Society of Mt. Carmel v. National Ben Franklin Insurance Co.

June 30, 1997

1-96-0446


SOCIETY OF MOUNT CARMEL,                    )    APPEAL FROM
CARMELITE FATHERS, FATHERS OF          )    THE CIRCUIT COURT
THE ORDER OF MOUNT CARMEL, INC.,       )    COOK COUNTY.
CARMELITE FATHER JOHN                  )
KNOERNSCHILD, O. CARM.,                )
CARMELITE FATHER JOE ATCHER,           )
O.CARM., AND LARRY GABRIEL,            )
                                            )
         Plaintiffs-Appellees,              )    
                                            )
                                            )
         v.                                 )    No. 89 CH 03629
                                            )                
NATIONAL BEN FRANKLIN                  )    
INSURANCE COMPANY OF ILLINOIS,         )    
and THE CONTINENTAL INSURANCE COMPANY, )         
                                            )    THE HONORABLE,
         Defendants-Appellants.             )    LESTER FOREMAN,
                                            )    JUDGE PRESIDING.
 
         PRESIDING JUSTICE COUSINS delivered the opinion of the
court:
         Plaintiffs, Society of Mount Carmel, Carmelite Fathers,
Fathers of the Order of Mount Carmel, Inc., Carmelite Father John
Knoernschild, Carmelite Father Joe Atcher, and Larry Gabriel,
filed this declaratory action seeking coverage from defendant
insurers under a workers' compensation and employers' liability
policy for claims brought by Larry Gabriel from an alleged
wrongful termination from his teaching position at a California
high school.  Defendants, National Ben Franklin Insurance Company
of Illinois (National Ben Franklin) and the Continental Insurance
Company (Continental), appeal from an order granting summary
judgment in favor of all plaintiffs except Larry Gabriel in which
the trial court found that the insurers had waived or were
estopped from asserting coverage defenses and from an order in
which the trial court awarded plaintiffs $5,224,254.72,
consisting of the judgment awarded to Gabriel in California. 
         On appeal, defendants contend that: (1) the trial court
erred in holding, as a matter of law, that the plaintiffs who
were named as defendants in the underlying action were "insureds"
under the workers' compensation and employers' liability policy;
(2) even assuming that the plaintiffs were insureds, the trial
court erred in holding that the defendant insurers owed a duty to
defend the underlying action under the workers  compensation and
employers  liability policy; (3) even assuming the plaintiffs
were insureds, the trial court erred in holding, as a matter of
law, that defendant insurers waived their right to deny coverage
and were estopped from denying coverage under the workers 
compensation and employers  liability policy; and (4) the trial
court erred in finding coverage where the underlying judgment was
based on the willful acts of plaintiffs and includes an award of
punitive damages otherwise not insurable.
BACKGROUND
         On October 3, 1985, Larry Gabriel, a teacher at Crespi High
School in California, filed a five-count complaint in the
superior court of the State of California for the County of Los
Angeles for wrongful termination against Fathers of the Order of
Mount Carmel, Inc., Crespi High School, Carmelite Father John
Knoernschild, and Carmelite Father Joe Atcher.  The Fathers of
the Order of Mount Carmel is domiciled in Illinois; the remaining
defendants are domiciled in California.  Count I alleged breach
of contract; count II alleged breach of the covenant of good
faith and fair dealing; count III alleged intentional infliction
of emotional distress; count IV alleged negligent infliction of
emotional distress; and count V alleged fraud.
