MESSERSMITH v. MID CENTURY INSURANCE COMPANY

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Court of Appeal, Fourth District, Division 2, California.

Linda MESSERSMITH, Plaintiff and Respondent, v. MID–CENTURY INSURANCE COMPANY, Defendant and Appellant.

No. E012603.

Decided: June 29, 1995

Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone, and Jeffrey M. Spurlock, Irvine, for defendant and appellant. Norman L. Schafler, Los Angeles, for plaintiff and respondent.

OPINION

 The action underlying this appeal resulted in a judgment for “first party bad faith” (a term with which we are unfamiliar) against Mid–Century Insurance Company (defendant or defendant insurer) and in favor of Linda Messersmith (plaintiff or plaintiff third party claimant).   The action was tried to the court sitting without a jury and proceeded on a legal theory with which we are also unfamiliar.   Actually, although the complaint was not challenged by demurrer, it failed to state a cause of action against defendant insurer.   The complaint was defective because it alleged no tortious conduct by defendant, amounting to a breach of the implied covenant of good faith and fair dealing.   Hence, it did not allege any cognizable damages to defendant's insured or to her assignee, the plaintiff.

Plaintiff and Rachel Austin (the insured) were involved in a routine motor vehicle traffic collision in which plaintiff sustained personal injuries.   It is undisputed that the medical expense to treat her injuries amounted to about $12,000.   In any case, soon after the collision, plaintiff third party claimant retained counsel who learned that the insured was covered for public liability by defendant insurer and that the policy limits were $15,000.

The collision occurred April 4, 1988.   After an initial contact with defendant insurer's claims representative, counsel for plaintiff third party claimant, on May 12, 1988, made a written demand upon defendant insurer for policy limits of $15,000.   Despite repeated requests from defendant insurer's claims representative for full medical reports, none with any meaningful content were forthcoming until August 22, 1989.   After evaluation of such reports, defendant insurer on August 30, 1989, offered policy limits to plaintiff third party claimant.   The offer of policy limits was “rejected,” 1 counsel for plaintiff expressing the view that the policy limits “no longer applied.”

In the meantime, the antecedent, traffic-collision action had been filed and the insured served with process on April 14, 1989.   However, it was only after the offer of policy limits had been rejected, as above noted, that the antecedent, traffic-collision action went to non-binding arbitration.   The arbitration resulted in an award to plaintiff of $65,927.   Thereupon, counsel provided by defendant insurer to represent the insured in the antecedent, traffic-collision action filed a request for trial de novo.

At this point, according to his own testimony, counsel for plaintiff third party claimant approached trial counsel for the insured.   By letter of December 28, 1989, counsel for plaintiff third party claimant suggested that a stipulated judgment be entered against the insured in the amount of the arbitration award.   He further suggested that the insured assign to plaintiff third party claimant any claim she (the insured) had against defendant insurer in exchange for plaintiff third party claimant's covenant not to execute on the insured's personal assets.

These suggestions were implemented in open court.   A copy of the stipulation is attached as an appendix along with a copy of the letter of December 28, 1989.   The underlying third party action for alleged bad faith was then filed on August 16, 1990;  in the later trial the several documents above noted were admitted in evidence without objection.

The testimony at trial was concerned mostly with the nature and extent of the settlement negotiations conducted between counsel for plaintiff and representatives of defendant.   Both sides even called “experts” who gave opinions as to whether defendant insurer had conducted these negotiations in “bad faith.”   In this regard, we note that the expert called by plaintiff gave an opinion that such negotiations had been so conducted without even having inspected the claim file assembled by defendant after notice of the collision.

As earlier noted, the trial court, in the underlying action here under review, awarded judgment against defendant for $50,927, representing the amount of the stipulated judgment entered in the antecedent, traffic-collision action, less the $15,000 policy limits which were eventually accepted by plaintiff notwithstanding her having earlier “rejected” them.   In its judgment, the court recited that “the plaintiff has maintained her burden of proof as to the first party bad faith 2 on the part of the defendant on plaintiff's cause of action assigned to her by Rachel Austin․”  (Emphasis added.)   Then followed the award above noted.

With regard to the key recital in the judgment, there was no bad faith.   There was no bad faith, regardless of how characterized, because defendant insurer committed no breach of the implied covenant of good faith and fair dealing.   There was no breach committed because the insured was never exposed to a binding excess judgment, the sine qua non of such a breach in third party cases.   As a result, the insured had nothing to assign to plaintiff third party claimant, and the trial testimony was thus directed at a nonexistent issue.

In sum, because the insured had suffered no damages, her assignee (plaintiff) was never entitled to an award of damages.   There were no such damages because, as noted, the insured was never exposed to a judgment in excess of policy limits binding upon defendant insurer.   Hence, the manner in which the settlement negotiations were conducted was of no legal consequence as a probative issue at the trial.   We shall reverse the judgment with directions accordingly.

THE ANTECEDENT, TRAFFIC–COLLISION ACTION

The insured, while driving her vehicle, rear ended the vehicle driven by plaintiff third party claimant.   This collision, as above noted, occurred April 4, 1988.   As alleged in the complaint in the underlying action (post ), by May 12, 1988, plaintiff third party claimant had identified the insurance carrier for the insured and ascertained the public liability coverage limits.   On that date, a demand was made upon defendant insurer for the $15,000 policy limits.   The insurer responded on May 16, 1988, that it needed more information supporting the claim, particularly medical records.

Thereafter, an exchange of correspondence and telephone calls ensued between counsel for plaintiff third party claimant and representatives of defendant insurer, mostly centering on defendant insurer's request for further information to enable evaluation of the claim.   However, very early in the game, as also alleged in the complaint in the underlying action (post ), counsel for plaintiff third party claimant, on June 13, 1988, wrote to defendant insurer informing it that the time had expired for considering the settlement offer, i.e., the demand for policy limits was then withdrawn.   In other words, the insurer was afforded only about a month to investigate and evaluate the claim before plaintiff withdrew its offer to settle for policy limits.   After June 13, 1988, plaintiff never relaxed her stance that she was no longer willing to accept policy limits.

In any event, the action based on the antecedent, traffic-collision action was filed September 26, 1988.   After the insured was served, defendant insurer accepted the insured's tender of defense of the action and provided counsel for this purpose.   As noted, defendant offered policy limits on August 30, 1989, and the offer was rejected.   Thereafter, as alleged in the complaint in the underlying action, the matter was ordered to non-binding arbitration on December 7, 1989.   This arbitration resulted in an award of $65,927, plus costs.   Trial counsel for the insured in the antecedent, traffic-collision action then requested a trial de novo.

Next, according to the complaint in the underlying action, the insured assigned all of her rights against defendant insurer to plaintiff third party claimant.   What the complaint did not allege is that this assignment was part of a larger transaction.   The parties to the antecedent, traffic-collision action stipulated that judgment be entered on the arbitration award for $67,927;  in consideration of the assignment noted, plaintiff third party claimant gave her covenant not to execute on the personal assets of the insured.

SYNOPSIS OF TRIAL COURT PROCEEDINGS

As earlier explained, the complaint in the underlying third party action was filed after plaintiff and the insured had stipulated to entry of judgment against the insured in the antecedent, traffic-collision action.   This entry of a stipulated judgment was coupled with plaintiff's covenant not to execute on the personal assets of the insured given in exchange for the insured's assignment to plaintiff of any rights she had against defendant insurer.   As we shall further explain (post ), the insured had nothing of value to assign.

In its essential features, the complaint alleged:  1) Rachel Austin was insured by a policy issued by defendant which contained public liability coverage limits of $15,000;  2) plaintiff and Rachel Austin were involved in an auto accident;  3) as a result of the accident plaintiff was injured and required to undergo surgery on two separate occasions resulting in total medical expenses of approximately $12,000;  4) on May 12, 1988, plaintiff made a written demand upon defendant for policy limits of $15,000;  5) on May 16, 1988, plaintiff received from defendant a request for information to enable evaluation of the claim;  6) plaintiff then provided defendant copies of all billings and estimates for repair of plaintiff's vehicle;  7) on June 13, 1988, having heard nothing further from defendant, plaintiff's counsel sent a letter to defendant “indicating that their time had expired for considering the settlement offer;”  8) an action was filed sometime before April 4, 1989, entitled Linda Messersmith v. Rachel Austin, No. 245668, San Bernardino County Superior Court;  9) this action went to court-ordered, non-binding arbitration;  10) as a result of the arbitration, an award was made to plaintiff of $67,927 plus costs;  11) “․ the refusal of the defendants herein [to pay the demand for policy limits] ․ was unreasonable, unwarranted, in bad faith and a violation of [I]nsurance Code sections, including but not limited to 790.03;  12) “․ that said conduct is outrageous and should support an award of exemplary damages in the sum of $2,000,000;”  13) Rachel Austin “assigned all of her rights under her policy as against [defendant] to plaintiff herein.”   We note in passing that there was no allegation in the complaint that the insured was ever exposed to a judgment in excess of policy limits.

