Reset A A Font size: Print

Court of Appeal, Second District, Division 7, California.

Wayne WAINER, Plaintiff and Appellant, v. WEST AMERICAN INSURANCE COMPANY, et al., Defendants and Respondents.

No. B025582.

Decided: May 13, 1988

Bennett, Kerry, Kistner & Garcia and Nona Williams, Long Beach, for plaintiff and appellant. LaFollette, Johnson, DeHaas & Fesler, Alfred W. Gerisch, Jr. and Melinda W. Ebelhar, Los Angeles, for defendants and respondents, West American Ins. Co. and Thomas Logan, dba All Claims Services. Roper & Folino and Joseph L. Stark, Los Angeles, for defendant and respondent, Thomas Logan, dba All Claims Services.

After settlement and dismissal with prejudice of the underlying action against West American's insured, Mr. Wainer brought this action against West American for violation of its statutory duty to attempt to settle claims in good faith.  (Ins.Code, § 790.03, subd. (h).)  West American moved for summary judgment solely on the ground the settlement agreement did not admit its insured's liability.   The trial court granted the motion and entered judgment for West American.   We reverse.


This case arises out of a minor traffic accident.   West American's insured, Mr. Washington, was driving a 3/434–ton pickup.   There was water on the street as Washington rounded a blind corner at between 20 and 35 m.p.h.   He jammed on his brakes and slid into Mr. Wainer's Mazda which was coming from the opposite direction.   The collision caused $377.88 damage to Mr. Wainer's car.

Mr. Wainer filed a claim for property damage with West American the next day.   West American's claims adjuster investigated the accident and concluded its insured was driving “entirely too fast.”   He concluded the driver of Mr. Wainer's car was not at fault:  “I don't see what the claimant could have done to have avoided the accident any further.”   The adjuster did suggest, however, a construction company which was doing street work at the time of the accident was negligent in blocking the road and creating the blind corner.   He also suggested the City of Los Angeles was negligent for allowing water to run on the roadway.   Therefore, the adjuster recommended that on the basis of “comparative negligence” West American should offer Mr. Wainer 60 percent of his damages “and I may even start a bit lower.”

West American did in fact offer to settle for 60 percent of Mr. Wainer's damages and clung to that offer for two-and a-half years following the accident.   Mr. Wainer rejected the settlement offer.   Eventually he retained counsel and sued Washington.   After the suit was filed, West American finally settled with Mr. Wainer for the full $377.88.   Mr. Wainer signed a release which provides, in part, “I further understand and agree that this settlement is the compromise of a doubtful and disputed claim, and that the payment made is not to be construed as an admission of liability on the part of the party ․ by whom liability is expressly denied.”   The quoted language was the basis for West American's motion for summary judgment.



 Although the rules of summary judgment are well known, one rule is particularly relevant to this case and bears repeating.   A defendant moving for summary judgment must set forth competent evidentiary facts sufficient to sustain a judgment in its favor.  (Parsons Manufacturing Corp. v. Superior Court (1984) 156 Cal.App.3d 1151, 1157, 203 Cal.Rptr. 419.)   This means it must either negate a necessary element of the plaintiff's case or state a complete defense.  (Ibid.)  Unless the defendant's declarations meet this threshold requirement, the plaintiff has no obligation to file declarations of its own in order to defeat the motion.  (Rowland v. Christian (1968) 69 Cal.2d 108, 111, 70 Cal.Rptr. 97, 443 P.2d 561.)

In the case at bar, West American's motion for summary judgment was based solely on the contention Mr. Wainer's case lacked an essential element:  a determination of liability.  (See Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 892, 153 Cal.Rptr. 842, 592 P.2d 329.)   As we explain below, the evidence submitted by West American failed to negate this element of Mr. Wainer's case;  therefore Mr. Wainer had no obligation to show a determination of liability had been made.   Although it is not necessary to our decision, we also point out Mr. Wainer did submit evidence at the hearing tending to show West American had made a determination its client was liable.