         After receiving the Gabriel complaint, the defense of the
action was tendered to the defendant insurers pursuant to three
policies issued by the insurers to plaintiffs. These policies
were: (1) the comprehensive business policy, No. CBP 418775 (the
CGL policy); (2) the umbrella liability policy, No. LX 2104669
(the umbrella policy); and (3) the workers  compensation and
employers  liability policy, No. WC 3048779 (the workers 
compensation and employers  liability policy).  On May 21, 1986,
an agent from Continental sent a response in which he explained
that the Gabriel suit was not covered under Continental's CGL
policy.  The agent explained why the action was not covered and
stated in pertinent part:
              "Liability policies, as in Continental's, contain
         employee exclusions because such coverage is normally
         provided through separately procured employer's liability
         insurance.  Continental protects against liability to third
         parties, such as invitees, visitors or consumers who are not
         employees of the society of Mount Carmel; coverage for
         employee related injuries and claims is available through
         the Society's Workers Compensation [sic] carrier, which
         ordinarily protects not only against employee's compensation
         claims, but against their tort actions as well.  (In this
         particular instance, Continental also writes the workers'
         compensation policy, policy number WC 3048779.  And, as this
         appears to fall within the parameters of their coverage, we
         are advising the worker's [sic] compensation division of
         this loss and are requesting they respond directly to you.)
         On October 3, 1986, plaintiffs' attorney wrote to
Continental because he had not received a response from the
workers' compensation division. Counsel also informed Continental
of the status of the Gabriel litigation in that depositions had
been taken and scheduled.  
         On October 3, 1986, Continental's workers' compensation
division sent plaintiffs' counsel a handwritten memo asking him
to forward all pertinent information that would "help get the
ball rolling."  Relevant documents were then sent to Continental
on October 20, 1986.
         Having received no response from Continental, plaintiffs'
counsel again wrote to the insurer on November 17, 1986, and
December 8, 1986.  Correspondence exchanged between the parties
between December 8, 1986, and April 14, 1988, addressed the CGL
and umbrella liability policies issued by defendants.
         Meanwhile, in the underlying action, a judgment was reached
in favor of Gabriel consisting of $198,311.52 for loss of
earnings, $2,672,200 in compensatory damages and $700,000 in
punitive damages, for a total of $3,570,511.52.
         On May 3, 1989, plaintiffs filed suit in Illinois against
defendants for a declaration of rights under the three policies
of liability insurance issued by defendants.   Plaintiffs sought
a defense in connection with Gabriel s wrongful termination
action as well as attorney fees and costs for the defendants'
alleged bad-faith refusal to defend the claims and allegations in
the Gabriel complaint.  
         On September 15, 1989, defendants moved to dismiss the
declaratory complaint pursuant to section 2-615 of the Code of
Civil Procedure (735 ILCS 5/2-615 (West 1992)) based on
plaintiffs' failure to join Larry Gabriel as a necessary party
and Crespi High School s lack of standing to sue for the reason
that it was not a legal entity.  On November 6, 1989, the trial
court denied defendants  motion to dismiss for failure to join a
necessary party but granted their motion with respect to Crespi
High School, striking it as a party to this action.  
         Plaintiffs moved for summary judgment on January 22, 1990,
asking the trial court to find in its favor that the defendants
had a duty to defend the underlying Gabriel action. The trial
court granted plaintiffs  motion after finding that defendants
owed such a duty and after finding that the Gabriel complaint s
allegation of negligent infliction of emotional distress sounded
in tort and was potentially within the coverage of the CGL
policy.  By two later orders, the trial court awarded plaintiffs
attorney fees incurred in the defense of the Gabriel action for
$56,647.85 and $51,065.63, respectively. 
         Plaintiffs filed a motion to add Gabriel as a necessary
party on April 23, 1991.  Thereafter, plaintiffs also filed a
motion for leave to file a second amended complaint naming
Gabriel as an additional plaintiff and alleging that defendants
were estopped from raising coverage defenses.  On May 23, 1991,
the trial court denied plaintiffs  motion for leave to file the
complaint and on July 2, 1991, denied plaintiffs  motion to
reconsider.  
         Both parties thereafter appealed to this court.  On appeal,
plaintiffs sought a declaration of their rights as insureds and
defendants  liabilities as insurers.  Plaintiffs argued that the
trial court erred in denying their request for fees incurred in
the filing of the action and in denying their motion to file an
amended complaint.  Defendants challenged the trial court s order
granting plaintiffs  motion for summary judgment on the duty-to-
defend issue and the trial court s award of attorney fees to
plaintiffs.
