Hillenbrand, Inc. v. Insurance of North America (104 Cal. App. 4th 784, 2002)

Opinion

RAYE, J.

A jury found that Aetna Insurance Company maliciously prosecuted two lawsuits against the insureds, George F. Hillenbrand, a framer, and his company, George F. Hillenbrand, Inc. The Insurance Company of North America (INA) handled the investigation and processing of the claim, as well as the prosecution of the lawsuits against Hillenbrand, but the trial court granted INA’s motion for a directed verdict, concluding it was not liable as an agent for the insurer pursuant to section 2351 of the Civil Code. Based on evidence the insurer prosecuted the lawsuits despite its knowledge of facts triggering potential coverage and a duty to defend, and of the law prohibiting an insurer from suing its insured during the pendency of the underlying claim, the jury awarded Hillenbrand punitive damages. Hillenbrand accepted the trial court’s remittitur of the award. Aetna appeals the judgment for compensatory and punitive damages. Hillenbrand appeals the judgment on a directed verdict in favor of INA and cross-appeals the reduction of punitive damages.

The insurer justifies the prosecution of the two lawsuits against its insured as routine advocacy and sound economics. The jury and several trial judges rejected the insurer’s conservative notion of its duty to defend and its expansive notion of its right to fight its own insured. We conclude there is substantial evidence to support the jury’s findings. We therefore affirm the judgment for the compensatory and punitive damages and find no abuse of discretion in the reduction of the punitive damages. We reverse, however, the judgment in favor of INA, having concluded that Civil Code section 2351 does not allow a corporation to exonerate itself from liability as an agent by delegating its obligations to its own employees.

Facts

In 1973 Hillenbrand did the framing, subfloors and decking, and installed siding on various condominium units as one of several subcontractors for Ring Brothers Corporation and Dalehurst Comstock Corporation (Ring Brothers), the general contractor for the Crosswoods condominium project in Citrus Heights. Although the siding needed to be painted or sealed to protect it from delaminating and warping, Hillenbrand was not responsible for that work, nor was it responsible for the necessary periodic repainting or resealing of the siding.

In 1981 Crosswoods Homeowner Association sued Ring Brothers for negligent construction. Hillenbrand knew nothing of the lawsuit. It was not notified of any defects in its work. Customarily, it remedied any alleged problems; as a consequence, it had never been sued. In 1982 George Hillenbrand was named Builder of the Year by the Building Industry Association, the same year he served as president of that organization. The award was particularly meaningful because he was the first president of the association who “had ever come up from a carpenter.”

In August 1982 Ring Brothers demanded that Hillenbrand defend and indemnify it, pursuant to its subcontract, for all damages resulting from the services it performed on the Crosswoods project. Hillenbrand immediately notified its insurer, Aetna, but after an initial contact with G. John Palmer, a claims supervisor, Aetna made no further contact until late 1983. Meanwhile, Aetna sent the claim to INA for assistance in investigation and handling. The claim was assigned to the claims unit manager in the Sacramento regional office, Michael Cerf. Throughout his involvement with the claim, Cerf reported to home office supervisors Perry Huntington and Jane Joiner.

On June 30, 1983, Ring Brothers cross-complained against Hillenbrand and other subcontractors for indemnity and contribution, alleging that the homeowners’ alleged damages were caused by Hillenbrand’s and the other subcontractors’ “fail[ure] ... to perform their work on Crosswoods ... in a workmanlike manner” and “[furnishing of] all . . . materials ... for the . . . siding” in a “negligent” manner. The insurer later admitted that Ring Brothers’s amended complaint alleged potential damage to property other than Hillenbrand’s work product as a result of Hillenbrand’s work on the siding. Hillenbrand tendered the cross-complaint to Aetna under two separate broad form comprehensive general liability (CGL) insurance policies.

Aetna’s CGL policies provided for the following coverage: “[Aetna] will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of [^|] . . . property damage [if] to which this insurance applies, caused by an occurrence, and [Aetna] shall have the right and duty to defend any suit against the insured seeking damages on account of such . . . property damage, even if any of the allegations of the suit are groundless, false or fraudulent.... [f] ... [t] ‘[Occurrence’ means an accident, including continuous or repeated exposure to conditions, which results in . . . property damage neither expected nor intended from the standpoint of the insured[.]” The policies did not apply “to that particular part of any property, not on premises owned by or rented to the insured, [f ] . . . [H] . . . the restoration, repair or replacement of which has been made or is necessary by reason of faulty workmanship thereon by or on behalf of the insured[.]”

The policies, therefore, covered: (1) damage to the siding if it was due to some cause other than Hillenbrand’s own faulty workmanship, such as improper maintenance by others, defective materials, or design; and (2) damage to property other than the siding caused by Hillenbrand’s faulty workmanship.

Aetna agreed to defend Hillenbrand, but only under a full reservation of rights, citing the faulty workmanship exclusion in its CGL policies. Aetna hired the law firm of Porter, Scott, Weiberg & Delehant to represent Hillenbrand.

Attorney Russell G. Porter advised Cerf that he had reviewed an April 1982 report from Scott Whitten, Inc., wherein Whitten concluded the major siding problem was buckling and loose siding sheets. Anthony S. Warburg, another lawyer from the Porter firm, advised Cerf in March 1984 that George Hillenbrand had driven through the project and concluded: “[T]he great majority of the present complaints concerning the siding (were) the result of poor maintenance as opposed to faulty workmanship. Apparently the units have never been repainted and this type of plywood siding needs to be repainted periodically to protect it from water intrusion and weathering.”

Again, in April 1984, Warburg reported to Cerf that the siding problems were due to poor maintenance and not to faulty workmanship. “Discussions at our meeting evinced three major problems with the project, namely, improper tile decking, improper roofing, and improper siding. The siding problems break down into three areas, including, warping, improper nailing and improper backing. Also, some of the Z-bar flashing is missing which has caused interior water damage to some of the units. Although approximately 80 units have siding problems, we do not know which units in which phase have the particular problems mentioned above. Also, of the problems mentioned, we are uncertain which were caused by improper installation, improper maintenance, or both.”

