Pearson Food Co. v. State Compensation Ins. Fund CA2/7

Filed 3/17/14 Pearson Food Co. v. State Compensation Ins. Fund CA2/7

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN

PEARSON FOOD COMPANY, INC., B242556
Cross-Complainant and Appellant,
v. (Los Angeles County
Super. Ct. No. KC057585)
STATE COMPENSATION INSURANCE
FUND,
Cross-Defendant and Respondent.

APPEAL from a judgment of the Superior Court of Los Angeles County,
Bruce H. Minto, Judge. Affirmed.

Kerendian & Associates, Shab D. Kerendian, Shawn S. Kerendian, Erika P.
Licon, Verlan Y. Kwan and Julie R. Woods for Cross-Complainant and Appellant.

Judith D. Sapper, Betty R. Quarles, Isabel C. Lallana and Katrina
Manookian for Cross-Defendant and Respondent.

______________________________________
 Pearson Foods, Inc. (“Pearson”) appeals from the judgment entered after a trial by
reference pursuant to Code of Civil Procedure section 639 in favor of State
Compensation Insurance Fund (“SCIF”) on Pearson’s cross-complaint against SCIF
alleging causes of actions for breach of contract, breach of the covenant of good faith and
fair dealing, quantum meruit and violation of Business and Professions Code section
17200. Pearson’s causes of action centered around three workers’ compensations claims
that Pearson alleged SCIF failed to fully investigate, had mishandled, over-valued and
negligently adjusted in various ways resulting in overpayment and setting improper
reserves on those claims. Pearson also claimed that as a result of SCIF’s conduct Pearson
was charged higher insurance premiums and was unable to secure less expensive
insurance from another insurance company.
On appeal, Pearson asserts that the trial court erred in entering judgment upon the
statement of decision because: (1) the referee’s decision did not contain express findings
or rule upon certain matters including the breach of contract and quantum meruit causes
of action; (2) the referee’s findings did not support a ruling in favor of SCIF on the other
causes of action, and the referee applied the improper standard of care in assessing the
case and incorrectly shifted the burden of proof on Pearson; and (3) the trial court erred in
denying Pearson a new trial. As we shall explain, Pearson’s claims do not warrant
reversal of the judgment and accordingly, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
A. The Parties and Background of the Case
Pearson owns and operates a large food and sundries distribution warehouse in
Los Angeles County, employing between 35-40 employees. From 2003 through 2005,
SCIF, the state’s largest workers compensation insurance carrier served as Pearson’s
workers compensation insurance provider. The workers compensation claims brought by
Pearson employees during this time period were investigated and adjusted by SCIF on
behalf of Pearson—SCIF paid benefits to the claimants and defended Pearson before the
Workers Compensation Appeal Board.

2
 At the end of the policy period for 2004-2005 an audit of Pearson’s financial
records by SCIF revealed that Pearson had under reported its payroll and therefore owed
additional insurance premiums to SCIF in the amount of $8,341.61. SCIF ultimately
assigned the collection of the unpaid premiums to a third party, Allied Interstate
Incorporated (“Allied”). Allied subsequently brought a collection action in the superior
court against Pearson on the claim.1
B. The Cross-Complaint and Discovery Proceedings
Pearson filed the cross-complaint against SCIF. Pearson claimed that during the
period SCIF provided insurance for the company, SCIF failed to fully investigate and
mishandled workers compensation benefit claims of three Pearson employees: Franz
Herzog, Hernando Aguilar, and Michael Quinones, which in turn resulted in
inappropriate increases in the experience modification,2 setting of reserves for the claims
and costs of its insurance premiums.
In March 2010, Pearson propounded discovery requests seeking records pertaining
to the handling, reserving, and settlement of workers compensation claims of Herzog,
Aguilar, and Quinones.
SCIF objected to the discovery of the claimant’s medical records based on privacy
concerns, but agreed to the production of medical documents, subject to a protective
order. SCIF also asserted an attorney-client privilege and attorney work-product
objections in its response to the discovery requests.
In October 2010 Pearson moved to compel further production of “claimant
medical records.” The trial court granted Pearson’s motion and ordered SCIF to “give

1
Allied is not a party to this appeal, and Pearson does not appeal from that portion
of the judgment awarding Allied damages on the complaint.
2
The “experience modification” or “ex-mod” is a tool used in the workers
compensation insurance industry to compare similar businesses in terms of worker
injuries, accidents and workplace safety. The “ex-mod” is reflected by numerical value.
An employer’s ex-mod number affects the amount of workers compensation premiums
that an employer will be charged by a workers compensation insurer.

3
notice to all claimants that their medical records are produced and to provide them with
the opportunity to request a protective order.” The court further ordered SCIF to produce
all claimant medical records.
In November 2010, SCIF filed a motion for protective order. On January 12,
2011, the trial court denied SCIF’s motion for protective order, and ruled that “all
documents previously ordered to be produced on 10/26/2010 are to be produced.”3 SCIF
produced the records, but did not produce a privilege log or otherwise indicate that any
records were being withheld on the basis of privilege.
C. Trial Reference
In May 2011, the trial court ordered the matter to reference under Code of Civil
Procedure section 639, subdivisions (a)(1)-(3). The court stated that the reference was
warranted because “The claims and counter claims involve the examination of a long
account, which in turn involves extensive medical billings, records and reports [and] [t]he
parties have estimated the trial in the case as requiring 55 court days.” The order stated
the scope of the reference as:
“The issues referred for determination by the referee are:
“All issues of the complaint;
“All issues of the First Amended Cross-Complaint, excepting therefrom any
determination as to whether any party’s actions were willful, conscious, reckless, done
with malice, fraud, or oppression, and any determination regarding entitlement to or an
award of punitive damages;
“Included in the above issues to be determined, but not limited to such issues, are:
“The amount of payroll, the proper classification or class code of the involved
employees, the proper experience, rating plan, premium discount or other modifiers to
apply, and the proper surcharges.”