In Royal Globe our Supreme Court held an injured party may sue the insurer of the party who injured him for damages resulting from the insurer's unfair claims settlement practices.  (23 Cal.3d at p. 884, 153 Cal.Rptr. 842, 592 P.2d 329;  Ins. Code, § 790.03, subd. (h)(5).)   The court put at least one condition on such a suit:  “the third party's suit may not be brought until the action between the injured party and the insured is concluded.”   (Id. at p. 884, 153 Cal.Rptr. 842, 592 P.2d 239.) 1  Presently there is a controversy over whether a final determination of the liability of the insured in the underlying action is a separate prerequisite to the maintenance of a bad faith action against the insurer.  (Contra Clarke v. Fireman's Fund Ins. Co. (1988) 199 Cal.App.3d 607, 245 Cal.Rptr. 107, [88 Daily J. D.A.R. 3538 (3–17–88) ];  Kornblum & Olson, Royal Globe Revisited:  Standards For The Maturity Of A Third–Party Action (1985) 25 S. Clara L.Rev. 81;  Note, Rodriguez v. Fireman's Fund Insurance Companies, Inc.:  An Illustration Of The Problems In The Royal Globe Doctrine (1985) 15 Sw.U.L.Rev. 371, 385–395.)   This issue is now before our Supreme Court.  (See Barclays Cal.Sup.Ct.Serv. (Jan. 1988) Pending Cases, pp. 44–48.)

We need not decide whether a determination of liability is required in order to resolve the appeal in the case before us.   If a determination of liability is not a prerequisite to a suit under section 790.03, then summary judgment for West American was clearly erroneous because the motion was based solely on the lack of such a determination.   If a determination of liability is a prerequisite, summary judgment was nevertheless inappropriate in this case because the evidence submitted by West American did not negate this element of Mr. Wainer's case.

 Assuming determination of the insured's liability is a prerequisite to a third party's suit against the insurer, we must decide what constitutes a “determination.”   So far, only two methods of determining liability are recognized in reported cases:  a final judgment in favor of the injured party (Nationwide Insurance Co. v. Superior Court (1982) 128 Cal.App.3d 711, 714, 180 Cal.Rptr. 464) or an express in-court admission of liability accompanied by a settlement and dismissal of the injured party's lawsuit;  (Rodriguez v. Fireman's Fund Ins. Co. (1983) 142 Cal.App.3d 46, 55, 190 Cal.Rptr. 705.)   If our Supreme Court holds a determination of liability is a prerequisite to a third party's bad faith claim against the insurer, we do not believe it will restrict the methods of determining liability to judgment or an in-court admission.   This is a new and still developing area of law and there are undoubtedly procedures by which liability can be determined other than those two.   One obvious method is internal investigation and determination by the insurer itself.2

West American contends only a judgment against the insured or an express admission of liability in court or in the settlement agreement qualify as determinations of liability for purposes of a bad faith action under section 790.03, subdivision (h)(5).   That contention has no support in the case law nor is it necessary to adopt such a narrow rule to give effect to a determination requirement if one should be imposed.

Contrary to West American's contention, previous cases have recognized a determination of liability may be outside the settlement agreement.   For example, Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d 46, 55, 190 Cal.Rptr. 705 stated:

“Generally, a settlement will not act as an admission of liability of either the insured or the insurer with respect to any other claim arising from the same accident or event.   However, accepting the truth of Ms. Rodriguez' allegation that Fireman's Fund has admitted the liability of its insured, a specific finding of the insured's liability is therefore unnecessary.   Further, the complaint alleges admissions of liability exclusive of the formal denial in Fireman's insured's answer.   This becomes a factual issue.

“In this case, the insured denied liability for the accident.   Furthermore, the settlement agreement cannot be construed as an admission, nor can it be a recognition of liability on the part of Fireman's Fund.   However, by demurring to Ms. Rodriguez' complaint in the action against Fireman's, Fireman's Fund admits the specific allegations of its own admissions of its insured's liability.”  (Citations omitted.)