On June 11, 1984, Warburg told Cerf that the homeowner association’s experts estimated it would cost $963,140 to fix the defective siding work. But Cerf considered the insured’s exposure grossly inflated, as he explained in his deposition testimony: “Well, in this type of litigation, construction defect litigation, the experts are always real high up in that range, where in reality, what happens in these cases is they settle for cents on the dollar in the long run. The carriers are aware of that. At the time you get to the settlement conference a nine hundred thousand dollar demand is settled for 25 thousand bucks so everybody knows that.” On June 13, Cerf wrote to Hillenbrand, informing it that Aetna had no duty to defend because there was no potential coverage under the policy, and consequently, Aetna continued to assert its reservation of rights. Cerf told Warburg that Aetna/INA’s “primary concern [was] effective management of the [litigation] expenses.”

Cerf provided the INA home office an extensive report on the Hillenbrand litigation on July 9, 1984, concluding that it was not necessary to refer the case to outside counsel for a legal opinion as to coverage. He recommended INA not to file a declaratory relief action and sent the actual file and all original documents to the home office. He did not, however, mention either the potential maintenance problems or the potential damage to other property from the defective siding.

Within three weeks, Cerf changed his mind. On July 23 he warned Hillenbrand that “it may be necessary” to file a declaratory relief action to obtain a judicial determination whether INA/Aetna was obligated to indemnify it in the Crosswoods action. Because INA/Aetna would seek reimbursement of defense costs, Cerf advised Hillenbrand to hire its own lawyer to defend the declaratory relief action. It was not until the following day that he inquired about Hillenbrand’s actual involvement in the construction project.

In August, Warburg apprised Cerf that his investigation of the causes of the damages to the condominium units was incomplete. He was particularly interested in the slope discrepancies on the second floor decking, which might have been due to design defects rather than faulty workmanship. The insurer also knew about water damage to wallboard and insulation not installed by Hillenbrand (“other property”) caused by missing Z-bar flashing.

Nevertheless, in September Cerf asked the superintendent of the home office claims department for permission to file a declaratory relief action, despite his belief that INA had a duty to defend. He wrote: “[I]t is my recommendation that we join with Transamerica Insurance Services on this case, retain outside counsel to represent both carriers and file a Declaratory Relief immediately. The Declaratory Relief, in my estimation, will not resolve the case completely, but it will in fact resolve the damages that the carrier is responsible for. I would distinctly feel that we will not come away from this case without an obligation to defend the insured.”

David Mackenroth and Claudia Robinson, representing INA/Aetna, filed the declaratory relief action against Hillenbrand in October 1984. A month later, Warburg informed Cerf that INA/Aetna’s expert had conducted a site inspection and it was his expert opinion that much of the damage, which Ring Brothers claimed was due to Hillenbrand’s defective workmanship, was in fact caused by poor maintenance of the siding panels. Moreover, according to the same expert, the type of material used for the siding itself might have been defective. Hillenbrand did not supply the materials it installed in the Crosswoods development.

Hillenbrand was represented by Warburg in the underlying construction litigation. Warburg, paid by the insurer, reported to Cerf. At the same time, Hillenbrand was represented by Alvin R. Wohl and Steven B. Eggleston in the declaratory relief action filed against it by its own insurer. George Hillenbrand was baffled, frustrated, and depressed. At trial, Eggleston explained: “[Hillenbrand] didn’t understand—as he explained it to me, he did not understand why it is that he was being sued by the very insurance company that he had paid to provide him protection if he got sued. [|] And he was concerned about how he was going to—he expressed his concern about how he was going to be able to financially defend against that insurance company. He also expressed his concern about them having a conflict of interest. How could they protect him on the one hand while at the same time they were suing him. And he expressed his concern about all the confidential things he had been telling his former attorney, for example, Mr. Warburg and just in general how all this was going to be kept separated. And how it wasn’t going to be—whether it was going to be used against him by INA, Aetna.”

George Hillenbrand’s concerns were well founded. In March 1985 the insurer asked Hillenbrand to admit that the damage to the condominium units arose “from deficiencies and/or defects in workmanship.” Eggleston explained the untenable position his client was then in. As he told George Hillenbrand, “[F]irst of all, if you answer these interrogatories, what’s going to happen is you’re going to create a record which does two things. One, it will—if you answer them in a certain way, it will be an admission that you did something wrong at the Crosswoods action. And it will then become a record, and the attorneys for Crosswoods will be able to get that information and use it against you in the underlying case, [f] Secondly, the way these are written by answering the questions on faulty workmanship, you give answers that will hurt you and will cause the insurance company to deny coverage because they’re not going to cover that. So if you respond to these, you run the risk of both by confessing to do [sic] doing something wrong [in] your underlying case and at the same time eliminating all the insurance coverage for what you just confessed was there. [^[] That was the risk you ran depending on what was happening, what the correct answers were. So what I told him was that we were in a very, very, very difficult spot. - • - [1J] - - - [f] . . .So it’s sort of like—I was explaining to him it was sort of like being shot by your own people behind the lines as you’re trying to fend off the other side.”

Shortly after the requests for admissions were sent to Hillenbrand, David Pritchett replaced Cerf. In October 1985 Robinson reported to Pritchett that one of the experts for the Crosswoods project testified at his deposition that some of the siding installed by Hillenbrand appeared to be defective. She also told Pritchett that two experts confirmed at their depositions that there was water damage due to leakage after the siding buckled and pulled away and that there was evidence the damage was due to maintenance problems. The same month, she reported to Pritchett that there was evidence the pooling of water on approximately 78 tile balconies was the result of inaccurate slope design. In November, Eggleston also informed Pritchett that the failure to paint the siding after it was installed and to properly maintain the siding after the project was completed caused the siding problems.

In response to interrogatories propounded by Hillenbrand, the insurer stated: “[T]he reports and investigation of CIGNA received prior to the institution of the Declaratory Relief Action showed that the insured may not have been responsible for various damage claims being alleged by the homeowners, and that such damages may have been due to the negligence of other contractors or of the association in failing to properly maintain the complex.”

Nevertheless, in January 1986 Pritchett instructed Robinson to file a motion for summary judgment in the declaratory relief action before any settlement conference in the Crosswoods action. Hillenbrand’s lawyer reminded Pritchett of the evidence giving rise to potential coverage and emphasized the applicability of the analogous case, Economy Lumber Co. v. Insurance Co. of North America (1984) 157 Cal.App.3d 641 [204 Cal.Rptr. 135], At the same time, the insurer challenged first party claims from Crosswoods condominium owners, asserting that the homeowners did not properly maintain the property.