The prayer was for compensatory damages of $65,927 less $15,000, for exemplary damages of $2,000,000, and for costs and attorney's fees.

Thereupon, defendant insurer moved to strike those portions of the complaint based upon section 790.03 of the Insurance Code and those portions which sought to recover attorney's fees and exemplary damages.   The motion was granted in its entirety.

Defendant insurer then appeared by answer which, in the first instance, interposed a general denial pursuant to section 431.30 of the Code of Civil Procedure.   The answer also included 16 affirmative defenses;  all but 4 amounted to so-called boilerplate pleading.   Otherwise, defendant correctly asserted that the complaint failed to state a cause of action against defendant insurer.   The answer also alleged that defendant had acted in good faith and that plaintiff and her attorney had failed to provide sufficient information to enable defendant to adjust plaintiff's claim.   In this further regard, defendant alleged cumulatively “that it acted in good faith since its acts were reasonable in conducting a prompt and thorough investigation of plaintiff's claims, in seeking information essential and relevant to the merits of said claim [sic ], and in fully communicating its position to plaintiff and/or her counsel.”

The case moved through mandatory settlement conferences and was eventually set for trial before the court sitting without a jury.   There is a reference in the clerk's transcript to a motion in limine and that it was denied.   In the reporter's transcript there are brief references to it, but we have been unable to locate the motion itself in the record on appeal.   In any event, the case proceeded through three days of testimony and, after closing arguments, was submitted for decision.   About three months later, the court filed its statement of decision, a copy of which is attached as an appendix.   As appears therein, the court granted defendant's motion to strike plaintiff's testimony with regard to her emotional distress.   The court correctly observed that, “․ plaintiff did not adequately plead the requisite cause of action that would allow plaintiff to recover.”

A judgment reflecting the statement of decision was eventually signed and filed.   Its three holdings provided:  “1. The defendant's Motion to Strike the Testimony of the plaintiff dealing with emotional distress is granted.  [¶] 2. The plaintiff failed to maintain her burden of proof as to the third party bad faith cause of action.  [¶] 3. The plaintiff has maintained her burden of proof as to the first party bad faith on the part of defendant on plaintiff's cause of action assigned to her by Rachel Austin and is thus awarded the principal sum of $50,927.00 plus costs in the amount of $1,495.37.”  (Emphasis added.)   This appeal followed.

DISCUSSION

Counsel on both sides embarked upon the trial laboring under a misconception concerning the viable nature of the “bad faith” theory on which the case was tried.   In so doing, they misled the court.   We are perplexed, if not astonished, by the assertion in defendant's trial brief that the most plaintiff would be entitled to recover was $50,927 while the brief at the same time pointed out that “․ Austin did not suffer any monetary damages as a result of the conduct of Mid–Century, as Messersmith had agreed not to execute against Austin's personal assets in satisfaction of the remaining $50,927 of the stipulated judgment.”   Thus, the question which counsel for defendant should have raised at trial, because Austin admittedly suffered no damages at the hands of Mid–Century, is:  on what theory could Austin's assignee win any recovery against Mid–Century?   As observed at the outset, because no damages were inflicted upon the insured Austin by defendant insurer, she had nothing to assign.   As a result, it was error to award damages to plaintiff assignee which the insured assignor herself could never have recovered.

Because counsel on both sides misled the trial court concerning the viability of the theory under which the case was pleaded and tried, the issues initially briefed on appeal were irrelevant to its proper disposition.   In view of this circumstance, we invited counsel for defendant to file a supplemental letter brief and therein to address two points.   The first was to define the legal consequences for the insurer of a stipulated judgment against the insured, coupled with the third party's covenant not to execute on such judgment.   As to this point, we directed counsel to Smith v. State Farm Mut. Auto. Ins. Co. (1992) 5 Cal.App.4th 1104, 7 Cal.Rptr.2d 131, particularly footnote 5 at p. 1116 (Smith ).   The other point on which discussion was invited was whether, in the absence of the insured's exposure to an arm's-length judgment exceeding policy limits, there could be a breach of the implied covenant of good faith and fair dealing (bad faith) by an insurer in a third party case (which this is).

Counsel for defendant did submit a letter brief.3  As to the first point above noted, counsel reviewed the decision in Smith and recited its holding as being that “an insured's assignment of a cause of action for bad faith will only be valid if some form of personal liability has been imposed against the insured․”   In our view, the foregoing begs the real question resolved in Smith.   As explained (post ), the Smith holding as it relates to the case here is that a stipulated judgment coupled with the third party's covenant not to execute thereon is not binding on the insurer for any purpose.

Turning to the second point above noted, counsel for defendant did not undertake to answer the question of whether there could be a breach by the insurer of the implied covenant of good faith and fair dealing in a third party case in the absence of a judgment against the insured in excess of policy limits.   Instead, counsel purported to discuss the difference between “first party” bad faith and “third party” bad faith, terms with which, as noted, we are unfamiliar.   The letter brief concludes with the observation “․ that under the express holding of Smith v. State Farm Mut. Auto. Ins. Co., supra, there was no valid assignment of the insured's cause of action for ‘first party’ bad faith.”

We shall comment here on the last recital briefly, only to observe that the “invalidity” of the assignment, as discussed in Smith, although therein awkwardly described, meant, aside from the criminal conviction (post ), that there was nothing to assign in the way of a bad faith cause of action in the absence of entry of an arm's-length judgment against the insured exceeding policy limits after a refusal to offer such limits to settle the third party claim.

Reflecting the foregoing, it has been variously held that a stipulated judgment, vitiated by a covenant not to execute, is not sufficient to meet the requirements of an adverse excess judgment against the insured such as is necessary before there can be an assertion of bad faith against the insurer, either by the insured or his/her assignee.

In Wright v. Fireman's Fund Ins. Companies (1992) 11 Cal.App.4th 998, 14 Cal.Rptr.2d 588, (Wright ), which reversed a judgment for the insured in a third party, bad faith case, the reviewing court stated that “․ we hold that where an insurer provided a defense to the insured in the underlying litigation [fn. omitted], and the insured, without the participation or consent of the insurer, stipulated to a judgment without evidentiary support and with no potential for personal loss, such judgment is insufficient to impose liability on the insurer in a later action against the insurer under section 11580 [of the Insurance Code].   To hold otherwise would create in the insured the ability to escape all liability for his or her own wrongdoing while imposing on the insurer totally unsupported liability.”  (Id. at p. 1024, 14 Cal.Rptr.2d 588.)

The case here under review is not a section 11580 case;  however, the purported assignment by the insured of a supposed claim for breach by the insurer of its covenant of good faith and fair dealing operates to invoke the same principal as applied in Smith, which decision was relied upon substantially by the Wright court.   In this regard, the Wright decision recited that, “[w]e find no reason to distinguish between the judgment required for an action on an assignment addressed in Smith and the judgment required for a direct action presented here.   Whether the action is brought pursuant to an assignment or section 11580, the same potential for abuse arises in binding an insurer to a stipulation in which [as here] it did not participate or to which it did not consent.”  (Wright, supra, 11 Cal.App.4th 998, 1023, 14 Cal.Rptr.2d 588.)  Smith therefore merits extended analysis.

In Smith, the facts showed that the Smiths' son was fatally injured by an automobile driven by Donnelly, who owned an auto repair business.   A customer of that business, Stein, left his automobile with Donnelly to be repaired.   Thereafter, Donnelly drove the Stein automobile and while so driving caused the death of the Smiths' son.   At the time of the fatality, Donnelly was insured by a Firemen's Fund Insurance Companies policy with $300,000 limits.   Stein was insured by a State Farm policy with $100,000 policy limits.   Donnelly was later convicted of manslaughter.   In the wrongful death action brought by the Smiths against Donnelly, State Farm refused to defend Donnelly.   Before that case went to trial, Donnelly and Firemen's Fund settled with the Smiths.   This settlement took the form of a stipulated judgment in favor of the Smiths and against Donnelly in the amount of $500,000.

Simultaneously, Donnelly and the Smiths entered into an assignment and release agreement in which Donnelly assigned to the Smiths all claims that he, Donnelly, might have against State Farm by reason of its failure to defend or participate in settlement of the wrongful death action.  (Smith, supra, 5 Cal.App.4th 1104, 1108, 7 Cal.Rptr.2d 131.)   In addition, just as plaintiff did here, in consideration of the assignment, the Smiths covenanted not to execute on the stipulated judgment entered against the insured Donnelly.   (Ibid.)

The Smiths, as claimants, just as plaintiff did here, then brought suit against State Farm, alleging, as Donnelly's assignees, breach of the covenant of good faith and fair dealing and also, for their own account, breach of the statutory duties arising under section 790.03(h) of the Insurance Code.  The trial court sustained State Farm's demurrer to the third amended complaint and entered a judgment of dismissal.

