartford Accident & Indemnity Co. (1990) 219 Cal.App.3d 1217, 1224-1225 and cases cited therein.) Similarly, in Merced Mutual Ins. Co. v. Mendez, supra, 213 Cal.App.3d 41, we held there was no duty under a comparably-worded homeowner’s policy to defend or indemnify the insured for damages caused by his intentional sexual acts. "[W]here the insured intended all of the acts that resulted in the victim’s injury, the event may not be deemed an ‘accident’ merely because the insured did not intend to cause injury." (Id. at p. 50; see also Shell Oil Co. v. Winterthur Swiss Ins. Co. (1993) 12 Cal.App.4th 715, 750-751.)

Still other cases have addressed an insurer’s duty to defend a claim for wrongful termination in light of the proscription in Insurance Code section 533 against coverage for an insured’s willful acts. In Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, the Supreme Court endorsed a "clear line of authority in this state to the effect that even an act which is ‘intentional’ or ‘willful’ within the meaning of traditional tort principles will not exonerate the insurer from liability under Insurance Code section 533 unless it is done with a ‘preconceived design to inflict injury.’" (Id. at p. 887.) Appellate courts have since held that an act, to be willful within the meaning of the statute, must have been undertaken not only with the general intent to commit the act but also with the specific intent to cause harm. (See B & E Convalescent Center v. State Compensation Ins. Fund (1992) 8 Cal.App.4th 78, 94; Republic Indemnity Co. v. Superior Court (1990) 224 Cal.App.3d 492, 501-502.) Thus, Insurance Code section 533 requires a different analysis than the "occurrence" language discussed above because section 533 does not necessarily preclude coverage for intentional acts that result in unintended harm. (Id. at p. 503; see also Shell Oil Co. v. Winterthur Swiss Ins. Co., supra, 12 Cal.App.4th at pp. 739-743; United States Fid. & Guar. Co. v. American Employer’s Ins. Co. (1984) 159 Cal.App.3d 277.)

Both B & E Convalescent and Republic Indemnity concerned the right to a defense under the employer’s liability part of a workers’ compensation and employer’s liability policy. In Republic Indemnity, the claim was for employment discrimination under the state Fair Employment and Housing Act (FEHA) based on a failure to take reasonable steps to accommodate an employee with cancer. The employee was later terminated. The court held Insurance Code section 533 did not preclude coverage, although termination is an intentional act, because it is not necessary to show an intent to injure in order to prevail on a "failure to reasonably accommodate" theory of discrimination. (Republic Indemnity Co. v. Superior Court, supra, 224 Cal.App.3d at p. 503.)

The underlying claim in B & E Convalescent alleged a supervisory employee had been discharged for refusing to interfere with unionization efforts, and on account of her gender, age, and ethnic origin. The court initially concluded the claim was not barred by the exclusive remedy provisions of the workers’ compensation law because it was the sort of claim, i.e., wrongful termination in violation of fundamental public policy, for which a separate tort action lies. (B & E Convalescent Center v. State Compensation Ins. Fund, supra, 8 Cal.App.4th at pp. 91-92, referring to Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167. See also Gantt v. Sentry Insurance (1992) 1 Cal.4th 1083.) Turning then to Insurance Code section 533, the court noted the Supreme Court had recently clarified its decision in Clemmer v. Hartford Insurance Co., supra, 22 Cal.3d 865. In J. C. Penney Casualty Ins. Co. v. M. K. (1991) 52 Cal.3d 1009, the court had explained: "Properly understood, Clemmer … does not require a showing by the insurer of its insured’s ‘preconceived design to inflict harm’ when the insured seeks coverage for an intentional and wrongful act if the harm is inherent in the act itself." (Id. at p. 1025.) The B & E Convalescent court held a Tameny termination is such an act, and one for which indemnification therefore is barred by Insurance Code section 533. (B & E Convalescent Center v. State Compensation Ins. Fund, supra, 8 Cal.App.4th at pp. 97-98.)

There appears to be no real dispute in the present case, nor could there be, that Melton’s discharge of Martin was a deliberate act. The parties disagree, however, on the significance, if any, of Melton’s state of mind at the time. That is, Industrial, in reliance on the "occurrence" cases cited above, maintains essentially that it is enough Melton acted intentionally and thus it is immaterial whether or not he intended to harm Martin. Melton, on the other hand, citing the Insurance Code section 533 cases, argues the policy precludes coverage only if he acted with a "preconceived design to inflict injury," which he denies doing. In fact, the language of part IV does not lend itself easily to either interpretation. It simply states: "This policy applies only to injury … by accident occurring during the policy period .…" It is not clear from this language whether the act or the injury, or both, must have been nonaccidental in order for the limitation to apply. But it might reasonably be interpreted to mean that an intentional act is covered if it causes only unintended harm. (See Olson v. American Bankers Ins. Co. (1994) 30 Cal.App.4th 816 [coverage for death due to "bodily injury caused solely by an accident" is ambiguous as to whether it refers to accidental means or unforeseen result].)

In the case of a 132a violation, however, the act and the harm are essentially the same thing. The statute prohibits discrimination against an employee who has suffered a work-related injury. (Judson Steel Corp. v. Workers’ Comp. Appeals Bd., supra, 22 Cal.3d 658.) It does not require that the employee have sustained some additional injury as a result of the discriminatory treatment. "Section 132a … addresses a breach of an employee’s civil rights and applies regardless of whether that breach causes a medical injury." (City of Moorpark v. Superior Court, supra, 18 Cal.4th at p. 1154.) Here, the WCJ expressly found that Melton fired Martin for having made known his intention to file a workers’ compensation claim, and rejected as pretextual Melton’s argument, made again here on appeal, that he was acting instead for legitimate business reasons. As the court explained in B & E Convalescent in a similar context, "An affirmative act which can only violate the law when it is accompanied by … an impermissible motivation necessarily involves willful and intentional misconduct." (B & E Convalescent Center v. State Compensation Ins. Fund, supra, 8 Cal.App.4th at p. 95.)

This is not to say that all acts or omissions in violation of section 132a are perforce intentional. Discrimination may be unintentional when it stems from a failure to take reasonable steps to accommodate a disabled worker (Republic Indemnity Co. v. Superior Court, supra, 224 Cal.App.3d 492), or from the "disparate impact" of a facially neutral employment policy. (Melugin v. Zurich Canada (1996) 50 Cal.App.4th 658, 665; Save Mart Supermarkets v. Underwriters (N.D.Cal. 1994) 843 F.Supp. 597, 606). In County of Santa Barbara v. Workers’ Comp. Appeals Bd. (1980) 109 Cal.App.3d 211, for example, the application of a policy that automatically reclassified disabled workers into lower paid positions was found to violate section 132a even though it was applied without regard to whether the disability was work-related. (Id. at p. 215; see also Smith v. Workers’ Comp. Appeals Bd. (1984) 152 Cal.App.3d 1104, 1110, fn. 5.) Similarly, in Judson Steel Corp. v. Workers’ Comp. Appeals Bd., supra, 22 Cal.3d 658, a provision in a union contract permitted (but did not require) the employer to terminate the seniority status of any employee who had not worked for 12 consecutive months. The Supreme Court held application of the provision violated section 132a when the employee had missed work due to an industrial injury. (Id. at p. 669.) Here, by contrast, Melton’s discriminatory act, and so the resulting harm, plainly were intentional.

However, this conclusion does not resolve the issue before us because part IV of the insuring agreement is ambiguous in another important respect. Although it purports to limit coverage to accidental injuries, this is not always the case. As previously noted, where the conditions of compensation concur, an employer is liable, regardless of fault, for the compensation due under division 4 of the Labor Code for any injury sustained by an employee arising out of and in the course of the employment. (§ 3600; see also § 3208 [defining "injury" to include "any injury or disease arising out of the employment .…" (italics added)].) This includes intentional injuries. (Azevedo v. Industrial Acc. Com. (1966) 243 Cal.App.2d 370, 374 (Azevedo I) [physical assault by employer].) As our Supreme Court explained recently:

More particularly, disabling injuries resulting from employment termination are compensable, and workers’ compensation provides the employee’s exclusive remedy unless the discharge comes within an express or implied statutory exception, or it resulted from a risk reasonably deemed to be outside the "compensation bargain." (Shoemaker v. Myers, supra, 52 Cal.3d 1, 7, 16; Cole v. Fair Oaks Fire Protection Dist. (1987) 43 Cal.3d 148, 160.) If the injury arose out of and in the course of employment, the exclusive remedy provisions apply "notwithstanding that the injury resulted from the intentional conduct of the employer, and even though the employer’s conduct might be characterized as egregious." (Shoemaker v. Myers, supra, 52 Cal.3d at p. 15. See also Livitsanos v. Superior Court (1992) 2 Cal.4th 744, 752 ["[T]he proposition that intentional or egregious employer conduct is necessarily outside the scope of the workers’ compensation scheme is erroneous."].) Indeed, the exclusive remedy provisions bar a discharged employee’s civil claim for emotional distress even in the absence of any compensable physical disability. (Id. at p. 754.) However, the workers’ compensation law does not preempt a common law action for wrongful termination in violation of public policy, e.g., one based on sexual or racial discrimination, because such misconduct is not a normal part of the employment relationship. (Gantt v. Sentry Insurance, supra, 1 Cal.4th at p. 1100.) Likewise, a section 132a violation falls outside the compensation bargain, and workers’ compensation does not provide the employee’s exclusive remedy. (City of Moorpark v. Superior Court, supra, 18 Cal.4th 1143, 1161.)

It is because some intentional workplace injuries are compensable under the workers’ compensation system, and because an employer is required to "secure the payment of compensation" by purchasing insurance against its liability for those injuries (§ 3700), that sections 533 of the Insurance Code and 1668 of the Civil Code do not apply to workers’ compensation policies. Subject to approval by the Insurance Commissioner, a workers’ compensation policy may restrict or limit liability insurance "in any manner whatsoever." (Ins. Code, §§ 11657-11660.) However,

When Azevedo II was decided in 1968, section 132a contained no provision for the payment of additional compensation; it simply made it a misdemeanor for an employer to discriminate against an employee because the employee had filed or made known his or her intention to file a workers’ compensation claim. (Stats. 1965, ch. 1513, § 36, p. 3562.) That is, only section 4553 at the time imposed a compensation "penalty," as distinct from "ordinary liability," for an employer’s willful misconduct.

Section 132a was repealed in 1972 and replaced with a new version providing, in addition to criminal sanctions, that an employer who violated the statute was subject to section 4553. (Stats. 1972, ch. 874, § 1, p. 1545.) As previously noted , section 132a was amended again in 1982 to eliminate this reference to section 4553 while at the same time incorporating its provisions for the payment of additional compensation. Consequently, in the present circumstances, unlike those in Azevedo II, section 4553 and Insurance Code section 11661 do not work to resolve the "surface conflict between the compensation law’s demand for secured compensation and the statutory policy against insurance for willful torts." This is so because Insurance Code section 11661 does not apply by way of section 4553 to prohibit insurance against an employer’s 132a liability for additional compensation. It is true as well because the requirement an employer secure the payment of "compensation" (§ 3700) refers to the compensation due under division 4 of the Labor Code (§ 3207), which does not include section 132a. An employer is neither required to secure the payment of any additional compensation due under section 132a, nor expressly prohibited from doing so.

Nonetheless, the rationale underlying the decision in Azevedo II still applies with equal force in the present situation. If sections 533 of the Insurance Code and 1668 of the Civil Code were to apply to workers’ compensation insurance, they would bar coverage for all intentional workplace injuries, including those that are compensable under the law, notwithstanding the requirement that an employer insure itself against its liability for compensation. The accident limitation in part IV of the policy, if it were strictly applied, would have the same effect. An employer who had such a policy, and no more, would be in violation of the workers’ compensation law.

