Xebec Development Partners, Ltd. v. National Union Fire Insurance (12 Cal. App. 4th 501, 1993)

Opinion

STONE, J.

Defendant National Union Fire Insurance Company of Pittsburgh, Pa., appeals from a judgment for more than $7 million obtained against it by plaintiff Xebec Development Partners, Ltd. (XDP) on claims assigned to XDP by insureds under a policy of directors and officers liability and corporate reimbursement insurance (the D&O policy) issued by National Union. XDP cross-appeals from the same judgment, asserting that the amount of its judgment was improperly limited.

The jury implicitly, and properly, found that National Union had breached the D&O policy. But the jury’s assessment of damages cannot stand; the judgment must be reversed and the matter remanded for further trial of the issue of damages for breach of contract. XDP is entitled to no recovery from National Union beyond such damages, together with prejudgment interest and costs (excluding attorney fees) ancillary to such damages, as may be fixed in further proceedings conducted in accordance with this opinion.

The D&O policy had been issued by National Union to Xebec Corporation (Xebec) and was applicable to claims made during the policy period. Subject to policy terms and conditions, the D&O policy provided for payment of indemnity in two categories:

(1) Loss: National Union promised to pay, on behalf of directors and officers of either Xebec or any of its designated subsidiaries, “loss . . . arising from any claim or claims . . . made ... by reason of any Wrongful Act... in their respective capacities as Directors or Officers.” “Loss” was defined as “any amount which the Insureds are legally obligated to pay for a claim or claims made against them for Wrongful Acts, and shall include damages, judgments, settlements, costs, charges and expenses . . . incurred in the defense of actions . . . .” “Wrongful Act” was defined as “any breach of duty, neglect, error, misstatement, misleading statement, omission or other act done or wrongfully attempted by the insureds ... or any matter claimed against them solely by reason of their being such Directors or Officers . . . .” National Union also promised to pay, on behalf of Xebec and its designated subsidiaries, “any amount [Xebec or a subsidiary] shall be required or permitted by law to pay to a Director or Officer as indemnity” for claims of essentially the kind defined with respect to directors and officers. The policy provided no coverage for claims made against Xebec or its subsidiaries as entities.

(2) Costs of defense: The policy provided that “[n]o costs, charges, expenses and settlements shall be incurred without the Insurer’s consent which shall not be unreasonably withheld; however, in the event of such consent being given, the Insurer will pay, [subject to provisos and limitations not relevant here], 100% of all such costs, charges, expenses and settlements . . . .” Under the policy terms National Union could arguably require that the corporation (always subject to National Union’s consent) advance the costs of defense, to be reimbursed by National Union upon completion of the defense. But there was evidence that as a matter of industry practice, generally followed by National Union, D&O insurers would be willing, upon some showing of the corporation’s inability to pay, to advance costs of defense currently. This procedure was referred to as “interim funding.”

The D&O policy, and the policy application which became a part of the policy, further provided in pertinent part:

(a) That “as a condition precedent” to their rights to be indemnified under the policy Xebec, its subsidiaries, and its directors and officers “shall . . . give to the insurer notice as soon as practicable in writing of any claims made upon” directors or officers.

(b) That Xebec, its subsidiaries, and its directors and officers “shall give the Insurer such information and cooperation as it may reasonably require and as shall be in the . . . power” of the corporations, directors and officers.

(c) That “all Directors and Officers shall furnish the insurer with copies of investigations, pleadings, and all other papers relating to an occurrence which could give rise to a possible claim under the . . . policy.”

(d) That “the Directors and Officers will give the insurer the right to associate with them in the defense and settlement of any claim that appears reasonably likely to involve the insurer and the Directors and Officers will cooperate with die insurer in the defense of such claim.”

Beginning in 1983 XDP, a limited partnership, had entered into research and development agreements (RDA’s) with Xebec by the terms of which XDP was to provide nearly $14 million in funding to Xebec for certain high-technology research and development work, and Xebec was to assign specified proprietary rights in the technology to XDP. Xebec agreed that the money XDP provided under the RDA’s would be used only for specified costs incurred in performing the research and development work.

In 1985 certain XDP limited partners, including one Crary, concluded that Xebec had been diverting the research funds to unauthorized uses, and thereupon filed a lawsuit (the Crary lawsuit) against Xebec and certain of its subsidiaries. The Crary lawsuit was filed as a partner derivative action, and XDP was designated as a technical defendant.

None of Xebec’s directors or officers was named as a defendant in the Crary lawsuit. Nevertheless, in December 1985 Xebec submitted a copy of the Crary complaint to National Union as notice of a “potential occurrence” under the D&O policy, pointing out that the complaint designated “Doe” defendants. Early in 1986 National Union acknowledged receipt of the complaint, stated that it would “treat this matter as an occurrence which may subsequently give rise to a claim . . . ,” and asked that National Union be notified if the complaint were amended to name directors or officers as defendants. The language “occurrence which may subsequently give rise to a claim” came directly from the policy, invoking a policy provision under which XDP’s subsequent lawsuit against Xebec directors and officers (the Toreson-Hoebich lawsuit) was treated as a claim made during the policy period.

It appears that National Union received no further notice concerning the Crary lawsuit. Nor did it receive notice of a cross-complaint by XDP or of an independent lawsuit by XDP, both arising out of the RDA’s and filed during 1986 but neither directed to individual directors or officers of Xebec.

In January 1986 a Xebec shareholder named Heideman (and one other shareholder) filed a securities class action (the Heideman lawsuit), not directly related to the RDA’s, against Xebec and other entities and individuals, including Xebec’s officers and directors. National Union was notified of the claims against officers and directors in the Heideman lawsuit and concurred in selection of counsel (the Orrick firm) to represent both Xebec and its officers and directors in that lawsuit. National Union provided interim funding for defense of directors and officers in the Heideman lawsuit.

Because there had been no activity reported to it for one year, National Union closed its file on the Crary lawsuit in January 1987.

In February 1987, as an economy measure, Xebec allowed the D&O policy to expire.