3
In January 2011, SCIF filed a petition for writ of mandate in the court (case No.
B230325) based on the denial of the motion for protective order to prevent or limit
disclosure of private medical information of third-party injured workers. State Fund’s
writ petition was summarily denied.

4
 In January 2011, the trial by reference began before the assigned referee, Retired
Judge Gregory O’Brien.
In July 2011, Pearson filed a second amended cross-complaint asserting claims for
breach of contract, breach of the implied covenant of good faith and fair dealing,
quantum meruit, and violation of Business and Professions Code section 17200.
Pearson’s second amended complaint alleged that SCIF breached the insurance
contract, and engaged in bad faith in various ways including: delaying making coverage
determinations as to the Herzog, Lopez and Quinones claims; failing to conduct a full and
complete investigation of the claims; failing to exercise diligence in processing the
claims, overvaluing and overpaying on the claims and setting unreasonable reserves,
failing to properly handle and administer the workers compensation insurance and the
defense to the workers compensation claims; failing to provide Pearson with information
about its coverage; ignoring facts and medical evidence about the claims which would
have demonstrated that the claims were false and exaggerated; and failing to maintain
proper files and failing to comply with insurance regulations. Pearson’s cause of action
based on the implied covenant of good faith and fair dealing was based upon the same
allegations as the breach of contract claim, and included a request for punitive damages.
Pearson claimed that SCIF’s conduct (giving rise to the breach of contract, and the
implied covenant and statutory violation) harmed Pearson because, as a result Pearson
was charged higher insurance premiums by SCIF and was unable to find less expensive
workers compensation insurance and liability insurance from another carrier.
During the trial4 Pearson presented the testimony inter alia of William Wilson, the
CEO of Pearson, and Adam Wilson, the Vice President of Pearson. Pearson presented
expert testimony of Sam Smith, a claims handling expert, Susan Silberman, an attorney
and expert on claims handling and legal support, and Duncan Prince. SCIF’s claim
adjuster/employees George Ashkharian, Rosa Rodriguez-Cubero, and Christopher

4
The trial before the Referee lasted eight days and occurred on various dates
between January 16, 2012 and March 14, 2012.

5
Punzalan also testified. The SCIF employees testified about handling of the claims as to
the three claimants, setting medical evaluations, and obtaining medical reports, and the
process of determining benefit payments and setting reserves. SCIF presented expert
witness William Spiegel, who testified about the proper methods of claims handling for
workers compensation claims.
On the fourth day of the trial, Pearson’s claims expert, Susan Silberman testified
that SCIF had minimal information in the claims files. Her testimony prompted the
referee to inquire whether SCIF maintained one or two files for each claim: “the file
that’s maintained by the adjustor, or are there two files, one maintained by the lawyer and
one maintained by the adjustor?” Silberman responded that “[g]enerally for me of course
I have two files. I mean, I have a different file than the adjustor . . . .” The Referee asked
if “the reason we’re not seeing this decision tree is because this is the attorney’s decision
tree and maybe all that’s privileged?” Pearson’s counsel interrupted and made the
following representation:
“[Pearson’s Counsel]: Before you do, let me interject and present one piece of
evidence, that the files that were produced to us, there was no hold-back on anything
based on privilege, so what we reviewed contained everything.” Pearson’s counsel stated
that during discovery it had requested the “entire file” on each claim, and “what is
represented is there was no hold-back, there was no list of privilege documents.”
SCIF’s trial counsel responded that SCIF had a litigation file, but did not produce
it during discovery. SCIF took the position that it was required to produce only the
“claim file,” and not provide the litigation file. The following exchange then occurred:
“[Pearson’s Counsel]: You did not produce the litigation file?
“[SCIF’s Counsel]: No, we didn’t.
“[Pearson’s Counsel]: On what basis? I didn’t get a privilege log. I didn’t get
anything.
“[Referee]: Excuse me, folks.
“[SCIF’s Counsel]: That is not the subject of a privilege log.
“[Referee]: . . . This is not a question I can help you with. . . .”

6
 Thereafter Referee stated his view that the scope of his powers under the reference
order was limited and did not include the power to resolve discovery disputes or to
determine whether a violation of a discovery order had occurred. The referee observed
that Pearson had a couple of weeks before the next scheduled day of trial proceeding and
directed Pearson’s counsel to bring the issue of the discovery order violation to the
superior court prior to the next scheduled trial date. Pearson’s counsel informed the
Referee that Pearson would pursue that course of action.5 Pearson did not, however, file
any motion.

5
“[Referee]: We’ve got a few weeks now between now and the next hearing. If you
have a beef with all of this or with [SCIF’s counsel] or with what you received, I don’t
think I’m the guy who can sort this out for you. I think that’s Judge Minto. This is a
reference trial. This isn’t an arbitration. The scope of my duties I think is fairly limited.
“[Pearson’s Counsel]: Okay.
“[Referee]: I think the scope of my duties is to decide the facts and the law based
on the evidence that’s presented to me at the hearing, but you correct me if I’m wrong.
Did Judge Minto put me in charge of discovery? Was this also a discovery reference?
“[Pearson’s Counsel]: I have to look at the --
“[SCIF’s Counsel]: No, it wasn’t.
“[Referee]: Yeah, I don't think it was.
“[Pearson’s Counsel]: Then we have to file a motion, your Honor, because my
understanding was based on what I received, I have everything. . . . [¶] And I think it’s
unfair to me that in the middle of trial I am told that there’s a part of the file that was not
produced. There’s no privileged log.
“[Referee]: . . . I get it, and you need not belabor the point. I don’t think there’s
any 638(e) reference here as a discovery referee. Consequently, I don’t think I have
jurisdiction to address your issue. I was just curious. You now are armed with the facts.
You have a transcript. Do what you need to do, and I’ll see you all in whatever, three,
four weeks.”