Industrial all but concedes in its supplemental briefing that the accident limitation does not always mean what it says. Industrial acknowledges, based on Azevedo II, that the limitation does not exclude coverage for an employer’s "ordinary liability" for compensation for intentional workplace injuries, in which case it says the limitation is "simply superceded by the provisions of the law" that are incorporated into the policy. It is perhaps more accurate to say the accident limitation, to the extent it is more restrictive than the law allows, is unenforceable. (See Howell v. State Farm Fire & Casualty Co. (1990) 218 Cal.App.3d 1446, 1453-1454.) Industrial nevertheless insists that the limitation, as well as the two statutory public policy exclusions, continue to foreclose coverage for an employer’s 132a liability because it is not a form of "ordinary liability." The problem with this argument is that nothing in the insurance policy or the law clearly distinguishes between an employer’s "ordinary liability" for medical injuries and its "nonordinary" liability for section 132a discrimination.

The employee in Azevedo II did not seek the additional compensation "penalty" authorized by section 4553 for an employer’s serious and willful misconduct. But if she had, as the court made clear in the passage quoted above, coverage for the employer’s liability for the additional compensation would have been barred by the express terms of Insurance Code section 11661. For the reasons discussed above, the same statute might also have barred coverage for an employer’s liability for additional compensation under section 132a between the time section 132a was reenacted in 1972 and the time it was amended in 1982 to delete the reference to section 4553. But following the 1982 amendment, there was no statutory prohibition, either direct or indirect, against coverage for an employer’s 132a liability.

Nor does the policy itself differentiate between an employer’s "ordinary liability" and its 132a liability. By contrast, the amendatory endorsement specifically excludes coverage for an employer’s liability for the additional compensation due under section 4553. There is no comparable exclusion for the employer’s section 132a liability.

Industrial’s position comes down to an argument that Melton should have known the workers’ compensation law does not, in the words of Azevedo II, "pretermit this demand [to secure the payment of compensation] in the case of perils caused by the employer's willful tort." (264 Cal.App.2d at p. 457.) Put a different way, Industrial would ascribe to Melton the knowledge that part IV of the insuring agreement was meant to apply only to his 132a liability, and not to his "ordinary liability" for intentional injuries, even though neither the policy nor the law makes any such distinction. This argument supposes a level of legal sophistication not even Industrial demonstrated at the time.

We must read the policy "as a layman would read it and not as it might be analyzed by an attorney or an insurance expert." (Crane v. State Farm Fire & Cas. Co. (1971) 5 Cal.3d 112,115.) "Even if a provision raises doubts as to coverage in the minds of legally trained observers due to a sophisticated legal distinction, courts will not assume the distinction was incorporated into the policy." (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 840.) "An exclusionary clause ‘must be conspicuous, plain and clear.’" (De May v. Interinsurance Exchange (1995) 32 Cal.App.4th 1133, 1137.) "[A]n exclusion or limitation on coverage must be clearly stated and will be strictly construed against the insurer. If an exclusion ambiguously lends itself to two or more reasonable constructions, the ambiguity will be resolved against the insurer and in favor of coverage." (Smith Kandal Real Estate v. Continental Casualty Co. (1998) 67 Cal.App.4th 406, 414.)

Section 132a is "quite different" from other workers’ compensation remedies and need not necessarily be treated the same. (City of Moorpark v. Superior Court, supra, 18 Cal.4th at p. 1154.) But what distinguishes section 132a from the others is not intentional conduct. Industrial, in effect, would have us read a statutory coverage exclusion into the preamble to section 132a, which provides: "It is the declared policy of this state that there should not be discrimination against workers who are injured in the course and scope of their employment." Certainly this policy would be advanced by prohibiting an employer from insuring itself against its liability for discriminatory conduct. And indeed it appears Insurance Code section 11661 may have served this purpose prior to the amendment of section 132a in 1982. Notably, however, the Legislature did not amend Insurance Code section 11661 at the same time or enact a comparable statute making section 132a liability uninsurable.

Moreover, this is not a case where Industrial attempted to limit its exclusion, as it could have, to an employer’s discriminatory conduct in violation of section 132a. Instead the policy purports to exclude coverage for all nonaccidental workplace injuries, ordinary or nonordinary, when in fact the former generally are covered. Part IV of the insuring agreement, insofar as it seeks to restrict coverage to accidental injuries, is honored in the breach far more than the observance. In this respect the accident limitation is not merely ambiguous but practically meaningless.

Notwithstanding this ambiguity, we must determine whether, in the context of the entire policy and under the circumstances of this case, coverage for an employer’s 132a liability is consistent with the insured’s "objectively reasonable expectations." (Bank of the West v. Superior Court, supra, 2 Cal.4th at p. 1265.) Language in an insurance policy cannot be found to be "ambiguous in the abstract." (Ibid.) Therefore, it is necessary to consider whether an employer’s 132a liability for discrimination is different enough from its "ordinary liability" for medical injuries that an employer could not reasonably expect coverage for the former. We believe it is not so different for the reasons we have already discussed. First, the two types of liability are not distinguished one from the other by intentional conduct; an employer’s ordinary liability for nonaccidental injuries is covered under the policy notwithstanding the accident limitation. Second, although the two types of liability arise from different sorts of injuries, if an employee were to suffer a medical injury as the result of the employer’s discriminatory conduct, the employer’s liability for this injury presumably would be covered under the policy. That is, a 132a violation can give rise to both kinds of liability. Finally, while a section 132a award has some of the characteristics of a penalty, it is also compensatory in the manner of ordinary workers’ compensation benefits. Therefore, we cannot say as a matter of law it was unreasonable for Melton to expect coverage under this policy for his section 132a liability.

In summary, we conclude the accident limitation is ambiguous because it fails to clearly distinguish between what it is arguably meant to exclude, i.e., an employer’s 132a liability, and what it purports to exclude but does not, i.e., an employer’s ordinary liability for nonaccidental workplace injuries. Accordingly, we resolve the ambiguity against Industrial and in favor of coverage. (Smith Kandal Real Estate v. Continental Casualty Co., supra, 67 Cal.App.4th at p. 414.)

Martin was injured on April 24 and discharged by Melton on August 21 of 1984. Sierra Signs’s policy with Industrial expired on August 1, 1984, after which the business was insured by a different company. Thus, Martin’s injury occurred during Industrial’s policy period but his discharge did not. Part IV of the policy’s insuring agreements provides in part: "This policy applies only to injury (1) by accident occurring during the policy period .…" Industrial maintains that the operative date for determining coverage for Melton’s 132a liability is the date Martin was fired rather than the date of the event that caused him to be fired, i.e., the date he was injured or the date he first made known his intention to file a workers’ compensation claim based on the injury. On this premise, Industrial argues Melton’s 132a liability was not covered under the policy (even if it otherwise might have been). Assuming, without deciding, the premise is correct, we conclude Industrial is estopped to deny coverage on this basis.

The record leaves some question as to whether the trial court relied on the policy period provision to reach its conclusion there was no coverage for Melton’s 132a liability. In announcing its coverage ruling the court said:

The court subsequently instructed the jury it had found there was no coverage on the first two of these three grounds, i.e., the accident limitation and the two public policy statutes.

The court ruled Industrial was not estopped to assert its coverage defenses (meaning presumably its accident limitation and public policy defenses) because Melton was aware of Industrial’s no-coverage position notwithstanding the company’s failure to send him a 132a letter, and because Melton therefore had not detrimentally relied on a belief Industrial would indemnify him against a 132a award. However, the court left it to the jury to decide whether Industrial had impliedly waived its right to deny coverage by "conduct[ing] itself in a way that was so inconsistent with an intent to enforce its right to deny coverage under the policies [sic] so as to induce a reasonable belief that Industrial Indemnity had relinquished such right." In this regard it also instructed the jury that when an insurance company relies on specific grounds to deny coverage, it waives its right to rely in subsequent litigation on any other grounds a reasonable investigation would have uncovered.

Because the doctrines of waiver and estoppel have played such a significant role in this case, and because they are so often confused with one another (as they were here), we will consider Industrial’s final no-coverage argument after examining the two doctrines in greater detail.

"The insurer’s undertaking defense of the third party suit creates a high potential for misleading the insured, by creating the impression the insurer is not disputing coverage. And, the insured may rely thereon by failing to retain independent counsel to negotiate or defend the action." (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, 7:712, p. 7B-59.)

Similarly, when an insurer limits its reservation of rights to certain grounds, it thereby "waives" its right to contest coverage on any other grounds of which it was, or should have been, aware. (Canadian Ins. Co. v. Rusty’s Island Chip Co. (1995) 36 Cal.App.4th 491, 497-498; Alta Cal. Regional Center v. Fremont Indemnity Co. (1994) 25 Cal.App.4th 455, 463- 465.) "Application of the waiver rule to disputes over whether coverage exists is designed as an incentive to compel an insurance company to fulfill its duty to thoroughly investigate a claim before denying coverage." (Alta Cal. Regional Center at p. 465.) In fact, however, this "waiver rule" is grounded in the doctrine of equitable estoppel inasmuch as it also generally requires a showing of detrimental reliance on the part of the insured. (Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at pp. 31-34 [rejecting the "automatic waiver" rule in such circumstances and disapproving Alta Cal. Regional Center to the extent it relied on the rule].)

Thus, although courts often speak in terms of waiver, the principle most commonly at work in insurance cases derives from the doctrine of equitable estoppel.

Waiver is the voluntary relinquishment of a known right and looks solely to the intent of the waiving party. (Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at p. 31.) It does not require any act or conduct by the other party. (DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Cafe & Takeout III, Ltd. (1994) 30 Cal.App.4th 54, 59.) "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." (Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at p. 31.) An insurer can "waive" policy provisions that would otherwise defeat coverage. (Miller v. Elite Ins. Co., supra, 100 Cal.App.3d at p. 754.)

Equitable estoppel, on the other hand, looks both to the statements or conduct of the party to be estopped and to the actions of the other party taken in reliance thereon. "The object of equitable estoppel is to ‘prevent a person from asserting a right which has come into existence by contract, statute or other rule of law where, because of his conduct, silence or omission, it would be unconscionable to allow him to do so.’ [Citation.]" (Skulnick v. Roberts Express, Inc. (1992) 2 Cal.App.4th 884, 891.)

An equitable estoppel normally has four elements: (1) the party to be estopped must have known the true facts; (2) he must have intended that his conduct be acted upon, or must have acted in such a manner that the party asserting the estoppel had a right to believe the conduct was so intended; (3) the party asserting the estoppel must have been ignorant of the true facts; and (4) the party asserting the estoppel must have relied on the conduct to his detriment. (Insurance Co. of the West v. Haralambos Beverage Co., supra, 195 Cal.App.3d at p. 1321; Miller v. Elite Ins. Co., supra, 100 Cal.App.3d at p. 754. See also Evid. Code, § 623.)

The party to be estopped need not have acted with actual fraudulent intent in order for an estoppel to arise. "Negligence that is careless and culpable conduct is, as a matter of law, equivalent to an intent to deceive and will satisfy the element of fraud necessary to an estoppel." (Crestline Mobile Homes Mfg. Co. v. Pacific Finance Corp. (1960) 54 Cal.2d 773, 778-779.) An estoppel may arise from silence where there is a duty to speak. (Skulnick v. Roberts Express, Inc., supra, 2 Cal.App.4th at p. 891.)