In March 1987 XDP and another entity filed the Toreson-Hoebich lawsuit against Xebec directors and officers Toreson and Hoebich, asserting conversion and breach of fiduciary duties with respect to the RDA’s and praying for approximately $6.5 million in damages. Toreson and Hoebich retained the Orrick firm to represent them in the Toreson-Hoebich lawsuit. It is undisputed that, by virtue of the December 1985 notice to National Union of the Crary lawsuit, the Toreson-Hoebich lawsuit constituted a claim made within the policy period of the D&O policy. But until September 24, 1987, no one notified National Union of the Toreson-Hoebich lawsuit.

The Heideman lawsuit proceeded along its own track, separate from the lawsuits arising out of the RDA’s. The Crary lawsuit had been submitted to binding arbitration, and by April 1987 all the lawsuits arising out of the RDA’s had been consolidated in the arbitration proceedings. An arbitration “trial,” before a panel of three attorney-arbitrators, was set for July 1987 but was then continued to September 28, 1987.

By late spring 1987 Xebec had fallen behind in paying the Orrick firm’s legal fees. To reduce its legal costs Xebec retained an attorney named Haun, formerly both a member of the Orrick firm and house counsel at Xebec, to do part of its legal work at a lower cost. By early summer 1987 the Orrick firm had advised Xebec that it wished its account brought up to date.

In August 1987 the Orrick firm moved for summary judgment on behalf of Xebec in the arbitration proceeding, arguing primarily that Xebec had performed sufficiently under the RDA’s and therefore that XDP was not entitled to recover the money it had provided. In response XDP submitted extensive documentation to show that Xebec and its subsidiaries, officers, and directors had in fact wrongfully diverted a substantial part of the money. The arbitrators denied summary judgment, and from the arbitrators’ remarks both Haun and the Orrick firm’s attorneys concluded that the arbitration trial might produce a result unfavorable to ¿11 defendants including Toreson and Hoebich as individuals.

In mid-September 1987, the Orrick firm, having been informed that Xebec had diverted funds intended for payment on the Orrick firm’s account to other uses, told Xebec and the other defendants that it would withdraw from its representation of them in the arbitration proceedings. At about this time Xebec, through Toreson as its president, concluded that the defendants should undertake to settle the disputes in arbitration, entered into an agreement with Haun by which Haun was to receive an incentive fee to get the matter settled, and asked the Orrick firm to set up a settlement meeting with XDP. An Orrick firm attorney immediately called the principal attorney for XDP, Bisset, and arranged a meeting on September 18.

No attorney from the Orrick firm attended the September 18 meeting. It is apparent from the record that Xebec could not have expected the Orrick firm to act for the defendants, after September 15, unless arrangements satisfactory to the Orrick firm were made to pay the approximately $675,000 unpaid balance of attorney fees the firm had theretofore billed.

Toreson, Haun, Crary, Bisset, and a principal of XDP’s general partner attended the September 18 meeting. National Union still had not been given notice of the Toreson-Hoebich lawsuit, was unaware of the meeting, and was not represented. All five participants testified for XDP at trial, and their accounts were consistent and succinct: Toreson stated that the defendants’ financial condition was such that they could not fund a settlement. One alternative Toreson suggested was that the defendants’ rights against National Union under the D&O policy be assigned to XDP in return for an arrangement releasing the defendants from the claims in arbitration. XDP asked that the defendants verify their financial condition and that they provide the D&O policy to Bisset for review. There may have been mention of a minimum settlement figure of $5 million, but Bisset acknowledged in testimony that the defendants who were represented at the meeting indicated “they were prepared to discuss any kind of settlement that XDP wanted to do so long as it didn’t involve payments by them of any significant amount of money.” There was no settlement negotiation, as such, at the September 18 meeting: It was contemplated that Bisset and Haun would discuss settlement after XDP received the information it had requested.

Bisset had first heard of the possibility of insurance coverage at the August summary judgment hearing, when an Orrick firm attorney mentioned it in passing. After the hearing Bisset had questioned the attorney, who ultimately told Bisset that coverage had expired before the Toreson-Hoebich complaint was filed in March 1987. The attorney’s statement did not take account of the fact the claims-made provision of the policy had been satisfied by notice to National Union of the Crary lawsuit in December 1985.

Bisset testified that on September 21, having reviewed the policy, Bisset told Haun that XDP would need to have a judgment entered against the defendants and would want Xebec to pay certain royalties in cash. There was discussion of giving the defendants a covenant not to execute on the judgment. According to Bisset, this was all preliminary discussion and he was to submit a more formal settlement proposal to Haun.

Instead (Bisset testified), on September 22 Haun sent a written settlement proposal to Bisset. Bisset and Haun agreed in testimony that Bisset immediately rejected the proposal by telephone and then, on September 23 and 24, sent Ms own written proposals to Haun. The crux of these proposals was that Toreson and Hoebich, jointly and severally with the corporate defendants, would stipulate to an arbitration award and confirmatory judgment against them for $8,650,263, plus costs and fees, and would receive a covenant not to execute.

At trial National Urnon tendered, and the court received, substantial evidence to the effect that Toreson and Hoebich would not have been liable as individuals for more than a small fraction of tMs amount and might not have been liable, as individuals, at all.

As of September 24, 1987 (a Thursday, four days before the scheduled start of the arbitration “trial” on Monday, Sept. 28), National Urnon still had not been given notice of the Toreson-Hoebich lawsuit and was not aware of, and had not participated in, the settlement discussions between Bisset and Haun.

On the afternoon of September 24, Haun called a New York law firm wMch had represented National Urnon in connection with the Heideman lawsuit and spoke with one of the firm’s attorneys, Kristiansen. Kristiansen received the call at 4:45 p.m., New York time. Haun described the situation and told Kristiansen the matter was scheduled to go to “trial” on September 28. Haun testified that he told Kristiansen that “the only tMng I could tMnk of to get my clients out of tMs predicament was to either settle the case along the lines that we had been talking about or get National Urnon to step in and pick up the cost of contimiing to defendant [sic] the litigation.” Kristiansen’s recollection was somewhat different: He testified that Haun “told me that Orrick . . . had been representing the directors and officers and that they had incurred approximately [$675,000] in fees which had not been paid. ... He told me that if National Union did not step in and defend the directors an[d] officers, did not pay the back fees, as well as paying the fees ongoing, that Orrick would not continue to represent parties in the litigation. And that if National Union didn’t pick up those fees, Xebec and Toreson and Hoebich would stipulate to an [$8 million] nonrecourse judgment in favor of the plaintiff XDP and assign any right which they might have under [the D&O policy] to XDP.” Kristiansen called Haun back twice to obtain more information and copies of documents.