The reviewing court stated with reference to the bad faith count that “[a] stipulated judgment with a covenant not to execute will not bind the insurer under Civil Code section 2778, subdivision 5, because it does not represent a ‘recovery against’ the insured;  the statute plainly refers to the sort of recovery that will trigger a duty to indemnify, that is, a recovery imposing liability.   The covenant not to execute shields the insured from such liability.   Similarly, the stipulated judgment will not bind the insurer through the doctrine of res judicata because the insurer is not a party to the judgment.”  (Smith, supra, 5 Cal.App.4th 1104, 1114, 7 Cal.Rptr.2d 131.)

The Smith court went on to rule, however, as the result of the simultaneous criminal conviction of the insured for manslaughter, that there had been an adjudication of liability in the criminal matter such as would support assignment of a bad faith claim.   Nevertheless, the court recited in a footnote, “We wish to make clear that the $500,000 settlement here is entitled to no consideration in determining the amount of damages.   Moreover, appellants have not stated a cause of action for recovering damages above policy limits of State Farm's insurance policy;  the stipulated judgment with covenant not to execute does not constitute an excess judgment within the meaning of Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654 [328 P.2d 198].”  (Smith, supra, 5 Cal.App.4th 1104, 1116, fn. 5, 7 Cal.Rptr.2d 131, emphasis added.)   In other words, it was only the manslaughter conviction, establishing Donnelly's liability for the death of the Smith's son, that made the bad faith claim assignable.   The stipulated judgment was entirely meaningless for this purpose.

We hold that Smith and its progeny are controlling as to this appeal and do so while yet being fully mindful of the decision in California State Auto. Assn. Inter–Ins. Bureau v. Superior Court (1990) 50 Cal.3d 658, 268 Cal.Rptr. 284, 788 P.2d 1156 (CSAA ).   In that case, the Supreme Court defined the issue before it as “․ whether a stipulation of the insured's liability signed by the insurer, insured, and third party claimant, and entered as a judgment, satisfies the condition precedent.”  (Id. at pp. 661–662, 268 Cal.Rptr. 284, 788 P.2d 1156.)   The condition precedent there noted was whether that transaction represented a judicial determination of the insured's liability such as would permit a so-called Royal Globe 4 action under the Insurance Code to proceed as contemplated by the corollary ruling in Moradi–Shalal v. Fireman's Fund Insurance Companies (1988) 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58, on the question of prospective application of its decision to overrule Royal Globe.

The court held that it did.  (CSAA, supra, 50 Cal.3d 658, 662, 268 Cal.Rptr. 284, 788 P.2d 1156.)   The CSAA holding is arguably relevant here on the issue of whether a stipulation for entry of an excess judgment is binding upon the insurer for purposes of satisfying the condition precedent for assigning a bad faith action to the third party claimant.   In CSAA, the key rationale for the holding was that the insurer itself had joined in the three-way stipulation.  (Id. at p. 662, 268 Cal.Rptr. 284, 788 P.2d 1156.)

Here, the insurer did not join in the stipulation, and so prima facie CSAA is not relevant.   However, the further question arises as to whether the insurer is yet bound because counsel which it provided for the insured was actively involved in negotiating the stipulation and signed it on the insured's behalf.   In our view, that question was answered in Rose v. Royal Ins. Co. (1991), 2 Cal.App.4th 709, 3 Cal.Rptr.2d 483 (Rose ).   Although Rose was not a bad faith case, it is yet relevant and apposite to the question above recited.   The summary of the case provided by the Reporter of Decisions tells the whole story.  “Judgment creditors of two persons, who were insured under a policy providing coverage for comprehensive general liability and contractual liability, sued the insurance company that had issued the policy under Ins.Code, § 11580 (direct action against insurer after securing judgment against insured).   The creditors had obtained a consent judgment against the insureds in an action in which the insurance company, despite reserving its right to dispute coverage, had provided independent counsel to represent the insureds.   The insurance company demurred to the creditor's complaint, contending that the policy's ‘no-action’ clause, which permitted actions only when a judgment against the insured had been obtained after actual trial, precluded the creditor's action.   The trial court sustained the insurance company's demurrer and entered a judgment of dismissal․  [¶] The Court of Appeal affirmed.   The court held that the policy provision restricting actions unless the judgment against the insured was entered after actual trial did not defeat the purpose of Ins.Code, § 11580, nor conflict with its provisions.   The court also held that the judgment, which resulted from an agreement between the parties, did not qualify as a judgment after actual trial.   Although the independent counsel hired by the insurance company consented to the judgment, the court held that the insurance company was not bound by the consent nor estopped to deny its lack of consent, even though the insurance company had failed to provide counsel to represent its own interests․”  (Id. at p. 709, 3 Cal.Rptr.2d 483.)   In short, there was a stipulated judgment in Rose which the third party claimant sought to use as a basis for an action against the insurer under section 11580 of the Insurance Code.   The court held, notwithstanding that counsel provided for the insured by the insurer had been directly involved in entry of the stipulated judgment, that the judgment was not binding on the insurer.   It was not, because it failed to qualify as a contested judgment under the no-action clause of the policy.  (Id. at p. 717–718, 3 Cal.Rptr.2d 483.)

Thus, the Smith holding, because of Rose, is undiluted by the decision in CSAA.

So it is here.  (See generally, Aero–Crete, Inc. v. Superior Court (1993) 21 Cal.App.4th 203, 211, 25 Cal.Rptr.2d 804;  Pacific Estates, Inc. v. Superior Court (1993) 13 Cal.App.4th 1561, 1575, 17 Cal.Rptr.2d 434 (fn. 9);  Wright, supra, 11 Cal.App.4th 998, 1021–1022, 14 Cal.Rptr.2d 588.)

At this point, a basic, a priori analysis is called for.   Zealous counsel for personal injury plaintiffs regularly lose sight of two fundamental concepts.   The first is, as a public policy matter, that the tort system has evolved solely for the purpose of compensating victims of tortious conduct for their actual, out-of-pocket, monetary losses.   Here, the insured Austin suffered no monetary loss whatsoever.   Because of plaintiff's covenant not to execute, Austin was totally insulated from monetary loss.

We digress here to note that the foregoing observation about actual monetary loss, as the basis for tort liability, must now be tempered.   Since Molien v. Kaiser Foundation Hospitals (1980) 27 Cal.3d 916, 167 Cal.Rptr. 831, 616 P.2d 813, claims for monetary damages to compensate only mentally upset plaintiffs for mere negligent infliction of emotional distress, i.e., not involving actual monetary loss, have been recognized by the California Supreme Court.   That court had an opportunity in Burgess v. Superior Court (1992) 2 Cal.4th 1064, 9 Cal.Rptr.2d 615, 831 P.2d 1197, to overrule Molien;  however, it declined to do so, electing instead to limit Molien 's discussion of duty to its own facts.  (Id. at p. 1074, 9 Cal.Rptr.2d 615, 831 P.2d 1197.)   The entire negligent-infliction-of-emotional-distress scene, up to February 1994, was reviewed in Bro v. Glaser (1994) 22 Cal.App.4th 1398, 27 Cal.Rptr.2d 894.   Based on analysis of 26 post-Molien cases, we devised a Black Letter proposition for use in evaluating the viability of such claims.  (Id. at p. 1441, 27 Cal.Rptr.2d 894.)

 More recently, in Krupnick v. Hartford Accident & Indemnity Co. (1994) 28 Cal.App.4th 185, 34 Cal.Rptr.2d 39 (Krupnick ), we applied the test to a common-law action brought by a third party claimant directly against an insurer (just as here) on the theory that there was a duty owed third party claimants by insurers not to engage in so-called unfair settlement practices.   We rejected such theory out of hand.  (Id. at p. 209, 34 Cal.Rptr.2d 39;  see also Lee v. Travelers Companies (1988) 205 Cal.App.3d 691, 695, 252 Cal.Rptr. 468.)   The Krupnick decision is a complete answer to the argument of plaintiff's counsel that there was a direct duty owed plaintiff by defendant to investigate the claim and to offer policy limits once all the facts were disclosed.   There is no such duty.   Justice Richardson explained why in his dissent in Royal Globe, which was quoted in pertinent part in Krupnick, supra, at p. 195, 34 Cal.Rptr.2d 39.   Following the quotation, we noted that “to countenance a common law action by third parties directly against insurance companies would restore the precise evils which Justice Richardson delineated and deplored above.”  (Ibid., emphasis omitted.)

 Returning from the digression, the other fundamental concept often lost sight of by counsel for personal injury plaintiffs is that insurance policies such as the one providing public liability coverage to the insured here are contracts of indemnity and nothing more.   The only contractual duties devolving upon insurance carriers arising under such policies are to defend and to cover.   There is no contractual requirement that the insurance carrier engage in any settlement negotiations whatsoever.

