MOSK, J.—I dissent. In affirming the judgment of the Court of Appeal, which affirmed the judgment of the superior court, the majority favor Transamerica Insurance Company, an insurer, over PPG Industries, Inc., its insured, in a dispute about liability insurance. The result, however, is to favor all insurers over all their insureds. I cannot join such an opinion.
I
Under a liability insurance policy, which is manifestly a contract, an insurer makes promises, and its insured pays premiums, the one in consideration for the other, against the risk of loss. (See, e.g., Buss v. Superior Court (1997) 16 Cal.4th 35, 45 [65 Cal.Rptr.2d 366, 939 P.2d 766].)
[320]Under the terms of such a policy, the insurer has a duty to defend its insured against damages for a covered claim by a victim of the insured. (See, e.g., Buss v. Superior Court, supra, 16 Cal.4th at pp. 45-46.) The insurer also has a duty to indemnify its insured, to a specified limit, for those sums that its insured becomes legally obligated to pay its victim as damages for a covered claim. (See, e.g., id. at p. 45.) Such sums, of course, include damages to compensate the insured’s victim—namely, compensatory damages. But they do not include damages to punish the insured itself for any oppressive, fraudulent, or malicious conduct on its part—namely, punitive damages. So has it been held as a matter of law. (See, e.g., J.B. Aguerre, Inc. v. American Guarantee & Liability Ins. Co. (1997) 59 Cal.App.4th 6, 14 [68 Cal.Rptr.2d 837].)1 The purpose of punitive damages is, as implied, to punish a wrongdoer for any such oppressive, fraudulent, or malicious conduct in which it may have engaged in the past, and also to deter the wrongdoer, and others as well, from engaging in similar conduct in the future. (E.g., 6 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 1327, p. 785; see generally, Peterson v. Superior Court (1982) 31 Cal.3d 147, 158 [181 Cal.Rptr. 784, 642 P.2d 1305].)
The insurer’s duty to defend its insured, which arises at tender (Buss v. Superior Court, supra, 16 Cal.4th at p. 46), is of no lesser significance as a legal matter than its duty to indemnify it, which arises after establishment of liability (ibid.). Neither is it of any lesser significance as a practical matter. It has been stated: “The insured’s desire to secure the right to call on the insurer’s superior resources for the defense of . . . 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. As a consequence, California courts have been consistently solicitous of insureds’ expectations on this score.” (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295-296 [24 Cal.Rptr.2d 467, 861 P.2d 1153].) This is true when the insured is an individual man or woman. It is also true when the insured is a business entity. Indeed, the functioning of a free and open market in contemporary society demands no less.
Pursuant to the covenant of good faith and fair dealing, which is implied by law in every liability insurance policy (e.g., Comunale v. Traders & [321]General Ins. Co. (1958) 50 Cal.2d 654, 658 [328 P.2d 198, 68 A.L.R.2d 883]), the insurer has a duty to make reasonable efforts to settle a claim against its insured by the insured’s victim (e.g., Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 940-941 [132 Cal.Rptr. 424, 553 P.2d 584]; Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, 14-15 [123 Cal.Rptr. 288, 538 P.2d 744]; Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429 [58 Cal.Rptr. 13, 426 P.2d 173])—which accords with the public policy favoring settlement (e.g., Coleman v. Gulf Ins. Group (1986) 41 Cal.3d 782, 803 [226 Cal.Rptr. 90, 718 P.2d 77, 62 A.L.R.4th 1083] (dis. opn. of Bird, C. J.)). The insurer’s duty to settle arises from its interrelated duty to defend. (See, e.g., Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 660.) In discharging its duty to settle, the insurer must give at least as much weight to its insured’s interests as to its own (Crisci v. Security Ins. Co., supra, 66 Cal.2d at p. 429; Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 659), and must act as though it alone would have to bear any ensuing judgment (Johansen v. California State Auto. Assn. Inter-Ins. Bureau, supra, 15 Cal.3d at p. 16). In effecting a settlement, the insurer is not prohibited from offering a sum to avoid punitive damages as well as compensatory damages.2 Nor could it be. Otherwise, it would effectively be prohibited from offering any sum whatsoever for many claims. That is [322]because many claims seek punitive damages as well as compensatory damages. For it is easy to allege oppressive, fraudulent, or malicious conduct. It may indeed be difficult to prove such conduct. But it is also difficult to predict with any confidence what any given trier of fact may find in the premises.