On September 25 Kristiansen received copies of pleadings and met with one of his senior attorneys and National Union representatives. Then Kristiansen called Haun and told him that National Union would not pay defense costs because notice had been given too late and National Union had been substantially prejudiced by the delay.

Also on September 25, counsel for parties to the various consolidated actions arranged for the first of a series of continuances of the arbitration “trial.”

On September 29 Kristiansen transmitted a written statement of National Union’s position to Haun. Among other things, Kristiansen’s letter said: “Due to the complete failure of Xebec and its directors and officers to provide National Union with any information regarding this claim, which conduct constitutes breaches of [enumerated provisions] of the policy, National Union hereby disclaims any responsibility for the costs of defense and/or indemnity which may be asserted by Xebec and/or Messrs. Toreson and Hoebich under National Union’s policy in connection with the claims asserted by XDP against Xebec, its subsidiaries and Messrs. Toreson and Hoebich.”

On the same day Bisset transmitted a copy of a draft settlement agreement (incorporating a proposed stipulated award of slightly more than $9.8 million in favor of XDP and against Xebec, Toreson, and Hoebich) to Kristiansen, and advised Kristiansen that the parties intended to present the stipulation to the arbitrators on September 30. At trial Bisset attributed the difference between the earlier $8.6 million figure and the $9.8 million to attorney fees and interest. In his own testimony at trial Bisset maintained that every element of the settlement had been carefully analyzed by Bisset and Haun, on the basis of substantial evidence accumulated for the arbitration “trial,” that the amount assigned to each element represented a realistic appraisal of the element’s settlement value, and that the total settlement amount was some $2.5 million less than XDP’s actual out-of-pocket loss.

Kristiansen responded by telephone that National Union’s previously stated position was final. Kristiansen reiterated this position, in writing, on September 30 and again on October 2, as the arbitration “trial” was repeatedly postponed. In the course of correspondence and telephone calls Kristiansen expressed indifference to Bisset’s proposals to send him the settlement draft and to travel personally to New York to discuss the situation. The record reflects that over the same period Haun sent Kristiansen several written invitations to negotiate concerning National Union’s participation, and particularly concerning “allocation” of the settlement amount (for purposes of coverage under the D&O policy) between claims against Toreson and Hoebich, as directors and officers, and claims, not covered by the D&O policy, against corporate defendants. Kristiansen either rejected or did not respond to each of these overtures. At trial he and other National Union witnesses asserted that as of September 24 the prejudice to National Union’s position had been irremediable, primarily because (in their view) its belated entry into the matter might well jeopardize a settlement which could hardly have been better from the standpoint of their insureds Toreson and Hoebich. National Union professed to be concerned that anything it might do to set aside a settlement under which Toreson and Hoebich would walk away financially untouched could be construed as a violation of National Union’s duty of good faith toward Toreson and Hoebich as its insureds.

On October 6 Crary signed the settlement papers and Bisset took them to a scheduled status hearing before the arbitrators. Immediately before the hearing Haun informed Bisset that Toreson and Hoebich now insisted on an agreement from the corporate defendants for indemnification in the event Toreson and Hoebich should be required to incur further legal costs, and that such an agreement would require shareholder approval which might delay proceedings for two months. Toreson testified “[w]e were concerned that the insurance company would sue us because we were assigning our rights to the policy to somebody else and that there would be some legal exposure

Over the following week Bisset and Haun worked out an amendment to the settlement agreement to provide for shareholder approval, and the arbitrators reset the trial for February 1, 1988, as a date certain.

On October 14, Xebec paid $40,930 to XDP as its full royalty payment required by the settlement. By October 16 all defendants except one Xebec subsidiary had signed the settlement agreement, and on October 22 Xebec issued a press release reporting it had tentatively settled all disputes involving XDP. On October 23 Haun wrote to Kristiansen, explaining that shareholder ratification of the settlement would not be obtained before mid-January. Kristiansen did not reply.

In December the last corporate defendant signed the settlement agreement. In January 1988 the settlement agreement was ratified by shareholders of the corporate parties.

By the terms of the settlement agreement XDP undertook to deliver to Xebec, upon entry of final judgment, a form of covenant not to execute which provided in pertinent part that XDP “will not at any time levy execution on or otherwise seek to enforce the Final Judgment” as against Xebec, Toreson and Hoebich, but that the covenant “shall not limit enforcement of the Final Judgment or any claim or right against any person or entity other than” Xebec, Toreson or Hoebich, “including without limitation [their] insurers.”

Attached to the settlement agreement as ratified was a form of “Award of Arbitrators,” to be made “in accordance with the parties’ stipulation,” which in relevant part fixed the joint and several liability of Xebec, Toreson and Hoebich to XDP at $9,033,479 in principal and interest, plus $800,000 in attorney fees, for a total of $9,833,479. The form omitted an additional $123,139.16 in separate liability for Xebec, and included a recital that Toreson and Hoebich were entitled to indemnification from Xebec under the Corporations Code, but was otherwise identical to the proposed stipulated award Bisset had transmitted to counsel for National Union on September 29. Also attached to the settlement agreement were a form of “Stipulation and [Proposed] Order Confirming Arbitration Award and Directing Entry of Final Judgment” and a one-paragraph form of “Final Judgment.”

On January 19, after short deliberation, the arbitrators signed an award in the form attached to the settlement agreement. It appears from the record that only Bisset and Haun appeared before the arbitrators, and there is no suggestion in the record that any question or objection as to the propriety of the stipulation for an arbitration award was raised by anyone.

No executed copy of a stipulation for judgment appears in the record, but on January 21, 1988 (two days after the arbitration award was signed), the superior court entered an order, in the form attached to the settlement agreement, confirming and adopting the award “as the final judgment in this action, which judgment shall be entered forthwith.”