On this point, we note that the misconception of trial counsel here is reflected by the proceedings and the result reached in the trial court, reversed on appeal, in Camelot By the Bay Condominium Owners' Assn. v. Scottsdale Ins. Co. (1994) 27 Cal.App.4th 33, 32 Cal.Rptr.2d 354 (Camelot ).   In that case, a homeowners' association sued the contractor who built the homeowners' condominiums to recover damages for alleged defects in the construction.   The contractor had taken out a policy with Scottsdale Insurance Company (the insurer) covering such a risk;  the policy had $1,000,000 limits.   In the course of the action against the contractor, preceding the third party action for bad faith, the homeowners offered to settle for $280,000.   The insurer declined the offer.  (Id. at p. 39, 32 Cal.Rptr.2d 354.)

Negotiations variously continued during which the homeowners increased their demand to $300,000.   The insurer also rejected this demand.   After about a year of this, the homeowners and the insured contractor, acting on its own, entered into a stipulated judgment for $675,000.   The stipulation was coupled with a covenant not to execute given in exchange for the contractor's assignment to the homeowners of his perceived claim for bad faith against the insurer.   This was all accomplished without the knowledge of the insurer.   (Camelot, supra, 27 Cal.App.4th 33, 41, 32 Cal.Rptr.2d 354.)

Thereafter, the homeowners, as assignees, filed their third party action against the insurer based upon an alleged breach of the implied covenant of good faith and fair dealing.   The case was eventually tried to the court, sitting without a jury.   In its statement of decision, the trial court tabulated at least 12 instances of bad faith by the insurer in the conduct of the settlement negotiations.   Based thereon, the trial court actually made findings that the insurer had placed its interests ahead of the insured by failing to settle for $300,000.   That figure was found to be a reasonable settlement figure.   In its conclusions of law, the trial court invoked Comunale 5 in holding that the insurer's rejection of the $300,000 offer was unreasonable and was such because that rejection had resulted in the insured's sufferance of a $675,000 judgment against it.   The trial court then noted that the homeowners' covenant not to execute did not relieve the insured of the judgment against it.   It then awarded the homeowners $472,500, representing a net recovery after allowance of a setoff of the value of the insured's comparative bad faith.  (Camelot, supra, 27 Cal.App.4th 33, 41–45, 32 Cal.Rptr.2d 354.)

On appeal, as noted, the judgment was reversed with directions to the trial court to enter judgment in favor of the insurer.   To conclude its opinion, the reviewing court stated, “․ Scottsdale [the insurer] did not breach the implied covenant of good faith and fair dealing by failing to meet Camelot's settlement demand, since there was no policy limits exposure to the insured for claimed covered damages to make conclusive the reasonableness of that settlement demand.”  (Camelot, supra, 27 Cal.App.4th 33, 53–54, 32 Cal.Rptr.2d 354.)

 In rationalizing the result reached, the reviewing court observed, “[t]he problem with the trial court's theory is that the reasonableness of a settlement offer cannot be evaluated in a vacuum [6 ] or merely subjectively by a trial judge presented with a bad faith claim against the insurer, even taking into account the various circumstances of the case.   Instead, the Comunale line of cases teaches that the most reasonable manner of disposing of a claim may be a settlement within policy limits ‘whenever it is likely that the judgment against the insured will exceed policy limits.’   (Johansen, supra, 15 Cal.3d [9] at p. 16, 123 Cal.Rptr. 288, 538 P.2d 744].)  The potential excess judgment is the outer parameter by which to measure reasonableness.   Although the Supreme Court has also made an even broader formulation of the permissible considerations for evaluating the reasonableness of a settlement offer (i.e., whether ‘in light of the victim's injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer’ (ibid.)), the Supreme Court has never retreated from a consideration of probable excess judgment liability of the insured as a factor in determining the reasonableness of the claimant's settlement offer.   Nor would it be consistent with this line of cases to require an insurer to pay more than its policy limits to settle a third party claimant's claim, even though an insurer may be held liable in damages to its insured for amounts over its policy limits where bad faith has been found.  (Comunale, supra, 50 Cal.2d at p. 659 [328 P.2d 198].)”  (Camelot, supra, 27 Cal.App.4th 33, 51–52, 32 Cal.Rptr.2d 354.)   In short, there is no duty even to negotiate let alone settle when the demand is less than policy limits.   Until the insurer is faced with a demand for policy limits, it comes under no duty to evaluate the possibility of an excess judgment.   With further regard to the trial court's resolution of the case, the reviewing court stated, “[w]e believe the trial court's interpretation of the Comunale line of cases to reach its conclusions runs counter to an accepted tenet of insurance law:  ‘The rights of the parties are measured by the contract, and liability of the insurer ordinarily can be imposed only in this manner.’  (12 Appleman, Insurance Law and Practice, § 7004, pp. 43, 47, fns. omitted.)   Thus, the terms and conditions of the insurance policy must dictate the scope of the duties and performance to which the insured is entitled.   Ordinarily, the policy limits restrict the amount the insurer may have to pay a third party claimant, but those limits do not restrict an insured's potential damages for the insurer's breach of contract.   (Comunale, supra, 50 Cal.2d at p. 659 [328 P.2d 198].)  An insurer clearly takes on the duty of protecting, defending, and indemnifying its insured with respect to the scope of coverage that was purchased and attendant duties (defense and settlement).   The insurer does not, however, insure the entire range of an insured's well-being, outside the scope of and unrelated to the insurance policy, with respect to paying third party claims.   It is an insurer, not a guardian angel.   Even if the insurer may not consider its coverage beliefs in deciding whether to accept a settlement offer, it may still bear in mind the distinctions between its potential monetary obligations to the third party claimant and to its insured.”  (Id. at p. 52.)

Even so, ever since Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788, 41 Cal.Rptr. 401, counsel for personal injury plaintiffs have increasingly sought to replicate its scenario, with the hope of being able thereby to orchestrate a bad faith claim and by so doing create a predicate for tort damages in a case otherwise involving only minimal coverage (as here for $15,000).

In such instances, Critz has often been misunderstood and hence misapplied.   In that case, Betty Critz (Critz), while a passenger in an automobile driven by her husband, suffered severe personal injuries as a result of a head-on collision with another automobile driven by David Arnold.   The collision occurred when Arnold's automobile crossed the center line, thereby violating the Critzes' right-of-way.   At the time of the collision, Arnold was insured by Farmers Insurance Group for the risk which had matured.

Some months after the collision, acting through attorney Clifford Lewis, Critz offered to settle with Farmers by making a demand for the $10,000 policy limits.   Without notifying the insured Arnold of the Critz offer, Farmers made a counteroffer to Lewis of $8,250.   Then, providing the pattern for what plaintiff and her counsel attempted here, Lewis, without notifying Farmers, prepared a document which recited that Farmers had unreasonably rejected the Critz demand for policy limits, thereby subjecting Arnold to the risk of exposure to a judgment in excess of policy limits.   This document went on to frame an agreement between Critz and Arnold under which the latter assigned to Critz his so-called bad faith claim against Farmers in exchange for which she undertook to hold Arnold free and harmless from all efforts to collect on any judgment which might be later entered against him.

Thereupon, Lewis, on behalf of Critz, filed a garden-variety personal injury action against Arnold.   In ignorance of the assignment and covenant, Farmers accepted tender of the defense of the antecedent traffic collision action.   Later and before the case went to trial, Farmers learned of the assignment and covenant;  whereupon it offered policy limits at once.   Critz refused to accept the policy limits, just as plaintiff here did on August 30, 1989.   Parenthetically, we observe that, thus far, the Critz scenario and the scenario now before us are practically identical.   However, at this point, the two scenarios diverge drastically.

In the case here, simultaneously with the insured's assignment in exchange for plaintiff's covenant not to execute, plaintiff and the insured Austin stipulated to entry of judgment for $67,927 in the antecedent traffic collision action.   In Critz, by contrast, the antecedent traffic collision action proceeded to an arm's-length trial, after which the jury returned a verdict for Critz and against Arnold in the sum of $48,000.   Critz then accepted Farmer's payment of $10,000 policy limits.   It was only then, as Arnold's assignee, that Critz filed suit against Farmers, seeking to recover the remaining $38,000, i.e., the amount of the third party judgment in excess of policy limits which she had recovered against her assignor, Arnold, in a contested trial.

The gravamen of her suit against Farmers was “that the insurance Company [had] rejected the $10,000 settlement offer with a view only to its own financial interest and without regard to its obligation to protect” its insured.  (Critz v. Farmers Ins. Group, supra, 230 Cal.App.2d at 798, 793, 41 Cal.Rptr. 401.)   By another stipulation, in Critz, there was a preliminary trial conducted on an agreed statement of facts aimed solely at adjudication of the validity of the Arnold assignment.   The trial court held that the assignment was invalid;  judgment was entered for Farmers accordingly.

On appeal, the reviewing court reversed with directions specifying that the cause be returned to the trial court for further proceedings.