If the insurer breaches its duty to settle the claim of its insured’s victim, it commits a tort against its insured, at least if its breach is “wrongful.” (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 663; accord, e.g., Crisci v. Security Ins. Co., supra, 66 Cal.2d at pp. 432-433.) And if it commits such a tort, it is liable to it for damages to compensate for all the detriment that it proximately caused. (E.g., Crisci v. Security Ins. Co., supra, 66 Cal.2d at p. 433.) Such detriment includes—but is not limited to (see, e.g., id. at pp. 433-434)—any sums that its insured became legally obligated to pay its victim as damages for its claim. (E.g., Johansen v. California State Auto. Assn. Inter-Ins. Bureau, supra, 15 Cal.3d at pp. 12-17; Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at pp. 658-661.) The damages for which the insurer is liable are not affected in their amount by any limits on indemnification specified in any liability insurance policy. (E.g., Johansen v. California State Auto. Assn. Inter-Ins. Bureau, supra, 15 Cal.3d at pp. 12-17; Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at pp. 658-661.) That is because they do not constitute indemnification, which, as section 2772 of the Civil Code makes plain, comprises payment that is required under the terms of a liability insurance policy itself. Rather, as the very name declares, they are damages, which comprise payment that is compelled by law. The “principle[s]” that operate here are “[fjundamental in our jurisprudence.” (Crisci v. Security Ins. Co., supra, 66 Cal.2d at p. 433.) Section 3523 of the Civil Code sets out as a maxim of jurisprudence, in the nature of public policy, that “[f]or every wrong there is a remedy.” Section 3274 of the Civil Code implies that the “remedy” for a tort is generally “compensation.” For its part, section 3281 of the Civil Code implies that compensation for a tort is “in money, which is called damages.” Lastly, section 3333 of the Civil Code states that the “measure of damages” for a tort is generally the “amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.”
Inasmuch as the insurer is liable to its insured for damages to compensate for all the detriment that it proximately caused by its tortious breach of its duty to settle the claim of the insured’s victim, and inasmuch as such detriment includes any sums that its insured became legally obligated to pay its victim as damages for its claim, it follows that the insurer is liable to the insured for damages to compensate for detriment in the form of the sum that [323]its insured became legally obligated to pay its victim as punitive damages as well as compensatory damages. Otherwise, for the wrong the insured suffered at its insurer’s hands, there would not be a remedy, or at least not a complete remedy.
II
The majority, however, conclude to the contrary, to the effect that an insurer, including specifically Transamerica, is not liable to its insured, including specifically PPG, for damages to compensate for detriment in the form of the sum that its insured became legally obligated to pay its victim as punitive damages. At first glance, their discussion seems not unattractive. But, on sustained scrutiny, it shows itself otherwise.
The majority’s conclusion against PPG itself carries a certain rhetorical appeal. Who would be well-disposed to a firm whose conduct is referred to, time and again, as “egregious” and “outrageous” and “morally culpable” and “morally reprehensible”? No one. Until, that is, he has considered the matter more carefully. For, in factual truth, if not in legal fiction, the conduct in question was not that of PPG, but rather Solaglas California, Inc., subsequently known as Solaglas USA, Inc., a completely separate and independent firm whose stock PPG purchased several years later.
The majority’s conclusion against the insured as such rests on the familiar notion of proximate cause, which they import from the law of negligence. They quote the observation of then Justice Traynor, that proximate cause “is ordinarily concerned, not with the fact of causation, but with the various considerations of [public] policy that limit an actor’s responsibility for the consequences of his conduct.” (Mosley v. Arden Farms Co. (1945) 26 Cal.2d 213, 221 [157 P.2d 372, 158 A.L.R. 872] (cone. opn. of Traynor, J.).) But they fail to quote Witkin, that such considerations are those that would make it “unjust to hold” the actor “legally responsible.” (6 Witkin, Summary of Cal. Law, supra, Torts, § 968, p. 359, italics added.) Considerations of this sort are altogether absent here. For it is hardly unjust to hold the insurer legally responsible for all damages to its insured. That is because no damages would have arisen had it not tortiously breached its duty to settle.
In support of their conclusion against the insured as such, the majority present three points. None, as will appear, proves to bear any persuasive force.