On January 29 Bisset, for XDP, sent National Union a demand for payment of the full amount of the $9,833,479 judgment together with “your insuredsf’]” right to reimbursement of “approximately $900,000” in attorney fees and expenses. National Union did not respond. Eleven days later, on February 9, 1988, XDP sued National Union for the amount demanded, plus interest, punitive damages, and additional attorney fees, on three broad theories of liability: Breach of the insurance contract, of a covenant of good faith and fair dealing implicit in the insurance contract (cf. Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658-661 [328 P.2d 198, 68 A.L.R.2d 883]), and of subdivision (h) of Insurance Code section 790.03. (Cf. Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880 [153 Cal.Rptr. 842, 592 P.2d 329]; Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287 [250 Cal.Rptr. 116, 758 P.2d 58].) Various cross-claims were made but are not involved in this appeal. As pleaded in the four counts of XDP’s complaint and clarified in the course of the trial proceedings, XDP’s theories related to the elements of the recovery it sought as follows:

1. Breach of contract. In the first count of its complaint XDP sought recovery of the amount of the January 21, 1988, judgment against Toreson and Hoebich, plus interest, “[b]oth under the D&O policy and as damages proximately caused by its breach of the D&O policy.” Throughout trial and in summation Bisset made clear that XDP believed it was in any event entitled to the full amount of the judgment, upon contract principles, under the explicit terms of the insurance contract. In the second count of its complaint XDP sought further to enforce the asserted rights of Toreson and Hoebich, under the D&O policy, to recover attorney fees and other expenses they had incurred in defending against XDP’s claims.

2. Breach of the implied covenant of good faith and fair dealing. XDP’s third count undertook to enforce the asserted rights of Toreson and Hoebich to recover for National Union’s allegedly wrongful refusals to pay defense costs and to settle. As it took its case to the jury XDP made clear that it sought recovery on this theory only as to attorney fees and related litigation costs in two increments: Defense costs, including attorney fees, incurred by Toreson and Hoebich after National Union’s refusals (which occurred no earlier than Sept. 25, 1987), and XDP’s own costs of pursuing this lawsuit.

3. Breach of subdivision (h) of Insurance Code section 790.03. This theory was pleaded in XDP’s fourth count. By it XDP (as its theories developed during trial) sought recovery for National Union’s asserted bad faith insurance practices, in two increments. First, in its own right, as a “third party” claimant, XDP manifestly intended to use section 790.03 primarily as a predicate for a claim for punitive damages which would not otherwise be available to it. Second, XDP wished to use section 790.03, as the assignee under the settlement agreement of Toreson’s and Hoebich’s “first party” rights against National Union, as a basis, alternative to its breach-of-contract theory, for its claim to recover the defense costs Toreson and Hoebich had incurred both before and after September 24, 1987.

In the course of trial the superior court granted National Union’s motion for judgment on the pleadings as to XDP’s Insurance Code section 790.03 theories. The parties stipulated that XDP’s claims for defense costs—in essence, for attorney fees incurred by Toreson and Hoebich—and for XDP’s own attorney fees, should be tried by the court, after the jury returned verdicts on other issues. Thus, XDP went to the jury on its theories of breach of contract and breach of the implied covenant of good faith and fair dealing, but asked the jury to award damages only under its first contract count. As to the theories upon which it sought attorney fees it asked the jury only to make special findings for the use of the trial court in assessing XDP’s attorney-fee claims in separate and subsequent proceedings.

The trial court gave the jury a special findings form that addressed specific questions separately as to breach of contract and as to breach of the implied covenant of good faith and fair dealing. The jury found:

As to breach of contract:

(1) That Xebec, Toreson and Hoebich had failed to give notice of the claim against Toreson and Hoebich or had otherwise failed to cooperate with National Union.

(2) That these failures had not substantially prejudiced National Union.

(3) That the settlement agreement had not been collusive.

As to breach of the implied covenant of good faith and fair dealing:

(1) That National Union had acted unreasonably toward Xebec, Toreson or Hoebich in its handling of the claim after it received the September 24, 1987, telephone call from Haun.

(2) That National Union’s failure to act reasonably had proximately caused damage to Toreson, Hoebich or Xebec.

(3) That Xebec, Toreson or Hoebich had acted unreasonably toward National Union.

(4) That the failure of Xebec, Toreson or Hoebich to act reasonably had proximately caused damage to Xebec, Toreson or Hoebich.

(5) That the comparative percentages of unreasonable conduct were 25 percent attributable to Xebec, Toreson, Hoebich or their attorneys and 75 percent attributable to National Union or its attorneys.

The jury returned a general verdict for XDP and against National Union for $7,375,000. This general verdict was almost exactly 75 percent of the amount fixed in the settlement agreement as incorporated in the January 1988 arbitration award and, by reference, in the judgment confirming the award.

In the ensuing nonjury proceedings on attorney fees and costs, the court ruled that XDP could not recover attorney fees or costs as the assignee of Toreson and Hoebich, but could recover 75 percent of its own attorney fees in prosecuting this action by virtue of its assigned claim for breach of the implied covenant of good faith and fair dealing. After disallowing particular items of claimed fees and costs, and reducing net allowable fees by 25 percent, the court entered judgment for XDP for a total of $9,848,564.01.

The parties’ arguments on appeal, prepared and presented by the offices of trial counsel, do not always focus on cognizable appellate issues. In response to requests from the court the parties have submitted lengthy supplemental briefing. It has proved helpful to reorganize and to recast the parties’ contentions in an outline based on XDP’s theories of liability.

Breach of Contract

XDP’s first theory, on which it has consistently relied for recovery based on the amount specified in the underlying settlement and in the award and judgment based on the settlement, was that National Union had breached the literal terms of the insurance contract, that Xebec, Toreson and Hoebich, as insureds, were entitled to damages attributable to the breach, and that by virtue of assignment of the insureds’ rights XDP was entitled to sue for and to collect the damages.

1. Standing.

As a general rule, “in the absence of an assignment a third party claimant cannot bring an action upon a duty owed to the insured by the insurer.” (Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 889 [151 Cal.Rptr. 285, 587 P.2d 1098].) The trial court instructed the jury that Toreson and Hoebich had assigned “any and all of their rights or claims against . . . National Union” to XDP. Implicit in this instruction is an admonition that the assignment was valid. On appeal National Union has not questioned the validity of the assignment insofar as it relates to XDP’s breach of contract theory, and as to that theory the assignment appears to have been entirely orthodox. (Cf. generally, 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 933, p. 833 et seq.) Smith v. State Farm Mut. Auto. Ins. Co. (1992) 5 Cal.App.4th 1104 [7 Cal.Rptr.2d 131], decided while this appeal was pending and briefed by the parties at the court’s request, involved assignment of a conceptually distinguishable claim for asserted breach of the implied covenant of good faith and fair dealing.

