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California Supreme Court Decides The Right To Brandt Fees Is Assignable

In Essex Insurance Company v. Five Star Dye House, Inc., __ Cal.Rptr.3d __, 2006 WL 1843278 (2006), the California Supreme Court held that when an insured assigns its bad faith cause of action against an insurer for wrongfully denying benefits due under an insurance policy, that assignment carries the right to seek fees under Brandt v. Superior Court, 37 Cal.3d 813 (1985). In Essex, the Court concluded that the assignee of the insured's rights was entitled to recover the legal fees the assignee incurred to recover the policy benefits from the insurer.

In Brandt, the Supreme Court held that the insured was allowed to recover as tort damages the attorneys' fees incurred to obtain policy benefits wrongfully denied.

The Essex case involved an insured, Luis Sanchez, who sought a defense from Essex Insurance Company for a lawsuit brought by Five Star Dye House. Essex denied coverage for Sanchez' claim. Judgment was granted against Sanchez and in favor of Five Star for $1.35 million. In return for Five Star's agreement to delay executing on the judgment, Sanchez assigned his rights against Essex, including the right to assert breach of contract and breach of the implied covenant of good faith and fair dealing.

Pursuant to the assignment, Five Star sued Essex for breach of contract and bad faith. In the trial court, Essex was found to have owed Sanchez a duty to defend and to have acted in bad faith. Five Star was awarded $1.6 million but was denied its Brandt fees.

The Supreme Court noted that the Brandt decision authorized insureds to recover policy benefits in full, undiminished by the legal fees incurred in obtaining those benefits. In Essex, the question was whether the right to Brandt fees was a "personal" right that could not be assigned. See Murphy v. Allstate Ins. Co., 17 Cal.3d 937 (1976) [emotional distress damages and punitive damages were not assignable because such damages were "purely personal"]. The Court stated that Brandt fees are "an economic loss - damages" and "do not possess any of the personal aspects that preclude assignment of other tort damages, such as damages for emotional distress."

The Essex decision disagreed with the appellate court decision, Xebec Development Partners, Ltd. v. National Union Fire Insurance Company, 12 Cal.App.4th 501 (1993), which held an assignee could not recover Brandt fees on the grounds that the assignee could only assert the rights the insureds had and the insureds in that case had not incurred attorneys' fees to compel the insurer's payment.

Rather, the Essex decision stated that Sanchez had assigned to Five Star the "right to recover the policy benefits in full, undiminished by the attorney fees incurred in bringing the action to recover those benefits." As such, Five Star was entitled to recover Brandt fees it incurred in pursuing policy benefits from Essex.

Essex argued Five Star should not recover Brandt fees because the public policy underlying Brandt was to make the insured "whole" by paying for the insured's legal costs to obtain policy benefits and that awarding Brandt fees to Five Star would not reduce Sanchez' liability on the judgment. The Court rejected the argument, noting that Five Star's recovery from Essex, including Brandt fees, would result in a credit to Sanchez pursuant to the agreement between Sanchez and Five Star.

The Court cited a public policy reason for its decision. The Court stated that disallowing recovery of Brandt fees would result in a "windfall" for the insurer whose liability for tortious conduct would be reduced because of the fortuitous circumstance of the assignment of the bad faith claim. The Court further stated that barring recovery of Brandt fees incurred by assignees would also tend to discourage assignment of bad faith claims against insurers. In other words, the Court did not see reason to relieve an insurer, who had wrongfully withheld policy benefits, of liability for Brandt fees because an assignee rather than an insured sought the benefits.

Note that the Essex decision authorizes the assignee of a bad faith claim to recover only those fees that the assignee, and not the insured, incurred in seeking policy benefits. As Brandt fees may exceed the policy benefits in issue, this decision would tend to encourage third-party claimants and insureds to consider assigning claims against insurers earlier in the claim to maximize the amount of the recoverable Brandt fees.

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