7
 D. The Referee’s Statement of Decision and Entry of Judgment
On April 30, 2012, the Referee filed a Statement of Decision in the superior court
and served the statement on the parties. In the 53-page Statement of Decision, the
Referee described the evidence presented by both sides and the applicable law. The
Referee summarized the claims as centering on the issue of whether SCIF breached
certain alleged standards of care and internal rules in handling the three claims at issue.
The statement of decision further summarized the claims as: “Pearson . . . questions the
legitimacy and severity of certain injuries. It points to evidence of inconsistencies in the
observations, evaluations, prescribed treatments and prognoses offered by various
medical examiners seeing the same applicants. Pearson asserts that the adjuster(s) either
failed to recognize the alleged inconsistencies, or for unknown reasons saw them but
failed to investigate further, and then set reserves far in excess of the realistic expenses
that could be anticipated for the claims. [¶] Pearson also alleges that the adjuster(s)
failed to maintain appropriate records and notes of their own activities and decision
making, and then set arbitrary reserve amounts out of proportion to the realistic value of
the claims. … Pearson asserts finally that the adjuster in one instance paid for benefits
that were not required, set reserves for lifetime treatment for a soft-tissue injury, and
settled the cases at inflated values.” After reviewing the evidence, including the expert
testimony presented by both parties, the Referee found that Pearson failed to prove its
claims. The Referee found that although certain claims may have warranted additional
investigation, that Pearson’s complaints were trivial, and did not result in significant
damage or demonstrate a pattern of negligence or bad faith.
The statement of decision indicated that: Pearson failed to produced evidence that
“Herzog was not injured" or that setting a lifetime reserve in that case affected Pearson’s
“ex-mod” or future premiums. As to the alleged fabricated claim by Aguilar, the Referee
concluded that although Pearson suspected fraud, it was never reported to SCIF and the
evidence indicated that Quinones’s injury occurred and the applicant was telling the truth.
The Referee rejected the testimony of Pearson’s experts on the handling of Herzog’s,
Aguilar’s and Quinones’s claims. The Referee found Susan Silberman unqualified to

8
give medical testimony and found Mr. Smith’s testimony on reserve amounts lacked
foundation and was unpersuasive. The Referee further found Pearson failed to
demonstrate SCIF’s conduct damaged Pearson as alleged. Pearson did not file an
objection to the statement of decision.6
On May 16, 2012, the trial court adopted the statement of decision and
incorporated it by reference into the judgment. On May 22, 2012, the judgment was
served on all parties.
E. Motion For New Trial
On May 31, 2012, Pearson filed a “Notice of Motion for New Trial and Notice of
Motion to Set Aside Judgment” with the Referee; Pearson did not file the notice or
motion in the superior court. SCIF filed an objection with the court based on Pearson’s
failure to comply with Code of Civil Procedure section 639. On June 11, 2012, Pearson
filed a Notice of Motion for New Trial in the superior court. 7 SCIF opposed the motion
on jurisdictional grounds on the basis that it was untimely filed. The motion for new trial
was denied for being untimely.
Pearson appeals from the judgment.
DISCUSSION
Before this court, Pearson claims the judgment must be reversed because: (1) the
statement of decision upon which the judgment is based did not resolve its causes of
action for breach of contract and quantum meruit; (2) the Referee’s findings did not
support a ruling in favor of SCIF on the other causes of action, the Referee applied the
improper standard of care in assessing the case and incorrectly shifted the burden of proof
onto Pearson; and (3) the trial court erred in denying Pearson a new trial. We address
these arguments in turn.

6
The Referee also found for Allied on its claims against Pearson as alleged in the
complaint.
7
Pearson also filed a motion to vacate the judgment. The court denied the motion.
The order denying the motion is not at issue in this appeal.

9
I. Resolution of the Breach of Contract and Quantum Meruit Claims
Pearson asserts that the court entered judgment without ruling on all the matters
raised in the second amended complaint. Specifically, Pearson complains the Referee
failed to rule on its breach of contract and quantum meruit causes of action and failed to
address the issue of whether SCIF counsel represented Pearson before the Workers
Compensation Appeal Board.8
Pearson is correct that the statement of decision’s “Findings and Determinations”
did not expressly identify or specifically address which of the findings and
determinations, if any, pertained to the breach of contract and quantum meruit claims.
However, Pearson did not file any objection to the statement of decision in the trial court
on that basis. In addition, the findings on these claims are subject to the doctrine of
implied findings.
“The doctrine of implied findings is based on our Supreme Court's statutory
construction of [Code Civ. Proc.] section 634 and provides that a ‘party must state any
objection to the statement in order to avoid an implied finding on appeal in favor of the
prevailing party. . . . [I]f a party does not bring such deficiencies to the trial court's
attention, that party waives the right to claim on appeal that the statement was deficient
. . . and hence the appellate court will imply findings to support the judgment.’” (SFPP,
L.P. v. v Burlington Northern & Santa Fe Railway Co. (2004) 121 Cal.App.3d 452, 462,
citation omitted [holding that findings may be implied in a statement of decision in
reference proceedings].) The doctrine (1) directs the appellate court to presume that the

8
Pearson’s opening brief concedes that SCIF’s attorneys represented Pearson
before the Workers Compensation Appeals Board in connection with the three claims at
issue. SCIF does not dispute this fact. Pearson has not articulated how the Referee’s
failure to make a factual finding on the representation issue in the statement of decision
affects the outcome of the issues on appeal. To the extent that Pearson has raised this
matter to suggest that the Referee failed to rule that SCIF carried out its obligation to
defend it before the WCAB, such an argument is implicitly rejected by the Referee’s
findings on damages. As discussed in more detail here, the Referee concluded in the
statement of decision that Pearson failed to demonstrate that SCIF’s actions in relation to
the three claimants’ cases resulted in damage.