Shortly before trial XDP for the first time suggested that it could pursue contract remedies against National Union not only as the assignee of the insureds but also directly, in its own right, under subdivision (b)(2) of Insurance Code section 11580. XDP’s subsequent motion to amend its complaint to refer to subdivision (b)(2) was taken under submission and apparently never ruled on. In any event XDP could not properly have proceeded under subdivision (b)(2), because XDP’s underlying action against Toreson and Hoebich patently was not “based upon bodily injury, death, or property damage” within the meaning of the section. (Cf. Rolf Homes, Inc. v. Superior Court (1960) 186 Cal.App.2d 876, 880-881 [9 Cal.Rptr. 142].)

2. Breach.

XDP was of course required to prove that National Union had breached the insurance contract. Initially XDP asserted that National Union had done so (1) by failing and refusing in the fall of 1987, after notice of claims against the insureds, to consent to or to pay the insured’s costs of defense, and (2) by failing, in early 1988, to indemnify XDP (as the assignee of Toreson and Hoebich) for the amount of the judgment entered against Toreson and Hoebich. But at trial XDP requested instructions, and argued its case to the jury, upon only the first assertion: That National Union had breached the contract by refusing to pay costs of defense for Toreson and Hoebich. The court informed the jury of both assertions, but in its instruction on XDP’s burden of proof described only the first. Neither party complains of this apparent inconsistency.

a. Coverage.

The question of breach would not arise if the policy patently did not extend to the claim made upon it. Thus, for example, if Xebec had requested payment of its defense costs, a refusal by National Union could not have been a breach because the policy did not cover claims against the corporation as distinct from its directors and officers.

National Union complains that in the course of its instructions the trial court told the jury to “assume” there was coverage under the D&O policy. National Union asserts that the instruction “amounted to a directed verdict on virtually the entire case.”

The assertion disproportionately aggrandizes the instruction the court actually gave, and disregards relevant circumstances surrounding the decision to give the instruction.

The court’s instruction was that “for purposes of your deliberations you must assume that the claims asserted by [XDP] against Toreson and Hoebich were covered by the insurance policy. The defendant is still entitled to assert defenses to justify or excuse it from paying the plaintiff, however.”

This instruction was arrived at in the course of colloquy between the court and counsel, out of the presence of the jury, immediately before the court instructed the jury. In the course of trial National Union did not deny that Toreson and Hoebich were directors and officers (and thus that claims against them arising out of their activities as directors and officers would presumptively be within the policy’s coverage) but did from time to time assert either that there had been no colorable claim, within the policy coverage, against either Toreson or Hoebich as an individual, or at least that some elements of XDP’s claims against the individuals were not covered. The court ultimately determined that it should resolve the question of coverage, in the broad sense, as a matter of law and should instruct the jury in accordance with its determination, and made the parties aware that in its view there was coverage, as a matter of law, of the claims XDP had made against Toreson and Hoebich. In the preinstruction colloquy counsel for XDP suggested that the jury “needs to know” the court’s conclusion. The court expressed countervailing concerns that, on the one hand, a categorical instruction that there was coverage might lead the jury to disregard evidence of coverage defenses, but, on the other hand, the jury might be “sort of left at sea” if no instruction at all were given. At this point counsel for National Union suggested that the court and counsel had previously agreed (apparently in proceedings off the record) “something like we were going to go forward on assuming there is coverage . . . .” After further discussion the court proposed essentially the instruction it ultimately gave, acknowledging that it was “offering a middle ground” rather than informing the jury categorically. Counsel for National Union then said: “We would be willing to go along with that and it probably prejudices us more because we definitely believe there is no coverage and we are allowing the jury to assume coverage. We don’t want to be taken as waiving it should be [XDP’s counsel’s] struggle and not our struggle, but we would agree to it.”

Vague as this colloquy is, it appears to amount to acquiescence by National Union in the instruction as given, coupled with an expression of intent to reserve its objection that the trial court was wrong on the law: That as a matter of law there was not coverage.

But having reserved the coverage issue National Union does not appear to return to it in this court.

b. Duty to defend versus duty to pay costs.

At the outset XDP took the position that the D&O policy imposed a “duty to defend” on National Union, and National Union responded that the policy imposed at most a duty to pay defense costs subject to its advance consent which could not be unreasonably withheld. National Union’s position is consistent with judicial construction of other D&O policies (cf., e.g., National Union Fire Ins. Co. v. Stites Prof. Law Corp. (1991) 235 Cal.App.3d 1718, 1727 [1 Cal.Rptr.2d 570]; cf. also Helfand v. National Union Fire Ins. Co. (1992) 10 Cal.App.4th 869, 879 [13 Cal.Rptr.2d 295]; Gon v. First State Ins. Co. (9th Cir. 1989) 871 F.2d 863, 867-868), and XDP appears to have come around to this position.

The significance of the distinction between duty to defend and duty to pay defense costs will depend on the context in which the issue is raised. Here the relevant question was whether National Union had (as XDP asserted) breached a duty imposed upon it by the insurance contract, whatever the exact nature of that duty might have been. To answer the question the jury would need to know the exact nature of the duty. National Union argues that the jury was improperly instructed that the insurance contract imposed a duty to defend. National Union appears to be wrong. The trial court told the jury:

(1) That the insurance contract “required [National Union] to pay for defense costs, for claims filed against the officers and directors of Xebec charging them with wrongful acts . . . , and to indemnify the directors and officers for any amount for [sic\ which they became lawfully obligated to pay to an injured party on account of such wrongful conduct.” National Union’s objection does not reach this language, which is reasonably accurate.

(2) That “under the terms of the policy the defendant was obligated to pay the cost of defending Toreson and Hoebich against the claims which [XDP] filed against Toreson and Hoebich,” subject to “an agreement . . . that prior to incurring any attorney fees which were to be paid by the defendant Toreson and Hoebich would ask for and obtain the defendant’s consent. . . [which] would not be unreasonably withheld.” National Union argues that the instruction did not take sufficient account of its assertion “that the policy was already in ‘breach’ by the insureds before National Union was asked to respond.” This is a matter of coverage defense, considered below. Certainly the instruction does not tell the jury that National Union’s relevant duty under the policy was a duty to defend.

c. Asserted inconsistency in findings.

