DAVIS
In this class action lawsuit alleging contractual breach and
unfair business practices, General Motors Acceptance Corporation (GMAC) appeals from the
part of the judgment finding a breach of contract and from the trial court's orders
denying its motions to vacate the judgment and for judgment notwithstanding the verdict;
GMAC also appeals from an order awarding attorney fees and costs to the plaintiff class.
This action concerns GMAC's practice of buying property damage insurance when automobile loan borrowers fail
to do so themselves. Plaintiffs also appealed from the judgment, but have abandoned their
appeal.
On appeal from the judgment and posttrial orders, GMAC contends
that the accelerated method it used to compute earned insurance premiums was objectively and
commercially reasonable as a matter of law, and that plaintiffs failed to prove
proximately caused damage. We disagree. In doing so, we examine the nature of the implied
covenant of good faith and fair dealing in the context of discretionary contractual power,
as well as the issue of proving individual damages in the context of a class action
lawsuit.
* * *
Accordingly, we affirm the judgment, . . .
BACKGROUND
GMAC, a wholly owned subsidiary of General Motors Corporation,
finances automobile purchases. A purchaser who buys an automobile on credit typically
signs a conditional sales agreement granting the seller or its assignee a security
interest in the automobile.
The standard conditional sales agreement accepted by GMAC
(hereafter sales agreement or standard sales agreement) requires the borrower to maintain
physical damage insurance
on the automobile during the term of the sales agreement. When a borrower fails to
maintain such insurance,
or when a lapse in insurance
coverage is detected, GMAC generally notifies the borrower and warns that it will purchase
such insurance
if the borrower does not; this insurance is known as collateral protection insurance
(CPI).
GMAC purchases CPI from Motors Insurance Company (MIC), a wholly owned
subsidiary with GMAC as its only customer. In effect this makes GMAC the insurance
administrator.
GMAC purchases CPI to cover the remaining term of the sales
agreement. This is known as a remaining-term policy. The borrower may pay the entire
premium immediately, or add the premium to the sales agreement balance and pay it off over
the remaining term of the agreement with an added finance charge.
Nearly half of the CPI policies that go into effect are cancelled
during their first year. Nearly a third of purchased CPI policies do not go into effect at
all because the borrower notifies GMAC, within 10 days of notification of GMAC's CPI
purchase, that the borrower has insurance; these policies are
"flat-cancelled" and the borrower is not charged for them; the flat-cancelled
borrowers were excluded from the class.
When a remaining-term CPI policy goes into effect and is
cancelled before the end of its term, the borrower is refunded the unearned premium, or
credited with the unearned premium if GMAC has not yet received full payment. In
calculating the unearned premium to be refunded or credited, GMAC uses an accelerated
method whereby more of the total premium is earned at the beginning of the policy period;
thus, a CPI policy cancelled halfway through its term would result in significantly less
than half of the premium being refunded or credited. This method can be contrasted, for
example, with another method commonly used--the pro rata-by-time method--in which a
halfway cancellation would result in half the premium being refunded or credited (i.e.,
proportional over time).
The underlying suit was filed as a class action in early 1993 by
various GMAC borrowers for whom CPI had been purchased pursuant to the standard sales
agreement. Plaintiffs claimed that GMAC charged exorbitantly for CPI by charging for
certain coverages, expenses, policy lengths, and deductibles, and by calculating unearned
premium refunds. Plaintiffs asked for an injunction, restitution, declaratory relief and
damages. The class was subsequently certified.
GMAC filed a cross-complaint, seeking to collect amounts that members of the plaintiff
class owed it under their standard sales agreements. The trial court denied GMAC's motion
to certify a cross-defendant class, and GMAC unsuccessfully petitioned this court for a
writ of mandate.
Trial began in May 1995. A jury determined plaintiffs' breach of
contract claim. The rest of plaintiffs' claims--for violation of the unfair competition
law (Bus. & Prof. Code, § 17200), unjust enrichment and declaratory relief--were
deemed equitable in nature and the trial judge heard those simultaneously.
In a special verdict covering liability on the breach of contract
claim, the jury found that GMAC breached the standard sales agreement by the accelerated
method it used to compute unearned premium refunds. The jury also found that GMAC did not
breach the standard sales agreement by charging for certain coverages, expenses, policy
lengths, and deductibles regarding CPI.