10
trial court made all factual findings necessary to support the judgment so long as
substantial evidence supports those findings and (2) applies unless the omissions and
ambiguities in the statement of decision are brought to the attention of the superior court
in a timely manner. (Ibid.) Similarly, the failure to make a finding on an issue raised in
the pleadings is harmless when the missing finding reasonably may be found to be
implicit in other findings. (People v. Casa Blanca Convalescent Homes, Inc. (1984) 159
Cal.App.3d 509, 527, overruled on another ground, Cel-Tech Communications Inc. v.
Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163.)
Here, as we shall explain, based on the causes of action pled in the second
amended complaint, the evidence in the record and the statement of decision, we
conclude that Pearson’s breach of contract and quantum meruit claims were implicitly
rejected by the Referee.
A. The Quantum Meruit Cause of Action
A quantum meruit or quasi-contractual recovery rests upon the theory that a
contract to pay for services rendered is implied by law for reasons of justice. (Hedging
Concepts, Inc. v. First Alliance Mortgage Co. (1996) 41 Cal.App.4th 1410, 1419-1420.)
Quantum meruit is therefore, an equitable theory that supplies, by implication and in
furtherance of equity, missing contractual terms. Nonetheless, it is well established that
no equitable basis for an implied-in-law contract exists when the parties have an actual
agreement governing the matter at issue. (Ibid.) Contractual terms regarding a subject
are not implicitly missing when the parties have agreed on express terms regarding that
subject. (See Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 688, 700, fn. 42
[There cannot be a valid express contract and an implied contract, each embracing the
same subject, but requiring different results.].)
Here it was uncontroverted that SCIF and Pearson’s relationship was governed by
a valid, express written contract for insurance that existed between them during the time
periods at issue in these claims—2003 through 2005. The Referee made reference to the
contractual relationship in its statement of decision, and on the basis of the express
contract awarded Allied damages on the complaint for the unpaid premiums owed by

11
Pearson. Likewise, Pearson did not present any evidence or argument that there were any
missing terms from the contract of insurance that should have implied by reason of equity
or that the contract was invalid or void. As a result, the Referee’s failure to specifically
resolve the quantum meruit claim in the statement of decision is not error; the rejection of
the claim reasonably may be found to be implicit in other findings relating to the contract
between SCIF and Pearson.
B. The Breach of Contract Claim
A determination of whether Pearson’s breach of contract cause of action was
implicitly resolved in the statement of decision requires an examination of the
relationship between the breach of contract claim and another cause of action addressed
in the decision, namely, the breach of the implied covenant. We turn first to the legal
relationship between these causes of action and then to the manner in which they were
pled in the cross-complaint, presented at trial and resolved in the Referee’s decision.
Every contract imposes on each party a duty of good faith and fair dealing in its
performance and in its enforcement. (Egan v. Mutual of Omaha Ins. Co. (1979) 24
Cal.3d 809, 818.) The burden imposed is “‘that neither party will do anything which will
injure the right of the other to receive the benefits of the agreement.’” (Gruenberg v.
Aetna Ins. Co. (1973) 9 Cal.3d 566, 573, quoting Comunale v. Traders & General Ins.
Co. (1958) 50 Cal.2d 654, 658.) Stated another way, the “implied covenant imposes
upon each party the obligation to do everything that the contract presupposes they will do
to accomplish its purpose.” (Schoolcraft v. Ross (1978) 81 Cal.App.3d 75, 80.) This rule
was developed “in the contract arena and is aimed at making effective the agreement’s
promises.” (Foley v. Interactive Data Corp., supra, 47 Cal.3d at p. 683.) The “precise
nature and extent of the duty imposed . . . will depend on the contractual purposes.”
(Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d at p. 818.)
In Foley, the Court emphasized that an alleged breach of the implied covenant is a
claim founded upon contract and that a careful distinction must be maintained between
“ex-delicto” and “ex-contractu” obligations. “When a court enforces the implied
covenant it is in essence acting to protect ‘the interest in having promises performed’

12
[citation]. . . .” (Foley v. Interactive Data Corp, supra, 47 Cal.3d at pp. 689-690.) This
is the traditional function of a contract action. A tort action, on the other hand, redresses
the breach of the general duty to society that the law imposes without regard to the
substance of the contractual obligation. “The covenant of good faith is read into
contracts in order to protect the express covenants or promises of the contract, not to
protect some general public policy interest not directly tied to the contract’s purposes.”
(Id. at p. 690.)9
In short, it is an implied-in-law term of the contract and the elements of the claims
are similar. The elements of a breach of contract are: (1) existence of contract; (2)
plaintiffs’ performance or excuse for nonperformance; (3) defendants’ breach; and (4)
resulting damage. (See Armstrong Petroleum Corp. v. Tri–Valley Oil & Gas Co. (2004)
116 Cal.App.4th 1375, 1391, fn. 6.) The elements of a cause of action for breach of
covenant of good faith and fair dealing are: (1) existence of contractual relationship; (2)
implied duty; (3) breach; and (4) causation of damages. (Smith v. City and County of San
Francisco (1990) 225 Cal.App.3d 38, 49.) A breach of the implied covenant may result
in a breach of the contract, although a breach of a consensual (i.e., an express or implied-
in-fact) contract term will not necessarily constitute a breach of the covenant. (Careau &
Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1393-1395; see
Carma Developers (Cal.) Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th
342, 373 [To prove a breach of the implied covenant, it is not necessary that plaintiff

9
This notwithstanding, as the Court recognized in Foley, in insurance cases there is
a well-developed history recognizing a tort remedy for a breach of the implied covenant.
(Foley v. Interactive Data Corp, supra, 47 Cal.3d at p. 684.) A review of those cases
demonstrates that the existence of this remedy has been justified by the “special
relationship” existing between insurer and insured, which is characterized by elements of
public interest, adhesion and fiduciary responsibility. (Egan v. Mutual of Omaha, supra,
24 Cal.3d at p. 820.) In addition, it is essential to a recovery in tort that the insurer, in
breaching the implied covenant, have acted unreasonably (id., at p. 818; Gruenberg v.
Aetna Ins. Co., supra, 9 Cal.3d at p. 575) or without proper cause (Neal v. Farmers Ins.
Exchange, supra, 21 Cal.3d at p. 920; Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d at p.
574; Suarez v. Life Ins. Co. of North America (1988) 206 Cal.App.3d 1396, 1407).