         In Society of Mount Carmel v. National Ben Franklin
Insurance Co., 268 Ill. App. 3d 655, 643 N.E.2d 1280 (1994),  we
held that the failure of plaintiffs to join Larry Gabriel as a
necessary party in the declaratory action was reversible error
and that, under California law, the defendants owed no liability
coverage under the CGL policy because the wrongful termination
policy of Larry Gabriel was not an "occurrence" or "accident" as
required by the policy.  Relying on Wong v. State Compensation
Insurance Fund, 12 Cal. App. 4th 686, 16 Cal. Rptr. 2d 1 (1993),
we also held that Gabriel s complaint for wrongful termination
presented a potential liability under the workers  compensation
and employers  liability policy and that the defendants had a
duty to defend the plaintiffs upon a finding that the plaintiffs,
who were named as defendants in Gabriel s complaint, were
insureds under the workers  compensation and employers' liability
policy.  We then remanded the case to the trial court to grant
plaintiffs leave to amend to add Gabriel as a necessary party, to
allege with specificity coverage under the workers  compensation
and employers  liability policy and to allege their estoppel
argument.
         On remand, plaintiffs were given leave to file a two-count
second amended complaint that included Larry Gabriel as a party
plaintiff.  In count I, plaintiffs sought coverage under the
workers  compensation and employers  liability policy for a
judgment in the amount of $3,620.982.40 for the judgment entered
against only Fathers of the Order of Mount Carmel, Inc., and
Carmelite Father John Knoernschild.  Defendants filed an answer
denying all allegations of coverage and wrongful conduct.  In
addition, defendants counterclaimed for a declaration that they
owed no coverage.  
         On June 20, 1995, plaintiffs filed a motion for summary
judgment arguing, inter alia, that defendants had waived the
right to assert policy defenses under the workers  compensation
and employers  liability policy.  Defendants filed a cross-motion
for summary judgment.  In response to defendants  cross-motion,
plaintiffs conceded that defendants were entitled to summary
judgment on count II of the second amended complaint with respect
to the CGL and umbrella policies.
         On  November 6, 1995, the trial court granted summary
judgment in favor of defendants on count II of the second amended
complaint and in favor of plaintiffs on count I.  The court held
that plaintiffs were entitled to reasonably believe that
defendants were going to undertake coverage and intended to waive
any defenses and that the insured was induced to rely on the
insurers  apparent position that they intended to waive defenses. 
On December 27, 1995, the trial court subsequently granted
plaintiffs  petition for further relief in the form of a money
judgment and entered judgment in favor of all plaintiffs, except
Larry Gabriel, for $5,224,254.72.  It is from the orders of 
November 6, 1995 and December 27, 1995, that defendants appeal.
         We affirm.
ANALYSIS
      I
  Defendants first contend that the trial court erred in
holding, as a matter of law, that the plaintiffs, who were named
as insureds in the underlying action, were insureds under the
workers  compensation and employers  liability policy.  
Defendants argue that if the plaintiffs are not "insureds," there
is no duty to defend that can be breached, nor can defendants
waive their right to deny or be estopped from denying coverage.  
  It is a basic principle of insurance contract interpretation
that doubts, uncertainties and ambiguities arising out of policy
language ordinarily should be resolved in favor of the insured in
order to protect the insured's reasonable expectation of
coverage.  Producers Dairy Delivery Co. v. Sentry Insurance Co.,
41 Cal. 3d 903, 912, 718 P.2d 920, 924, 226 Cal. Rptr. 558, 562.
(1986).  It is also well established that this rule of
construction is applicable only when the policy language is found
to be unclear.  Producers Dairy, 41 Cal. 3d  at 912, 718 P.2d  at
924-25, 226 Cal. Rptr.  at 562.   "A policy provision is ambiguous
when it is capable of two or more constructions, both of which
are reasonable."  Producers Dairy, 41 Cal. 3d  at 912, 718 P.2d  at
924-25, 226 Cal. Rptr.  at 562, citing Delgado v. Heritage Life
Insurance Co., 157 Cal. App. 3d 262, 271, 203 Cal. Rptr. 672, 677
(1984).  Whether language in a contract is ambiguous is a
question of law, which this court is to review de novo. Producers
Dairy, 41 Cal. 3d  at 912, 718 P.2d  at 925, 226 Cal. Rptr.  at 562. 