In upholding the demurrer to the complaint in Heninger v. Foremost Ins. Co. (1985) 175 Cal.App.3d 830, 835, 221 Cal.Rptr. 303, the court observed, “Here, there is an absence of any allegation of a final determination of the insured's liability whether by way of judgment, admission or otherwise. ”   (Emphasis added.)   And, in Williams v. Transport Indem. Co., supra, 157 Cal.App.3d at page 960, 203 Cal.Rptr. 868 the court recognized an insured's liability need not be determined in a “legal proceeding.”

In Royal Globe, Nationwide and Rodriguez the courts discussed the need for a determination of liability in the context of the particular facts of the case.   Those cases are not authority for limiting all third party bad faith claims to actions that have resulted in final judgments for the injured party or in-court admission of liability.  (See Rodriguez, supra, 142 Cal.App.3d at p. 53, 190 Cal.Rptr. 705.)

In deciding what constitutes a determination of liability, we begin by examining the reasons for imposing such a requirement.   Three reasons are most often given for requiring a determination of liability precede an action for bad faith settlement practices.   First, liability insurance is an indemnity contract under which the insurer has no liability unless the insured is liable for the claimant's injury.   If the insured was not liable the insurer had no duty to settle.   Therefore, its failure to attempt to settle could not be a bad faith act.  (Heninger v. Foremost Ins. Co., supra, 175 Cal.App.3d at pp. 833–834, 221 Cal.Rptr. 303;  Williams v. Transport Indemnity Co., supra, 157 Cal.App.3d at p. 960, 203 Cal.Rptr. 868.)   Second, if it were ultimately determined the insured was not liable for the claimant's injury, the claimant suffered no damages proximately caused by the insurer's failure to settle.   (Heninger v. Foremost Ins. Co., supra, 175 Cal.App.3d at pp. 834–835, 221 Cal.Rptr. 303;  cf. Royal Globe, supra, 23 Cal.3d at p. 892, 153 Cal.Rptr. 842, 592 P.2d 329.)   Third is the concern a determination of the insured's liability in the bad faith suit would run afoul of Evidence Code section 1155 which prohibits the introduction of “[e]vidence that a person was, at the time a harm was suffered by another, insured ․ against loss arising from liability for that harm ․ to prove negligence or other wrongdoing.”  (See Royal Globe, supra, 23 Cal.3d at pp. 891–892, 153 Cal.Rptr. 842, 592 P.2d 329.)

A predetermination of liability avoids these problems.  (Rodriguez, supra, 142 Cal.App.3d at p. 53, 153 Cal.Rptr. 842, 592 P.2d 329.)   It does not follow that only a judicial determination or in-court admission can resolve these problems.   Assume, for example, a case in which the insurer's own investigation establishes the claimant was rear-ended by the insured who was driving with defective brakes at an excessive speed.   Assume further the insurer's internal documents ascribe fault entirely to its insured.   We believe these facts satisfy any reasonable requirement for a determination of liability.   If this hypothetical case went to trial, the facts of the accident would compel a finding of liability.   If instead the case eventually settles, we fail to see how inclusion of the magic words “liability is admitted” would add materially to the insurer's own internal determination of liability.

Insurers contend they have legitimate reasons for wanting to restrict bad faith actions to cases where there has been a judicial determination of liability or, at least, an express admission of liability.   It is argued allowing a bad faith action after any settlement deprives the insurer of one of the benefits of settlement:  the ability to close the file on the case.   The claimant would always file a bad faith suit against the insurer after the settlement because he would have nothing to lose.   Moreover, the claimant would use the insurer's money paid to settle the personal injury case to mount the new bad faith action against the insurer.  (See Rodriguez, supra, 142 Cal.App.3d at pp. 50, 56, 153 Cal.Rptr. 842, 592 P.2d 329;  Cal.Practice Guide, Bad Faith (1986) § 9:105, p. 9–29.)   In other words, the insurers argue restrictions are necessary, not to insulate the insurer from liability for its bad faith, but to protect it from the bad faith of the settling claimant.