Ordinarily, an estoppel cannot create coverage under an insurance policy where such coverage did not originally exist. (Miller v. Elite Ins. Co., supra, 100 Cal.App.3d at p. 755.) "‘"The rule is well established that the doctrines of implied waiver and of estoppel, based upon the conduct or action of the insurer, are not available to bring within the coverage of a policy risks not covered by its terms, or risks expressly excluded therefrom .…"’" (Aetna Casualty & Surety Co. v. Richmond (1977) 76 Cal.App.3d 645, 653, citing Insurance Co. of North America v. Atlantic National Ins. Co. (4th Cir. 1964) 329 F.2d 769, 775.) However, an equally well-established exception to this general rule applies where the insurer, although aware of a ground of noncoverage, defends an action against its insured without reserving its right to disclaim liability. (Miller v. Elite Ins. Co., supra, 100 Cal.App.3d at p. 755, citing Insurance Co. of North America v. Atlantic National Ins. Co., supra, 329 F.2d at pp. 775-776.) "An insurer can be estopped from raising coverage defenses if, knowing of the grounds of noncoverage, it provides a defense under the policy without a reservation of rights, and the insured reasonably relies on this apparently unconditional defense to his detriment." (State Farm Fire & Casualty Co. v. Jioras (1994) 24 Cal.App.4th 1619, 1626.)

The existence of an estoppel is a nonjury fact question to be determined by the trial court. (DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Cafe & Takeout III, Ltd., supra, 30 Cal.App.4th at p. 61.)

Turning to the present case, we note that at no time between the filing of Martin’s 132a petition in 1985 and Melton’s bad faith action in 1989 did anyone from Industrial, either directly or through Yrulegui, ever tell Melton his 132a liability was not covered by his workers’ compensation policy because Martin was fired after the policy’s expiration. Indeed, until Rossi’s letter in 1988, Industrial never gave Melton any reason at all for its denial of coverage. And within Industrial itself, the rationale for its coverage position underwent several changes during this same period.

Normally Industrial’s reasons would have been provided by a 132a letter. None, of course, was sent in this case. However, in two separate telephone conversations on August 26, 1985, shortly after Martin filed his 132a petition, Valerie Souza and Richard Yrulegui each reportedly told Melton he would be personally liable for an award if Martin were to prevail on his discrimination claim. Neither used the term "coverage" nor did either explain the basis for Industrial’s no-coverage position. This position presumably was the same as the one set out in Industrial’s sample 132a letter, which disclaimed coverage on only two grounds: the policy applied only to events resulting in bodily injury, and Insurance Code section 533 barred coverage for willful acts, including discrimination. Notably, the letter did not rely either on the policy’s coverage clause ("all compensation and other benefits required of the insured by the workers’ compensation law") or on the "accident" limitation.

More to the point, neither Souza nor Yrulegui denied coverage on the ground the policy had lapsed. There is no question Souza was aware of the relevant dates: initially she had denied Martin’s injury claim because the doctor’s report mistakenly listed the date of injury as August 3, 1984, three days beyond the policy period; and Martin’s 132a petition alleged he was fired "on or about August 20, 1984," well after the policy had expired.

Andre Hassid, the manager of Industrial’s claims counsel department, would later explain it was Industrial’s policy to provide a courtesy defense in 132a cases based on the date of an employee’s industrial injury, rather than on the date of the discriminatory act giving rise to the 132a claim. If so, the potential for confusion from this policy is evident: by providing a defense, Industrial not only might create the impression it was accepting coverage, but might also cause the insured as a result to avoid tendering its defense to the subsequent carrier. In this situation, Industrial was obligated to tell Melton his policy had expired if it intended to rely on that ground to deny coverage. Since the operative date for purposes of coverage might have been either the date of injury or the date of discharge, Industrial’s blanket denial of coverage was not enough to alert Melton to Industrial’s position on the subject.

But we need not decide whether Industrial’s initial failure to specify reasons for denying coverage was sufficient in itself to create an estoppel. Industrial’s posture in the case changed significantly late in 1986 after Yrulegui attended a workers’ compensation seminar where he learned for the first time of a legal argument in favor of coverage for an employer’s 132a liability. As a result, Yrulegui told Melton there was now a "potential coverage dispute" and his 132a liability might in fact be covered under his policy with Industrial. Industrial also agreed to pay for Cumis counsel and authorized Yrulegui to begin settlement negotiations with Martin. All these actions clearly were inconsistent with the position there was no coverage due to the policy’s expiration.

As discussed above, the coverage argument stemmed from a 1982 change in section 132a that removed a reference to section 4553 (the serious and willful misconduct statute). The net effect of the change, the argument went, was that a workers’ compensation insurer was no longer prohibited by section 11661 of the Insurance Code from insuring against an employer’s section 132a liability. Thus, the employer’s liability would be covered unless the policy itself or some other statutory provision excluded it. It is curious, then, that Industrial acknowledged the possibility of coverage under this new theory because up until then it had taken the position, internally at least, that the policy language (allegedly restricting coverage to bodily injury) and Insurance Code section 533 (precluding coverage for willful acts) both served this specific exclusionary purpose. In other words, the new "coverage argument" really only eliminated a possible statutory exclusion upon which Industrial had never relied to deny coverage in the first place, and which therefore did not require Industrial to reevaluate its coverage position.

Industrial’s change of position was not limited to discussions within the company. Yrulegui testified he explained the new coverage argument to Mitchell "very thoroughly." And Mitchell testified he understood the argument related to the lack of a specific provision in the policy excluding coverage for an employer’s 132a liability. Thus, by altering its position and acknowledging the possibility of coverage, Industrial arguably created the impression it was not asserting such an exclusion existed. In these circumstances, the fact Martin had been discharged after the policy’s expiration took on greater significance because it provided Industrial with a legal basis to deny coverage irrespective of the new coverage theory.

Even though coverage was now in question, Industrial did not disclaim responsibility for Melton’s 132a liability for this reason, or any other. Rather, it continued to provide a defense without taking a formal coverage position or explicitly reserving its rights to disclaim coverage. Industrial contends that its agreement to provide Melton with Cumis counsel was a "sufficient substitute" for a reservation of rights because it put Melton on notice of a coverage dispute. Certainly it would have made little sense for Industrial to pay for Cumis counsel if it were accepting coverage outright but, as noted, the rest of Industrial’s position with regard to Cumis counsel was confusing at best.

Moreover, many of Industrial’s other actions were inconsistent with the view it was denying coverage. Most notably, Industrial attempted, initially without consulting Melton, to settle the case with its own money. And it continued to represent to Melton it was making efforts to settle even after it had made the decision to stop for fear of giving "more argument Mitchell will use to make us pay if [we] lose." In addition, Yrulegui expressed the opinion to Mitchell that Industrial would pay some, if not all, of a 132a award. Rossi later confirmed Industrial’s willingness to contribute money toward the award, even after he sent Melton a letter in 1988 denying coverage. And Industrial passed up the opportunity to adjudicate the issue of coverage at the 132a hearing, a few months after the issue arose, even though Yrulegui appeared at the hearing on Industrial’s behalf.

It is useful to point out again in this connection that Industrial’s coverage position was not dependent on the resolution of disputed factual issues at the upcoming 132a hearing. It turned instead on purely legal questions involving policy interpretation and application of certain statutory provisions. In short, there was nothing to prevent Industrial from taking a position as soon as the "potential coverage dispute" arose. The only reasonable conclusion to be drawn from Industrial’s actions between the time Yrulegui returned from the seminar in 1986 until Rossi sent a no-coverage letter in 1988 is that Industrial, to the extent it gave the matter much thought, was hoping to resolve Martin’s 132a claim without having to test its position. This would have been in keeping with its practice in the usual case where a 132a petition is filed concurrently with an injury claim, i.e., to "settle" the 132a claim without appearing to acknowledge coverage.

In all material respects, Dennis Rossi’s April 5, 1988, no-coverage letter was the same as the 132a letter in Industrial’s claim manual. It cited the same two grounds for denying coverage, and only those two: part IV of the policy limited coverage to bodily injury, and Insurance Code section 533 prohibited coverage for intentional acts. Again, these two grounds were not affected at all by the "coverage argument" raised at the seminar in 1986. Rossi testified that, when he wrote the letter, he was aware of no other grounds for denying coverage.

In February of 1989, once the 132a decision was final, Richard Belardinelli wrote to Industrial requesting that it reconsider its coverage position. He argued, among other things, that Industrial had waived its coverage defenses, or was estopped to assert them, because it had misled Melton into believing it would pay any 132a award. Industrial’s response came in a letter from Andre Hassid the following month. Hassid disputed each of Belardinelli’s contentions, including waiver/estoppel, and once again denied coverage. In so doing, he relied on the public policy prohibiting insurance against intentional acts, citing both Insurance Code section 533 and, for the first time, Civil Code section 1668. Also for the first time, he argued coverage was excluded by the "accident" limitation in part IV of the policy. He did not contend coverage was limited by part IV to bodily injury, nor that a 132a award was not a form of "compensation and other benefits." Most importantly, Hassid’s letter, like Rossi’s before it, did not cite as a reason for denying coverage the fact Melton had discharged Martin after the policy expired.

Under these circumstances, Industrial is now estopped to argue Melton’s 132a liability was not covered due to the policy’s expiration. Although Industrial was aware of the policy period argument and had in fact initially asserted it to disclaim coverage for Martin’s injury claim, Industrial never raised it in connection with the 132a petition. As a result, Melton was denied the opportunity to tender his defense of the 132a claim to his subsequent workers’ compensation carrier in a timely manner. Moreover, Industrial’s delay in taking a formal coverage position, coupled with its settlement efforts, caused Melton to refrain from negotiating directly with Martin, whose back wages were accumulating all the while. Since, as we have determined, the grounds Industrial relied on in refusing to pay the 132a award proved to be without merit, it would be inequitable to permit the company at this late stage to escape responsibility for the award because of its silence.

Notwithstanding its estoppel ruling, the trial court held the ruling’s two factual underpinnings--no belief in coverage and no detrimental reliance--did not necessarily preclude a finding Industrial had impliedly waived its right to assert its coverage defenses (those being the same coverage defenses the court had just ruled Industrial was not estopped to assert). Therefore, on Melton’s first cause of action for breach of contract, the court permitted the jury to find a "contract by waiver" if it found Industrial had "conducted itself in a way that was so inconsistent with an intent to enforce its right to deny coverage under the policies [sic] so as to induce a reasonable belief that Industrial Indemnity had relinquished such right." And on the second cause of action, the jury could find a breach of the covenant of good faith and fair dealing either on the contract by waiver theory, or on the ground Industrial, once it undertook to defend Melton, had a duty to do so fairly and in good faith irrespective of whether the policy afforded coverage.

The jury returned a general verdict for Melton with three special interrogatories. The third special interrogatory asked the jury, if it found Industrial liable to Melton for breach of the covenant of good faith and fair dealing, to specify the amount of damages it was awarding for attorney fees. The jury entered a figure of $380,000. We will discuss Industrial’s challenge to this award below. But for our present purposes, the special interrogatory is significant only in that it shows the jury found in Melton’s favor on the cause of action for bad faith.