In March, Judge Roger K. Warren initially granted the motion for summary judgment, but on reconsideration he denied the motion. Before the motion had been reconsidered and denied, Robinson warned Pritchett the decision might be reversed. She wrote: “This situation is made more complicated by the fact that a recent decision on insurance coverage was not cited by Hillenbrand’s counsel and has not been spotted by Judge Warren. That is the case of Cal Farm Insurance Company v. TAC Exterminators, Inc. [(1985)] at 172 Cal.App.3d 564 [218 Cal.Rptr. 407], I am sending you a full copy of the opinion should you wish to review it. [H] • • • [1EI • • • Should either Judge Warren or Steve Eggleston pick up on the TAC case, it may be that our motion will be denied. In any event, the presence of that case in the books adds strength to the insured’s position and increases the chances that if we win in the Superior Court, we will be reversed on appeal.”

Judge Warren ultimately denied the motion for summary judgment because he discovered that Hillenbrand had presented evidence of “other property.” Robinson explained to Pritchett: “At the hearing on the motion to reconsider, Judge Warren indicated that he had gone back over materials submitted to the court on April 14, 1986 by Wohl’s office and had concluded that those papers may have established damage to ‘other property’ that is validly claimed in the underlying action. He specifically referenced cracked tiles, damage to insulation, and damage to sheetrock.” Nevertheless, the insurer continued to prosecute its lawsuit against its insured and thereafter filed a second lawsuit against Hillenbrand.

In July 1986 Hillenbrand settled the Crosswoods litigation with Ring Brothers for $40,000. Aetna paid one-third of the settlement, or $13,333, and gave up its right to recover this amount from Hillenbrand. On or about July 28, 1986, INA/Aetna filed a second action against Hillenbrand—a cross-complaint against both Hillenbrand individually and George F. Hillenbrand, Inc.

In March 1987 Pritchett asked Robinson to suspend work on the declaratory relief action while he consulted with his home office. He told his home office that INA/Aetna may “have little further basis for continuing the [declaratory relief action] except as to the reasonableness of the insured’s attorney’s fees.” Yet he advised the insurer to stay the course.

In July 1987 Pritchett received $44,840 from another insurer for Aetna’s defense costs. A year later, Robert Paine, a claims supervisor, replaced Pritchett and continued to prosecute the action despite Robinson’s advice that it “would be extremely difficult to prevail . . . .” Hillenbrand added a bad faith claim to its cross-complaint.

In 1988 Marc Babin summarized the insurer’s position as to coverage for damage to “other” property: “[T]he Complaint alleged that the siding was improperly nailed to the flaming. The resulting damage to other property seemed minimal and at first glance did not seem to justify forcing the carrier to pay the potential six figures in defense costs, merely because of this minimal damage.”

The insurer brought a motion for summary adjudication of the bad faith claim while the declaratory relief action was pending. Judge Jeffrey L. Gunther held that “INA/Aetna’s filing and maintenance of an action for declaratory relief cannot form the basis of an action for bad faith, for breach of fiduciary duty, or for other cause of action for wrongful conduct.” In later proceedings, Judge Gunther granted Hillenbrand’s motion for summary judgment, concluding that “INA/Aetna did owe a duty to defend Hillenbrand in the underlying action and thus cannot recover back its defense fees and costs from Hillenbrand.”

The insurer, in a motion in limine before trial of the bad faith claim, asked the court to exclude any reference to the declaratory relief action. Robinson argued that the bad faith claim rested exclusively on the insurer’s failure to investigate. The trial court held the declaratory relief action was “expunged” for the purposes of the bad faith trial. The jury thereafter returned a defense verdict.

In March 1991 Hillenbrand sued INA/Aetna for the malicious prosecution of both civil proceedings that had terminated in Hillenbrand’s favor: the 1984 complaint for declaratory relief and the 1986 cross-complaint to recover defense costs. In April 1998 the jury awarded Hillenbrand $1,445,000 in compensatory damages and $14 million in punitive damages. INA/Aetna appeals the judgment in the malicious prosecution action. Hillenbrand appeals the trial court’s reduction of punitive damages to $3 million and the directed verdict in favor of INA.

Discussion

I

To establish a cause of action for malicious prosecution, a plaintiff must prove that the prior action (1) had been commenced at the direction of the defendant and was pursued to a legal termination in the plaintiffs favor, (2) was brought without probable cause, and (3) was initiated with malice. (Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863, 871 [254 Cal.Rptr. 336, 765 P.2d 498] (Sheldon Appel).) In Sheldon Appel, the Supreme Court adopted the objective standard to determine the presence or absence of probable cause. “[T]he probable cause element calls on the trial court to make an objective determination of the ‘reasonableness’ of the defendant’s conduct, i.e., to determine whether, on the basis of the facts known to the defendant, the institution of the prior action was legally tenable. The resolution of that question of law calls for the application of an objective standard to the facts on which the defendant acted. [Citation.]” (Id. at p. 878.) “In other words, in California, the commission of the tort of malicious prosecution requires a showing of an unsuccessful prosecution of a criminal or civil action, which any reasonable attorney would regard as totally and completely without merit [citation], for the intentionally wrongful purpose of injuring another person.” (Downey Venture v. LMI Ins. Co. (1998) 66 Cal.App.4th 478, 499 [78 Cal.Rptr.2d 142] (Downey Venture).) We thus consider the elements of probable cause and malice.

Probable Cause

Two complaints filed by the insurer, both resolved in Hillenbrand’s favor, serve as the basis for the malicious prosecution action at issue in this appeal. We must determine whether the insurer had probable cause to bring a declaratory relief action against its insured in which it asserted it had no duty to defend and to file a cross-complaint for recovery of the costs of defense after the claim for indemnity had been settled. We first discuss the parameters of an insurer’s duty to defend and then consider the insurer’s assertion that a declaratory relief action is a preferred vehicle for resolving disputes regarding that duty.