However, a finding of ambiguity in policy language cannot be
based on an unreasonable misunderstanding on the part of the
insured. Producers Dairy, 41 Cal. 3d  at 913, 718 P.2d  at 925, 226 Cal. Rptr.  at 562.  
  In the instant case, the trial court found that plaintiffs
were insured under the disputed policy.  The trial court stated:
       "I don't think there's any question as to who the
  insurer was insuring.  If, in fact, there's an ambiguity
  here, I think that ambiguity must be resolved in favor of
  the insured."
We find no error in the trial court's analysis.  
  The workers  compensation and employers  liability policy
consists of general coverage provisions followed by several pages
of attachments.  The attachments are the  schedules  and
 endorsements.   General sections A and B of the policy provide
in pertinent part:
       "A.  The Policy
  This policy *** is a contract of insurance between you (the
  employer named in item 1 of the Information Page) and us
  (the insurer named on the Information Page).  The only
  agreements relating to this insurance are stated in this
  policy. 
       B.   Who is insured.
  You are insured if you are an employer named in item 1 of
  the Information Page.  If that employer is a partnership,
  and if you are one of its partners, you are insured, but
  only in your capacity as an employer of the partnership s
  employees."
Item 1 of the information page designates the name of the insured
as  Society of Mt. Carmel and/or Carmelite Fathers 45 East Dundee
Road Barrington, Illinois 60010."   Across from and to the right
of item 1 are four boxes labeled  individual,   partnership, 
 corporation,  and  other.   The  other  box is checked and
 Religious Order  is typed in the space provided.  Below the
checked boxes and to the right of the name of the insured is a
designation for "Other Workplaces not shown above."  The phrase
"See Schedules [sic] A Attached" is typed into the space
provided.  Schedule A lists several workplaces under the heading
"State of California."  Crespi High School is one of the
workplaces listed. "Church: Clergy, Professional Assistants,
etc.," and "College: All other employees" are listed under Crespi
High School.  Each workplace is rated separately and an estimated
annual premium is provided for each.  
  Despite the numerous workplaces listed on schedule A,
defendants contend that their duty to defend extended only to the
Society of Mt. Carmel and/or Carmelite Fathers as it was the only
employer named in item 1 of the information page.  Furthermore,
despite the premium calculation for each workplace on schedule A,
defendants argue that there is nothing to indicate that these
locations, employees or clergy were to be treated as insured
employers who were to receive workers  compensation or employers 
liability coverage for claims brought by their employees. 
  Plaintiffs contend that, under any reasonable interpretation
of the policy, there was coverage for Crespi High School and the
person and entities that operated it, particularly since
defendants proceeded to calculated the premium amounts based upon
the workplaces described in the policy. We agree.
  We believe the policy is not ambiguous and, when read as a
whole, clearly insures the plaintiffs.  Even if the policy could
be viewed as ambiguous, California law requires that ambiguous
language be resolved in favor of the insured.  Producers Dairy
Delivery, 41 Cal. 3d  at 912, 718 P.2d  at 924, 226 Cal. Rptr.  at
562.  The application of this rule operates to construe ambiguous
language against the party who caused the uncertainty to exist
and protects the objectively reasonable expectations of the
insured.  In the instant case, it was reasonable for plaintiffs
to believe they were insured.  There is no indication on the face
of the policy that the listing of Crespi High School, as well as
the other Mount Carmel localities in California, is for any
reason other than as a workplace that is insured under the
policy. Accordingly, defendants cannot now claim that plaintiffs
are not insureds under the policy.
                                    II
  Defendants next contend that, even assuming the plaintiffs
were insureds under the policy, the trial court erred in holding
that defendants owed a duty to defend the underlying action. 