In a special verdict on damages, the jury found that plaintiffs
had suffered actual damages in the "total amount" of $1,863,187.16 on the
contract breach.
On the remaining equitable claims, the trial court found that
GMAC had engaged in two unfair business practices: imposing finance charges on a
remaining-term CPI policy; and inadequately disclosing to borrowers the method it used to
calculate premium refunds or credits. The trial court issued an injunction enjoining GMAC
from engaging in these two practices. In a prior appeal, we reversed this injunction order
in an unpublished decision (hereafter the Injunction Appeal).
In its judgment, the trial court added approximately $1.2 million
in prejudgment interest to the damage figure found by the jury, for a total judgment of
$3,074,307.65. The court denied the plaintiffs' equitable claims, and denied GMAC any
relief on its cross-complaint. The court also denied GMAC's motions to vacate the judgment
and for judgment notwithstanding the verdict.
In a postjudgment order, the trial court found plaintiffs to be
the prevailing party and awarded them attorney fees of approximately $3.6 million and
costs of about $155,000. . . .
DISCUSSION
1. The Accelerated Method for Computing Earned Premiums and
Hence Premium Refunds
Under the standard sales agreement, when a borrower fails to
maintain property damage insurance
on the purchased automobile, GMAC is authorized to obtain CPI. As we noted in our opinion
in the Injunction Appeal, the standard sales agreement leaves the specific terms of the
CPI policy to GMAC's reasonable discretion, including the method for computing premium
refunds or credits upon cancellation. Because the standard sales agreement does not expressly
cover the method for calculating premium reimbursement but leaves that method to GMAC's discretion,
the issue of whether GMAC breached the standard sales agreement involves whether GMAC
breached the implied covenant of good faith and fair dealing. " 'Every
contract imposes upon each party a duty of good faith and fair dealing in its performance
and its enforcement.' (Rest.2d Contracts, § 205.)" This covenant particularly
applies where, as here, the contract gives one party a discretionary power affecting the
rights of the other.
GMAC concedes the trial court properly instructed the jurors on
the implied covenant, telling them in part:
"A contract may give one party a discretionary power
affecting the rights of another party. . . . Th[is] discretionary power must be exercised
in accordance with reasonable standards . . . .
"In determining whether a party given a discretionary power
has breached the implied promise of good faith and fair dealing, you may consider whether
[P] . . . [P] . . . the party's conduct was objectively unreasonable . . .
." (Italics added.)
"The meaning of the implied promise of good faith and fair
dealing depends on the express terms of the contract and the legitimate expectations
of the parties arising from those terms." (Italics added.)
GMAC maintains that it did not breach the
implied covenant because the accelerated method for computing earned premiums and hence
any premium refunds is objectively reasonable as a matter of law.
GMAC initially notes our statement in the Injunction Appeal
opinion that GMAC uses "an accelerated earnings rate whereby more of the total
premium is credited to the beginning of the policy period when the value of the insured
automobile, and thus the risk of loss, is greater than at the end of the policy
period." Along similar lines, GMAC quotes the trial court's observation, in its
statement of decision, that the evidence established a "strong business
justification" for computing earned premiums by an accelerated method because the
risk of physical damage is greater at the beginning of the policy term and diminishes
throughout the course of the term.
For purposes of establishing the objective reasonableness of the
accelerated method as a matter of law and thus overturning the jury verdict, GMAC reads
too much into our statement and that of the trial court. While these statements concede
the reasonableness of the accelerated method in theory, they cannot be stretched to
concede the reasonableness, as a matter of law, of the particular accelerated method GMAC
used here. The "accelerated method" does not refer to just one method; varying
accelerated methods exist with varying accelerations.
One key measure of reasonableness, for example, is how well
GMAC's accelerated method matched the premium earned to the risk insured. Substantial
evidence showed a mismatch in this face-off, including evidence of CPI's excessive
profitability; collection of premiums based on higher loan balances but paying the vast
majority of claims based on much lower repair costs; use of the pro rata-by-time method to
compute premium refunds for cancelled CPI policies with a term of one year or less; and
purchase of multiyear remaining-term policies with the entire premium added to the
outstanding loan, even though nearly 80 percent of CPI policies either never went into
effect or were cancelled within the first year.