Addressing the subject, Justice Friedman wrote, “The assignment from Arnold to Mrs. Critz represents an unorthodox tactic which has not previously confronted the courts.  [Fn. omitted.]   Its novelty lies in its timing.   In the fairly standardized situation, the policyholder assigns his damage claim to the injured person after the latter recovers a judgment exceeding the policy limit;  ․ Here, in contrast, David Arnold had not been fastened with an excess judgment, had not even been named as formal defendant in a personal injury suit, when he executed the assignment document.  [¶]  Some courts have held that the insured has no cause of action against his insurance company until such time as he suffers and satisfies a judgment in excess of the policy limit.   This view has been rejected in California and a number of other states.  (See cases cited 40 A.L.R.2d at pp. 190–195.)   In Brown v. Guarantee Ins. Co. (1957) 155 Cal.App.2d at page 690, [319 P.2d 69] the court says, ‘․ logic and reason support the contrary view that the insured's cause of action arises when he incurs a binding judgment in excess of the policy limit.’   Defendant relies upon the quoted statement to support the argument that its insured, having incurred no judgment at the time of the attempted assignment, could not make an effective assignment.   The court's remark was made without reference to the problem of assignability.   The court meant only that prepayment of the judgment was not a requisite to suit against the insurer;  not that an assignment could not possibly precede the personal injury judgment.”  (Critz v. Farmers Ins. Group, supra, 230 Cal.App.2d 788, 794–795, 41 Cal.Rptr. 401, emphasis added.)

Because of the Critz quotation from Brown v. Guarantee Ins. Co. (1957) 155 Cal.App.2d 679, 690, 319 P.2d 69, that “logic and reason support the ․ view that the insured's cause of action arises when he incurs a binding judgment in excess of policy limits,” it is our view that Justice Friedman's rationale was that the eventual maturing of a bad faith claim depends on the pre-judgment assignment's being eventually followed by a binding judgment against the insured assignor and in favor of the third party assignee in a contested trial.

In other words, the only reasonable interpretation to be placed on the result reached in Critz, i.e., because it was sent back to the trial court to determine factually whether Farmers had acted in bad faith in rejecting the demand for policy limits, is that the exchange of an assignment by the insured of his supposed bad faith claim against his insurance company for a covenant not to execute by the third party claimant is initially inchoate and only becomes viable, bringing the assigned claim to life, so to speak, if followed by a binding judgment after a real trial of the antecedent, traffic collision action.   In Critz, Justice Friedman even imposed a second condition subsequent, namely, that there also had to be a determination by the trier of fact on the issue of whether (reflecting then current authority) there had been a bad faith refusal to honor the demand for policy limits.

It was at this point that those here attempting to orchestrate a bad faith scenario against defendant insurer shot themselves in their collective foot by losing sight of the key factor in the Critz formula.   Their mistake was to resort to a stipulated judgment, rather than to carry the antecedent traffic collision action through to an arm's-length judgment.7  In Critz, the covenant not to execute was given with reference to an anticipated future binding judgment;  here, the covenant was made with reference to a meaningless stipulated judgment.

 The reason for the drastic legal difference between what happened in Critz and what happened here requires only a cursory explanation.   In Critz, after a real trial, a jury came in with a verdict of $48,000 against David Arnold and in favor of Betty Critz.   In the case here, as above noted, plaintiff and the insured resorted to a stipulated judgment coupled with the former's covenant not to execute upon it.   Shielded by such a covenant, there was no self-interest limitation operating to control the size of judgment the insured would agree to.   Thus, the figure she did agree to was useless in fulfilling the office of an actual judgment in excess of policy limits as occurred in Critz.   Without such a judgment binding the insured, the potential bad faith scenario collapsed.   Stated otherwise, exhaustive electronic research has failed to locate even one case where an insurer has been held liable for breach of the implied covenant of good faith and fair dealing in a third party case unless there had first been an arm's length adjudication of the third party claim against the insured in excess of policy limits.

At this juncture, it is appropriate to address the novel reference in the trial court's statement of decision to “third party bad faith” and to “first party bad faith.”   As above indicated, we are unfamiliar with these terms in which the modifier of “bad faith” is identified as a first party or a third party.   If such a characterization were to be used, accurately stated there would only be “second party” bad faith.   In other words, in the large majority of the cases, it is only the second party insurer who has been guilty of bad faith.  (Cf. Liberty Mut. Ins. Co. v. Altfillisch Constr. Co. (1977) 70 Cal.App.3d 789, 139 Cal.Rptr. 91, where the insured, not the insurer, was held to have breached the implied covenant of good faith and fair dealing.)

 If, however, the language used in the statement of decision were intended to describe supposed targets of the insurance carrier's bad faith, such labeling does not comport with the legal realities.   A third party claimant can never be a target or victim of an insurance carrier's bad faith.   This is so because there is no contractual privity between the insurance carrier and the third party claimant.  “Bad faith” is only a shorthand description of breach of the implied covenant of good faith and fair dealing.   Such implied covenant can only arise between parties who are already linked by express contractual privity.

 In paragraph 2 of the trial court's judgment, it properly referred to the “third party bad faith cause of action.”   That is the kind of case here involved.   However, in paragraph 3, the trial court mistakenly referred to “first party bad faith.”   If the trial court meant thereby to label this matter as a “first party bad faith action,” this is not such a case.   Such cases will be described (post ).   On the facts here, defendant insurer's duty to the insured Austin, after the demand for policy limits was made, was to conduct the negotiations in such a way as not to expose her to a judgment in excess of policy limits for which she would be legally responsible.   As earlier recounted, defendant insurer successfully discharged such duty;  at no time was Austin exposed, nor will she ever be exposed, to a judgment in excess of policy limits.

In any event, in the usual parlance, all cases involving second party, i.e., insurer bad faith, alternatively employ the characterization of either “first party cases” or “third party cases.”   Others refer to a first party, bad faith claim or to a third party, bad faith claim.   The case before us falls in the latter category, i.e., where the matured risk presented a potential loss by the insured (first) party for which it would seek indemnity from the insurer (second) party for a liquidated claim asserted by an adverse (third) party.   A so-called “first party case,” not present here, usually involves a risk of loss arising because of fire, disability, theft or other casualty (post ).   In such a case, there is no involvement of anyone other than the insured claimant (who suffered the loss) and the insurer of the risk which the loss represents.

 Thus, the case before us began as a third party case and would remain as such regardless of whether the insured had sought to raise the issue of alleged breach of the implied covenant of good faith and fair dealing or whether (as happened) such a claim were raised by the third party claimant after assignment of such claim by the insured (first) party to the claimant (third) party.

The foregoing analysis is confirmed by the fact that all the cases cited by counsel on both sides, purporting to provide the standard for measuring bad faith committed by the second party insurer, were all third party cases in the usual parlance.   In other words, all cases cited by both sides were third party cases involving assertions of bad faith based on an insurer's breach of the implied covenant of good faith and fair dealing with reference to a third party claim, asserted either directly by the insured or indirectly by the insured's assignee.   None of the cited cases were so-called first party cases as described in the usual parlance.   In short, as used by the trial court in its judgment here, one can find no reference to “first party bad faith,” in any cases involving third party claimants (as here).

We note again our perplexity over the fact that counsel for both sides went through a contested trial, accepting the possibility of an award of damages against defendant for “bad faith,” notwithstanding that defendant had caused no damages to its insured.   Actually, as already noted, trial counsel for the insured assignor Austin, provided by defendant, had succeeded in totally insulating the insured from any possible damages arising from the traffic collision with plaintiff.   Such insulation took the form of plaintiff's covenant not to execute on the stipulated judgment, a covenant given in exchange for the insured's assignment of her supposed claim for bad faith against defendant insurer.   While she may have had such a viable claim, if followed by a later excess judgment in a contested trial, once the parties stipulated to a judgment coupled with a covenant not to execute, the entire effort to saddle the insurer with bad faith liability became a meaningless charade.

The notion that an insured, under appropriate circumstances, can have a claim against its own insurance carrier, following sufferance by the insured of a judgment in excess of policy limits, goes back to Brown v. Guarantee Ins. Co., supra, 155 Cal.App.2d 679, 319 P.2d 69 (Brown ).   In Brown, after a routine motor vehicle collision between Brown (the plaintiff) and Charles M. Weisenberg (the insured), plaintiff made a demand upon the insured's carrier, Guarantee Ins. Co. (the defendant) for the $5,000 policy limits.   The defendant insurer made a series of offers to settle, i.e., for $3,000, $3,500 and $4,000, but never for policy limits.   After a contested trial, the antecedent traffic collision action resulted in a judgment against the insured for $15,000 plus costs.   The defendant then paid the $5,000 policy limits to the plaintiff.