Specifically, defendants argue that: (a) the policy pays only
benefits required under the workers  compensation law and not
damages awarded in a civil suit; (b) the underlying complaint
does not allege an "accident"; and (c) exclusions in the
employers  liability portion of the policy and section 533 of the
California Insurance Code (Cal. Ins. Code  533) precluded
coverage.  Plaintiffs respond that defendants have waived any
right to deny coverage and are estopped from arguing non
coverage.  We will first address the issues of waiver and
estoppel relative to this case as they are dispositive.
  Waiver is an affirmative defense for which the insured bears
the burden of proof. Waller v. Truck Insurance Exchange Inc., 11 Cal. 4th 1, 33, 900 P.2d 619, 637, 44 Cal. Rptr. 2d 370, 388
(1995).   California courts will find waiver in insurance cases
when an insurer intentionally relinquishes a right or when that
insurer's acts are so inconsistent with an intent to enforce the
right as to induce a reasonable belief in the insured that such
right has been relinquished (Waller, 11 Cal. 4th  at 33, 900 P.2d 
at 637, 44 Cal. Rptr. at 388) and where the insured detrimentally
relied upon such conduct.  Michaelian v. State Compensation
Insurance Fund, 50 Cal. App. 4th 1093, 1109, 58 Cal. Rptr. 2d 133, 142 (1996).  
  Plaintiffs contend that defendants waived their right to
assert coverage defenses by affirming coverage in the letter
dated May 26, 1986, and by their failure to tell the plaintiffs
that the workers' compensation and employers' liability policy
did not provide coverage. Plaintiffs also assert that defendants
are estopped from raising coverage defenses because of their
misconduct under California law and because of plaintiffs'
prejudice and detrimental reliance.  We agree.
  Defendants cite Waller v. Truck Insurance Exchange, Inc., 11 Cal. 4th 1, 900 P.2d 619, 44 Cal. Rptr. 2d 370, to support their
position that their failure to set forth in pre-suit
correspondence the specific coverage defenses applicable to the
workers' compensation and employers' liability policy did not
provide a basis for finding that they intended to waive these
defenses. In Waller, the plaintiffs argued that the insurer's
conduct over seven years in failing to raise certain coverage
defenses in its denial letter evidenced an objective intent not
to raise other coverage issues.  The California Supreme Court
rejected the rule that an insurer automatically waives coverage
defenses by failing to mention them when denying a claim.  11 Cal. 4th  at 33, 900 P.2d  at 637, 44 Cal. Rptr.  at 388.
  In the instant case, however, review of the record indicates
that defendants neither expressly denied nor expressly affirmed
coverage under the policy. In their May 21, 1986, letter to
plaintiffs' attorney, Continental's agent wrote, "And as this
[Gabriel's complaint] appears to fall within the parameters of
their coverage, we are advising the workers' compensation
division *** and are requesting they respond directly to you." 
Since plaintiffs received no notice that defendants would not
defend the Gabriel suit, we believe it was reasonable for the
plaintiffs to interpret the letter, particularly the language
above, as an indication of defendants' intent to defend the
underlying suit.  Therefore, it is our view that defendants
waived their right to assert coverage defenses as their conduct
reasonably induced plaintiffs, to their detriment, to believe
that the defendants would defend the underlying action.   See
Tomerlin v. Canadian Indemnity Co., 61 Cal. 2d 602, 394 P.2d 571,
39 Cal. Rptr. 731 (1964). 
  Furthermore, we believe defendants are also estopped from
asserting coverage defenses.  In Society of Mount Carmel v.
National Ben Franklin Insurance Co., 268 Ill. App. 3d 655, 643 N.E.2d 1280 (1994), we noted that, under California law, when an
insurer wrongfully refuses to defend, it is estopped from denying
liability under the policy at a later date.  268 Ill. App. 3d at
673, citing Gray v. Zurich Insurance Co., 65 Cal. 2d 263, 279,
419 P.2d 168, 178, 54 Cal. Rptr. 104, 114 (1966).  We stated in
pertinent part:
       "With respect to plaintiffs' estoppel claim, we note
  that under California law *** a duty to defend will arise
  where the underlying complaint filed against the insured
  alleges facts which are within, or potentially within, the
  coverage of the policy.  While an insurer has a duty to
  defend, it may not have a duty to indemnify. [Citations.]  