While we can appreciate the concerns expressed by insurers we believe their fears are unfounded.

A settlement followed by a dismissal with prejudice does close the file on liability arising from the underlying claim.   It does not close the new file on alleged wrongdoing by the insurer in the course of settling the underlying claim, but why should it?   As commentators on the subject have pointed out, the insurer is not a party to the underlying action and has no basis on which to insist it be released from inchoate causes of action the claimant may have against it.  (Note, Royal Globe Revisited, supra, 15 Santa Clara L.Rev. at p. 95, fn. 74;  Cal.Practice Guide, supra, § 9:110, p. 9–30;  and see Sheehan v. Atlanta Intern. Ins. Co. (9th Cir.1987) 812 F.2d 465, 469.)   Furthermore, an insurer which insists on such a release may jeopardize a settlement on behalf of its insured thereby exposing itself to additional bad faith claims by the injured party and its own insured.

The notion that allowing the injured party to “settle and sue” will place insurance companies at the mercy of venal, avaricious, rapacious claimants is a little far-fetched.   In the first place, most claimants will have much better things to do with their insurance proceeds than give them to lawyers to pursue bad faith actions where the outcome is highly speculative.   Even if Mr. Wainer chose to use the proceeds of his settlement with West American as seed money for his bad faith case, he could not wield much power with $377.88.

Furthermore, the restrictions on bad faith actions urged by insurers would only increase litigation;  not protect the insurers from second suits for bad faith.   If the claimant feels she was forced by economic duress to accept the settlement she can bring suit to void the agreement.  (See Rich & Whillock, Inc. v. Ashton Development, Inc. (1984) 157 Cal.App.3d 1154, 1158, 204 Cal.Rptr. 86.)   The result would be the insurer winds up defending three actions instead of one:  (1) the action against the insured for the underlying injury;  (2) the action to set aside the settlement agreement;  (3) the action for the insurer's bad faith settlement practices.

Even if the settlement does not guarantee that no bad faith action will be brought it is still in the insurer's best interests to settle.   Simple economics would seem to compel the insurer to attempt to limit its liability and not unnecessarily expose itself to additional general and punitive damages by settling as soon as possible.   Moreover, in the typical case it will be much easier for the claimant to win the underlying action against the insured than to win the bad faith action against the insurer.   The duty under section 790.03, subdivision (h) is not to settle but to “attempt [ ] in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.”  (Emphasis added.)   Thus, the burden on the claimant in establishing liability may be much greater than in the underlying case for personal injury.   It would be wrong to assume bad faith actions will follow, as a matter of course, every personal injury action.

Finally, there are other factors which will tend to prevent bad faith settlement actions from becoming a new wave of nuisance suits.   These include (1) the ethics of the market place;  (2) the cost of litigation to the plaintiff;  and (3) the judicious use of Code of Civil Procedure section 128.5 by the trial courts.

From the injured party's perspective, insistence on a judgment of liability or an express admission of liability would virtually wipe out the protection the Legislature intended to afford injured parties through section 790.03.   Because no insurer is likely to admit liability in the settlement agreement,3 the only recourse for a claimant unfairly refused a settlement would be to go to trial on the issue of the insured's liability then bring a bad faith action against the insurer.   The length of time it takes to bring one, much less two, cases to trial means many seriously injured parties will never survive the trip (see Williams, supra, 157 Cal.App.3d at p. 956, 203 Cal.Rptr. 868);  others, out of economic necessity, will give up along the way and accept the insurer's intentionally low offer.  (See Trujillo v. Yosemite–Great Falls Ins. Co. (1984) 153 Cal.App.3d 26, 28–29 & fn. 2, 200 Cal.Rptr. 26;  Rodriguez, supra, 142 Cal.App.3d at pp. 49–50, 153 Cal.Rptr. 842, 592 P.2d 329.)   The result would be to thwart the legislative purpose of encouraging “prompt, fair and equitable settlements.”   We agree with the Rodriguez court in balancing the interests of insurers and claimants the greatest need is to prevent “abuse by insurance companies who might entice a settlement by unfair practices, then seek to hide behind the cloak of that settlement.”  (142 Cal.App.3d at p. 56, 153 Cal.Rptr. 842, 592 P.2d 329.)