First, the majority assert that to recognize the insurer’s liability to its insured for punitive damages “would . . . violate the public policy against [324]permitting liability for intentional wrongdoing to be offset or reduced by the negligence of another . . . .” (Maj. opn., ante, at p. 319.) It would not. Indeed, it would not even implicate it at all. The identified public policy operates by comparing the relative culpability of the plaintiff and the defendant within a single action—for example, the culpability of the insured’s victim vis-á-vis the culpability of the insured itself in an action brought by the former against the latter for bodily injury and property damage. It does not operate, however, by comparing the relative culpability of the defendants in two separate actions—for example, the culpability of the insured in an action brought against it by its victim for bodily injury and property damage vis-á-vis the culpability of the insurer in an action brought against it by its insured for tortious breach of its duty to settle. As stated, section 3523 of the Civil Code declares that “[f]or every wrong there is a remedy.” (Italics added.) That means for the insured’s wrong against its victim. And also for the insurer’s wrong against its insured.
Second, the majority assert that to recognize the insurer’s liability to its insured for punitive damages “would . . . defeat the purposes of’ such damages, “which are to punish and deter the wrongdoer . . . .” (Maj. opn., ante, at p. 319.) It would not. Such liability would not be inconsistent with deterrence. Surely, it is inconceivable that the insured would be enticed to engage in oppressive, fraudulent, or malicious conduct on the speculation that its insurer might perhaps tortiously breach its duty to settle, and then might perhaps be held liable to it for damages therefor. In addition, such liability would not be inconsistent with punishment. It would cover only the insured’s out-of-pocket costs attributable to the payment of punitive damages. It would not reach various related opportunity and transaction costs, which are always real in fact if not certain in law. Opportunity costs are often substantial. Time passes, usually several years, between the insured’s payment of punitive damages to its victim and its insurer’s payment of damages to the insured itself compensating therefor. Often substantial as well are transaction costs. “[A]ny litigation involves transaction costs,” which “are not limited to the monetary costs of the litigation” itself, “but also include the toll the litigation takes” on the insured. (Grimm v. Leinart (6th Cir. 1983) 705 F.2d 179, 183, fn. 4.) Litigation that threatens the insured with punitive damages and ultimately makes good on the threat involves transaction costs greater still. In light of such opportunity and transaction costs, punishment and deterrence perdures. In any event, a payment in settlement avoids punitive damages at the outset. By doing so, it may be said to “defeat the purposes of punitive damages” even more completely, since it obviates any and all opportunity and transaction costs that would subsequently be incurred by the “wrongdoer.” (Maj. opn., ante, at p. 319.) Nevertheless, as the majority themselves admit, it is not prohibited.
[325]Third, the majority assert that to recognize the insurer’s liability to its insured for punitive damages “would . . . violate the public policy against indemnification for” such damages. (Maj. opn., ante, at p. 319.) It would not. Indeed, it would not even implicate it at all—and certainly no more so than the public policy favoring settlement of the underlying claim. The insurer’s payment to its insured is not indemnification, inasmuch as it is not required under the terms of any liability insurance policy. It is rather damages, inasmuch as it is compelled by law. To be sure, a payment of this sort makes up for punitive damages. But, as stated, a payment in settlement avoids such damages at the outset. The latter is not prohibited. Neither is the former.
Notwithstanding the majority’s implication, “considerations of [public] policy” (Mosley v. Arden Farms Co., supra, 26 Cal.2d at p. 221 (cone. opn. of Traynor, J.)) argue against a refusal to recognize the insurer’s liability to its insured for punitive damages.
Such considerations arise out of the public policies favoring settlement and making a wrongdoer remedy its wrong.