The Duty to Defend

“The insured’s desire to secure the right to call on the insurer’s superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability.” (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295-296 [24 Cal.Rptr.2d 467, 861 P.2d 1153] (Montrose Chemical).) The duty to defend is broader than the duty to indemnify, so broad that an insurer must defend if there is any potential the claim might be covered. (Montrose Chemical, supra, 6 Cal.4th at p. 295; Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081 [17 Cal.Rptr.2d 210, 846 P.2d 792] (Horace Mann); Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275 [54 Cal.Rptr. 104, 419 P.2d 168].) Any doubts as to whether the insurer has a duty to defend must be resolved in the insured’s favor. (Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 753 [161 Cal.Rptr. 322].)

The insurer insists that the allegations of the complaint fell within the faulty workmanship exclusion. But it is “clear that facts known to the insurer and extrinsic to the third party complaint can generate a duty to defend, even though the face of the complaint does not reflect a potential for liability under the policy.” (Montrose Chemical, supra, 6 Cal.4th at p. 296.) The record reflects that the insurer considered the possibility that there was damage to other property, a covered risk, slight in comparison to the compelling evidence that the damage was caused by Hillenbrand’s faulty workmanship, an excluded risk. However, “[w]e look not to whether non-covered acts predominate in the third party’s action, but rather to whether there is any potential for liability under the policy. . . . [A]n insurer has a duty to defend the entire third party action if any claim encompassed within it potentially may be covered . . . .” (Horace Mann, supra, 4 Cal.4th at p. 1084.) In other words, the insurer’s duty necessarily includes a defense to the entire action even though that may include claims that are not potentially covered. (Buss v. Superior Court (1997) 16 Cal.4th 35, 48 [65 Cal.Rptr.2d 366, 939 P.2d 766] (Buss).)

Hence, in order to prevail on the issue of the duty to defend, “the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. Facts merely tending to show that the claim is not covered, or may not be covered, but are insufficient to eliminate the possibility that resultant damages (or the nature of the action) will fall within the scope of coverage, therefore add no weight to the scales.” (Montrose Chemical, supra, 6 Cal.4th at p. 300.)

Malicious Prosecution and Declaratory Relief

The insurer argues the probable cause requirement is modified where the underlying action is one for declaratory relief; it has the unrestrained right to bring a declaratory relief action as long as it is not frivolous. According to the insurer, there is a strong public policy favoring resolution of coverage issues through declaratory relief actions. (Montrose Chemical, supra, 6 Cal.4th at p. 301.) Here, continues the argument, the action was not frivolous because there were at least five cases supporting the insurer’s interpretation of the “other property” provision, when even one would have sufficed to establish probable cause to file the complaint.

It is true as a general proposition that a declaratory relief action is the appropriate vehicle for resolving disputes involving the contested meaning of contractual language. (See, e.g., John Hancock Mutual Life Ins. Co. v. Greer (1998) 60 Cal.App.4th 877 [71 Cal.Rptr.2d 48]; Chong v. California State Automobile Assn. (1996) 48 Cal.App.4th 285 [55 Cal.Rptr.2d 648].) That is not to say, however, that a declaratory relief action cannot be maliciously prosecuted.

Interestingly, the first reported case holding that prosecution of a declaratory relief action would support a claim for malicious prosecution involved an insurance company lawsuit against its insured for declaratory relief. In Camarena v. Sequoia Ins. Co. (1987) 190 Cal.App.3d 1089 [235 Cal.Rptr. 820] (Camarena), the court emphasized “the damage to individuals and society caused by the pursuit of groundless claims should not be underestimated.” (Id. at p. 1095.) Yet the insurer argued that, as a matter of public policy, declaratory relief proceedings do not give rise to claims for malicious prosecution. The court rejected the insurer’s notion of the prevailing public policy. (Ibid.)

Quoting from the Supreme Court in Bertero v. National General Corp. (1974) 13 Cal.3d 43, 50-51 [118 Cal.Rptr. 184, 529 P.2d 608, 65 A.L.R.3d 878] (Bertero), the court reiterated the untoward damage to the individual subjected to a groundless declaratory relief action, and to the judicial process: “ ‘The malicious commencement of a civil proceeding is actionable because it harms the individual against whom the claim is made, and also because it threatens the efficient administration of justice. The individual is harmed because he is compelled to defend against a fabricated claim which not only subjects him to the panoply of psychological pressures most civil defendants suffer, but also to the additional stress of attempting to resist a suit commenced out of spite or ill will, often magnified by slanderous allegations in the pleadings.’ ” (Camarena, supra, 190 Cal.App.3d at p. 1095.) The court concluded: “In sum, there is nothing in the nature of declaratory relief actions which requires that we eliminate any potential liability for malicious prosecution.” (Id. at p. 1097.)

Hillenbrand does not contest an insurer’s right to reimbursement for defense costs pursuant to a reservation of rights, if and when it is determined there is no potential for coverage. It objects to the timing of that determination. The insurer insists it had the right to determine the coverage issue while the underlying case was still pending, thereby placing its insured in the untenable position of fighting the third party claim, assisted by the insurer, while simultaneously fighting the insurer on issues that would compromise its position in the third party litigation. The insurer maintained this position in the trial court even though it was aware of case law to the contrary, hoping that the trial court or Hillenbrand’s lawyer would not find it.

In Cal-Farm Ins. Co. v. TAC Exterminators, Inc., supra, 172 Cal.App.3d 564 (Cal-Farm Ins.), the insurer also claimed coverage was excluded, and therefore it had no duty to defend its insured. But the applicability of the exclusion would not be determined until the underlying suit was resolved. The court observed: “We are aware that holding exclusion (j) disallows coverage if in the underlying action Sunset Ladder is held liable and the alleged indemnity agreement between TAC and Sunset Ladder is valid, makes for the interesting situation of Cal-Farm’s having a duty to defend, even though it may not have to indemnify TAC against a loss under the alleged contract. This is not as incongruous as it seems. [U] If we were to hold otherwise, any time an insurance company had a questionable claim due to an uncertain exclusion clause, it could defend, under a reservation of rights, and immediately bring an action for declaratory relief seeking to rid itself of the arguable duty to defend. As a result, the duty to defend would eventually be no broader than the duty to indemnify.” (Id. at p. 580.)