13
show that a specific contractual provision was breached; “[w]ere it otherwise, the
covenant would have no practical meaning, for any breach thereof would necessarily
involve breach of some other term of the contract”].)
As a result, the same conduct does not necessarily result in a breach of both a
consensual contract term and the implied covenant of good faith. (See, for example,
Schoolcraft v. Ross, supra, 81 Cal.App.3d at pp. 80–81; Wilkerson v. Wells Fargo Bank
(1989) 212 Cal.App.3d 1217, 1230–1231; Sheppard v. Morgan Keegan & Co. (1990) 218
Cal.App.3d 61, 66–67.)10 Thus, the court’s resolution of the breach of the implied
covenant cause of action does not necessarily imply findings as to the breach of contract
claim. However, where the breach of contract and implied covenant claims are pled
identically – relying on the same underlying alleged acts, or allegedly resulting in the
same damage, and where the trier of fact determines that the underlying conduct did not
occur or did not result in any compensable or material injury, then the court’s findings
about the underlying conduct and damages resolves both causes of action. Such is the
situation here.

10
For example, in Schoolcraft, the court awarded contract damages to the trustor
under a deed of trust upon the theory that the beneficiary’s conduct, in applying fire
insurance proceeds to the secured debt rather than to the reconstruction of the insured
residence, was a breach of the covenant of good faith implied in the trust deed. While
such choice was permitted by the express terms of the trust deed, and thus there was no
breach of those terms, the court found that the choice had been made in bad faith and had
deprived the trustor of the benefit of the agreement without necessarily enhancing the
beneficiary’s security. (Schoolcraft v. Ross, supra, 81 Cal.App.3d at pp. 80-81.) In
Wilkerson, plaintiff sued on an alleged contract of employment that he would not be
terminated except for cause. The court held that even though the employer may have had
a good faith belief that such “good cause” existed, such belief would be a defense only to
an action for breach of the covenant, but would not provide a defense to breach of
contract. (Wilkerson v. Wells Fargo Bank (1989) 212 Cal.App.3d at pp. 1230-1231.) In
Sheppard, the plaintiff had left his stock analyst position in California to accept a similar
job in Tennessee but was terminated before he could begin work. The court held that
while there was no agreement not to terminate except for cause, and thus no breach of a
consensual contract term, the implied covenant of good faith required that the employer
at least give the new employee an opportunity to demonstrate his ability to satisfy the
requirements of the job. (Sheppard v. Morgan Keegan & Co., supra, 218 Cal.App.3d at
p. 66-67.)

14
 In the operative cross-complaint, Pearson alleged that SCIF breached the terms of
insurance contract by: delaying making coverage determinations as to the Herzog, Lopez
and Quinones’ claims; failing to conduct a full and complete investigation of the claims;
failing to exercise diligence in processing the claims, overvaluing and overpaying on the
claims and setting unreasonable reserves; failing to properly handle and administer the
workers compensation insurance; failing to present a defense to the workers
compensation claims; failing to provide Pearson with information about its coverage;
ignoring facts and medical evidence about the claims which would have demonstrated
that the claims were false and exaggerated; and failing to maintain proper files and failing
to comply with insurance regulations. Pearson’s cause of action for breach of the implied
covenant of good faith and fair dealing expressly incorporated the same factual
allegations pled in support of the breach of contract claim.11
In addition, Pearson also alleged each cause of action resulted in identical harm.
Pearson claimed that SCIF’s conduct giving rise to the breach of contract, and the
implied covenant claim damaged Pearson in the same manner – as a result of SCIF’s
actions Pearson was charged higher insurances premiums by SCIF, was unable to find
less expensive insurance workers compensation and liability insurance from another
carrier and paid excessive amounts on each of the claims.
Furthermore, in terms of what Pearson sought to prove at trial, again Pearson
made no distinction between the two causes of action. Specifically with respect to the
Herzog claim, Pearson sought to demonstrate that Herzog’s 2004 workplace injury to his
shoulder caused him no permanent disability and required no future treatment, and his
persistent complaints about neck and shoulder pain were exaggerated and inconsistent
with medical evidence and his active lifestyle post-injury. Pearson sought to show that
SCIF paid excessive medical expenses and set reserves for the claim that were too high

11
The only meaningful distinction between the two claims is that Pearson sought an
award of punitive damages on its implied covenant claim.

15
and unjustified. Pearson also sought to show that even though there was no future
treatment indicated for Herzog, as of the trial, the claim remained open.
Concerning the workers compensation case of Mr. Aguilar, Pearson sought to
show that the alleged repetitive motion injuries to his back, hands, ankle and knees and
his complaints of pain were exaggerated, and that Mr. Aguilar gave inconsistent
information to three different medical providers about how he sustained the injuries.
Pearson also sought to demonstrate that SCIF mishandled Mr. Aguilar’s claim for
vocational rehabilitation. In addition, Pearson sought to prove that SCIF ignored
information about the claim and failed to investigate whether the claim of injury was
fabricated. Pearson further attempted to show that both reserves setting and the SCIF
settlement of $18,000 for the claim were too high.
Finally, with respect to the claim of Mr. Quinones, Pearson sought to prove that
SCIF’s resolution of the claim failed to take into account that Mr. Quinones suffered
from pre-existing injuries, and thus failed to properly apportion responsibility to Mr.
Quinones’s prior employer. Pearson also claimed that SCIF failed to investigate claims
that Mr. Quinones had engaged in fraud because at the time he was receiving workers
compensation benefits, including vocational rehabilitation, from SCIF, he was active and
employed by a different company. Pearson claimed that SCIF mishandled the workers
compensation case and set reserves for that case that were too high and unjustified based
on the injuries.
The statement of decision summarized the evidence presented during the trial with
respect to the three cases. Thereafter in the decision, the Referee assessed Pearson’s
factual and legal contentions in light of the evidence presented about each case. With
respect to the Herzog claim the Referee found that “no evidence was produced that
Herzog was not injured” or that “he was playing golf during the time of his treatment.”
The Referee further found that SCIF’s adjuster’s setting of reverses was not unjustified or
excessive in light of the evidence presented at trial. The Referee also noted that the
impact of the reserves on Pearson’s “ex-mod, if calculable was not identified” even
though the claim remained “open.” The Referee concluded that “[a]t the end of the day, I