West American argues Wainer could not introduce evidence of West American's internal determination of its insured's liability because Evidence Code section 1152, subdivision (a) prohibits evidence of conduct or statements made in negotiating a settlement to prove the insured's liability.4  West American misconstrues the purpose of the evidence.   The language of section 1152, subdivision (a) does not preclude evidence of settlement negotiations to prove failure to process the claim fairly and in good faith.  (White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 877, 221 Cal.Rptr. 509, 710 P.2d 309.)   It would be nonsensical to recognize a cause of action for bad faith settlement practices but make evidence of the defendant's settlement practices inadmissible.   This would be the equivalent of making murder a crime but prohibiting the introduction of evidence of how the victim was killed.   The Legislature made clear it did not intend such a result when it amended section 1152 in 1987 to add subsection (b).   The new subsection specifically recognizes evidence of an offer to compromise may be admitted in an action for bad faith or violation of Insurance Code section 790.03, subdivision (b).5  The issue before the trial court in this case will not be whether West American's insured was liable but whether his liability had become “reasonably clear” to West American thereby triggering its duty to attempt a good faith settlement.  (Ins.Code, §§ 790.03, 790.03 subd. (h).)  In deciding this issue the trial court may consider any and all evidence bearing on what the insurer knew about the facts of the accident, when did it know and what did it do with this knowledge.


 West American submitted a declaration by its attorney stating the insured's liability was never determined in a legal proceeding.  “Nor was there ever an admission of liability by [the insured], West American, or any other defendants in the underlying action.”   The quoted portion of the declaration is ambiguous.   It could mean the defendants made no admission of the insured's liability in any testimony or documents filed in the underlying lawsuit.   Or, it could mean none of the defendants in that action ever, at any time, any place, admitted the insured's liability.

The declarations of the party moving for summary judgment are strictly construed.  (Slobojan v. Western Travelers Life Ins. (1969) 70 Cal.2d 432, 437, 74 Cal.Rptr. 895, 450 P.2d 271.)   Under this rule the attorney's declaration should be construed to mean there was no admission of liability in any testimony or documents filed in the lawsuit Wainer brought against Washington, West American's insured.   As so construed, the declaration will not support a summary judgment in favor of West American because, as we explained supra, an in-court admission is not necessary to meet a “determination” requirement.   Furthermore, the question is not whether there was an “admission” of liability but whether there was a determination of liability.  (See discussion, supra.)   The insurer may make an internal determination of liability.   Once the insurer has satisfied itself as to its insured's liability, the rationale for a determination of liability has been observed.   Indeed, the prime example of bad faith would be a case where the insurer has investigated the accident, concluded its insured is liable but failed to make a good faith attempt to settle and likewise failed to formally “admit” liability.

Our rejection of the attorney's declaration does not put an unfair burden on West American to prove a negative, i.e., there was no determination of the insured's liability.   Ample means were available to West American to discover whether Mr. Wainer contended there had been a determination of the insured's liability and, if so, what facts formed the basis for that contention.  (Cf. Conn v. National Can Corp. (1981) 124 Cal.App.3d 630, 639, 177 Cal.Rptr. 445.)

Although he was not required to do so, Mr. Wainer in fact produced evidence which tends to show West American had made an internal determination their insured was liable for Mr. Wainer's property damage.   West American's claims adjuster, Thomas Logan, wrote to Mr. Wainer in November 1981 offering to settle for 60 percent of the damages because West American “felt that there is negligence on the part of others other than Mr. Washington [the insured].”   The “others” Logan refers to are the City of Los Angeles and the construction company doing road work where the accident occurred.   West American never claimed Mr. Wainer or Ms. Sauls, who was driving his car, shared any fault in the accident.6  In a September 1981 report to his superior, Logan placed the blame for the accident on the insured, the city and the construction company.   He added, “I don't see what [Ms. Sauls] could have done to have avoided the accident․” 7

Having failed to negate a necessary element of Mr. Wainer's case or state a complete defense, West American was not entitled to summary judgment.