In her concurring opinion in Montrose Chemical, supra, 6 Cal.4th 287, Justice Kennard echoes the same general rule enunciated in Cal-Farm Ins. “When an insured calls upon a liability insurer to defend a third party action, the insurer as a general rule may not escape the burden of defense by obtaining a declaratory judgment that it has no duty to defend. Were the rule otherwise, the insured would be forced to defend simultaneously against both the insurer’s declaratory relief action and the third party’s liability action. Because the duty to defend turns on the potential for coverage, and because coverage frequently turns on factual issues to be litigated in the third party liability action, litigating the duty to defend in the declaratory relief action may prejudice the insured in the liability action.” (Id. at p. 305 (conc. opn. of Kennard, J.).)

There is no support in the cases for the insurer’s notion that a declaratory relief action affords an insurer a convenient vehicle for determination of coverage issues, limited only by a standard that the action not be frivolous. To the contrary, the cases suggest declaratory relief actions are disfavored because of the practical difficulties they create for an insured that must defend against two actions simultaneously. We thus return to the question of whether the insurer’s action was supported by probable cause.

Two questions are pertinent to our discussion: What extrinsic facts did the insurer know at the time it filed and prosecuted the declaratory relief action, and what factual issues were to be resolved in the underlying third party liability action? Seven months before filing the declaratory relief action, the insurer knew that the lawyer it hired to represent the insured and Hillenbrand itself believed the damage to the condominiums was caused not by faulty workmanship, but by poor maintenance. Six months before the action was filed, the same lawyer reported to the insurer that defective siding materials might have caused damage to other property in the condominium units. Hillenbrand did not supply the materials. Three months before the action was filed, the claims manager assigned to the case recommended to the home office not to file a declaratory relief action, yet two weeks later, with no additional information, he warned Hillenbrand that a declaratory relief action “may be necessary.” Two months before the action was filed, the insurer’s lawyer told the same manager that design defects, rather than faulty workmanship, might have caused slope discrepancies. A month later, the manager asked the home office for permission to file the declaratory relief action even though, he conceded, “we will not come away from this case without an obligation to defend the insured.” He then began to investigate the case.

Hence, before filing the suit, the insurer knew the alleged damages might have been caused by poor maintenance or design defects, both insured risks, and that there was a possibility there had been damage to other property that was not covered by the exclusion. It filed the declaratory relief action against its insured anyway.

The insurer had knowledge of these extrinsic facts pointing to the possibility of coverage, but the facts themselves were disputed and would not be resolved until the third party claim was litigated. Yet litigating the duty to defend in the declaratory relief action would clearly prejudice Hillenbrand in the Crosswoods litigation.

The insurer not only knew the extrinsic facts supporting potential coverage, it also was aware of the case law prohibiting an insurer from pursuing a declaratory relief action that would prejudice its insured in the third party litigation. The insurer’s lawyer, Claudia Robinson, provided the insurer with a copy of Cal-Farm Ins., supra, 172 Cal.App.3d 564, explaining that it “ha[d] not been spotted” by the trial judge considering the summary judgment motion and predicting that if either opposing counsel or the judge “pick[ed] up on” the case, the motion would be denied or reversed on appeal. She told the insurer “the presence of that case in the books adds strength to the insured’s position . . . .” The insurer did not cite the case to the court and continued to pursue its declaratory relief action.

Clearly, the insurer did not sustain its burden of proving there was no potential coverage under its CGL policy. Both the facts and the law suggested to the contrary. The summary judgment ruling in favor of Hillenbrand only cemented what the insurer already knew, viz., that it had a duty to defend. Nevertheless, it filed another action, still maintaining it was entitled to recover the costs of defense.

On appeal, the insurer places great reliance on cases holding there was no coverage for damage to other property, insisting that these cases compel a finding that it had probable cause to file the declaratory relief action. We disagree. Western Employers Ins. Co. v. Arciero & Sons, Inc. (1983) 146 Cal.App.3d 1027 [194 Cal.Rptr. 688] and Maryland Casualty Co. v. Imperial Contracting Co. (1989) 212 Cal.App.3d 712 [260 Cal.Rptr. 797] both involved general contractors as the insureds, not subcontractors. In the case of a general contractor, all the work at the project is considered its work product, whereas in the case of a subcontractor, like Hillenbrand, only its portion of the work, such as siding, is the work product and damage to other parts of the project is considered damage to other property. St. Paul Fire & Marine Ins. Co. v. Coss (1978) 80 Cal.App.3d 888 [145 Cal.Rptr. 836] also involved a general contractor and there was no evidence of damage to property outside the project. Rafeiro v. American Employers’ Ins. Co. (1970) 5 Cal.App.3d 799 [85 Cal.Rptr. 701] (Rafeiro) is of even less help to the insurer. In Rafeiro, the insurer filed its indemnity action after the trial of the third party claim. The trial court looked at the entire record of the third party trial and concluded that the damages awarded were all within an exclusion in the policy. Rafeiro does not stand for the proposition that the insurer does not have a duty to defend prior to resolution of the third party claim. Rather, it supports the proposition, never disputed by Hillenbrand, that under the proper set of facts, either undisputed or resolved by trial, the faulty workmanship exclusion precludes coverage.

The insurer erroneously contends that the federal case Golden Eagle Ins. Co. v. Travelers Companies (9th Cir. 1996) 103 F.3d 750 (Golden Eagle Ins.) vindicates the position it has taken on coverage. In Golden Eagle Ins., the insured claimed that the cost of repairing “other property” in order to fix the defective concrete was covered under the policy notwithstanding the faulty work exclusion. The court held that since the faulty work exclusion eliminates coverage for the cost of repairing the insured’s work product, it also eliminates coverage for the cost of repairs to “other property” incidental to repairing the defective workmanship. We agree with Hillenbrand that Golden Eagle Ins. does not address the pertinent issue as to whether damage to “other property” caused by a subcontractor’s work is covered. Consequently, the case is not authority for a proposition it did not consider.

We conclude the insurer’s contention, at the time it filed—let alone prosecuted—the declaratory relief action and filed its cross-complaint, that it had a tenable claim it had no duty to defend Hillenbrand is indeed frivolous. The extrinsic facts known to the insurer disclosed the potential, indeed the likelihood, as recognized by the insurer’s managers and lawyers alike, that it had a duty to defend its insured. The law was in accord. (Buss, supra, 16 Cal.4th at p. 49; Val’s Painting & Drywall, Inc. v. Allstate Ins. Co. (1975) 53 Cal.App.3d 576, 582, 585 [126 Cal.Rptr. 267].) It simply decided to pursue a declaratory relief action in the absence of probable cause, thereby subjecting itself to a claim for malicious prosecution.