GMAC also argues that it could not disappoint any
"legitimate expectations" arising from the express terms of the standard sales
agreement because that agreement did not mention any method for computing premium refunds;
furthermore, as noted in the Injunction Appeal opinion, the standard sales agreement
permits GMAC to "unilaterally decide" the method for computing such refunds.
This argument, however, suffers from problems, theoretical and
practical.
Theoretically, it comes close to dispensing with the implied
covenant of good faith and fair dealing. Although the standard sales agreement does not
expressly mention the method for computing premium refunds, the implied covenant is just
that--"implied"--and it functions because something has not been expressly
mentioned in a contract. (Of course, the implied covenant does not exist in a vacuum and
is circumscribed by the purposes and express terms of a contract, and the jury was so
instructed.) The standard sales agreement does state expressly that if the borrower
fails to maintain property damage insurance for the purchased car, GMAC will
procure such insurance
and the borrower must pay the premiums for it. From this, a borrower can legitimately
expect that an appropriate amount of the premiums will be refunded if the insurance
is ended before its term. And although GMAC can unilaterally decide the premium refund
method, that decision, pursuant to the implied covenant, must be a reasonable one;
legitimate expectations naturally flow from this recognition.
Practically speaking, the standard sales agreement states in part
with respect to CPI: "Insurance:
You agree to keep the vehicle insured in favor of us with a policy satisfactory to us,
with comprehensive theft and collision coverage, insuring the vehicle against loss in
amounts not less than the unpaid sums owed under this contract. If you fail to maintain
such insurance,
we may, at our option, procure such insurance . . . and you agree to pay for the insurance
and finance charges on the premiums . . . ." From this provision, borrowers can
legitimately expect that CPI will accord with their experience with customary property
damage automobile insurance
(comprehensive and collision). GMAC concedes the evidence indisputably showed that the pro
rata-by-time method, also known as the actuarial method, is commonly used to compute
premium refunds on automobile insurance policies for comprehensive theft and
collision coverage. In fact, GMAC used the pro rata-by-time method to compute premium
refunds on its "non-remaining term" CPI policies (i.e., policies issued for
terms of a year or less).
Moreover, GMAC's standard sales agreement specifies that the
borrower agrees to pay for CPI "according to the notice we send you." A legally
required and publicly available statement on file with the Michigan Insurance Bureau states with respect to GMAC's
CPI that "Return premiums will be calculated on a pro rata basis when cancelling the
Policy and/or Individual Certificate." And the individual CPI certificate sent to
GMAC customers states that premium refunds upon cancellation "shall be computed
pro-rata under the customary pro-rata cancellation table."
GMAC cannot argue that, given the standard sales agreement's
silence on the issue of the premium refund method, there can be no substantial evidence of
any legitimate expectations regarding that method. The tables can be turned on such
silence. In light of the evidence of the customary automobile insurance policy and the notices just
described, a borrower legitimately can expect in the face of such silence that a pro
rata-by-time refund method will be used.
Nor can GMAC rely on our Injunction Appeal opinion, which
concluded that the CPI certificate notice was not an unfair business practice under
Business and Professions Code section 17200. As we noted in that opinion, an unfair
business practice claim under section 17200 is more akin to a tort than a contract claim,
and requires a finding that the public is " 'likely to be deceived' " (in the
Injunction Appeal, there was evidence showing that the term "pro rata," by
itself, means pro rata-by-time, so, as we concluded, the CPI certificate notice of
"pro-rata under the customary pro-rata cancellation tables" must have meant
something else; in fact, these tables referenced two accelerated methods). By contrast, in
this appeal, we are considering a contract claim that requires the less stringent finding
of "legitimate expectation" based on the contractual terms and relationship. As
we said in the Injunction Appeal, "unlike the covenant of good faith, the question
whether a particular business practice is 'unfair' within the meaning of section 17200 is
independent of any contractual relationship between the parties."
2. Proving Damages
GMAC contends the plaintiffs failed to prove that the contract
breach involving the method for computing premium refunds proximately caused any damages.
We disagree.