 At the first hearing on West American's motion for summary judgment West American introduced the release signed by Mr. Wainer and the declaration of its attorney summarized supra, at page 884;  Mr. Wainer attempted to introduce West American's internal correspondence containing the statements summarized supra at pages 884–885.   We do not have a reporter's transcript of that hearing but the parties are in substantial agreement as to what occurred.   The trial court refused to admit the West American documents submitted by Mr. Wainer because they had not been properly authenticated.   The court also informed counsel it was prepared to grant the motion for summary judgment but it would continue the hearing to give Mr. Wainer the opportunity to authenticate the documents on condition Mr. Wainer pay $1,000 in attorney's fees to West American.

As we explained above, West American's motion for summary judgment should have been denied because it failed to negate an element of the plaintiff's case or present a complete defense.   Unless the defendant's showing is sufficient, there is no burden on the plaintiff to file counter declarations at all.   (Rowland v. Christian, supra, 69 Cal.2d at p. 111, 70 Cal.Rptr. 97, 443 P.2d 561;  Residents of Beverly Glen, Inc. v. City of Los Angeles (1973) 34 Cal.App.3d 117, 127, 109 Cal.Rptr. 724.)

If the trial court had denied West American's motion, as it should have, there would have been no need for a continuance to authenticate documents.   Because the court's order was without a legal basis, the $1,000 paid to West American must be returned.


The judgment is reversed.   The order imposing payment of $1,000 to West American is also reversed and West American is ordered to return that sum to plaintiff.   Plaintiff shall recover his costs on appeal.


1.   West American concedes the release and dismissal with prejudice concluded the underlying action and that the release does not cover its liability for bad faith.

2.   Other examples might include situations involving strict liability or where the doctrine of res ipsa loquitur applies.

3.   In Rodriguez, supra, 142 Cal.App.3d at page 55, 153 Cal.Rptr. 842, 592 P.2d 329, the court states “Fireman's Fund admits the specific allegations of its own admission of its insured's liability.”   The court does not say what form those admissions of liability took.

4.   Evidence Code section 1152, subdivision (a) reads:“Evidence that a person has, in compromise or from humanitarian motives, furnished or offered or promised to furnish money or any other thing, act, or service to another who has sustained or will sustain or claims that he or she has sustained or will sustain loss or damage, as well as any conduct or statements made in negotiation thereof, is inadmissible to prove his or her liability for the loss or damage or any part of it.”

5.   Evidence Code section 1152, subdivision (b) provides in relevant part:“In the event that evidence of an offer to compromise is admitted in an action for breach of the covenant of good faith and fair dealing or violation of subdivision (h) of Section 790.03 of the Insurance Code, then at the request of the party against whom the evidence is admitted, or at the request of the party who made the offer to compromise that was admitted, evidence relating to any other offer or counteroffer to compromise the same or substantially the same claimed loss or damage shall also be admissible for the same purpose as the initial evidence regarding settlement.”

6.   An internal memorandum of West American speculates Ms. Sauls should have stopped when she saw Washington approaching instead of pulling to the right.   This memorandum was written after the 60 percent settlement offer and appears to have played no part in the action West American took on the claim.

7.   Whether West American can escape liability for failure to settle for the full amount of Wainer's claim based on its contention there were other tortfeasors will be settled at trial, but see Jackson v. State Farm Mut. Auto. Ins. Co. (1983) 148 Cal.App.3d 1179, 1185–1188, 196 Cal.Rptr. 474.

JOHNSON, Associate Justice.

LILLIE, P.J., and THOMPSON, J., concur.