The dispositive issue in this case, therefore, is not probable cause but is whether the declaratory relief action was prosecuted with the requisite malice. Before we examine the sufficiency of the evidence to support the jury’s finding of malice, however, we must consider the insurer’s first contention that the defense verdict in the bad faith action collaterally estops Hillenbrand from challenging the probable cause finding and its second contention that Judge Warren’s ruling granting a summary adjudication before reconsidering and reversing establishes probable cause as a matter of law. Neither contention has merit.

II

The insurer brought a motion for summary adjudication of multiple issues in Hillenbrand’s bad faith action. At the hearing on the motion, counsel for the insurer argued: “And I genuinely believe that Mr. Hillenbrand’s distress does stem from the filing of the declaratory relief action in some degree, but that the only remedy under the law is for malicious prosecution.” Apparently relying oxl Atlas Assurance, supra, 146 Cal.App.3d 135, Judge Gunther ruled that “INA/Aetna’s filing and maintenance of an action for declaratory relief cannot form the basis of an action for bad faith, for breach of fiduciary duty, or for other cause of action for wrongful conduct.” He ruled that the issuance of reservation of rights letters does not constitute bad faith and denied summary adjudication of the remaining issues. Hillenbrand’s bad faith claim went to trial and the jury returned a verdict for the insurer.

Hillenbrand did thereafter file an action for malicious prosecution, the very remedy the insurer had suggested in the bad faith proceedings. The insurer, however, then argued that the earlier ruling in the bad faith action collaterally estopped Hillenbrand from proving malicious prosecution. The insurer moved for judgment on the pleadings or, alternatively, for summary adjudication.

Judge John R. Lewis denied the insurer’s motion, explaining his rejection of the collateral estoppel defense at some length: “While there are similarities between the issues in the bad faith action and this action, mere similarity is not the test. The issues must have been the same and must have been thoroughly and adequately litigated in the earlier action (if mere similarity were the test the denial of [a Code of Civil Procedure section] 128.5 motion would have the effect of always precluding a later malicious prosecution action, which does not appear to be the California law), [f] The circumstances and filing of the declaratory relief action would have been but an evidentiary aspect of the issue of bad faith while the circumstances of the filing of the declaratory relief are the very heart of this malicious prosecution action. Thus, effectively, moving party here seeks to foreclose assertion of an essential element of plaintiffs’ claim based upon an evidentiary determination in the prior action, (ie. [sz'c] whether the Court properly could consider in the prior action the circumstances of the bringing of the declaratory relief action[.)] The apparent law at the time of Judge Gunther’s ruling was that it could not be considered. The later articulated law was that it could be considered but was only a factor.”

The insurer alludes to general notions of res judicata and collateral estoppel, lumping together the two distinct legal concepts and claiming that, even if neither applies, “fundamental fairness and equity cry out for this Court to correct” such “a legally repugnant outcome.” According to the insurer, “However labeled, California law should not sanction a malicious prosecution case which is predicated on an insurance coverage dispute that ended with a jury finding that the carrier acted in good faith toward its policyholder.” The insurer is wrong.

First, the jury did not find that the insurer acted in good faith. Rather, in its special verdict, the jury found the insurer had not breached the implied duty of good faith and fair dealing. A plaintiff, however, must show at a minimum that benefits were delayed or withheld and that the insurer acted unreasonably or without proper cause to prove a bad faith claim. (Dalrymple v. United Services Auto. Assn. (1995) 40 Cal.App.4th 497, 512 [46 Cal.Rptr.2d 845] (Dalrymple); Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1151 [271 Cal.Rptr. 246].) The jury could have found that benefits were not unreasonably delayed though the insurer acted without proper cause. There was no affirmative finding, as the insurer suggests, that it acted in good faith.

It is also disingenuous for the insurer to seek judicial usurpation of the malicious prosecution verdict when it ardently strove to keep the filing of the declaratory relief action from the jury in the bad faith trial. At the insurer’s insistence, the first jury heard absolutely no evidence that the insurer had filed or prosecuted the declaratory relief action and the cross-complaint to recover defense costs against its insured both before and after the third party claim was settled. The evidence introduced in the trial of the bad faith claim, therefore, was not identical to the evidence introduced at the trial of the malicious prosecution action, and the cases cited by the insurer are inapposite. (Dalrymple, supra, 40 Cal.App.4th 497; State Farm Mut. Auto. Ins. Co. v. Superior Court (1991) 228 Cal.App.3d 721 [279 Cal.Rptr. 116].) While the elements of the two causes of action bear substantial similarity in the abstract, the evidence offered at trial may in cases such as this be quite different. Hence, the bad faith claim that was sent to the jury was predicated only on the failure to investigate the claim. The heart of the malicious prosecution action simply was not a part of the trial of the bad faith claim. To contend, as the insurer does, that the jury verdicts are inconsistent or anomalous or that there is a void in California law that we should address ignores the record before us and the disparity in the evidence presented at the two trials.

The real issue is not whether the jury verdict in the bad faith claim precluded the malicious prosecution action, for clearly it did not, but whether Judge Gunther’s ruling on the motion for summary adjudication collaterally estopped Hillenbrand from asserting that the filing and prosecution of the declaratory relief action constituted a malicious prosecution of an untenable legal claim. We agree with Judge Lewis that Judge Gunther’s ruling did not address the viability of a malicious prosecution claim, for indeed, since the declaratory relief action was still pending, any such claim would have been premature. Therefore, the issue before Judge Gunther was not identical to the issue later raised in the malicious prosecution action to satisfy the rigid criteria for imposing collateral estoppel. (American Internat. Underwriters Agency Corp. v. Superior Court (1989) 208 Cal.App.3d 1357, 1362 [256 Cal.Rptr. 730].)