The jury was not asked to make special findings as to whether National Union had breached the duty to pay defense costs. National Union argues that in postverdict proceedings the court expressly found that National Union had not breached the duty. Apparently National Union is referring to the trial court’s conclusion, stated during trial and referred to somewhat obliquely in its written postverdict orders on attorney fees, that because (in the court’s view) National Union had not received sufficient notice of XDP’s claims against Toreson and Hoebich, and thus had been given no opportunity to grant or withhold consent to defense costs, before September 24, 1987, National Union had no retroactive duty to pay the attorney fees Toreson and Hoebich had incurred (primarily to the Orrick firm, which by September 24 had effectively withdrawn from the representation) before that date. The court’s order did not extend to, and thus did not imply a finding as to, National Union’s asserted duty to pay costs of defense (including attorney fees) for Toreson and Hoebich from and after September 24.

d. Anticipatory repudiation.

Under the trial court’s view of the evidence, the only breaches of National Union’s duty to pay defense costs would have related to costs incurred from and after September 24, 1987. The evidence shows that National Union made quite clear, beginning on September 25, that it would not consent to, or pay, defense costs to be incurred in the future in the Toreson-Hoebich lawsuit. The trial court instructed the jury, in part, that “[i]f a party to an insurance contract disclaims a future obligation to perform under the insurance contract the other party to the insurance contract is entitled to treat the disclaimer as a breach of the insurance contract even if the performance disclaimed is not yet due.” National Union asserts that the instruction was erroneous, arguing that “[t]he doctrine of ‘anticipatory repudiation’ is generally not applicable to insurance contracts” and “is peculiarly inapplicable in the context of a contract of indemnity.” (Italics in original.)

National Union’s argument overtaxes the cases on which it relies. It is established that “[t]here can be no anticipatory breach of a unilateral contract.” (Cf. generally, 1 Witkin, Summary of Cal. Law, supra, Contracts, §§ 811-812, pp. 731-732.) This rule has been applied to certain kinds of insurance contracts in circumstances which have rendered the contracts unilateral, and National Union cites some of these cases (cf., e.g., Garage etc. Employees Union v. Pacific Mut. Life Ins. Co. (1969) 2 Cal.App.3d 706, 712 [82 Cal.Rptr. 821]), but these cases by no means establish that there can never be an anticipatory repudiation of an insurance contract. More to the point, the instruction was at worst superfluous: By the time XDP filed its lawsuit, the time for National Union’s performance had passed and National Union, rightly or wrongly, unequivocally maintained its refusal to perform (either by interim funding or by reimbursement). Although arguably over-broad, the instruction could not have prejudiced National Union.

e. Settlement.

In its supplemental briefing XDP suggests that the D&O policy imposed on National Union a duty to accept a settlement entered into by its insureds, and that National Union breached its duty by rejecting the settlement Haun described to Kristiansen.

XDP relies on policy language which does not support its conclusion. The language, in an amendment to both the company reimbursement and the directors and officers liability coverages of the policy, is a provision for payment of costs in the limited circumstances in which an insured may be required to contest legal proceedings; the provision refers in passing to payment of “settlements.” XDP argues that this provision “expressly gave the insureds the right to settle” and thus implicitly required National Union to acquiesce in any such settlement. On the face of the provision XDP’s argument is tenuous at best; more to the point, another provision of the same policy amendment expressly states that “[n]o . . . settlements shall be incurred without the Insurer’s consent which shall not be unreasonably withheld . . . .”

In any event XDP did not effectively raise the point in the trial court.

f. Coverage defenses.

National Union did not and could not deny that it flatly and unequivocally refused to pay defense costs, or that it persisted in its refusal over the several months between September 24, 1987, and entry of XDP’s judgment in January 1988.

Instead, National Union asserted, as coverage defenses, that it was released from its duty to pay defense costs by its insureds’ antecedent breaches of duties imposed upon the insureds under the insurance contract.

i. Asserted breaches by the insureds.

A. Notice.

The D&O policy required, “as a condition precedent to” the insureds’ rights to be indemnified, that Xebec give National Union “notice as soon as practicable in writing of any claims made upon the insureds.” The contract also incorporated an agreement to furnish National Union with “copies of investigations, pleadings, and all other papers relating to an occurrence which could give rise to a possible claim . . . In January 1986 National Union had acknowledged notice (with respect to the Crary lawsuit) of “an occurrence which may subsequently give rise to a claim,” but it is undisputed that the first relevant claim made explicitly upon Toreson and Hoebich was XDP’s March 1987 lawsuit, and that although Xebec, Toreson and Hoebich were aware of that lawsuit from the outset, National Union was not given any form of notice or information concerning the lawsuit until September 24, 1987, six months later. The jury expressly found that Xebec, Toreson and Hoebich failed to give notice of the claim.

B. Cooperation.

The D&O policy required that Xebec “give the Insurer such information and cooperation as it may reasonably require and as shall be in the Insured’s power.” The jury expressly found that Xebec, Toreson and Hoebich had failed to cooperate with National Union.

ii. Prejudice.

National Union tacitly acknowledges that the jury’s findings that the insureds had failed to give notice or otherwise to cooperate were not sufficient in and of themselves to establish National Union’s coverage defenses. In the circumstances of this case National Union had the burden of showing it was substantially prejudiced by the insureds’ breaches. (Northwestern Title Security Co. v. Flack (1970) 6 Cal.App.3d 134, 140-144 [85 Cal.Rptr. 693]; cf. Clemmer v. Hartford Insurance Co., supra, 22 Cal.3d at pp. 881-884; Campbell v. Allstate Ins. Co. (1963) 60 Cal.2d 303, 305-307 [32 Cal.Rptr. 827, 384 P.2d 155]; Select Ins. Co. v. Superior Court (1990) 226 Cal.App.3d 631, 636 [276 Cal.Rptr. 598]; but see Helfand v. National Union Fire Ins. Co., supra, 10 Cal.App.4th 869 [notice-prejudice rule does not apply to notice which is an “element of coverage,” citing cases involving claims-made-and-reported policies].) The jury was so instructed, and explicitly refused to find substantial prejudice.