16
am persuaded that Pearson’s dispute on this issue is a quibble that does not support
significant damages.”
With respect to the Aguilar claim, the Referee found that “more investigation on
this claim may have been warranted, but I am not persuaded that the history of his injury
that Aguilar gave to the three physicians constituted multiple and therefore fabricated
versions of a single event.” The Referee further found that if Pearson had reason to
suspect that Aguilar’s claim was fraudulent, Pearson never reported it to SCIF even
though SCIF had requested that Pearson provide such information if Pearson had reason
to doubt the validity of the claim. In the statement of decision the Referee stated that
Pearson had failed to prove any additional investigation of the claim would have revealed
the claim to be fraudulent, and found: “I cannot on the basis of the evidence find that
Aguilar’s claim was fraudulent.” The Referee also concluded that neither the settlement
nor the payment of the vocational rehabilitation benefits as part of the settlement was
excessive or shown to affected Pearson’s ex-mod.
As to the Quinones claim, the Referee found that Pearson failed to demonstrate
error with respect to the apportionment of the claim between Pearson (80 percent) and
Quinones’s prior employer (20 percent) and that Pearson failed to show how the
apportionment affected Pearson’s ex-mod or payment of premiums. Similarly, the
Referee found that Pearson failed to demonstrate error with respect to setting the reserves
on the claim. The Referee further concluded that Pearson failed to prove that Quinones
had engaged in fraud with respect to his work for another employer while he was
receiving vocational rehabilitation benefits from SCIF. While the Referee agreed that the
matter could have merited additional investigation, the evidence did not support a finding
that Quinones engaged in fraud or was disqualified from receiving the benefits provided.
On the issue of damages, the referee found Pearson’s evidence that it suffered
damage as a result of SCIF’s action, namely that it paid higher insurance premiums or
that it could not obtain less expensive insurance from another carrier, was not persuasive
and that the damage claim was based on expert testimony that was lacking in foundation
in the evidence. Specifically, the Referee found: “After a review of the evidence, I am

17
persuaded that a few isolated acts of adjuster negligence may have led to the payment of
unwarranted or higher benefits, but in all but a few relatively minor instances, the
evidence on damages does not support a judicial finding that more thorough
investigations would have led to more favorable results.” The Referee also found that
Pearson “failed to meet its burden of demonstrating that the loss reserves set for the three
subject claims were excessive” and that Pearson has “failed to sustain its burden of proof
as to damages.”
In light of the manner in which the breach of contact and the implied covenant
actions were pled, the evidence presented during the trial and the findings and
conclusions of the Referee in the statement of decision, we conclude that the Referee did
not err in failing to specifically address the breach of contract claim in the decision
because the Referee implicitly rejected the contract cause of action when he concluded
that the underlying acts did not occur as alleged, or were not support by the evidence
presented, or were minor and immaterial failings on the part of SCIF adjusters.
Moreover, the Referee’s findings and determinations on the issue of damages – that
Pearson had “failed to sustain its burden of proof as to damages” – applies to the breach
of contract claim in the cross-complaint. Thus, the omission of a separate finding on the
contract claim does not amount to reversible error.
II. Rulings on the Other Claims in the Cross-Complaint
Pearson complains that the Referee erred: (1) in finding that Pearson failed to
carry its burden of proof on its causes of action with respect to SCIF’s adjusting,
investigation and payment of the workers compensation claims; (2) in failing to find in its
favor on the claims based on the evidence presented that showed a pattern of negligence
in support of a finding of bad faith; and (3) in failing to apply the proper standard of care
to the analysis.
Turning first to the contentions about the allocation of burden of proof and the
findings and evidence on the issue of negligence and bad faith, in the statement of
decision the Referee concluded that Pearson bore the burden of proof with respect to its
causes of action and that Pearson failed to demonstrate a pattern of negligence amounting

18
to bad faith. The Referee specifically rejected Pearson’s argument that the burden of
proof should shift to SCIF to prove the appropriateness of its conduct in handling the
claims. At several places in the statement of decision the Referee noted that Pearson had
failed to present persuasive evidence supporting its contention that SCIF mishandled the
claims and that any failure to investigate resulted in measurable harm.
Underlying Pearson’s arguments on appeal are the contentions that SCIF
improperly withheld certain documents during discovery that denied Pearson the
opportunity to demonstrate its claims, and that the Referee improperly concluded this
discovery dispute was beyond the scope of the Code of Civil Procedure section 639
reference order. Pearson argues that because the Referee did not resolve the discovery
issue, it was unable to prove its case against SCIF. It further maintains that in light of
SCIF’s conduct, the Referee should have found that the burden of proof shifted to SCIF.
Pearson maintains that in light of the failure to resolve the discovery issue and its effect
on the outcome of the decision below, this court should reverse the judgment.
Our analysis thus begins with an examination of the scope of the Referee’s
authority and of the Referee’s ruling on the discovery dispute during the trial.
A reference by the trial court involves the sending of a pending action, or some
issue raised in the proceeding, to a referee for hearing, determination and report back to
the court. The procedure is most commonly employed where complicated accounts can
more conveniently be examined or taken outside of court, and to resolve discovery
disputes or certain types of family law issues. (See generally, DeGuere v. Universal City
Studios, Inc. (1997) 56 Cal.App.4th 482, 496-497.)
The Code of Civil Procedure provides for two types of reference. A “general”
reference is conducted pursuant to Code of Civil Procedure section 638, subdivision (1),
which authorizes the trial court to refer any or all issues to a referee for trial and
determination, provided that the parties have agreed thereto in an agreement filed with
the clerk or judge or entered in the minutes or docket.12 (Ibid; Ruisi v. Thieriot (1997) 53