III

Judge Warren granted the insurer’s motion for summary judgment in the declaratory relief action, granted reconsideration, and reversed his first ruling. The insurer insists that one ruling in its favor, no matter how fleeting, establishes probable cause as a matter of law. Judge Edward J. Garcia of the federal district court disagreed. So do we. The record of the proceedings is the most telling.

During the initial hearing on the insurer’s motion, the trial court was prepared to deny summary judgment because the insurer had failed to submit one of the two policies purchased by Hillenbrand and a declaration submitted by a purported employee was deficient. The insurer requested a continuance to obtain additional evidence to satisfy its burden of proof. Although the court pointed out that the moving party was not entitled to a continuance, it granted the insurer’s request. The insurer did not disclose the evidence in its possession that the damage for which Hillenbrand had been sued was not caused by faulty workmanship, but by improper maintenance and the type of material used. The court granted the insurer’s motion for summary judgment.

In Hillenbrand’s motion for reconsideration, it urged the court to consider additional evidence that had been acquired since the hearing on the motion for summary judgment, including transcripts from depositions of the homeowners. Many of these homeowners described damage to property other than the siding installed by Hillenbrand, and over 125 additional depositions were still pending. During the first week of the depositions, five of 11 homeowners had claimed damage to “other property” allegedly caused by Hillenbrand’s faulty workmanship.

In May 1986, Robinson advised Pritchett: “At the hearing on the motion to reconsider, Judge Warren indicated that he had gone back over materials submitted to the court on April 14, 1986 by Wohl’s office and had concluded that those papers may have established damage to ‘other property’ that is validly claimed in the underlying action. He specifically referenced cracked tiles, damage to insulation, and damage to sheetrock.” Judge Warren revoked and set aside his earlier ruling granting summary judgment in its entirety and denied the insurer’s motion.

In a later motion for summary judgment in the malicious prosecution action, the insurer argued that Judge Warren’s initial ruling granting summary judgment established probable cause to file the declaratory relief action as a matter of law. The insurer contended that Hillenbrand’s additional evidence was merely cumulative and that Judge Warren had expressly considered, and rejected, Hillenbrand’s “other property damage” argument. Judge Garcia rejected the insurer’s argument. He stated, “I think that Judge Warren ruled without all of the facts before him. And when he got the additional facts, on the motion for reconsideration, he reversed himself completely. This isn’t a case where an Appellate Court reversed him. He just reserved [s-zc] himself when he had the full facts. And I recall that he also made a statement that he simply misapplied the law in the matter. So, I don’t find that the previous erroneous decision by, admittedly, by Judge Warren has any effect, whatsoever, on the determination of probable cause. And is distinguishable from cases that you cite, where the reversal was by Appellate Court after the initial decision.”

There are, as Judge Garcia suggested, many cases that hold that a judgment or verdict after trial in favor of the plaintiff establishes the proceedings were prosecuted with probable cause, even if the case is later reversed on appeal. (Cowles v. Carter (1981) 115 Cal.App.3d 350, 356 [171 Cal.Rptr. 269] (Cowles)) According to Cowles, the inquiry is: “Did a trier of fact after a fair adversary hearing reach a determination on the merits against the defendant in the prior proceeding? If the answer is in the affirmative, the defendant in that proceeding may not thereafter institute an action for malicious prosecution, whether the matter was criminal or civil, even though he shows that the determination in question was reversed on appeal or set aside by the trial judge.” (Id. at p. 358.)

In Cowles, the trial court denied a defense motion for nonsuit and the jury returned a verdict for the plaintiff. The judge thereafter reversed the jury’s determination by granting a motion for judgment notwithstanding the verdict. “[I]t was the ‘dual action’ of the court’s denial of the nonsuit motion and the initial jury verdict for plaintiff (even though later overturned), which established probable cause.” (Lucchesi v. Giannini & Iniack (1984) 158 Cal.App.3d 777, 787, fn. 11 [205 Cal.Rptr. 62].) The holding in Cowles “was based on the notion that persons who initiate civil proceedings should not thereafter be subjected to malicious prosecution litigation unless it could be shown that they acted without probable cause—and that if probable cause had been determined by the trier of fact in the prior proceedings, it was not subject to reevaluation even when the jury’s determination was reversed.” (Hufstedler, Kaus & Ettinger v. Superior Court (1996) 42 Cal.App.4th 55, 65 [49 Cal.Rptr.2d 551].)

The same logic has been extended to summary judgment rulings. “Denial of a defendant’s summary judgment motion provides similarly persuasive evidence that a suit does not totally lack merit” (italics added) because “summary judgment rulings usually are grounded in a dependable evaluation of the facts” and “the judge denying summary judgment is impartial.” (Roberts v. Sentry Life Insurance (1999) 76 Cal.App.4th 375, 383 [90 Cal.Rptr.2d 408].)

These general principles are somewhat self-evident and consistent with the public policy forestalling the filing of unwarranted, groundless litigation. (Sierra Club v. Superior Court (1985) 168 Cal.App.3d 1138, 1147 [214 Cal.Rptr. 740].) A verdict following a jury trial or a ruling following a thorough exploration of the evidentiary and legal basis for a claim is certainly indicative, if not conclusive, that the underlying action was tenable, even if unsuccessful. But the insurer has not cited any cases, and we have found none, where a ruling reversed and set aside following a successful motion for reconsideration was found to be conclusive evidence of probable cause. Such a rule simply would not comport with existing authority or the policies underlying the tort of malicious prosecution.

The facts of this case are far different from those presented in the reported cases. Here, the trial judge, upon receiving additional evidence and reconsidering his earlier ruling, reversed himself. The insurer insists that the judge’s mistaken decision, even though it was rectified soon after it was made, conclusively establishes that its position was tenable. According to the insurer’s rationale, there is no opportunity for redemption; the mistake is fatal to a subsequent action for malicious prosecution. We disagree.

A favorable ruling or verdict after trial is conclusive evidence that the lawsuit was not unwarranted or groundless. But a ruling reconsidered and rectified sheds no light on the legal viability of a claim. Particularly in a case such as this, when the trial court considers new evidence on rehearing, even if cumulative, the significance of the earlier ruling is lost. It is as if to say the insurer can validate its prosecution for years of a meritless lawsuit because a trial judge, in a moment of confusion or misunderstanding, temporarily erred. We are unwilling to deny a plaintiff a remedy for malicious prosecution simply because a trial judge committed a mistake he himself promptly undid.