National Union attacks the jury’s negative finding, arguing that “prejudice appears as a matter of law, and a properly instructed jury could not have found otherwise.” If National Union were right, this court could properly conclude that National Union had borne its burden of proof of substantial prejudice and could set aside the jury’s special finding on that ground. But if the record does not show substantial prejudice as a matter of law, the jury’s finding must be deemed supported by an implicit determination, fully within the powers of the trier of fact, that National Union simply had not borne its burden.

The record unquestionably contains strong evidence that an insurer in National Union’s position stood to be gravely prejudiced by an inability to assure itself that Toreson and Hoebich had selected competent counsel, to exercise its contractual privilege “to associate with them in the defense and settlement” of XDP’s claims at a point early enough in the proceedings to have some meaningful opportunity to participate in those proceedings, and otherwise to assure that both its and its insureds’ interests were protected. Unlike a standard liability insurance policy, this D&O policy neither imposed a duty to defend upon National Union nor gave National Union the concomitant right to control and manage the defense. Nevertheless as a practical matter National Union might, with earlier notice, have been able effectively and consistently to serve both its insureds’ interests and its own.

But these perceptions are necessarily speculative and by the same token insufficient to establish substantial prejudice as a matter of law. The insurer’s burden “is not carried by a showing of possibility of prejudice to the insurer. Rather, actual prejudice must be shown. [Citation.] The insurer ‘must establish at the very least that if the cooperation clause had not been breached there was a substantial likelihood the trier of fact would have found in the insured’s favor.’ [Citation.]” (Northwestern Title Security Co. v. Flack, supra, 6 Cal.App.3d at pp. 141-142.) XDP tendered evidence of its own which (whether or not sufficient to have supported a finding of no prejudice had the burden been on XDP) was sufficient to raise a doubt as to whether National Union was substantially prejudiced by the six-month delay in notice and other “cooperation.” National Union’s evidence does not compel a finding of substantial prejudice as a matter of law.

In supplemental briefing National Union argues that Smith v. State Farm Mut. Auto. Ins. Co., supra, 5 Cal.App.4th 1104, demonstrates it was substantially prejudiced, as a matter of law, by the “stipulated” judgment entered in January 1988. National Union also asserts that “the requirement of ‘substantial prejudice’ ... is really something of a non-sequitur in ‘stipulated judgment’ cases.” Apparently the second argument (which is not wholly clear on its face) is intended as a variant of the first. In this case neither argument appears to reach the question whether as a matter of law the insureds’ failure to give notice to, or otherwise to cooperate with, National Union before September 24, nearly four months before the stipulated judgment was signed, substantially prejudiced National Union under the insurance contract. The language from Smith on which National Union relies relates not to prejudice antecedent to the stipulated judgment but rather to prejudice inherent in use of a stipulated judgment, coupled with a covenant not to execute, to support a subsequent action by an assignee for breach of the implied covenant of good faith and fair dealing. Rose v. Royal Ins. Co. (1991) 2 Cal.App.4th 709 [3 Cal.Rptr.2d 483], which National Union also cites, involved the propriety of a broadly worded no-action clause under Insurance Code section 11580 and contributes nothing to National Union’s argument.

Finally, National Union asserts that the jury’s special verdicts expressly found “that Toreson and Hoebich had acted unreasonably and that their unreasonable conduct had contributed to the ultimate size of the judgment. This requires a finding of ‘substantial prejudice’ as a matter of law.” At best the argument is disingenuous. What the jury found, not in the context of the notice and cooperation clauses of the insurance contract but with respect to XDP’s claim for breach of the implied covenant of good faith and fair dealing, was that Xebec, Toreson or Hoebich had acted unreasonably toward National Union and that their failure to act reasonably had proximately caused damage to Xebec, Toreson or Hoebich. These findings appear to have no tendency at all to show substantial prejudice to National Union, with respect to the judgment or anything else.

g. Summary.

By finding no substantial prejudice the jury effectively negated National Union’s coverage defenses. Its general verdict, under instructions the thrust of which was to require it to return such a verdict, if at all, only on a theory of breach of contract, necessarily implies a finding of breach of the contract by refusal to pay defense costs. The evidence sufficiently supports the implicit finding, and National Union has suggested no reason cognizable in an appellate court why the implicit finding of breach should not be upheld.

3. Damages.

In broad generality a party to a contract who is injured by breach of the contract, and who elects to seek damages (rather than one of several alternative remedies) for the breach, should receive the cash equivalent of the benefit of performance of the contract. (1 Witkin, Summary of Cal. Law, supra, Contracts, § 813, pp. 732-733.)

The generalization applies to an insurance contract such as this one. If all conditions of performance were met, in net effect the benefit of performance of the contract, to Toreson and Hoebich, was that the total of their unreimbursed legal obligations to pay covered claims and their expenses of defending against such claims should in no event exceed minimal “retention” amounts specified in the contract and not at issue here. To the extent they were not indemnified for amounts they could be legally compelled to pay, or reimbursed for costs of defense, in excess of the retention amounts, Toreson and Hoebich would suffer contract damages. As their assignee XDP sought to recover such damages.

a. Loss.

The policy provisions directly relevant to indemnification of Toreson and Hoebich define indemnifiable “loss” as “any amount which the Insureds are legally obligated to pay . . . .” To prove damages on the basis of unindemnified loss XDP needed to prove both the legal obligation to pay and the amount of the obligation. (Cf. Fidelity & Deposit Co. v. Whitson (1960) 187 Cal.App.2d 751, 757 [10 Cal.Rptr. 6].)

An insured might incur, or assume, an obligation to pay a covered claim in any of several circumstances ranging from enforcement of a litigated civil judgment at one extreme to voluntary payment, whether pursuant to a negotiated settlement or simply by way of acquiescence in the claimant’s demands, at the other. Given breach by the insurer, the easiest case for assessment of indemnity damages almost certainly would be one in which the third party claimant had forced the insured to trial and had obtained a fully litigated judgment fixing the amount due on the claim. Such a judgment, in contested proceedings, would provide relatively persuasive evidence of both the obligation and its amount. On the other hand a wholly voluntary payment would have very little tendency to demonstrate, in and of itself, the fact and amount of a legal obligation to pay. An insurer in National Union’s position could rationally insist, in such a situation, on some independent verification of the validity and amount of the obligation to pay asserted as a basis for indemnity. The farther down the continuum from contested judgment to voluntary payment the facts lie, the more difficult it will be to prove the existence of an “amount which the insureds are legally obligated to pay.”

i. Covenant not to execute.