Industrial challenges the jury’s bad faith verdict, and the underlying contract by waiver theory, on numerous grounds, all of which suppose the trial court’s coverage and estoppel rulings were correct. Industrial’s principal contention, briefly stated, is that waiver cannot create a contractual duty where none existed before, and bad faith liability cannot arise but for an unreasonable failure to perform a contractual duty. Therefore, on the assumption there was no coverage and no estoppel to assert its coverage defenses, Industrial maintains it could not properly have been held liable to Melton under the first or second causes of action. However, because coverage existed without resort to the contract by waiver theory, we need not address Industrial’s objections to it. And given that Industrial had a contractual duty to defend and indemnify Melton, it may be held to have breached the covenant of good faith and fair dealing for unreasonably failing to do so. As we explained above, the jury’s analysis of the issue is the same regardless of the theory upon which the duty was found to exist.

On the premise it is not liable for breach of contract or bad faith, Industrial next argues the court’s estoppel findings necessarily negated one or more elements of all the remaining causes of action for fraud, negligent misrepresentation, negligence, negligent infliction of emotional distress, breach of fiduciary duty, and constructive fraud. Since the premise is incorrect, it is not necessary for us to consider these arguments further. It is well settled a general verdict implies a finding in favor of the prevailing party of every fact essential to the support of his or her action or defense. (Henderson v. Harnischfeger Corp. (1974) 12 Cal.3d 663, 673.)

We turn now to Industrial’s surviving arguments. We begin with the jury’s award of damages to Melton for attorney fees.

Ordinarily, each party to a civil suit must bear his or her own legal fees. (Code Civ. Proc., § 1021 ["Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties .…"]; Trope v. Katz (1995) 11 Cal.4th 274, 278-279.) However, attorney fees reasonably incurred by an insured to compel payment of benefits due under an insurance policy are recoverable as an element of damages in a bad faith action against the insurer. (Brandt v. Superior Court (1985) 37 Cal.3d 813, 815.) "When an insurer’s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney’s fees are an economic loss--damages--proximately caused by the tort.… [They] are recoverable … in the same way that medical fees would be part of the damages in a personal injury action." (Id. at p. 817.)

This rule stated in Brandt is an application of the "third party tort" or "tort of another" doctrine under which "[a] person who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover compensation for the reasonably necessary loss of time, attorney’s fees, and other expenditures thereby suffered or incurred." (Prentice v. North Amer. Title Guar. Corp. (1963) 59 Cal.2d 618, 620; Rest.2d Torts, § 914, subd. (2), p. 492.) Under the doctrine, for example, attorney fees also are recoverable as damages in an action for false arrest (Nelson v. Kellogg (1912) 162 Cal. 621) or malicious prosecution (Bertero v. National General Corp. (1974) 13 Cal.3d 43, 59).

As with any such claim for damages, a plaintiff in a bad faith action who seeks to recover compensation for attorney fees incurred in a policy action must plead and prove the amount of the fees actually paid or incurred. (Mabee v. Nurseryland Garden Centers, Inc. (1979) 88 Cal.App.3d 420, 425. See Pearl, Cal. Attorney Fee Awards (Cont.Ed.Bar 2d ed. 1994), ch. 9.) The amount of any damages awarded is a determination for the trier of fact unless the parties stipulate otherwise. (Brandt v. Superior Court, supra, 37 Cal.3d at p. 819.)

The recovery of attorney fees as damages under Brandt "must be distinguished from recovery of attorney’s fees qua attorney’s fees, such as those attributable to the bringing of the bad faith action itself." (Brandt v. Superior Court, supra, 37 Cal.3d at p. 817.) "The fees recoverable … may not exceed the amount attributable to the attorney’s efforts to obtain the rejected payment due on the insurance contract. Fees attributable to obtaining any portion of the plaintiff’s award which exceeds the amount due under the policy are not recoverable." (Id. at p. 819.) "If the insured were to recover benefits under the policy in a separate action before suing on the tort, the distinction between fees incurred in the policy action, recoverable as damages, and those incurred in the tort action, nonrecoverable, would be unmistakable." (Id. at p. 818.) But where, as is more commonly the case, the attorney fees claimed as damages are incurred in the very lawsuit in which their recovery is sought, the identification of the allowable fees may be "more sophisticated." (Ibid.)

The recovery of Brandt damages in a bad faith action is limited to attorney fees "reasonably incurred" in the policy action. (Brandt v. Superior Court, supra, 37 Cal.3d at p. 815.) "To ‘incur’ a fee, of course, is to ‘become liable’ for it [citation], i.e. to become obligated to pay it." (Trope v. Katz, supra, 11 Cal.4th 274, 280 [holding that an attorney who appears in propria persona in an action to enforce a contract containing an attorney fee clause is not entitled under Civil Code section 1717 to recover "reasonable attorney’s fees" "incurred" in the action].) So too, "the usual and ordinary meaning of the words ‘attorney’s fees,’ both in legal and in general usage, is the consideration that a litigant actually pays or becomes liable to pay in exchange for legal representation." (Ibid.)

Here the jury awarded Melton $380,000 in Brandt damages. Thus his recovery broke down roughly as follows:

Industrial challenges this award in three respects. First, it argues Melton did not incur any attorney fees to recover policy benefits because, absent coverage, there were no benefits due him under the policy. Since this argument rests on an incorrect premise, we reject it for the reasons we have already discussed above. Similarly, we do not address Melton’s claim Industrial owed him certain duties even in the absence of coverage.

Next, Industrial maintains the attorney fees Melton actually "incurred" under his fee agreement with Belardinelli were far less than $380,000. That is, Industrial asserts, without discussion, that the agreement provided for a straight one-third contingency fee, and on this basis argues Melton’s damages were limited to one-third the policy benefits or, at most, one-third his total recovery. Melton, in response, seems to argue in effect that the terms of the fee agreement were irrelevant to a determination of Brandt damages, and so he was entitled to recover Belardinelli’s actual hourly fees notwithstanding the agreement. Both positions are incorrect. As we have already explained, Melton incurred attorney fees only to the extent he paid or was obligated to pay them under the fee agreement. However, we believe the evidence shows the agreement was a "hybrid" under which Melton owed Belardinelli one-third his recovery, or Belardinelli’s hourly fee, whichever amount was greater.

Much of the confusion about the nature of the agreement stemmed from the parties’ imprecise use of the term "contingency" to mean either that Melton’s obligation to pay was contingent only on the fact of recovery, or that it also was contingent on the amount of recovery. (See Cazares v. Saenz (1989) 208 Cal.App.3d 279, 288 [percentage contingency fee depends upon two contingencies: the ultimate success of the case and the amount recovered].) The distinction is critical to our resolution of the present issue.

According to Belardinelli, Melton gave him a $1,000 retainer in August of 1988 under an unwritten agreement to pay $125 per hour for services rendered. But by January of the following year, Melton’s balance had increased to over $12,000 as Belardinelli began to prepare his demand letter to Industrial. Melton paid an additional $100 toward this amount, but was unable to pay any more. On January 31, 1989, the agreement was converted to a "hybrid" under which Melton was to pay the hourly rate, or one-third of any recovery, whichever was greater. Thus, at this point Melton’s obligation still was not necessarily contingent upon his recovering anything from Industrial; he would owe the hourly fee even if he did not prevail. The new hybrid arrangement was evidently reduced to writing, but the written document was not disclosed at trial for reasons of attorney-client privilege. Belardinelli later increased his hourly rate to $150.

Belardinelli’s fees continued to accumulate over the next two years and by the end of January 1991, Melton’s balance was nearly $150,000. It became clear he would not be able to pay this amount on his own. So sometime in 1991, but before the case went to trial in September, Melton and Belardinelli reached an oral "understanding" Melton would not owe anything unless he won. In other words, Melton’s obligation to pay Belardinelli--whether a percentage of the recovery or the accumulated hourly fee--then became contingent on recovery. Despite Industrial’s assertion to the contrary, the arrangement otherwise remained a "hybrid" and was not converted to a straight one-third contingency fee agreement. Although Belardinelli’s testimony on the subject was hardly a model of clarity, he described his ultimate agreement with Melton as follows:

Here, the amount of Belardinelli’s accumulated hourly fee that he attributed to Melton’s pursuit of policy benefits was substantially greater than one-third of Melton’s recovery. This, then, was the amount Melton was obligated to pay Belardinelli--an amount the jury determined to be $380,000. In its final contention, Industrial maintains the award was excessive as a matter of law.

Belardinelli conceded his methodology was imperfect. For example, many billing entries provided only a general description of the activities involved--legal research, preparation of pleadings, discovery, consultation with experts, letter writing, or telephone calls--descriptions which might have applied to any or all causes of action. Belardinelli did not attempt to further break down the charges to isolate those dealing specifically with either breach of contract or waiver/estoppel. He explained it would have been virtually impossible for him to refine the search to that level of specificity.

Belardinelli also confessed to some initial confusion about the scope of the Brandt decision. His testimony indicates he was under the impression, at least at the time he was reviewing his bills, that Brandt damages might include attorney fees incurred in the bad faith action inasmuch as it is necessary to prove bad faith in order to recover attorney fees incurred in the policy action. But for reasons that will appear, the result would not have been significantly different had he understood the distinction more clearly.

Belardinelli reviewed his bills using this process for the period from September of 1988 through July of 1991. They totalled $196,781.31, of which he allocated $157,047.81, or roughly 80 percent, to his efforts to compel payment of policy benefits. Trial began two months later in late September and continued until early January of 1992. Belardinelli testified regarding his bills in the middle of November. His fees for August, September, and October totalled an additional $165,780.17. Rather than go through these charges individually, he estimated 75 percent, or $124,335.13, was attributable to the pursuit of policy benefits. Thus, Melton’s claim for Brandt damages as of October 31, 1991, was $281,382.94 on fees totalling $362,561.48.

Industrial contends the jury’s $380,000 award was excessive for two reasons. First, it argues Belardinelli failed to adequately segregate his fees attributable to Melton’s recovery of policy benefits, i.e., those fees related to the causes of action for breach of contract and waiver/estoppel, from his fees related to Melton’s bad faith and other noncontract claims. Second, it asserts there is no evidentiary support for an award in excess of the $281,000 about which Belardinelli testified.

Under Brandt, "[t]he fees recoverable … may not exceed the amount attributable to the attorney’s efforts to obtain the rejected payment due on the insurance contract. Fees attributable to obtaining any portion of the plaintiff’s award which exceeds the amount due under the policy are not recoverable." (Brandt v. Superior Court, supra, 37 Cal.3d at p. 819.) However, "[a]ttorney’s fees need not be apportioned when incurred for representation on an issue common to both a cause of action in which fees are proper and one in which they are not allowed." (Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 129-130 [applying Civil Code section 1717].) Thus, apportionment is not required when the prevailing party’s various claims are so "‘"inextricably intertwined"’" that it would be "‘impracticable, if not impossible, to separate the multitude of conjoined activities into compensable or noncompensable time units.’" (Abdallah v. United Savings Bank (1996) 43 Cal.App.4th 1101, 1111.)

The principal issue during the trial of this case was waiver/estoppel, i.e., whether Industrial, either directly or through Yrulegui, led Melton to believe his 132a liability, if any, would be covered under the policy. As is clear from our lengthy statement of facts, this issue was so "inextricably intertwined" with Melton’s remaining causes of action for bad faith, negligence, fraud, misrepresentation, breach of fiduciary duty, and his other claims as to be practically inseparable. Melton did not seek to recover attorney fees for the time Belardinelli spent on his claims for damages for physical injury and emotional distress, his claim for punitive damages, and his claims against Yrulegui individually. No further allocation of fees was reasonably possible under the circumstances.