       Furthermore, while the insurer must defend the
  underlying action, it will not be estopped at a later date
  from claiming non coverage under the indemnity provisions of
  the policy if it has reserved its right to do so by securing
  a nonwaiver agreement from the insured or making a
  reservation of rights disclaiming liability to the insured. 
  [Citations.]  If the insurer adequately reserves its right
  to assert the non coverage defense later, it will not be
  bound by the judgment entered against the insured in the
  underlying action. [Citation.]  However, when the insurer
  wrongfully refuses to defend, it is estopped from denying
  liability under the policy at a later date. [Citations.]
       In the instant case, the defendant insurers did not
  seek a judicial determination regarding their obligation to
  defend the underlying California action and did not defend
  that action under a reservation of rights.  Defendants
  refused to defend the lawsuit and thus would be estopped
  from raising non coverage as a defense under the indemnity
  provisions of the policy should the court on remand find
  that the defendants owed a duty to defend the plaintiffs who
  were California defendants in the underlying action.
  [Citations.]" 268 Ill. App. 3d at 672-673.
Pursuant to our instructions on remand, the trial court
determined whether the defendants owed a duty to defend the
Gabriel suit and found in the affirmative. 
  An insurer's duty to defend is separate from its duty to
indemnify. Ohio Casualty Insurance Co. v. Hubbard, 162 Cal. App. 3d 939, 943, 208 Cal. Rptr. 806, 808 (1984). The fact that an
insurer may ultimately not be liable as the indemnifier of the
insured does not establish that it has no duty to defend, because
the duty to defend is broader than the duty to indemnify and is
measured by the reasonable expectations of the insured. Ohio
Casualty, 162 Cal. App. 3d  at 944, 208 Cal. Rptr.  at 809; Gray v.
Zurich Insurance, 65 Cal. 2d  at 272-75, 419 P.2d  at 172-74, 54 Cal. Rptr.  at 111-14. 
  In determining whether there is a duty to defend, courts
examine not only the pleadings, but also the potential liability
created by the suit.  Waller, 11 Cal. 4th  at 19, 900 P.2d  at 624,
44 Cal. Rptr.  at 378.  In Gray v. Zurich Insurance, 65 Cal. 2d 263, 419 P.2d 168, 54 Cal. Rptr. 104, the insured had been sued
for allegedly having "wilfully, maliciously, brutally and
intentionally assaulted" the plaintiff.  The California Supreme
Court held that such conduct, could have fallen within the
insurance policy's indemnification coverage as the plaintiff
could have amended his complaint to allege merely negligent
conduct, which would have brought the conduct within that
liability.  This possibility created a duty to defend. 
Accordingly, under Gray, an insurer is not absolved from its duty
to defend a lawsuit merely because it is forbidden by law or
contract to indemnify the liability-causing action. See also Ohio
Casualty, 162 Cal. App. 3d  at 944, 208 Cal. Rptr.  at 809.
  The defendants in the instant case had a duty to defend the
Gabriel claim because the facts in the underlying complaint gave
rise to a potential for coverage under the policy. When Gabriel's
complaint was first tendered, an employee was permitted, under
California law, to sue an employer for negligent infliction of
emotional distress resulting from wrongful termination of
employment.  Gabriel's complaint included a count based on
negligent infliction of emotional distress and, therefore, was
potentially within the terms of the policy. 
  Accordingly, since defendants wrongfully refused to defend,
the trial court was correct in determining that they are
therefore estopped from asserting coverage defenses and summary
judgment in favor of plaintiffs was proper. 
                                    III
  Defendants also contend that section 533 of the Insurance
Code precludes coverage. We disagree.  Section 533 of the
Insurance Code states that an insurer is not liable for the
"willful act of the insured" and is an implied exclusionary
clause in all policies. (Cal. Ins. Code  533); Moore v.