The insured next declared bankruptcy.   The trustee in bankruptcy thereupon assigned to the plaintiff the insured's perceived claim against the defendant insurer.   As phrased by the allegations in the complaint, later filed by the plaintiff Brown against the defendant, “defendant refused to perform its obligation to the insured, and was ‘negligent and acted in bad faith in refusing to accept the compromise offer of the plaintiff in view of the facts within [its] knowledge regarding the plaintiff's expenses and severity of his injuries and the fact that the liability of the assured was clear,’․”  (Brown, supra, 155 Cal.App.2d 679, 682, 319 P.2d 69.)   The defendant's demurrer to the complaint was sustained in the trial court and a judgment of dismissal followed.   On appeal, the reviewing court reversed the judgment.  (Id. at p. 696, 319 P.2d 69.)

At the outset of its opinion, Brown noted that “The first question which must be determined by this court is whether or not an insured has a cause of action against the insurer for the latter's wrongful refusal to settle a claim against the former.   Concomitantly this court must ascertain the character and limitations of such a cause of action.   It is our conclusion that when an insurer engages in compromise negotiations of a claim against the insured, it owes the insured a duty to exercise good faith, for the breach of which it is liable in damages.”  (Brown, supra, 155 Cal.App.2d 679, 682, 319 P.2d 69.)   After quoting from an Oregon case and a Mississippi case, as well as 40 ALR 2d 168, the Brown court stated that “[a]s yet no appellate court in this state has passed upon the question now before this court.”  (Id. at p. 683, 319 P.2d 69.)

After discussing several additional out-of-state cases, the court concluded that certain duties to the insured devolve upon the insurer once it accepts defense of an action against the insured and then undertakes settlement negotiations.  (Brown, supra, 155 Cal.App.2d 679, 687, 319 P.2d 69.)   The court then concluded that performance of such duties is properly measured by a good faith standard, which to be violated, involves conduct more culpable than mere negligence.  (Id. at p. 688, 319 P.2d 69.)   In this respect, the court stated, “It is a harsh measure to hold the insurer liable for amounts often far in excess of the agreed limit.   To justify such a result requires substantial culpability on the part of the insurer—bad faith rather than mere negligence.”  (Ibid.)

The court then tabulated a list of seven factors to be considered in deciding whether the insured's refusal to settle (for policy limits) amounted to bad faith.   Such factors are:  “[1] The strength of the injured claimant's case on the issues of liability and damages;  [2] attempts by the insurer to induce the insured to contribute to a settlement;  [3] failure of the insurer to properly investigate the circumstances so as to ascertain the evidence against the insured;  [4] the insurer's rejection of advice of its own attorney or agent;  [5] failure of the insurer to inform the insured of a compromise offer;  [6] the amount of financial risk to which each party is exposed in the event of a refusal to settle;  [7] the fault of the insured in inducing the insurer's rejection of the compromise offer by misleading it as to the facts;  and any other factors tending to establish or negate bad faith on the part of the insurer.”  (Brown, supra, 155 Cal.App.2d 679, 689, 319 P.2d 69.)   With reference to these factors, the court concluded that “[u]nder the facts alleged [in the complaint] a jury could have found that defendant breached its duty to exercise good faith when it refused to settle for [policy limits].”  (Ibid.)

Other peripheral issues were also disposed of in Brown.   It held that it was not necessary than an insured actually pay the excess judgment before a cause of action can accrue;  entry of judgment was held to be sufficient.   (Brown, supra, 155 Cal.App.2d 679, 691, 319 P.2d 69.)   The court next determined that such a claim is assignable.  (Id. at p. 695, 319 P.2d 69.)   The court concluded with the observation that “[t]his result may seem anomalous in that the plaintiff, who previously offered to settle his claim for $5,000, has now acquired the right to maintain against defendant insurer an action which arose by reason of that offer to settle.   But it must be borne in mind that plaintiff merely stands in the shoes of the insured;  it is the insured who has allegedly suffered the wrong at the hands of the insurer.   It might be said that the result reached herein will cause more injured claimants to propose settlement for the policy limit when the insurance company is defending the action against an insured who is apparently judgment-proof.   Yet the insurer has nothing to fear so long as its refusal to settle is made in good faith.”  (Id. at p. 696, 319 P.2d 69.)   With reference to the last quotation, we emphasize the insistence “․ that plaintiff merely stands in the shoes of the insured․”  (Ibid.)   We emphasize further that all of the foregoing commentary was made in a context in which an arm's-length judgment in excess of policy limits had first been entered against the insured.

From this unspectacular wellspring, a flood of precedents has poured forth.   The following year, the Supreme Court had occasion to deal with the same issue in Comunale, supra, 50 Cal.2d 654, 328 P.2d 198.   In that case, Mr. and Mrs. Comunale (plaintiffs), as pedestrians, were struck in a crosswalk by a truck driven by Percy Sloan (the insured).   Both the plaintiffs suffered personal injuries;  Mr. Comunale's were serious.   Before the accident, Traders & General Insurance Company (the defendant) had issued an auto insurance policy to the insured which had $10,000/$20,000 limits for public liability.

After the accident, the insured notified the defendant of the event.   The defendant took the position that its policy did not provide coverage for the reason that the insured was driving a truck which did not belong to him.   The plaintiffs then filed suit against the insured.   After the defendant refused tender of the defense, the insured obtained other counsel to represent him.   On the second day of the trial, the insured informed the defendant that the Comunales would compromise the case for $4,000 and that he did not have enough money to effect the settlement.   He further pointed out that it was highly probable that the jury would return a verdict in excess of policy limits.  (Comunale, supra, 50 Cal.2d 654, 657, 328 P.2d 198.)   Thereupon, the insured demanded that the defendant assume the defense and settlement of the case.   The defendant refused and the case proceeded to judgment, $25,000 for Mr. Comunale and $1,250 for Mrs. Comunale.  (Id. at p. 657, 328 P.2d 198.)

The insured did not pay the judgment.   As a result, the plaintiffs commenced a second action against the defendant directly under a provision in the policy which permitted an injured party to maintain an action against the insured after obtaining a judgment against the insured, similar to what is authorized by statute pursuant to section 11580, subdivision (b)(2) of the Insurance Code.  (Cf. Wright, supra, 11 Cal.App.4th 998, 1014, 14 Cal.Rptr.2d 588.)   In the suit based on that policy provision, the plaintiffs recovered $10,000 for Mr. Comunale and $1,250 for Mrs. Comunale.   When that judgment became final, defendant paid it.  (Comunale, supra, 50 Cal.2d 654, 658, 328 P.2d 198.)   The plaintiff husband then obtained from the insured an assignment of all his rights against the defendant and then commenced yet another action against the defendant to recover the unpaid portion of the judgment he had won in excess of policy limits.  (Ibid.)  The jury returned a verdict in the plaintiff husband's favor;  the trial court nevertheless entered a judgment for the defendant notwithstanding the verdict.  (Ibid.)

On appeal, which reached the Supreme Court, the judgment was reversed with directions by a unanimous court.   In rationalizing the result it reached, the Comunale court saw as the principal issue whether the insured assignor had a cause of action against the defendant for the amount of the excess judgment.  (Comunale, supra, 50 Cal.2d 654, 658, 328 P.2d 198.)   In deciding that the insured did have such a cause of action, the court recited several trenchant factors for measuring bad faith which have reverberated through the cases even down to this day.   To tabulate them:

(a) “[t]here is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement ․” (id. at p. 658, 328 P.2d 198);

(b) “[u]nder these circumstances the implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty ․”  (id. at p. 659, 328 P.2d 198);

(c) “[t]he insurer, in deciding whether a claim should be compromised, must take into account the interest of the insured and give it at least as much consideration as it does to its own interest ․” (ibid.);

(d) “[w]hen there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration of good faith of the insured's interest requires the insurer to settle the claim.   Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing ․” (ibid.);

(e) “[t]here is an important difference between the liability of an insurer who performs its obligations and that of an insurer who breaches its contract.   The policy limits restrict only the amount the insurer may have to pay in the performance of the contract as compensation to a third person for personal injuries caused by the insured;  they do not restrict the damages recoverable by the insured for a breach of contract by the insurer ․” (ibid.);

(f) “[i]t is generally held that [because] the insurer has reserved control over the litigation and settlement it is liable for the entire amount of a judgment against the insured, including any portion in excess of the policy limits, if in the exercise of such control it is guilty of bad faith in refusing a settlement ․” (id. at p. 660, 328 P.2d 198);

(g) “[a]n insurer who denies coverage does so at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer's breach of the express and implied obligations of the contract.   Certainly an insurer who not only rejected a reasonable offer of settlement but also wrongfully refused to defend should be in no better position than if it had assumed the defense and then declined to settle.   The insurer should not be permitted to profit by its own wrong ․” (ibid.);

(h) “․ an insurer who wrongfully declines to defend and who [also] refuses to accept a reasonable settlement within the policy limits is in violation of its duty to consider in good faith the interest of the insured in settlement, is liable for the entire judgment against the insured even if it exceeds the policy limits.”  (Id. at p. 661, 328 P.2d 198.)