National Union asserts in essence that because, by virtue of the covenant not to execute, Toreson and Hoebich would never be required to pay XDP’s claim, there was no “amount which [Toreson and Hoebich] are legally obligated to pay” and thus no “loss” for National Union to indemnify under the insurance contract, either directly under the policy or indirectly by responding in damages to XDP as the insureds’ assignee.

The parties argue this issue in terms of the distinction between liability insurance policies (which provide what the Civil Code calls “an indemnity against liability” (Civ. Code, § 2778, subd. 1)) and indemnity insurance policies (which provide “indemnity against claims, or demands, or damages, or costs” (id., subd. 2); cf. generally, Gribaldo, Jacobs, Jones & Associates v. Agrippina Versicherunges A.G. (1970) 3 Cal.3d 434, 446 [91 Cal.Rptr. 6, 476 P.2d 406]; 3 Cal. Insurance Law & Practice (1992 rev.) § 41.12[4], pp. 41-30, 41-31.)

XDP argues that the D&O policy is a liability policy and, as such, is subject to the well-established rule that upon breach of the insurer’s duty to defend the insured may, in the absence of fraud and without forfeiting his or her right to be indemnified by the insurer, assign that right to the third party claimant in exchange for the claimant’s covenant not to execute or otherwise enforce its claim against the insured. (Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788, 794-799 [41 Cal.Rptr. 401, 12 A.L.R.3d 1142]; cf. Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 240-241 [178 Cal.Rptr. 343, 636 P.2d 32].)

National Union argues, to the contrary, that the policy is an indemnity policy under which the right of Toreson and Hoebich to be indemnified would arise only after they had paid the amount of the liability asserted against them (Gribaldo, Jacobs, Jones & Associates v. Agrippina Versicherunges A.G., supra, 3 Cal.3d at p. 447 [“an indemnitor is not liable for a claim made against the indemnitee until the indemnitee suffers actual loss by being compelled to pay the claim”]; cf. Civ. Code, § 2778, subd. 2), and that since the covenant not to execute removes any compulsion upon Tore-son and Hoebich to pay the asserted liability National Union had no duty to indemnify Toreson and Hoebich.

Although the question is undoubtedly close (cf. Note (1985) 32 UCLA L.Rev. 690, 691), a persuasive argument can be made for the conclusion that this is a liability policy. (Cf. Okada v. MGIC Indem. Corp. (9th Cir. 1986) 823 F.2d 276, 280; Mt. Hawley Ins. v. Federal Sav. & Loan Ins. Corp. (C.D.Cal. 1987) 695 F.Supp. 469, 474-475; Nat. Union Fire Ins. of Pittsburgh v. Brown (S.D.Fla. 1991) 787 F.Supp. 1424, 1429-1430; Note (1967) 80 Harv.L.Rev. 648, 651-653.) As such the policy would be subject to the general rule permitting the insured, without jeopardizing the enforceability of his or her claim, to assign it in exchange for a covenant not to execute.

But even were this court to agree with National Union that the policy requires indemnity only for losses already paid, it would not be obliged to agree with National Union that the covenant not to execute would ipso facto release National Union from any obligation to pay indemnification under the policy. Assuming, for purposes of analysis, that the settlement accurately reflected, and that the arbitration award and judgment sufficiently implemented, a legally enforceable obligation upon Toreson and Hoebich to pay an enormous sum to XDP, it would be an idle exercise to require Toreson and Hoebich to fund an actual cash payment to XDP and then to pursue their own right of indemnity against National Union. Given these admittedly hypothetical assumptions, the result would be essentially the same in either case: National Union would pay the sum, XDP would receive the sum, and Toreson and Hoebich would be neither wealthier nor poorer for the experience. In a sense Toreson and Hoebich may be regarded as middlemen, and the assignment and covenant not to execute may be regarded as mechanisms by which the transaction can be simplified by permitting the middlemen to withdraw in order to allow XDP to proceed directly against National Union. There is no apparent just purpose to be served by insisting, in these circumstances, on a hypertechnically literal payment from Toreson and Hoebich to XDP. One text implies that no more is required, in the indemnity insurance context, than that the liability of the person to be indemnified have been “discharged by satisfaction of a judgment or otherwise.” (3 Cal. Insurance Law & Practice, supra, § 41.12[4], pp. 41-30, fn. omitted.) To satisfy any perceived need to honor form, it might be said that Toreson and Hoebich did in fact discharge their liabilities to XDP by the very act of assigning their claims against National Union in return for a covenant not to enforce the liabilities.

The real issue as to damages attributable to unreimbursed loss under the insurance contract in this case is as to the weight to be given to the procedure, far short of a contested judgment, by which the parties other than National Union purported to fix the value of XDP’s claim. The covenant not to execute may bear circumstantially upon the validity of transactions among XDP, Xebec, Toreson and Hoebich. (Cf., e.g., Smith v. State Farm Mut. Auto. Ins. Co., supra, 5 Cal.App.4th at p. 1114 [validity of judgment for purposes of assignment of claim for breach of implied covenant of good faith and fair dealing]; Wright v. Fireman’s Fund Ins. Companies (1992) 11 Cal.App.4th 998, 1014-1016 [14 Cal.Rptr.2d 588] [validity of judgment for purposes of direct action under Ins. Code, § 11580, subd. (b)(2)].) But the covenant not to execute does not ipso facto cause XDP’s asserted claim for damages for breach of contract, or National Union’s asserted obligation ultimately to pay the claim, to disappear.

ii. Judgment or arbitration award.

Throughout the proceedings below, and in this court, XDP has taken the position that upon proof that National Union had breached the insurance contract and that other conditions of recovery existed, XDP (as the assignee of Toreson and Hoebich) was entitled to recover, from National Union, the full amount of the judgment entered on January 21, 1988.

In its instructions to the jury the trial court assigned to XDP th