We first consider the issue of the fact of damages. The jury found that GMAC
breached the standard sales agreement through the accelerated method it used to compute
premium refunds upon CPI cancellation. As made clear through the posture of plaintiffs'
case and the special verdicts on liability and damages, the jury found that GMAC
unreasonably overcharged for the CPI premiums by refunding too little of the
premium upon cancellation; this overcharging violated the covenant of good faith and fair
dealing implied in the sales agreement. Thus, the contract breach actually caused damages.
Not so fast, argues GMAC. Plaintiffs failed to prove that the
class had suffered any damages because the class as a whole owed GMAC more for
CPI than the amount of the alleged CPI overcharges claimed by the class as a whole.
Since the evidence, however, also showed that there was a significant number of class
members who had paid off their CPI balances, the trial court directed that damages be
bifurcated from liability and assessed individually by checking each class member's CPI
balance and the amount of CPI premiums each member had paid; a collective approach would
unfairly deprive those who had paid off their CPI balances, including overpayments on
which GMAC was liable, from recovering anything.
The trial court's approach to the fact of damages was proper, and
maintained the class action nature of the lawsuit. A class action
can be maintained even if each class member must at some point individually show his or
her eligibility for recovery or the amount of his or her damages, so long as each class
member would not be required to litigate substantial and numerous factually unique
questions to determine his or her individual right to recover.
Here, the class had a standard sales agreement with GMAC. The
question of liability was amenable to class treatment. The question of damages required a
check of each class member's CPI account to determine if the member could actually recover
monies because of the accelerated method for computing premium refunds. This check was
done and the jury awarded a "total amount" of damages to be allocated to
approximately 14,000 out of 116,000 class members. The remaining class members did not
share in the damages awarded because they did not cancel CPI during the class period, or
because they had CPI policies covering terms of one year or less with premium refunds
governed by a pro rata-by-time method, or because they did not pay enough of their CPI
account to GMAC to have suffered any damages resulting from the smaller refund. As we
noted in our Injunction Appeal opinion, when a CPI remaining-term policy is cancelled
before the end of its multiyear term, the borrower is either refunded the unearned premium
or the amount is credited to his account if GMAC has not yet received full
payment. GMAC notes in its brief that when the Injunction Appeal opinion overturned the
trial court's findings that GMAC had engaged in unfair business practices, the plaintiffs'
claim for restitution and credits was undercut; consequently, the final judgment contains
no provision for restitution or credits.
Where the fact of damages is certain, as here, the amount
of damages need not be calculated with absolute certainty. The law requires only
that some reasonable basis of computation be used, and the result reached can be a
reasonable approximation.
Here, the jury was presented with a reasonable
basis for computing damages resulting from use of GMAC's accelerated method for premium
refunds. The plaintiffs had their expert quantify the amount by which the refunds
computed on a pro rata-by-time basis exceeded the refunds GMAC had actually paid class
members using the accelerated method. This approach was supported by evidence that
comprehensive and collision automobile insurance premium refunds are commonly, if not
customarily, computed on a pro rata-by-time basis, that GMAC used this basis to compute
premium refunds on CPI policies of one year or less, and that notices related to the
standard sales agreement mentioned cancellation in pro rata terms.
That brings us to GMAC's final point on the issue of damages.
GMAC contends the trial court erred in excluding evidence that GMAC's CPI premiums were
lower because of the additional funds engendered from the accelerated method. The trial
court afforded GMAC ample opportunity to present an offer of proof regarding this benefit.
The best GMAC could muster was evidence that two insurance carriers had filed premium rates for
two CPI policies with the California Department of Insurance based on an accelerated method, and
had apparently received a 5 to 30 percent discount for one policy on this basis, and a 10
percent discount for the other.
The trial court did not abuse its discretion in excluding this
evidence. As with damages, there must be a reasonable basis for quantifying offsets.
GMAC's CPI policy was filed with the insurance authorities in Michigan, not in
California. It was speculative whether the Michigan authorities would approve a higher
premium for a remaining-term CPI policy based on use of a pro rata-by-time refund method.
The wide variability of the California discount rates--including a span of 25 percent (or
a 600 percent difference) in one of the policies--greatly reduced their relevant punch.
And GMAC did not quantify any sort of discount factor for the accelerated method it used.
We conclude the judgment and posttrial orders should be affirmed.
. . . .