After concluding that the insured's cause of action against the defendant was assignable and that the plaintiff's right to proceed thereon was not barred by the statute of limitations (Comunale, supra, 50 Cal.2d 654, 662, 328 P.2d 198), the court proceeded to apply the principles above tabulated and reverse the judgment for the defendant with directions to enter judgment on the verdict.

Although it has been tedious, if not pedantic, we have tabulated the Comunale pronouncements to reflect the concepts which were argued in the trial court here.   However, in contrast to what occurred here, in Comunale there were two arm's-length judgments entered before the plaintiff, third party claimant (assignee) succeeded in recovering the excess judgment from the defendant insurer.

Moving ahead chronologically, one of the first cases to rely upon Comunale was Davy v. Public National Ins. Co. (1960) 181 Cal.App.2d 387, 5 Cal.Rptr. 488 (Davy ).   In that case, following a routine motor vehicle collision between one of Davy's taxicabs and a police unit driven by an officer, the officer was injured and sued Davy for $225,000.   Public National Insurance Company (the insurer) had issued a policy on Davy's taxicabs with $5,000 policy limits for a single injury.  (Id. at p. 393, 5 Cal.Rptr. 488.)   The insurer accepted defense of the action.   About two weeks before trial, the police officer offered to settle for $4,500;  the offer was rejected.   (Ibid.)

A jury trial of the traffic collision action proceeded to verdict, resulting in a judgment in favor of the officer and against Davy for $24,268.  (Davy, supra, 181 Cal.App.2d 387, 394, 5 Cal.Rptr. 488.)   The insurer then paid the policy limits of $5,000, leaving the judgment unsatisfied in the amount of $19,268.  (Ibid.)  Davy, the insured, then brought suit against the insurer to recover the unsatisfied excess judgment, alleging that the insurer had not acted in good faith in refusing to accept the $4,500 settlement offer.   After a jury trial of this latter action, judgment was awarded Davy in the amount of $22,400.12.   On appeal, the judgment was affirmed.  (Ibid.)

In rationalizing the result it reached, the court in Davy relied extensively in Comunale as well as Brown.   In so doing, it paraphrased most of the Comunale factors above tabulated.   However, the court treated that case as an “evidence” case to be decided in light of the Comunale factors, stating, “[t]he primary issue on this appeal concerns the sufficiency of the evidence to support the implied finding of the jury that the defendant insurance company did not exercise good faith in refusing to accept the offer ․ for $4,500.”  (Davy, supra, 181 Cal.App.2d 387, 396, 5 Cal.Rptr. 488.)   The opinion reviewed at length actions taken by the insurer to investigate and evaluate the police officer's claim.   By today's standards (post ), in what in our view appeared to be an easy affirmance, the court seemed to agonize over its eventual decision that the evidence supported an inference that the insurer had acted in bad faith.  (Id. at p. 401, 5 Cal.Rptr. 488.)

Again, we remind the parties here that the effort against the insurer in Davy was undertaken only after the third party claimant had obtained an arm's-length judgment against the insured in excess of policy limits.   In other words, weighing the Comunale factors, as reflected in the evidence for and against a finding of bad faith refusal to settle for a figure less than policy limits, was only undertaken in light of an earlier contested judgment entered in the antecedent traffic collision action.

Following Davy in quick succession, opinions were handed down in Hodges v. Standard Accident Ins. Co. (1961) 198 Cal.App.2d 564, 574, 18 Cal.Rptr. 17, Palmer v. Financial Indem. Co. (1963) 215 Cal.App.2d 419, 428, 30 Cal.Rptr. 204, Kelly v. British Coml. Ins. Co. (1963) 221 Cal.App.2d 554, 562, 34 Cal.Rptr. 564, and Martin v. Hartford Acc. & Indem. Co. (1964) 228 Cal.App.2d 178, 182, 39 Cal.Rptr. 342, in which the several factors announced in Comunale provided the framework of decision.   In Hodges, a jury verdict in favor of the trustee in bankruptcy for the insured was reversed on appeal.   The reviewing court concluded that there was no evidence to support a finding that the insurer had acted in bad faith.   However, in Palmer and Kelly, judgments against the insurer, based on a finding of bad faith, were affirmed;  in Martin the insurer's demurrer to a bad faith complaint was sustained in the trial court and the judgment of dismissal based thereon was reversed on appeal.   Although each of these cases had its own unique set of facts demonstrating the bad faith behavior of the insurer in breaching its duties arising under the implied covenant, every case without exception proceeded against the insurer only after a prior judgment in excess of policy limits had been obtained against the insured in a contested, arm's-length trial.

The chronology brings our commentary up to Critz, earlier discussed and analyzed (ante ).   Beyond what we have already stated about Critz, it is worth noting further certain of the Critz language.   Justice Friedman observed at the conclusion of his opinion that “[o]ne more contention should be noted.   Defendant argues that the hold harmless clause, in effect a covenant not to execute against Arnold, prevented the latter from suffering any damage by reason of the personal judgment against him.   If, as a trier of fact may find, the carrier violated its duty of good faith, the damage, however potential, occurred at that time.   As noted in the Ivy case, supra, 156 Cal.App.2d [652] at page 662 [320 P.2d 140], a covenant not to execute is not a release.  (See also Pellett v. Sonotone Corp., supra, 26 Cal.2d 705 [160 P.2d 783].)  It did not blot out the personal judgment against Arnold or extinguish his claim for breach of contract against the carrier.  [¶] We conclude that validity of the assignment turns on the identical fact determination as the claim itself—did the carrier act in good or bad faith when it rejected the offer to settle at the policy limit?   If, after considering the circumstances of the rejection, the fact trier finds that the carrier acted in good faith, then Mrs. Critz must lose this suit without regard to validity of the assignment.   If[,] on the other hand, the fact trier finds that the rejection was characterized by bad faith, the assignment must be upheld.”  (Critz, supra, 230 Cal.App.2d 788, 803–804, 41 Cal.Rptr. 401.)   In our view, this observation in Critz is significant.   Although it suggests that the covenant not to execute may not be a complete shield, such view was not made in the context of a stipulated judgment.   The entirety of the Critz analysis contemplated that there would be litigation of the factual issue of the insurer's bad faith notwithstanding that a contested judgment in excess of policy limits had already been awarded against the insured.

Following Critz, Kinder v. Western Pioneer Ins. Co. (1965) 231 Cal.App.2d 894, 42 Cal.Rptr. 394, was decided.   As in Palmer and Kelley, whose judgments against the insurer based on bad faith were affirmed on appeal, the court in Kinder held that the evidence of insurer bad faith, in light of the Comunale factors, was sufficient to support the judgment for the excess policy limits entered in favor of the insured's assignee.  (Id. at p. 902, 42 Cal.Rptr. 394.)   More important, the action to recover the amount of the excess judgment was only undertaken by the insured's assignee after that assignee had recovered a $30,000 verdict in the antecedent, traffic-collision action.   With $10,000 policy limits, the insurer had declined to accept a settlement offer by the third party claimant of $8,000.

That brings our survey of the relevant authorities up to Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173 (Crisci ).   After an interval of almost 10 years following Comunale, the issue once again reached the Supreme Court.   In Crisci, the Supreme Court was urged to take the measurement of bad faith one step closer to a rule of precise application, namely that the “insurer should be liable for any resulting judgment [against its insured] where it refuses to settle within the policy limits.”  (Id. at p. 431, 58 Cal.Rptr. 13, 426 P.2d 173.)

In Crisci, factually that is what happened.   In an action against the insured, where the policy limits for the covered risk were $10,000, the jury brought in a verdict against the insured for $101,000.   Before the case went to trial, the insurer had rejected a demand for $9,000 even though the insured herself had been willing to contribute $2,500.   In the later action against the insurer, the insured was awarded $91,000 (the insurer having already paid the $10,000 policy limits) plus $25,000 damages for mental suffering.   (Crisci, supra, 66 Cal.2d 425, 427–428, 58 Cal.Rptr. 13, 426 P.2d 173.)