Finally, as noted, the jury awarded Melton about $100,000 more in Brandt damages than Belardinelli testified he had billed Melton as of the end of October of 1991 for services to recover the policy benefits. Industrial argues there is no evidence to support this additional sum. October was the first full month of the trial, which would continue into the following January. Belardinelli’s billing records were introduced at trial and show his fees for October, reduced by 25 percent for purposes of the Brandt claim, were $49,542.17. The jury evidently added a similar amount for each of the two remaining months of trial. It was entirely reasonable under the circumstances for the jury to infer that Belardinelli’s fees in November and December were the same as they had been in October.

In summary, we will uphold the jury’s award of Brandt damages.

Industrial maintains the trial court erred by refusing its request to give a 29-page set of 36 special interrogatories that would have required the jury to subdivide its award into contract and tort damages and the latter into economic and noneconomic damages; to allocate comparative fault as between Melton, Industrial, Yrulegui, and all nonparties (e.g., Mitchell and Ellis) for noneconomic damages in connection with the tort causes of action; to allocate comparative fault as between Melton, Industrial, and Yrulegui for economic damages in connection with these same causes of action; and to make specific findings regarding Industrial’s liability under each cause of action. The court found the proposed interrogatories were too complex for the jurors to understand. (See Wyler v. Feuer (1978) 85 Cal.App.3d 392, 405-406; Gherman v. Colburn (1977) 72 Cal.App.3d 544, 588-590.) Instead, the jury was given a general verdict form and a set of three special interrogatories requiring it to make findings on whether Industrial and/or Yrulegui acted with malice, fraud, or oppression, and to specify the amount of Melton’s Brandt damages. Based on its response to the interrogatories, the jury then returned a special verdict awarding Melton $20,000 in punitive damages as against Industrial only.

Industrial’s primary objection to the procedure used by the court is that it did not require the jury to allocate responsibility for Melton’s noneconomic damages. (Roslan v. Permea, Inc. (1993) 17 Cal.App.4th 110.) Under Civil Code section 1431.2, Industrial was liable for Melton’s noneconomic damages only in direct proportion to its percentage of fault. (DaFonte v. Up-Right, Inc. (1992) 2 Cal.4th 593, 601.) This section provides:

However, it appears the jury awarded Melton little, if any, noneconomic damages. Melton generally alleged he had suffered emotional distress, as well as assorted economic losses, as a result of Industrial’s and Yrulegui’s mishandling of the 132a claim against him. He testified he was under a lot of stress during the time the claim was pending, which stress eventually manifested itself in the form of high blood pressure and caused, or at least contributed to, the rupture of a blood vessel in his eye in 1989. He presented expert medical testimony to this effect, which was disputed in turn by Industrial’s medical expert.

Melton also presented the testimony of Joseph Penbera, an economist, regarding his economic damages, and in particular the economic value of the money he borrowed to pay the 132a award. These damages included the loan itself, the present value of the interest payments, the lost opportunity cost of the money, and Sierra Signs’s lost profits and lost business value for the period from 1988 through 1990. (Penbera testified in November of 1991, and the trial continued into January of the following year.) Penbera’s calculations also took into account the present value ($830.76) of the medical expenses Melton reportedly incurred as a result of his stress. In response, Industrial offered the testimony of Richard Nordstrum, also an economist, who disagreed with some of the assumptions underlying Penbera’s figures.

According to Penbera, Melton’s economic damages, not including attorney fees, came to $244,559.12. The jury awarded him $250,000 in undifferentiated damages, plus $380,000 in Brandt damages and $20,000 in punitive damages. Thus the verdict, viewed in light of the evidence, suggests the jury did not award Melton any noneconomic (i.e., emotional distress) damages at all.

The parties themselves seem to have assumed as much. As noted, Yrulegui’s liability extended only to the $250,000; Industrial alone was responsible for the Brandt damages and punitive damages. After the verdict but before judgment was entered, Yrulegui reached a sliding scale ("Mary Carter") settlement agreement with Melton (see Code Civ. Proc., § 877.5, subd. (b); Abbott Ford, Inc. v. Superior Court (1987) 43 Cal.3d 858) under which he agreed to make an immediate payment to Melton of $125,000, and a contingent payment sufficient to bring the total to $250,000 in the event Industrial ultimately were found to be liable to Melton for less than the remaining $125,000. Thus, the agreement supposed Yrulegui was jointly and severally liable for the entire $250,000 award. (Nevertheless, some part of the award presumably was contract damages, i.e., the value of the policy benefits due Melton under the policy, for which Yrulegui was not responsible.)

Industrial objected to the court’s valuation of the credit, contending the setoff should have been the whole $250,000. In making this contention, Industrial abandoned its earlier position and maintained instead that Yrulegui was jointly and severally liable for the full amount. This, of course, would have been true only if the award consisted entirely of tort damages for Melton’s economic losses. (See Espinoza v. Machonga, supra, 9 Cal.App.4th at p. 275 [explaining it is in the interest of a nonsettling defendant to allocate settlement to economic damages so as to increase the credit against its own liability].) The court eventually valued the agreement’s contingent payment at $5,000, and amended its order approving the good faith settlement to provide for a credit of $130,000, leaving Industrial liable for only $120,000 in economic damages. (Industrial reversed position again in its motion for new trial, arguing once more it was entitled to have the jury allocate noneconomic damages.)

In short, the evidence does not support the argument Melton’s damages were predominantly noneconomic. Nor does it indicate Industrial had comparatively little responsibility for them. Quite the opposite is true. We need not review all the evidence to prove the point, but it is helpful to recall the jury found that only Industrial’s actions were sufficiently egregious to warrant an award of punitive damages. There is, in other words, simply no reasonable interpretation of the evidence under which Industrial’s liability would have been any less than the amount it was required to assume. Therefore, the court’s failure to have the jury allocate fault and segregate economic and noneconomic damages, although error, was not prejudicial.

We turn next to Industrial’s complaint the general verdict failed to allocate fault to Melton for his (or his agents’) alleged mishandling of the132a petition. However, a liability insurer cannot assert the "comparative bad faith" of its insured in an underlying third party action as an affirmative defense to a bad faith action against it. (Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 411.) That is, the principles of comparative fault do not apply in insurance bad faith cases to reduce the insurer’s liability for tort damages in proportion to the insured’s responsibility for his or her own losses. This is so because, while the insurer’s breach of the implied covenant of good faith and fair dealing is governed by tort principles, the insured’s breach of the covenant is not a tort, but rather is confined to the express contractual provisions of the policy. (Id. at p. 412.) Industrial’s present complaint therefore is unfounded.

Finally, Industrial criticizes the general verdict because it failed to identify the cause or causes of action under which the jury found Industrial and Yrulegui liable to Melton. Its proposed special interrogatories were necessary, Industrial argues, to test the general verdict, given Melton’s various theories of liability with their differing defenses and measures of damage. Nothing about the jury’s verdict, however, is inconsistent with its finding Industrial was liable for bad faith, which finding in turn permitted the jury to award both economic and noneconomic damages, as well as Brandt damages and punitive damages. (Crogan v. Metz (1956) 47 Cal.2d 398, 404-405; Gilman v. Nemetz (1962) 203 Cal.App.2d 81, 94 [applying general verdict rule despite differences in measure and amount of damages under various theories of liability]; compare Tavaglione v. Billings (1993) 4 Cal.4th 1150 [general verdict rule not applicable where one of several causes of action does not account for all of jury’s damages award].)

Next, Industrial maintains the trial court committed some 23 additional errors that individually and collectively require reversal. We address them in order.

As we have already explained, the terms waiver and estoppel, although they refer to distinct doctrines resting on different legal principles, are often used interchangeably (and sometimes incorrectly) in insurance cases. Here the court found Industrial’s workers’ compensation policy did not cover Melton’s 132a liability, and held further that Industrial was not estopped to deny coverage because it had informed Melton he would be personally responsible for any 132a award. But the court allowed the cause of action for breach of contract to go to the jury on a "contract by waiver" theory. The court’s instructions on this theory incorporated two definitions of waiver: first, the voluntary relinquishment of a known right (i.e., the right to assert certain coverage defenses) by conduct "so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished," and second, loss of the right to deny coverage as a consequence of having provided a defense without a reservation of rights. This latter type of "waiver" requires detrimental reliance by the insured and is actually a form of equitable estoppel. The existence of an estoppel is a nonjury fact question to be determined by the court. Therefore, Industrial contends the court erred by submitting the contract by waiver theory to the jury. True as this may be, it makes no difference here because we have determined the policy covered Melton’s 132a liability without resort to the theory.

Industrial complains the court erred by refusing to take judicial notice of certain "facts" contained in Martin’s WCAB file. This claim is closely related to the next three, so we briefly review the relevant proceedings to place all four issues in their proper context.

Prior to trial, at Industrial’s request, the court took judicial notice of Martin’s entire WCAB file, and of the Board’s findings and award with respect to Martin’s 132a claim. In particular, the court took notice of two of the Board’s findings of fact:

Industrial also requested the court take judicial notice of various other "matters" that are unrelated to the present discussion. It did not ask the court to take notice of the facts that are the subject of the present dispute. (See Evid. Code, § 453 [party requesting judicial notice must give sufficient notice of request].)

Industrial, at the same time, asked the court to give preclusive effect to the Board’s findings. It asserted Melton should be collaterally estopped to argue Martin’s injury was not work-related and, more importantly, he should be estopped to claim Martin’s firing was not intentional. In relation to this second point, Industrial cited the four "facts," which it maintained established as a matter of law that Melton’s motive for firing Martin was discriminatory. The four facts were extracted from the "OPINION ON DECISION" in which the WCJ set out the basis for his two findings. Industrial’s ultimate purpose in all this was to show that, because Martin’s firing was intentional, Melton’s 132a liability was not covered under the policy for the reasons we have already discussed (and rejected). Industrial made this coverage argument in its then-pending motion for judgment on the pleadings, to which it attached the WCAB file. The court subsequently denied the motion, but ruled there was no coverage because the firing was indeed intentional, just as Industrial had maintained.

Industrial had a second, related purpose for its request, which was to preclude Melton from arguing Industrial had acted in bad faith by failing to conduct an adequate investigation into Martin’s injury and discrimination claims. Industrial contended collateral estoppel should also bar Melton from attempting to show a more thorough investigation would have produced evidence sufficient to cause the WCJ to reach a different conclusion more favorable to him.

Along with its requests for judicial notice and collateral estoppel, and its motion for judgment on the pleadings, Industrial filed 55 motions in limine. Motions 16 and 18 sought, on the grounds of collateral estoppel, to preclude Melton from challenging the Board’s two findings, i.e., that Martin suffered an injury AOE/COE, and Melton fired him in violation of section 132a. The court granted these two motions and instructed the jury to accept the findings as true for all purposes. Motions 15 and 53 sought to bar Melton from making any reference to Industrial’s investigation of Martin’s claims. The court granted these motions with respect to Industrial’s investigations of Martin’s injury and discrimination claims, but denied it with respect to Industrial’s coverage investigation.

Later on during the trial, the court reconsidered and modified its collateral estoppel decision. It ruled Melton was still estopped to relitigate his 132a liability, but he could attempt to show he would have prevailed at the 132a hearing had he been given a more effective defense. Accordingly, the court instructed the jury it must accept as true only that Martin had been "adjudged" by the WCAB to have suffered an injury AOE/COE and to have been discharged in violation of section 132a. The court also reversed its prior rulings on Industrial’s in limine motions relating to investigation of Martin’s injury and discrimination claims.

Industrial challenges the court’s refusal to take judicial notice of the four "facts," its modification of the jury instruction, the reversal of its ruling regarding investigation of Martin’s injury and discrimination claims, and the denial of Industrial’s motion to exclude evidence of Industrial’s coverage investigation.