19
Cal.App.4th 1197, 1208.) Such agreement of the parties is required in order to comport
with the constitutional prohibition against delegation of judicial power. (Ibid.) The
finding and determination of the referee upon the whole issue must stand as the finding of
the court and judgment may be entered thereon in the same manner as though the matter
had been tried by the court. (Estate of Bassi (1965) 234 Cal.App.2d 529, 536.)
This case involves the second type of reference: a “special” reference, conducted
pursuant to Code of Civil Procedure section 639. Under Code of Civil Procedure section
639, the findings of the referee are advisory only, and do not become binding unless
adopted by the court; the court must independently consider the referee’s findings before
acting. (Ruisi v. Thieriot, supra, 53 Cal.App.4th at p. 1208.) The consent of the parties is
not required; however, such nonconsensual reference is authorized under the statute only
in certain specified and limited circumstances: “(a) When the trial of an issue of fact
requires the examination of a long account on either side; in which case the referees may
be directed to hear and decide the whole issue, or report upon any specific question of
fact involved therein. [¶] (b) When the taking of an account is necessary for the
information of the court before judgment, or for carrying a judgment or order into effect.
[¶] (c) When a question of fact, other than upon the pleadings, arises upon motion or
otherwise, in any stage of the action. [¶] (d) When it is necessary for the information of
the court in a special proceeding. [¶] (e) When the court in any pending action
determines in its discretion that it is necessary for the court to appoint a referee to hear
and determine any and all discovery motions and disputes relevant to discovery in the

12
Code of Civil Procedure section 638 provides: “A reference may be ordered upon
the agreement of the parties filed with the clerk, or judge, or entered in the minutes or in
the docket, or upon the motion of a party to a written contract or lease which provides
that any controversy arising therefrom shall be heard by a reference if the court finds a
reference agreement exists between the parties:

“1. To try any or all of the issues in an action or proceeding, whether of fact or of
law, and to report a statement of decision thereon;

“2. To ascertain a fact necessary to enable the court to determine an action or
proceeding.”

20
action and to report findings and make a recommendation thereon.” (Code Civ. Proc., §
639.)
The statutory scheme carefully preserves the distinction between general and
special references in order to comply with the constitutional mandate regarding the
delegation of judicial power. “[A] general reference has binding effect, but must be
consensual, whereas a special reference may be ordered without consent but is merely
advisory, not binding on the [ ] court. [Citations.]” (Aetna Life Ins. Co. v. Superior
Court (1986) 182 Cal.App.3d 431, 436.)
Thus, special reference orders are construed narrowly to limit the scope of the
referee’s authority to the precise terms of the order as permitted by the statute. (See e.g.,
Jovine v. FHP, Inc. (1998) 64 Cal.App.4th 1506, 1525 [finding the referee’s ruling
granting summary judgment exceeded the scope of the Code of Civil Procedure section
639, subdivision (e) reference; reference to designated referee for purpose of hearing and
determining summary judgment motions, in employment discrimination action, was
beyond trial court’s authority since, without requisite consent to make general reference,
the court had authority only to make special reference, however, such power is limited by
statute, and hearing and ruling upon a summary judgment motion was not explicitly
authorized by statute]; De Guere v. Universal City Studios, Inc. (1997) 56 Cal.App.4th
482, 500-502 [finding the referee exceeded the scope of the Code of Civil Procedure
section 639 reference in making findings on the interpretation and enforceability of the
parties’ contract, where reference limited referee’s authority to determining the proper
accounting methodology to be applied to the dispute].)
Here the trial court ordered the case to reference under Code of Civil Procedure
section 639, subdivisions (a)(1), (2), and (3). The reference order limited the issues for
determination to: “All issues of the complaint; and all issues of the First Amended
Cross-Complaint, excepting therefrom any determination as to whether any party’s
actions were willful, conscious, reckless, done with malice, fraud or oppression and any
determination regarding the entitlement to or an award of punitive damages.” The
reference order did not refer to Code of Civil Procedure section 639, subdivision (e) or

21
otherwise indicate that the referee had the authority to resolve discovery issues or
disputes or rule on the violation of discovery orders. Thus, on the face of the reference
order, it appears that the Referee properly referred the matter to the trial court, correctly
concluding that the scope of his powers under the reference order was limited.
Thus the Referee properly directed Pearson’s counsel to bring the issue of the
discovery order violation to the superior court prior to the next scheduled trial date. Once
the Referee refused to decide the discovery issue, Pearson’s remedy was to file a motion
in the superior court. At the time Pearson’s counsel informed the Referee that it would
seek redress in the trial court. However, Pearson did not follow through.
Before this court, Pearson attempts to excuse its inaction, claiming that it would
have been too difficult to “switch gears” during the trial at that point and that because
discovery had “closed” any effort to obtain redress would have been futile. These
arguments are not persuasive. First, the trial was only mid-way complete at the time this
issue arose and as the Referee observed Pearson had a number of weeks before the next
scheduled trial proceedings – sufficient time to obtain a ruling on the matter. The
Referee also appeared to be open and willing to change course or re-open certain areas of
inquiry depending on the resolution of discovery issue.
Second, assuming for the sake of argument that SCIF’s failure to produce
documents violated one of the court’s discovery orders, the trial court had a number of
possible options at its disposal to remedy the situation, including imposing issue and
evidence preclusion sanctions, or monetary sanctions, or even terminating sanctions.
Indeed, the trial court has broad discretion to impose sanctions for violations of court
orders, including those intended to compel compliance with a party’s disclosure and
discovery obligations. (Parker v. Wolters Kluwer United States, Inc. (2007) 149
Cal.App.4th 285, 297; see, e.g., Laguna Auto Body v. Farmers Ins. Exchange (1991) 231
Cal.App.3d 481, 489 [“[w]here, as here, the record is replete with instances of delay and
failure to comply with a court order, dismissal may be proper,” disapproved on another
point by Garcia v. McCuthchen (1997) 16 Cal.4th 469, 478, fn. 4]; Doppes v. Bentley
Motors, Inc. (2009) 174 Cal.App.4th 967, 992 [“‘where a violation is willful, preceded by

