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Prejudgment Interest
Introduction
When a plaintiff wins a civil lawsuit against a defendant, Civil Code § 3287(a) permits the plaintiff to recover prejudgment interest at the rate from 7% or 10% for those damages that are “certain, or capable of being made certain by calculation.” The purpose of the right to recover prejudgment interest is to make an injured party whole. The “certainty” requirement of this statute may be met if the defendant/debtor knows the amount of principal owed or the debtor could compute interest on the principal amount of damages. Recovery of prejudgment interest is mandatory from the first day there exists both a breach and a liquidated claim. Simple interest is calculated at the rate of 10% on sums due under contracts entered into after January 1, 1986, or at 7% on earlier contracts and on tort claims. The plaintiff can recover compound interest in cases of oppression, fraud, or malice and where the defendant breached a fiduciary duty to the plaintiff. Interest may be awarded by the trier of fact, either a judge or a jury.
Purpose
“[O]ne purpose of section 3287[(a)], and of prejudgment interest in general, is to provide just compensation to the injured party for loss of use of the award during the prejudgment period – in other words, to make the plaintiff whole as of the date of the injury.” Prejudgment interest is intended to make an injured party whole “for the accrual of wealth which could have been produced during the period of loss.” A similar purpose is served by prejudgment interest awarded by a jury pursuant to Civil Code § 3288. “Prejudgment interest [on a punitive damage recovery] is awarded to compensate a party for loss of use of his or her property and is in the nature of damages. ‘The inclusion of interest in the verdict is not the granting of damages in excess of the loss incurred. When, by virtue of the fraud or breach of fiduciary duty of the defendant, a plaintiff has been deprived of the use of his money or property and is obliged to resort to litigation to recover it, the inclusion of interest in the award is necessary in order to make the plaintiff whole.’ It is always the trier of fact that determines the issue of damages and this is true with regard to prejudgment interest.”
Certainty of Amount
Civil Code § 3287(a) permits recovery of prejudgment interest on sums that are “certain, or capable of being made certain by calculation.” California courts have recognized a variety of ways that prejudgment interest becomes due when the requisite certainty is established. “[T]he certainty requirement of section 3287, subdivision (a) has been reduced to two tests: (1) whether the debtor knows the amount owed or (2) whether the debtor would be able to compute the damages.” Also, “[d]amages are deemed certain when, though the parties dispute liability, they essentially do not dispute the computation of damages, if any.”
“The test for determining certainty under section 3287(a) is whether the defendant knew the amount of damages owed to the claimant or could have computed that amount from reasonably available information. Uncertainty as to liability is irrelevant. A dispute concerning liability does not preclude prejudgment interest in a civil action. The certainty required by section 3287(a) is not lost when the existence of liability turns on disputed facts but only when the amount of damages turns on disputed facts. Moreover, only the claimant’s damages themselves must be certain. Damages are not made uncertain by the existence of unliquidated counterclaims or offsets interposed by the defendant.”
“Where the fact of damages is certain, the amount of damages need not be calculated with absolute certainty. The law requires only that some reasonable basis of computation of damages be used, and the damages may be computed even if the result reached is an approximation.” However, §3287(a) “does not authorize pre-judgment interest as a matter of law where the amount of damages depends upon a judicial determination based upon conflicting evidence.”
Mandatory Award
“Under section 3287(a), ‘the court has no discretion, but must award prejudgment interest upon request, from the first day there exists both a breach and a liquidated claim.” “[The creditor] was entitled as a matter of law to interest from the date it paid the obligation which [the debtor] was, under its contract, obligated to pay.”
10% or 7% Rate of Interest
Civil Code § 3289(b) provides in part: “If a contract entered into after January 1, 1986, does not stipulate a legal rate of interest, the obligation shall bear interest at a rate of 10 percent per annum after a breach.” For earlier contracts and tort claims, the interest rate is 7%. “Whether the proper interest rate was applied is a question of law. [T]he constitutional rate of 7 percent applies to tort damages.”
Simple or Compound Interest
The Civil Code § 3287(a) does not authorize an award of compound interest. However, a jury may exercise its discretion to award compound interest pursuant Civil Code § 3288 in cases of oppression, fraud, or malice or where the defendant “stood in a fiduciary relationship with [the plaintiff] and the jury found that [the defendant] breached his fiduciary duty. These cases confirm that an award of compound interest is appropriate in this type of case.” The judge or the jury may award prejudgment interest.
Waiver of Interest
“A waiver is the voluntary and intentional relinquishment of a known right. It depends upon the intention of one party only.” But Civil Code § 3290 provides: “Accepting payment of the whole principal, as such, waives all claim to interest.” However, this statute has been narrowly construed. “We are inclined to the view that interest is due on a legacy not as a penalty for nonpayment or default in payment, but as a part of or an accretion to the legacy [read principal amount] itself. In the case last above cited, an action in assumpsit to recover interest due on a legacy was allowed even though the legacy had theretofore been paid. From what has been said, it follows that any payment less than the aggregate of the legacy and interest constitutes nothing more than a payment on account and should not serve to extinguish the right to interest on the legacy.” (Estate of Hubbell (1932) 216 Cal. 574, 578; see also, Kawasho, supra, 152 Cal.App.3d at 794-95 (citation omitted).)
Liability Insurer’s Obligation To Pay Prejudgment Interest
1. The Duty to Defend
When an insurer fails to faithfully fulfill its duty to defend, the amount due from the insurer for costs of defense may be “certain” because the insurer must pay “all” defense costs. “[The insurer] was under a duty to defend [the policyholder] in the [liability] action and is liable for all costs and attorneys’ fees expended by [the policyholder] for this purpose.” “[The insurer’s] obligation to reimburse [the insured] attached the moment [the insured] made the payment which [the insurer] was obligated under its policy to make, and, the amount being certain, interest commenced to run from that date.” Breach of the duty to defend renders the insurer liable for all damage proximately caused damages suffered by the insured “plus appropriate interest.” However, if Civil Code § 2860 applies the amount that the insurer owes may not become “certain” until adjudicated by mandatory arbitration.
2. Duty to Indemnify
When an insurer wrongfully fails to defend and the policyholder settles with the plaintiff, the defaulting insurer owes interest on the amount of the settlement paid by the policyholder from the date of payment. “[The insurer’s] liability was created by its contract and, under its contract, it was obligated to pay the [settlement amount] that was paid by [the policyholder]. The fact that it misconceived and put an erroneous construction upon this contract in no way affected its liability to pay the [settlement amount] at the time the [liability] claim was settled, and its obligation to reimburse [the policyholder] attached the moment [the policyholder] made the payment which [the insurer] was obligated under its policy to make, and, the amount being certain, interest commenced to run from that date.”
When judgment is entered against the policyholder that the insurer wrongfully fails to pay, postjudgment interest accrues automatically on the judgment at the rate of 10%. The insurer may be held liable for the entire amount of the judgment, including the amount of post judgment interest.