As we have already noted, the court did not refuse to take judicial notice of the four facts because it was never formally asked to do so. Moreover, it would have been error for the court to grant any such request. While the court properly took judicial notice of the WCAB file, and of the fact the WCJ made certain factual findings, it could not take judicial notice of the truth of "facts" asserted in the findings of fact. (Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1564-1569.) This is true apart from whether the doctrines of res judicata or collateral estoppel operated to prevent any further litigation of the matters contained in the findings. (Id. at pp. 1566, 1569.) And finally, it made no difference in the end whether the court took notice of the four "facts" or not. Industrial cited them to show Melton’s firing of Martin was an intentional act. The trial court agreed it was, as do we. Therefore, Industrial suffered no prejudice.

Here again, Industrial fails to distinguish between judicial notice and collateral estoppel. What the court gave in effect was a judicial notice instruction, not a collateral estoppel instruction. "Whether a factual finding is true is a different question than whether the truth of that factual finding may or may not be subsequently litigated a second time." (Sosinsky v. Grant, supra, 6 Cal.App.4th at p. 1569.) A fact judicially noticed is treated as true for purposes of proof. "The effect [of taking judicial notice] would be that without resort to concepts of collateral estoppel or res judicata that would litigate whether the issue was fully addressed and resolved, a finding of fact would be removed from dispute in the other action in which it was judicially noticed." (Id. at p. 1564.) As discussed, the court could properly take judicial notice of the fact the WCAB had made certain findings of fact, i.e., the WCAB had "adjudged" certain things to be true, but the court could not take notice of the truth of the facts contained in Board’s findings. (Id. at pp. 1564-1569.) Therefore, the court’s modified instruction was correct. (See Evid. Code, § 457 ["If a matter judicially noticed is a matter which would otherwise have been for determination by the jury, the trial court may, and upon request shall, instruct the jury to accept as a fact the matter so noticed."].) It remains to be decided whether Melton should have been collaterally estopped to argue Industrial had conducted an inadequate investigation into the facts underlying the Board’s findings.

The doctrine of collateral estoppel prevents the relitigation of an issue actually decided in a prior proceeding between the same parties or their privies.

Assuming the other elements of collateral estoppel were met in this case, the issue Melton sought to prove at trial was not the same as the issue litigated at the 132a hearing. Melton was not attempting to overturn the WCAB’s determination he violated section 132a, but rather to show that, but for Industrial’s inadequate investigation, he would have prevailed at the hearing. Specifically, it was Melton’s position that a more complete investigation would have uncovered evidence Martin’s injuries were not the result of his fall from the ladder, but were incurred later during a fight or a fall from a motorcycle. Similarly, Melton maintained there was evidence Martin was an undependable worker who was fired for that reason, and not because of his injury.

In order to prevail on a claim for legal malpractice or other form of professional negligence, a plaintiff generally must prove a "case-within-a-case" in order to establish causation. (Mattco Forge, Inc. v. Arthur Young & Co. (1997) 52 Cal.App.4th 820, 832-837; Williams v. Wraxall (1995) 33 Cal.App.4th 120, 131.) That is, the plaintiff must show he or she would have prevailed in the underlying action in the absence of the attorney’s negligence. (Williams v. Wraxall, supra, 33 Cal.App.4th at p. 131.) The same burden exists in a bad faith lawsuit alleging an insurer provided its insured with an inadequate defense. (Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 197.) Since an inadequate defense was central to Melton’s claims against Industrial and Yrulegui, he properly was permitted to present evidence challenging their investigation into Martin’s claims.

Industrial also contends the quality of its investigation into Martin’s injury claim was irrelevant because it had an absolute right to settle the claim as it saw fit. As we have already explained however, that right is limited by the duty of good faith where, as here, the settlement might affect the insured’s premiums or 132a liability. (Notrica v. State Comp. Ins. Fund, supra, 70 Cal.App.4th at pp. 921-925.) (See fn. .)

Industrial argues Melton should not have been permitted to criticize its coverage investigation because there was no coverage, and so its failure to conduct an investigation was "completely irrelevant." But, as previously noted, we have determined Melton’s 132a liability was covered under the policy. More to the point, when Martin filed his discrimination claim, no determination had yet been made regarding coverage. That is the whole purpose of an investigation. If Industrial had reviewed its coverage position, this case might never have developed as it did, for several reasons. First, the rationale Industrial relied on initially to deny coverage was legally suspect. (See fn. .) Second, the change in the law that gave rise to the "potential coverage dispute" had occurred three years before Martin filed his 132a petition. (See fn. .) And finally, to the extent Industrial intended to rely on it as a reason to deny coverage, even a cursory investigation would have turned up the fact Martin’s discharge had occurred after the policy expired. We find no error.

Industrial moved in limine to exclude all expert testimony to the effect it was the custom and practice in the insurance industry to attempt to resolve 132a claims along with injury claims. The court denied the motion subject to a future relevance objection. Industrial maintains this was error.

As Industrial did not raise any objection when the testimony was later offered at trial, it failed to preserve the issue for appeal. (See People v. Morris (1991) 53 Cal.3d 152, 188-190 [motion in limine, without subsequent objection, will preserve issue for appeal only if made when it was possible to decide the evidentiary question in appropriate context].) Moreover, by the time the testimony was offered, there already had been considerable testimony it was in fact Industrial’s own practice to attempt to resolve 132a claims with the normal issues. This effectively answered Industrial’s objection that the manner in which other companies handled 132a petitions did not necessarily establish a standard of care for Industrial.

Industrial moved in limine to preclude Melton’s experts from giving an opinion about what the law is, and more particularly about whether Industrial’s policy covered Melton’s 132a liability. The court granted the motion. A lengthy discussion followed about whether an expert should be permitted to state his or her understanding of the law. It focussed on the anticipated testimony of Timothy Nye, who was expected to express the opinion Industrial’s no-coverage position was unreasonable. But, by the time the discussion concluded, the court had already ruled there was no coverage. So the issue became more generally whether Nye would be allowed to opine Industrial and/or Yrulegui had conducted an inadequate coverage investigation. The court reserved a ruling pending the testimony.

Nye’s subsequent testimony on the subject was critical primarily of Yrulegui for failing to examine Industrial’s coverage position when he first undertook Melton’s 132a defense, and then for failing to deal appropriately with the conflict of interest situation that arguably arose once he learned of the "potential coverage dispute." In the course of his testimony, Nye, as well as another of Melton’s experts, William LaFay, expressed the belief there was coverage, or at least the potential for coverage, under Industrial’s policy, notwithstanding the trial court’s earlier ruling. Industrial claims this was error.

Industrial did not object to this testimony, and in fact elicited some of it during its cross-examination of the two experts. Further, although Industrial asserts the testimony was "highly prejudicial," it does not explain why, nor does the case it cites in support of its argument shed any light on the matter. (California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 66-67 [expert witness may not state interpretations of the law].) Here the thrust of the testimony was not that there was coverage, but that there were questions about coverage that should have caused Industrial and Yrulegui to take certain steps they did not. The existence of a coverage question, at least after the seminar, is undisputed. The jury was informed of the court’s coverage ruling prior to the expert testimony, and it was instructed bad faith cannot be predicated on denial of benefits when there is a "genuine or debatable legal or factual issue concerning … coverage .…" It was also instructed to disregard the experts’ opinions to the extent they presupposed the existence of coverage. We find no error.

Industrial makes a similar objection to the testimony of Melton’s experts that an insurer can waive or be estopped to assert its coverage defenses if it provides a defense without a reservation of rights. This testimony was not significantly different from what the court itself instructed the jury. As to the testimony Industrial had, in fact, waived its coverage defenses in this particular case, Industrial raised no objection at the time.

Timothy Nye is an attorney who, at the time of trial, had practiced for several years defending employers in workers’ compensation cases. Prior to his testimony, Industrial argued Nye was not qualified to offer an expert opinion about insurance claims practices, and moved to exclude his testimony on this subject. The court denied the request. Industrial asserts this was error.

Industrial’s motion was premature. When Nye subsequently appeared as a witness, Industrial conducted no voir dire into his qualifications. Nye’s testimony was directed almost entirely at Yrulegui’s handling of the 132a defense. Industrial has not pointed us to any objectionable testimony of Nye regarding Industrial’s claims practices in particular, nor did it make any such objection. The issue is waived. (Cf. People v. Blankenship (1989) 213 Cal.App.3d 992, 995-996.)

On August 26, 1985, the day before the matter was set for a hearing, Martin agreed to accept Industrial’s offer to settle his injury claim for $4,200. Yrulegui sent Deutinger, Martin’s attorney, a proposed compromise and release (C & R) the same day. Industrial’s present objection, and the next two, look to changes made to the C & R before it was approved by the WCJ. First, Yrulegui’s draft stated Martin had been "laid off" from work in July of 1984; Deutinger changed it to say Martin had been "disabled" from work. Second, Yrulegui requested the WCJ make a Thomas finding relieving Industrial of future liability for Martin’s vocational rehabilitation benefits, but the WCJ concluded the record did not support the finding and approved the C & R without one. Third, Deutinger made an addition to the standard language in the C & R form to say it was not intended to settle Martin’s 132a claim. Industrial and Yrulegui accepted the revisions without objection. One of the issues at trial was whether these changes to the settlement of the normal issues somehow prejudiced Melton’s position with regard to the 132a.

Industrial moved in limine to preclude Timothy Nye from expressing his opinion the first change was prejudicial. The court granted the motion only to the extent it ruled it would be unduly speculative for Nye to say what the WCJ would have done had the change not been made. Nye was not precluded from expressing his opinion about the change itself. He was later permitted to testify, over Industrial’s objection, that the substitution of "disabled" for "laid off" "might have had … an impact." He did not explain why he believed this to be so, other than to say the WCAB was "severely underfunded and understaffed" at the time, nor did he describe what the effect might have been. Industrial objects to this testimony because it was speculative, and because it permitted Melton to relitigate the Board’s 132a findings. The second objection is groundless for the reasons we have already discussed.

It is difficult to decipher the point Nye was trying to make. There is no dispute Martin became disabled in July of 1984. The only significant disability issue for purposes of the 132a claim was whether his injury was work-related. There is likewise no dispute Martin was laid off, i.e., effectively fired, when he attempted to return to work in August. The only contested issue in regard to the firing was Melton’s motive behind it. In short, Nye’s testimony about the first change in the C & R was so brief and so vague as to be insignificant.

Absent a Thomas finding in the C & R, Martin was still entitled to seek vocational rehabilitation benefits for a period of up to five years from the date of his injury. (§§ 5410, 5405.5.) Industrial moved in limine to exclude any evidence the omission of the finding affected resolution of Martin’s 132a claim. It argued the evidence was irrelevant because the five-year limitations period had expired without Martin having made a claim, and because liability for the benefits would have fallen on Industrial rather than Melton in any event. Thus, it reasoned, the lack of a Thomas finding had caused Melton no harm. The court rejected this reasoning and denied the motion. Nye later testified Martin might have been more inclined to settle the 132a if there had been a Thomas finding. Industrial contends the court erred by denying its motion, and by refusing to instruct the jury on the statute of limitations for rehabilitation claims.

The potential for harm to Melton from the omission of a Thomas finding was not limited to possible liability for Martin’s rehabilitation benefits. Nye’s testimony suggests another, less direct form of damage. A Thomas finding would have indicated there was a serious question whether Martin had suffered an injury AOE/COE, and it therefore would have increased the risk to Martin if he elected to litigate the issue at the 132a hearing. It was in Melton’s interest, in other words, to make as strong a showing as possible in support of a finding. Industrial had a corresponding duty to thoroughly investigate the cause of Martin’s injury.