Refusal to recognize the insurer’s liability to its insured for punitive damages would lead to untoward consequences. For example, the insurer would be given an incentive tortiously to breach its duty to settle when the claim of its insured’s victim is deemed to expose the insured to a relatively small sum in compensatory damages and a relatively large sum in punitive damages. In discharging its duty to settle, the insurer is required to give at least as much weight to its insured’s interests as to its own, and to act as though it alone would have to bear any ensuing judgment. It would be invited, however, to act otherwise. It might even compel its insured to go to trial at unreasonably grave risk as for punitive damages—it has not only a duty to defend it, but also a right to control its defense (see, e.g., Buss v. Superior Court, supra, 16 Cal.4th at p. 63 (dis. opn. of Kennard, J.); see also id. at p. 46, fn. 9). For it would know that it alone would not have to bear the judgment, and would thereby be tempted to give more weight to its own interests than to its insured’s. Why should it not take a gamble, inasmuch as it is a “gamble that only its insured stands to lose” {Magnum Foods, Inc. v. Continental Cas. Co. (10th Cir. 1994) 36 F.3d 1491, 1504)? The result would be to transform the duty to settle into a thing of paper. The result of that would be the unjust enrichment of the insurer and the unjust impoverishment of its insured. The insurer would receive real premiums in consideration for an empty promise, and would also avoid any payment in settlement. Its insured would pay such premiums in exchange for such a promise, and would also be compelled to bear the threat and actuality of loss that a payment in settlement would have precluded.
[326]By contrast, recognition of the insurer’s liability to its insured for punitive damages would not lead to untoward consequences. That the insurer would be encouraged to discharge its duty to settle would be all to the good. That its insured would receive a remedy for any tortious breach thereof would not appreciably reduce the force of punitive damages as a punishment for, and deterrent against, oppressive, fraudulent, or malicious conduct on its part. As explained, punishment remains in the form of opportunity and transaction costs. So too deterrence. As also explained, it is inconceivable that the insured would be enticed to engage in such conduct on the speculation that its insurer might perhaps tortiously breach its duty to settle, and then might perhaps be held liable to it for damages therefor.
In conclusion, I would simply allow the law to operate in neutral fashion. The insurer has a duty to settle. It must discharge it in the face of punitive damages as well as compensatory damages. In addition, under section 3523 of the Civil Code, “[f]or every wrong there is”—and must be—“a remedy.” That applies to the wrong the insured suffers at the hands of its insurer as well as the wrong the insured’s victim suffers at the hands of the insured itself.
in
For the reasons stated above, I cannot favor all insurers over all their insureds on the issue of punitive damages. Since the majority do so, I am compelled to dissent.
George, C. J., and Werdegar, J., concurred.
See section 533 of the Insurance Code: “An insurer is not liable for a loss caused by the wilful act of the insured . . . .” Although often cited together with the foregoing, section 1668 of the Civil Code—providing that “[a]ll contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of tire law”—has been held inapplicable to liability insurance policies. (See, e.g., State Farm Fire & Casualty Co. v. Eddy (1990) 218 Cal.App.3d 958, 966-967 [267 Cal.Rptr. 379].)
Curiously, the majority assert that J.B. Aguerre, Inc. v. American Guarantee & Liability Ins. Co., supra, 59 Cal.App.4th 6, “concludefs] to the contrary . . . .” (Maj. opn., ante, at p. 317, fn. 3.) Not so. It is one thing for the insurer to indemnify its insured for punitive damages, which necessarily follows the establishment of liability therefor. It is quite another for it to offer a sum to avoid punitive damages on its behalf, which necessarily precedes such an event. Aguerre appears to recognize the distinction. It states that the “insurer, though not liable to indemnify against punitive damages, must reasonably assist and cooperate with the insured in defending and settling punitive damages claims.” (J.B. Aguerre, Inc. v. American Guarantee & Liability Ins. Co., supra, 59 Cal.App.4th at p. 15.) It similarly states that, although the insurer is “not obliged to pay compensation for punitive damages in a settlement, it [is] required, as part of its duty to defend, to accommodate and cooperate in any effort by [the insured] to buy peace from the punitive damage claims by contributing to the settlement.” (Id. at p. 17.) But it does not imply that the insurer may ignore any threat of punitive damages against its insured. It is settled that the insurer must take into account its insured’s exposure to compensatory damages beyond the policy limits, and must act accordingly: “When there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured’s interest requires the insurer”—at least as a general matter—“to settle the claim. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing.” (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 659.) By parity of reasoning, the insurer must take into account its insured’s exposure to punitive damages, which are, as it were, beyond the policy itself, and must act accordingly: “When there is great risk of a recovery” of punitive damages “so that the most reasonable manner of disposing of the claim is a settlement which can be made within [the policy] limits, a consideration in good faith of the insured’s interest requires the insurer”—again, at least as a general matter—“to settle the claim. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing.” (Ibid.)