22
a history of abuse, and the evidence shows that less severe sanctions would not produce
compliance with the discovery rules, the trial court is justified in imposing the ultimate
sanction’”].)
Pearson’s failure to raise the discovery issue in the trial court amounts to a
forfeiture of any complaints on appeal that SCIF violated the discovery orders; and that
the Referee misallocated the burden of proof at trial based on SCIF’s conduct during
discovery.
Moreover, it also deprives Pearson of a persuasive argument that the Referee erred
in concluding that Pearson failed to carry its burden on the issues at trial. The effect of
failing to pursue the discovery issue means that Pearson did not have evidence it needed
to support its contentions. As discussed elsewhere here, the Referee found that Pearson
had not supported a number of it contentions with any evidence and/or that the evidence
presented was unconvincing. Based on our review of the record and in light of the
deferential standard of review applied to the trier of fact’s assessment of the evidence and
credibility of the witnesses at trial, we agree with the Referee’s resolution of the causes of
action in the case. The Referee properly concluded that Pearson failed to demonstrate
that it suffered any damage as a result of SCIF’s conduct.
Likewise Pearson has not presented a winning argument that the Referee failed to
identify and apply the appropriate standard of care in assessing SCIF’s conduct. The
statement of decision identified and described the legal and regulatory standards
governing workers compensation carriers in detail, and the decision discloses that the
Referee sought to apply those standards to the evidence presented during the trial. The
Referee also heard evidence from expert witnesses presented by both parties on the
application of the standards of care. Although the Referee disregarded some of that
expert testimony for various reasons, 13 we perceive no error with respect to the Referee’s
application of the standard of care evidence to the resolution of the case.

13
The Referee granted Pearson’s motion to strike portions of SCIF’s expert’s
testimony on the issue of the reasonability of the carrier’s reserves. The Referee

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III. The New Trial Motion
Before this court, Pearson argues that the trial court should have granted a new
trial on the grounds of “irregularity and surprise” resulting from SCIF’s “abuse of the
discovery process.” The trial court denied the motion finding that it lacked jurisdiction to
decide the merits because it was not timely filed. The trial court did not err.
A party intending to file a motion for a new trial must file notice of intention to
move for a new trial with the court clerk and serve on each adverse party “[b]efore the
entry of judgment.” (Code Civ. Proc., § 659, subd. (a)(1).) Otherwise, it must be brought
by the earliest of three deadlines: (1) within 15 days of “the date of mailing notice of
entry of judgment by the clerk of the court pursuant to Section 664.5”; (2) within 15 days
of service on the moving party “by any party of written notice of entry of judgment”; or
(3) “within 180 days after the entry of judgment.” (Code Civ. Proc., § 659, subd. (a)(2).)
The 60 days during which the trial court has jurisdiction to rule on such a motion is
similarly linked to the clerk’s mailing or a party’s service of written notice of entry of
judgment. (Code Civ. Proc., § 660.) Thus, under the express terms of Code of Civil
Procedure sections 659, and 660, the time limits for bringing and ruling on motions for a
new trial start to run either on the date of the court clerk’s mailing or on the date of
service on the moving party of notice of entry of judgment. Failure to comply with the
filing and timing provisions of Code of Civil Procedure section 659, deprives the trial
court of jurisdiction to rule on the merits of the motion. (Smith v. Superior Court (1976)
64 Cal.App.3d 434, 437 [It has long been held that the power to grant a new trial may be
exercised only by following the statutory procedure and is conditioned upon the timely
filing of a motion for new trial].)

Here on May 16, 2012, the trial court adopted the statement of decision and
incorporated it by reference into the judgment, and on May 22, 2012, the judgment was

disregarded Pearson’s expert witness’s testimony concerning damages. Similarly, the
Referee found Pearson’s claims legal support expert unqualified to present medical
testimony and found Pearson’s claims handling expert’s testimony on reserve amounts
lacked foundation, and was unpersuasive.

24
served on all parties. Thereafter, on May 31, 2012, Pearson filed a “Notice of Motion for
New Trial and Notice of Motion to Set Aside Judgment” with the referee. Pearson did
not file the notice or motion for a new trial in the superior court until June 11, 2012.
Although Pearson’s May 31 notice was submitted to the Referee within 15 days after it
was served with the judgment, Pearson did not file that notice with the superior court
clerk as required by Code of Civil Procedure section 659. Pearson has not submitted any
authority which holds that service on a referee satisfies the statutory requirement that the
notice be filed with the clerk of the court. Thus, Pearson’s May 31 notice did not comply
with the filing requirements of Code of Civil Procedure section 659 and therefore it did
not preserve the trial court’s jurisdiction to decide the merits of the motion. Likewise,
although Pearson’s subsequent motion for a new trial was filed with the superior court
clerk, it was filed on June 11, 2012 – more than 15 days after service of the judgment and
thus was filed too late. In view of these circumstances, we conclude that the trial court
properly denied the motion for new trial.

DISPOSITION
The judgment is affirmed. Respondent is entitled to its costs on appeal.

WOODS, J.
We concur:

PERLUSS, P. J. ZELON, J.

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