Conversely, the absence of a Thomas finding, if he had understood the significance of it, might have induced Melton to settle the 132a. Although Industrial would have been liable for Martin’s rehabilitation benefits, its payment of the benefits could have increased Melton’s insurance premiums. Melton testified he would have attempted to settle the 132a along with the normal issues if someone had fully explained to him the risks he faced. Thus, Industrial’s settlement of the normal issues implicated its duty of good faith and fair dealing. (See fn. .)

The C & R of the normal issues would not have settled the 132a with or without the additional language inserted by Deutinger. (Morehouse v. Workers’ Comp. Appeals Bd., supra, 154 Cal.App.3d at p. 331.) However, the trial court refused Industrial’s request to give a jury instruction to this effect. Industrial contends this was error because the instruction was necessary to counteract Nye’s criticism of Industrial for failing to object to what was an inconsequential change in the C & R. The record does not support this contention. None of Nye’s testimony cited by Industrial makes any reference at all to this change in the C & R.

Industrial moved in limine to preclude Melton from referring to Industrial as a party to the 132a. The court denied the motion. It also declined to take judicial notice of the "fact" Industrial was not a party to the 132a.

Whether Industrial was a party to the 132a, or should have been, or appeared to be, was a source of considerable confusion and disagreement, both while the 132a claim was pending before the WCAB, and throughout the trial below. The court instructed the jury that evidence Industrial was a party to the 132a had been admitted only for the limited purpose of determining whether Melton reasonably could have believed Industrial would pay a 132a award. (See fn. .) Since Industrial does not dispute that the evidence was admissible for this purpose, and since the jury presumably followed the court’s instruction, no error occurred.

The court held Industrial was not estopped to deny coverage because Melton had been made aware of Industrial’s coverage position and therefore had not relied to his detriment on a belief Industrial would pay the 132a award. However, the court refused Industrial’s request to give various instructions that would have set out the elements of estoppel and informed the jury of its decision. Industrial claims this was prejudicial error because it left the issue of estoppel unresolved for the jury. Industrial argues in particular that the jury could have found it liable for bad faith because Andre Hassid, in response to Belardinelli’s demand letter, refused, on behalf of Industrial, to accept coverage under an estoppel theory, when in fact his position was correct.

The existence of an estoppel, like other theories of coverage in this case, was the subject of considerable dispute, both factual and legal. The jury was instructed it could find bad faith where an insurer acted unreasonably to deprive its insured of the benefits due under the policy, as by refusing unreasonably to pay a covered claim, conducting an inadequate factual investigation, failing to inform the insured of settlement offers, or by denying coverage without thoroughly examining the grounds for its denial. The jury was also instructed, however, that "The mere denial of benefits … does not demonstrate bad faith especially where the denial is based on a genuine or debatable legal or factual issue concerning [coverage] .…" Estoppel clearly was such an issue.

Industrial asked the court to instruct the jury that Lloyd Ellis, the insurance broker, was the agent of Melton and not Industrial, such that any representations made by Ellis to Melton were not binding on Industrial. Instead, the court gave the following instruction: "An insurance broker[] is the agent of the insured and is not the agent of the insurer unless there is a separate contract between the broker and the insurer." (Italics added.) Industrial contends the italicized language allowed the jury to conclude Ellis was acting for Industrial and so to hold Industrial responsible for Ellis’s "misrepresentations and negligence to MELTON."

As Industrial concedes, however, there was absolutely no evidence of a separate contract between Ellis and Industrial. Thus, there was no reason under the instruction for the jury to conclude Ellis was Industrial’s agent. Moreover, Industrial has failed to point to a single act of misrepresentation or negligence by Ellis in any capacity. In fact, Ellis played a very minor role in this case. The only significant event in which he took a meaningful part was the decision to hire Yrulegui for the 132a, where he acted as an intermediary between Industrial (Rauch) and Melton. Ellis testified he had been given the impression by Rauch, which he conveyed in turn to Melton, that Industrial had already hired Yrulegui to represent its interests, and that Melton could either agree to be jointly represented by Yrulegui at Industrial’s expense, or could hire someone else to represent him at his own expense. Nothing in either Ellis’s or Melton’s rendition of this exchange conveyed a suggestion Ellis was purporting to speak for Industrial.

Industrial requested an instruction stating that any act or omission of John Mitchell, since he was Melton’s agent, was attributable to Melton. The court gave the instruction but limited its application to "imputed knowledge only." This was error, according to Industrial, because Mitchell was Melton’s agent for all purposes "including his failures to act on MELTON’s behalf." (See Yanchor v. Kagan (1971) 22 Cal.App.3d 544, 549.) However, Industrial neglects to identify any specific act or omission by Mitchell which, had it been attributed to Melton, might have affected the jury’s verdict. Therefore, it has failed to show it was prejudiced by the alleged error.

The court, at Melton’s request, instructed the jury: "If you find that a party wilfully suppressed evidence in order to prevent its being presented in this trial, you may consider that fact in determining what inferences to draw from the evidence." (BAJI No. 2.03.) Industrial maintains this was prejudicial error because there was no evidence either it or Yrulegui willfully suppressed evidence. (Estate of Moore (1919) 180 Cal. 570, 585; County of Contra Costa v. Nulty (1965) 237 Cal.App.2d 593, 594-598.) We agree the court should not have given the instruction, but conclude the error was not prejudicial. Unlike the two cases just cited, where on the entire record the instruction was clearly directed at one party in particular, the present record does not suggest Industrial and/or Yrulegui, any more than Melton, withheld pertinent evidence.

The WCAB held a supplemental hearing in December of 1988 to determine the amount of Martin’s accrued lost wages recoverable under section 132a. The WCJ’s initial award, dated March 24, 1989, was made in favor of Martin and against Industrial. Four days later, on March 28, the WCJ issued an order amending the award to indicate it was against Sierra Signs rather than Industrial. A dispute arose at trial over whether Yrulegui had intervened with the WCJ on Industrial’s behalf to cause the award to be amended. Dennis Rossi testified he called Yrulegui after the first award, and Yrulegui agreed to write a letter to the WCJ about the apparent mistake. Yrulegui’s records reflect a phone conversation with Rossi on March 28 about the "status" of the case, but Yrulegui denied having discussed the award or having done anything to have it changed. Neither the WCAB file nor Yrulegui’s file reflects any contact between Yrulegui and the WCJ on March 28. Industrial argued the amendment was made by the WCJ on his own initiative to correct what was simply a clerical error. In this connection, Industrial asked the court to give the following instruction:

The court gave the requested instruction but only after deleting the two italicized sentences and adding the phrase "if any" at the end. Industrial asserts this constituted prejudicial error because the changes rendered the instruction meaningless.

The proffered instruction was argumentative in that its evident purpose was to give judicial weight to Industrial’s interpretation of the evidence.

Although the instruction may have been a correct statement of the law regarding a court’s power to correct clerical errors (see Morgan v. State Bd. of Equalization (1949) 89 Cal.App.2d 674, 676-682), whether that is what the WCJ did here, and why, was more properly a subject for Industrial’s argument to the jury. And one it did in fact make.

Industrial maintains the court erroneously denied its request to take judicial notice of, and instruct the jury on, assorted statutes and WCAB rules of practice. We will assume for purposes of this discussion that the rules say what Industrial claims they do.

Rule 10450 requires the caption of a petition to contain the title and number of the case. An instruction was necessary, according to Industrial, to explain why its name appeared on the 132a petition even though it was not a party to the discrimination claim. Rule 10447 requires a 132a petition to state with specificity the nature of each violation alleged. Industrial claims Martin’s 132a petition failed to state a claim against Industrial. Several other rules govern service of a petition and show, Industrial asserts, that Melton was properly served by mail with the 132a petition.

Sections 533 of the Insurance Code and 1668 of the Civil Code generally prohibit insurance coverage for willful acts. Industrial claims instructions setting out the statutes’ provisions were necessary to explain the court’s coverage ruling. Section 4553 imposes additional liability on an employer for serious and willful misconduct, and Insurance Code section 11661 makes this liability uninsurable. A corresponding instruction arguably would have supported Industrial’s position sections 533 of the Insurance Code and 1668 of the Civil Code applied in this case to preclude coverage. Section 1060 of the Code of Civil Procedure authorizes an action for declaratory relief. Industrial contends an instruction was necessary to explain the circumstances under which a party, presumably Melton in this case, could have obtained a coverage determination during the pendency of the 132a claim.

The trial court denied these requests on the grounds their subjects were covered adequately by the evidence, and the additional instructions, on top of all those the court was already going to give, would only tend to confuse the jury. The court also reasoned that the proposed instructions relating to coverage were unnecessary given its coverage ruling. We agree.

Joseph Penbera, Melton’s expert witness, testified Melton suffered economic damages totalling $244,559.12, calculated as follows:

At trial, Industrial challenged two assumptions underlying Penbera’s calculations, and moved to strike those portions of his testimony that relied on the assumptions. First, Penbera adjusted some of the figures (items A, B, E, F, and I) to reflect present value by using an interest rate greater than the legal rate. (The amounts shown in brackets above represent Melton’s actual payments before the adjustment.) Second, Penbera assumed, when he included the "opportunity cost of capital" as an element of damages (item D), that Melton, because he had to borrow money to pay the 132a award, was thereby forced to forego an existing business opportunity. The court denied the motions to strike, and Industrial renews its objections on appeal.

The concept of present value is most commonly used in personal injury cases to determine the amount it would be necessary to pay now in order to fully compensate the plaintiff for damages expected to occur in the future, e.g., for impairment of future earning capacity or payment of anticipated medical expenses. (See Flahavan et al., Cal. Practice Guide: Personal Injury (The Rutter Group 1999) ¶ 3:98 et seq., p. 3-79.) "The present value of a gross award of future damages is that sum of money prudently invested at the time of judgment which will return, over the period the future damages are incurred, the gross amount of the award." (Holt v. Regents of University of California (1999) 73 Cal.App.4th 871, 878; BAJI No. 14.70.) Thus, the future damages award is reduced or discounted to its smaller, present value depending on various factors including the projected discount (interest) rate and the period over which the damages are expected to occur.

Here, however, Penbera used present value to mean the amount Melton would have now if, instead of having paid his medical bills or other items of damage, he had invested the same amount at the prevailing interest rate. Thus, as Penbera conceded, his upward adjustments for present value were made "in lieu of interest." They were, in effect, the same as an allowance for prejudgment interest. Prejudgment interest awarded pursuant to Civil Code section 3288 is intended to compensate a plaintiff for loss of the use of his or her property, and is in the nature of damages. (Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1586.) It is awardable at the discretion of the trier of fact. (Id. at pp. 1586-1587.) Absent some legislative act specifying the rate of interest, the constitutional rate of 7 percent applies. (Id. at p.1585; Cal. Const., art. XV, § 1.) The jury in this case was instructed accordingly.

In increasing Melton’s past payments to their present value, Penbera used the then-existing rate of interest for treasury bonds, which varied between 8 and 9 percent, instead of using the legal rate. Therefore, to the extent the jury relied on Penbera’s calculations, its award, at the very least, must be modified to reflect the lower 7 percent rate. However, it is not possible to tell from the record whether the jury meant to award prejudgment interest at all (on top of Penbera’s figures), although it appears it did not because the award corresponds so closely to Penbera’s total (i.e., without an additional sum reflecting interest at the legal rate). Nor is it clear the jury understood Penbera’s calculations already included prejudgment interest in the form of present value. In the absence of any clear indication of the jury’s intentions, we conclude Melton is not entitled to recover prejudgment interest, i.e., any more than he actually paid for items A, E, F, and I. Nor should his damages be reduced in item B by more than his actual tax savings. The net amount attributable to Penbera’s present value adjustments is $18,109.29.