Continental Insurance, 51 Cal. Rptr. 2d 176, 178 (1996). 
California courts have interpreted the provision to preclude
coverage for acts such as child molestation, which are deemed to
be inherently intentional, wrongful and harmful.  See J.C. Penney
Casualty Insurance Co. v. M.K., 52 Cal. 3d 1009, 1019, 1025, 804 P.2d 689, 695, 700, 278 Cal. Rptr. 64, 68, 73 (1991); Coit
Drapery Cleaners, Inc. v. Sequoia Insurance Co., 14 Cal. App. 4th 1595, 1603-04, 18 Cal. Rptr. 2d 692, 698 (1993)(section 533
precludes coverage for sexual harassment claims). Section 533
does not, however, bar coverage for conduct that may be wrongful
but is not intentional or willful from the standpoint of the
insured.  Melugin v. Zurich Canada, 50 Cal. App. 4th 658, 665, 57 Cal. Rptr. 2d 781, 787 (1996).  
  In the instant case, not all of the allegations in the
Gabriel complaint involve allegations of willful or intentional
conduct that would be barred under section 533.  For example, the
fundamental bases of the allegations in counts I and II of
Gabriel's complaint are breach of contract and breach of the
covenant of good faith and fair dealing based on wrongful
termination.  The conduct alleged in these counts may be wrongful
but does not necessarily involve willful and intentional conduct
of the sort that has been previously precluded under section 533.
Thus, section 533 is inapplicable here and defendants were
obligated to provide a defense. 

                                    IV
  Defendants also argue that the trial court erred in finding
coverage where the underlying judgment was based on the willful
acts of plaintiffs and includes an award of punitive damages not
otherwise insurable. We disagree.
  Generally, an insurer is not liable for any portion of a
judgment that awards punitive damages. Stevens v. Owens-Corning
Fiberglas Corp., 49 Cal. App. 4th 1645, 1664, 57 Cal. Rptr. 2d 525, 541 (1996); Stonewall Surplus Lines Insurance Co. v. Johnson
Controls, Inc., 14 Cal. App. 4th 637, 17 Cal. Rptr. 2d 713
(1993); City Products Corp. v. Globe Indemnity Co., 88 Cal. App. 3d 31, 42, 151 Cal. Rptr. 494, 500 (1979). Thus, indemnification
of punitive damages is prohibited in California.  Ohio Casualty,
162 Cal. App. 3d  at 946, 208 Cal. Rptr.  at 810-11.  The purpose
of this policy is to prevent the dilution of the deterrent effect
of punitive damages by allowing the impact of a penalty to be
shifted to an insurer. Ohio Casualty, 162 Cal. App. 3d  at 946,
208 Cal. Rptr.  at 810.  But this policy is not weakened by the
defense of an action in which punitive damages are sought.  Ohio
Casualty, 162 Cal. App. 3d  at 947, 208 Cal. Rptr.  at 811. 
  In the instant case, defendants are estopped from asserting
coverage defenses because of their conduct (i.e., their failure
to inform the plaintiffs that they would not defend the Gabriel
claim) subsequent to their issuance of the insurance contract.
See generally Tomerlin v. Canadian Indemnity Co., 61 Cal. 2d 638,
394 P.2d 571, 39 Cal. Rptr. 731, (1964)(recovery under a
subsequent estoppel does not offend public policy). Accordingly,
none of the reasons for the prohibition of the indemnification of
punitive damages are contravened by our decision here that
defendants wrongfully refused to defend plaintiffs in the Gabriel
suit.  See Ohio Casualty Insurance Co. v. Hubbard, 162 Cal. App. 3d  at 947, 208 Cal. Rptr.  at 811 ("If the reasonable expectations
of an insured are that a defense will be provided for a claim,
then the insurer cannot escape that obligation merely because
public policy precludes it from indemnifying that claim").
  For the foregoing reasons, we affirm the judgments of the
lower court.
  Affirmed.
  GORDON and CAHILL, JJ., concur.