The insurer insists that Wilson v. Parker, Covert & Chidester (2002) 28 Cal.4th 811 [123 Cal.Rptr.2d 19, 50 P.3d 733] (Wilson) dictates the opposite result. According to the insurer, Wilson establishes that a conclusive presumption of probable cause as a matter of law arose when, on reconsideration of the ruling granting the summary judgment, Judge Warren found the existence of a triable issue of fact. We disagree for several reasons.

In Wilson, the trial court denied the defendants’ motion to strike a SLAPP suit (strategic lawsuit against public participation) because the plaintiffs sustained their burden of demonstrating a reasonable likelihood they would prevail on the merits. After the plaintiffs ultimately lost at trial, the defendants filed a complaint for malicious prosecution. The Supreme Court held that the denial of the motion to strike is equivalent to a finding of probable cause. (Wilson, supra, 28 Cal.4th at p. 815.) The plaintiffs were the beneficiaries of the denial of the motion to strike and later used that ruling to defeat the defendants’ action for malicious prosecution.

The motion for summary judgment in the insurer’s declaratory relief action is very different from the motion to strike the SLAPP suit in Wilson. Here, the insurer, as plaintiff, moved for summary judgment and lost. But Hillenbrand had not filed a cross-motion for summary judgment. As a consequence, the trial court could not enter judgment in its favor. Instead, the trial court found there was a triable issue of fact. The insurer insists that the finding of a triable issue, even in this unique context, is the equivalent of probable cause. Not so.

Unlike the plaintiffs in Wilson who prevailed on the motion to strike, the insurer lost the summary judgment and yet attempts to use that ruling to preclude a malicious prosecution claim. If we were to accept that argument, an insurer who loses its motion for summary judgment in a declaratory relief action would thereby insulate itself from a malicious prosecution claim. That is not a result compelled by Wilson.

In Wilson, the underlying action was not one for declaratory relief involving an insurer’s duty to defend where that duty arises as long as there is any potential for coverage. Rather, Wilson involves a SLAPP suit where the plaintiffs, in order to avoid a motion to strike, must make an affirmative showing that they will prevail on the merits. Here, the denial of the summary judgment did not suggest that the insurer would prevail on the merits but merely exposed the existence of a triable issue.

Unlike Wilson, this case involves the tricky coalescence of declaratory relief, malicious prosecution, and an insurer’s duty to defend. Probable cause to defeat a malicious prosecution claim exists if there is an arguably tenable claim. Under the Wilson rationale, if there is a triable issue of fact, the claim is at least tenable. But that is not true in a declaratory relief action to determine whether there is a duty to defend because of the well-established proposition that the duty to defend arises whenever there is potential coverage. Hence, the existence of a triable issue of fact tends to negate, rather than to establish, probable cause due to the simple fact that a triable issue exposes potential coverage. Wilson, in short, does not apply to the facts before us.

IV

The insurer asserts that it relied on the advice of its counsel as a matter of law, thereby establishing a complete defense to liability for malicious prosecution. (DeRosa v. Transamerica Title Ins. Co. (1989) 213 Cal.App.3d 1390 [262 Cal.Rptr. 370].) Hillenbrand points out that prior to the summary adjudication of the probable cause issue, the insurer expressly declined the defense of reliance on advice of counsel. Judge Garcia explained: “From the commencement of the case in this court until November of 1992 defendants steadfastly maintained that they did not plan to rely on the affirmative defense of ‘reliance on advice of counsel.’ ” Hillenbrand urges us to ignore the resurrected defense because the insurer waived the defense below.

We need not be distracted by the nuances of waiver. The jury heard the evidence at trial and rejected the same inferences and arguments reiterated by the insurer on appeal. As a consequence, the scope of appellate review is quite limited. We must determine whether there is substantial evidence to support the jury’s finding that the insurer did not rely on the advice of counsel. (Bertero, supra, 13 Cal.3d at p. 54.)

The insurer catalogues the involvement of the Mackenroth law firm in the filing and prosecution of the declaratory relief action and the cross-complaint for reimbursement of defense costs and insists that even though it relied on the firm’s advice, it was obligated to independently investigate the facts to avoid a bad faith claim. (Garner v. American Mut. Liability Ins. Co. (1973) 31 Cal.App.3d 843 [107 Cal.Rptr. 604].) In other words, laments the insurer, claims personnel often express personal opinions on coverage during their investigations, and those opinions do not obliterate an insurer’s right to rely on its lawyer’s advice. While we agree that an insurer does have a right to rely on the advice of counsel in the proper case, we do not agree the insurer here was put in a no-win predicament, caught between its right to rely on counsel and its duty to independently assess coverage.

As Hillenbrand appropriately points out, an insurer is not exposed to malicious prosecution liability if it has probable cause to file and prosecute its complaint, whether or not it seeks the advice of counsel. Reliance on the advice of counsel is but one way to establish probable cause. Moreover, reliance on advice of counsel is not a defense if the defendant knows, as the insurer did in this case, that it does not have probable cause to file suit. (Sierra Club Foundation v. Graham (1999) 72 Cal.App.4th 1135, 1153-1154 [85 Cal.Rptr.2d 726].) Good faith reliance is an obvious prerequisite. (Bertero, supra, 13 Cal.3d at pp. 53-54.)

The jurors heard evidence from which they could infer that the insurer itself knew it lacked probable cause to file the lawsuit and, therefore, that good faith reliance on the advice of counsel was lacking. Cerf was uninterested in obtaining a written opinion on coverage, typically done when a coverage dispute erupts. He realized the insurer had a duty to defend, yet he recommended filing the initial action. Having heard Claudia Robinson’s testimony, the jurors certainly could have concluded that Cerf, not the lawyers, controlled the claim and made the decision whether, and when, to prosecute the lawsuits. The jurors might also have noticed that the written documents introduced into evidence by the insured to establish its claim of reliance on counsel were dated after the declaratory relief action was filed. In sum, the jury determined that as a matter of fact the insurer had not placed good faith reliance on its lawyers and blindly signed on to a lawsuit it honestly believed was meritorious. We are not at liberty to disturb that finding, supported as it is by substantial evidence.

V

The insurer challenges the sufficiency of the evidence of malice t