Penbera described the "opportunity cost of capital" as the return Melton could have been expected to receive if, instead of using $51,466.92 of his $60,000 loan to pay the 132a award, he had invested the same amount in his business. That is, given that Melton borrowed the money in the first place, Penbera’s calculation rested on at least two critical assumptions: first, that a business opportunity existed in which Melton might have invested and, second, that Melton was prevented from taking advantage of the opportunity because he had exhausted his borrowing power. The record fails to support either assumption.

There is no evidence Melton was looking to expand or improve his business, much less evidence that an opportunity existed for him to do so. Nor does it appear he would have been unable to borrow additional money had he wanted to. To the contrary, the evidence indicates he had sufficient equity in his house to obtain another loan. The jury’s damage award is deficient in this respect as well. (O’Neil v. Spillane (1975) 45 Cal.App.3d 147, 160 [plaintiff not entitled to recover economic damages absent proof she actually was deprived of use and enjoyment of her property and/or she wished to rent or encumber it].) The amount calculated by Penbera to be the opportunity cost of capital was $23,441.83, which sum must be deducted from the damage award.

Industrial maintains the trial court erred by refusing to compel Belardinelli to produce his written fee agreement with Melton in connection with the claim for Brandt damages. Industrial argued at trial, as it does again on appeal, that the agreement would have established that Melton’s obligation for attorney fees was limited to one-third his recovery, i.e., an amount that would have been much less than the $380,000 the jury awarded him.

As we have already explained however, Melton’s liability for attorney fees was governed ultimately by an oral modification to the written "hybrid" agreement. The modification provided Melton was not obligated to pay attorney fees unless he prevailed in his suit against Industrial. The principal factual dispute was whether the modification also made Melton’s obligation contingent upon the amount of the recovery, i.e., whether, as Industrial contends, it converted the hybrid agreement into a straight contingency fee agreement. We have concluded it did not for reasons that require no repetition here. For purposes of the present argument, it is enough to point out that resolution of the dispute turned on Belardinelli’s testimony about the nature of the modification rather than on the contents of the written agreement itself. As a result, Belardinelli’s failure to produce the written agreement was inconsequential.

Industrial requested the court give the following instruction in connection with Melton’s claim for Brandt damages:

The court gave only the first sentence of the proposed instruction. Industrial contends the court’s refusal to also give the second sentence was prejudicial error.

The cases cited by Industrial in support of this contention stand simply for the principle that a plaintiff seeking to recover damages must prove not only that he or she incurred certain costs, but also that they were necessary and reasonable (and attributable to the defendant’s acts or omissions). (Calhoun v. Hildebrandt (1964) 230 Cal.App.2d 70, 73; Linde v. Emmick (1936) 16 Cal.App.2d 676, 684.) We believe this general proposition is adequately conveyed by the first sentence of the instruction. It would seem self-evident that an expense is not necessarily reasonable merely because it was incurred.

Industrial argues the court’s instructions did not preclude the jury from awarding economic damages for negligence. This was error, it asserts, because economic damages are not recoverable for negligence unless a "special relationship" exists between the parties (Ott v. Alfa-Laval Agri, Inc. (1995) 31 Cal.App.4th 1439, 1448-1449), and no such relationship existed here. In fact, a special relationship does exist between an insurer and its insured. (See Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 820.) Regardless, the jury found Industrial was liable to Melton for bad faith, a cause of action that does support an award of economic damages.

Industrial requested the court give a general instruction on compensatory damages patterned after BAJI No. 14.00. The standard instruction states that the jury’s award is "subject to being reduced, as you will be instructed, if you should find that the plaintiff was contributorily negligent." Industrial proposed to modify this phrase to substitute "at fault" for "negligent." It claims the change was necessary to encompass the concept of comparative bad faith, and so it argues the court erred by giving the unmodified instruction. However, as we have already explained, Industrial was not entitled to assert Melton’s comparative bad faith as an affirmative defense to reduce its tort liability. (Kransco v. American Empire Surplus Lines Ins. Co., supra, 23 Cal.4th at p. 411.)

Finally, Industrial complains the evidence is insufficient to support the jury’s award of punitive damages. It argues the positions it took with regard to Melton’s 132a liability were largely vindicated by the court’s determinations first that the liability was not covered under the policy, and second that Industrial told Melton so before it provided him with a courtesy defense. Therefore, Industrial concludes, it did not act unreasonably, much less with malice, fraud, or oppression.

The fact an insurer has violated its duty of good faith and fair dealing "does not in itself establish that defendant acted with the quality of intent that is requisite to an award of punitive damages. For this we must look further--beyond the matter of reasonable response to that of motive and intent." (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 922.) To justify an award of punitive damages, the defendant must be guilty of oppression, fraud, or malice. (Civ. Code, § 3294.) It is not enough that an insurer’s claims handling practices were negligent, overzealous, legally erroneous, and callous (Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1288), or "at times witless and infected with symptoms of bureaucratic inertia and inefficiency." (Patrick v. Maryland Casualty Co. (1990) 217 Cal.App.3d 1566, 1576.) "He must act with the intent to vex, injure or annoy, or with a conscious disregard of the plaintiff’s rights." (Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, 462.)

Our role on review is simply to determine whether a reasonable fact finder could conclude from the evidence that the plaintiff had adequately shown malice, oppression, or fraud. (Aquino v. Superior Court (1993) 21 Cal.App.4th 847, 858.) We do not reweigh conflicting evidence or make credibility determinations. (Id. at p. 860.) All presumptions favor the correctness of the verdict and judgment. (Stevens v. Owens-Corning Fiberglas Corp. (1996) 49 Cal.App.4th 1645, 1658.) Here the trial court rejected Industrial’s challenge to the jury’s punitive damages award when it denied Industrial’s motions for judgment notwithstanding the verdict and new trial. Although the court’s ruling is not binding on appeal, we give it significant weight. (Ibid.)

We believe the evidence supports the jury’s award. In reaching this conclusion, we accept Industrial’s premise it initially informed Melton his 132a liability was not covered under the policy, and further that this was not an unreasonable position for it to take at the time. However, as we have already discussed at considerable length, the matter took on an entirely different complexion the following year when the "potential coverage dispute" arose. Although coverage was once again an issue, Industrial did not take a formal coverage position until Rossi sent Melton a 132a letter some 16 months later. Industrial’s conduct in the interim was at the very best ambiguous and confusing as to whether or not it was accepting coverage. On the one hand, it provided Melton with Cumis counsel. But on the other, it made several offers to settle the case, it conducted itself as if it were a party to the action, and it indicated a willingness to pay some if not all of a 132a award. Nonetheless, these actions too might be characterized as being merely shoddy or "witless" (Patrick v. Maryland Casualty Co., supra, 217 Cal.App.3d at p. 1576), and so still short of the type of conduct necessary to support an award of punitive damages.

But then, when faced with the consequences of its indecision, Industrial’s response was tellingly vexatious. It knew Melton’s potential 132a liability was increasing with each passing week as Martin’s back wages were accumulating. More importantly, Industrial understood Melton may have been led by its conduct to believe his liability would be covered. In March of 1987, soon after the 132a hearing, Industrial (Schwarer) told Yrulegui to stop making settlement offers lest they provide "more argument Mitchell will use to make us pay if we lose." Yrulegui complied with this instruction but represented to Mitchell that settlement discussions were ongoing.

Rossi, too, was concerned about the possibility that Industrial’s having made settlement offers might "estoppel our position that coverage is not afforded under the comp policy." He expressed this concern in a memo to Richard Sullivan, Industrial’s senior director of workers’ compensation claims, in which he also explained that Melton faced bankruptcy if he were forced to pay the 132a award, and he would probably file a bad faith action against Industrial as well. On this basis, Rossi proposed to Sullivan that Industrial attempt to settle Martin’s claim for a sum between $20,000 and $25,000.

Sullivan responded there was a principle involved and Industrial should pay nothing in settlement "irrespective of what the God damn legal costs are." He told Rossi he was not concerned about Melton’s financial predicament. And Sullivan, who was not an attorney, dismissed Rossi’s concern about an estoppel, saying "we don’t owe anything on this type situation, so we shouldn’t be paying anything and that’s it. All the other is just a matter of speculation." Likewise, Sullivan told Yrulegui, in regard to the coverage theory Yrulegui had discovered at the seminar, that "[t]he law is the law and there’s been no change in it that I know about to [justify] having an obligation .…"

In short, Industrial, and Sullivan in particular, knowing its mishandling of the 132a claim had placed Melton in a precarious financial position, obdurately refused to settle the claim and instead forced him to bring the present action, which is now more than 11 years old. It would not have been at all unreasonable for the jury to conclude Industrial’s stubborn indifference to Melton’s predicament demonstrated "a conscious disregard of the plaintiff’s rights." (Silberg v. California Life Ins. Co., supra, 11 Cal.3d at p. 462.)

Also on the subject of coverage, we hold Industrial is estopped to assert as a basis for denying coverage that Melton’s section 132a violation did not occur until after the policy expired.

Because Industrial had a contractual duty to defend and indemnify Melton against the section 132a claim, we have not addressed Industrial’s objections to the two theories of bad faith liability submitted to the jury: that Industrial failed unreasonably to satisfy its obligations arising under a "contract by waiver," or that Industrial, once it undertook to provide Melton with a defense, assumed a duty of good faith and fair dealing irrespective of the policy’s application. Nor have we considered Industrial’s other contentions that suppose there was no coverage under the policy and no estoppel to deny coverage.

On the subject of damages, we conclude the evidence is sufficient to support the jury’s award of attorney fees as damages pursuant to Brandt v. Superior Court, supra, 37 Cal.3d 813 ($380,000), as well as its award of punitive damages ($20,000). As for the jury’s award of compensatory damages other than attorney fees ($250,000), we find the evidence fails to support Melton’s claims for economic losses to the extent any amounts he expended in the past have been increased to allow for prejudgment interest under the guise of "present value" ($18,109.29). Nor is there support for Melton’s claim he is entitled to recover economic damages representing the lost opportunity cost of capital ($23,441.83).

We have several options in this situation. We can affirm the judgment of liability but vacate the damages award and remand for a new trial on that issue only. Or we can modify the award and affirm the judgment as modified. (See Cunningham v. Simpson (1969) 1 Cal.3d 301, 310; 9 Witkin, Cal. Procedure, supra, Appeal, § 754, p. 780.) Here its verdict fails to disclose just how the jury calculated compensatory damages, but the amount appears to correspond closely to Joseph Penbera’s testimony regarding Melton’s economic damages. For this reason, we elect to pursue a third option. We will affirm the judgment of liability, and the jury’s awards of Brandt damages and punitive damages. However, we will vacate its award of compensatory damages and remand the matter for a new trial on that issue only, unless Melton consents to a reduction in the amount.

The judgment of liability is affirmed. The jury’s award of damages is affirmed in all respects other than its award of $250,000 in compensatory damages. Its award of that amount is vacated and the matter is remanded for a new trial on that issue only, unless

Melton, within 30 days from the date of the remittitur, files with the clerk of this court, and serves upon Industrial, a written consent to a reduction of the award to $208,448.88. (Burnett v. National Inquirer, Inc. (1983) 144 Cal.App.3d 991, 1018-1019.)

Respondent is awarded costs on appeal.

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Buckley, J.

WE CONCUR:

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Harris, Acting P.J.

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Levy, J.