The new ground potentially plowed in Crisci was above noted.   After discussing the rationale evolved in Comunale and followed in Davy, Palmer and Critz, the Crisci court observed, “․ whenever an insurer receives an offer to settle within the policy limits and rejects it, the insurer should be liable in every case for the amount of any final judgment whether or not within the policy limits.   As we have seen, the duty of the insurer to consider the insured's interest in settlement offers within the policy limits arises from an implied covenant in the contract, and ordinarily contract duties are strictly enforced and not subject to a standard of reasonableness.   Obviously, it will always be in the insured's interest to settle within the policy limits when there is any danger, however slight, of a judgment in excess of those limits.   Accordingly the rejection of a settlement within the limits where there is any danger of a judgment in excess of the limits can be justified, if at all, only on the basis of interests of the insurer, and, in light of the common knowledge that settlement is one of the usual methods by which an insured receives protection under a liability policy, it may not be unreasonable for an insured who purchases a policy with limits to believe that a sum of money equal to the limits is available and will be used so as to avoid liability on his part with regard to any covered accident.   In view of such expectation an insurer should not be permitted to further its own interests by rejecting opportunities to settle within the policy limits unless it is also willing to absorb losses which may result from its failure to settle.  [¶] The proposed rule is a simple one to apply and avoid the burdens of a determination whether a settlement offer within the policy limits was reasonable.   The proposed rule would also eliminate the danger tha[t] an insurer, faced with a settlement offer at or near the policy limits, will reject it and gamble with the insured's money to further its own interests.   Moreover, it is not entirely clear that the proposed rule would place a burden on insurers substantially greater than that which is present under existing law.   The size of the judgment recovered in the personal injury action when it exceeds the policy limits, although not conclusive, furnishes an inference that the value of the claim is the equivalent of the amount of the judgment and that acceptance of an offer within those limits was the most reasonable method of dealing with the claim.  [¶] Finally, and more importantly, there is more than a small amount of elementary justice in a rule that would require that, in this situation where the insurer's and insured's interests necessarily conflict, the insurer, which may reap the benefits of its determination not to settle, should also suffer the detriments of its decision.   On the basis of these and other considerations, a number of commentators have urged that the insurer should be liable for any resulting judgment where it refuses to settle within the policy limits.”   (Crisci, supra, 66 Cal.2d 425, 430–431, 58 Cal.Rptr. 13, 426 P.2d 173.)

For good or ill, the Crisci court, notwithstanding the sound logic of the foregoing language, declined to rely upon such logic as its ratio decidendi. Instead, it went on to rule, under the Comunale factors, that the evidence supported a finding that the insurer had breached the implied covenant of good faith and fair dealing.  (Crisci, supra, 66 Cal.2d 425, 431–432, 58 Cal.Rptr. 13, 426 P.2d 173.)

A further refinement of the Crisci decision was to ratify awarding, in addition to the amount of the excess judgment, a component for mental suffering.   In this regard, Crisci stated that “[t]he general rule of damages in tort is that the injured party may recover for all detriment caused whether it could have been anticipated or not [citations].   In accordance with the general rule, it is settled in this state that mental suffering constitutes an aggravation of damages when it naturally ensues from the act complained of․”  (Crisci, supra, 66 Cal.2d 425, 433, 58 Cal.Rptr. 13, 426 P.2d 173.)

What had first come before the Supreme Court in Comunale again came before it in Johansen v. California State Auto. Assn. Inter–Ins. Bureau (1975) 15 Cal.3d 9, 123 Cal.Rptr. 288, 538 P.2d 744 (Johansen ).   In the antecedent traffic collision action, the third party claimant, Muriel Johansen, had recovered a judgment against the insured Dearings for $33,889.30, a sum well in excess of the Dearings' auto insurance policy limits.  (Id. at p. 13, 123 Cal.Rptr. 288, 538 P.2d 744.)

During the course of the earlier litigation, the insurer refused a demand for policy limits because it believed that the circumstances of the accident were beyond its policy coverage.   In a later declaratory relief action, the issue of coverage was resolved against the insurer.   It then paid the third party claimant the amount of its policy limits but refused to accept responsibility for the balance of the excess judgment.   The insureds then assigned their rights against the insurer to the third party claimant who, as plaintiff, sought to recover from the insurer the balance of the excess judgment.   In that effort, the trial court ruled for the insurer.  (Johansen, supra, 15 Cal.3d 9, 12, 123 Cal.Rptr. 288, 538 P.2d 744.)

Upon review by the Supreme Court, it reversed the trial court in a unanimous opinion written by Justice Tobriner.   The court noted the insurer's position as being that it could not be in violation of the implied covenant of good faith and fair dealing because at all times it harbored a good faith belief that there was no coverage.   More particularly, the court stated, “[d]efendant asserts, however, that the Comunale principle does not apply to an insurer whose refusal to settle stems from a bona fide belief that the policy does not provide its insured coverage.   In Comunale, the insurer asserted a virtually identical claim:  ‘It is not claimed the settlement offer was unreasonable in view of the extent of the injuries and the probability that [the insured] would be found liable, and [the insurer's] only reason for refusing to settle was its claim that the accident was not covered by the policy.’  (Id., at p. 658 [328 P.2d 198].)  This court nevertheless held the insurer liable for the excess judgment against its insured, stating:  ‘An insurer who denies coverage does so at its own risk and although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer's breach of the express and implied obligations of the contract.’  (Italics added.)  (Id., at p. 660 [328 P.2d 198].)  [Fn. omitted.]   Accordingly, contrary to the defendant's suggestion, an insurer's ‘good faith,’ though erroneous, belief in noncoverage affords no defense to liability flowing from the insurer's refusal to accept a reasonable settlement offer.”  (Johansen, supra, 15 Cal.3d 9, 15–16, 123 Cal.Rptr. 288, 538 P.2d 744.)   At the end of the quoted language, the court dropped footnote 5.  “Although defendant asserts that its liability can only be predicated on a finding of specific instances of reprehensible conduct, we rejected this very contention in Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 430, 58 Cal.Rptr. 13, 426 P.2d 173 [citation]:  ‘Liability is imposed not for bad faith breach of contract but for the failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing.   Moreover, ․ recovery may be based on unwarranted rejection of a reasonable settlement offer and ․ the absence of evidence, circumstantial or direct, showing actual dishonesty, fraud or concealment is not fatal to the cause of action.’  [Italics added.]”  (Id. at p. 16, 123 Cal.Rptr. 288, 538 P.2d 744.)

Further, the court observed, “[f]inally, we cannot accept defendant's complaint that the Comunale rule requires an insurer to settle in all cases irrespective of whether the policy provides coverage.   Clearly, if defendant's belief that the policy did not provide coverage in the instant case had been vindicated, it would not be liable for damage flowing from its refusal to settle;  all that Comunale establishes is that an insurer who fails to settle does so ‘at its own risk.’ ”  (Johansen, supra, 15 Cal.3d 9, 19, 123 Cal.Rptr. 288, 538 P.2d 744.)

It is significant in our view that Johansen made no reference to Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 110 Cal.Rptr. 511 (Merritt ), a case decided almost two years earlier.   The antecedent, traffic-collision action underlying Merritt arose from a collision of two trucks on U.S. Highway 99 near Merced.   In the resulting litigation, a judgment well in excess of the $100,000 policy limits was awarded against Stafford, who was covered by the defendant insured, and who was the owner of one of the trucks involved in the collision.  (Id. at p. 861, 110 Cal.Rptr. 511.)

After the judgment was obtained, the insurer paid Merritt, the third party claimant, the $100,000 policy limits, leaving the personal injury judgment unsatisfied in the sum of $334,000.   The insured, in exchange for a covenant not to execute on the unsatisfied judgment, paid the third party claimant $20,000 and assigned to him its claim (if any) held against the insurer.  (Merritt, supra, 34 Cal.App.3d 858, 862, 110 Cal.Rptr. 511.)   Thereupon, a so-called bad faith action was initiated by the third party claimant against the insurer.   The complaint also included a count for negligent defense of the action.   That count was resolved in the insurer's favor by a motion for judgment on the pleadings.   In any event, the jury returned a verdict on the bad faith count against the insurer for $499,000.   (Id. at p. 862, 110 Cal.Rptr. 511.)

On appeal, the judgment was reversed with directions to the trial court to enter judgment for the defendant insurer.  (Merritt, supra, 34 Cal.App.3d 858, 884, 110 Cal.Rptr. 511.)   In rationalizing the result it reached, the Merritt court announced a distillation of the several cases above analyzed.  “We can summarize the gist of these cases as follows:  When a claimant offers to settle an excess claim within policy limits a conflict of interest immediately arises between carrier and assured.   In such circumstances the carrier is required to evaluate the settlement offer in good faith, and good faith requires it to consider the interests of the assured equally with its own or, as some of the cases have said, to evaluate the settlement offer as though the carrier itself were liable for the full amount of the claim.   If the carrier rejects the offer to settle within policy limits without having made an honest, intelligent, and knowledgeable evaluation of the offer on its merits, then the carrier has acted in bad faith and may become liable to its assured for consequential damages caused by its bad faith rejection.”  (Id. at p. 873, 110 Cal.Rptr. 511.)   The court further observed, “In our view these facts conclusively demonstrate that the interests of carrier and assured at all times were parallel and not divergent, that nothing occurred to create any conflict of interest between them or to suggest the existence of any factors, which, if acted upon, might have created some conflict of interest.   Since no offer to settle was ever made, either within policy limits (the normal prerequisite for conflict of interest) or above policy limits but within feasibility limits of the assured's resources, we conclude that no conflict of interest ever developed between assured and carrier, and therefore the issue of the carrier's bad faith in relation to its assured never arose.”  (Id. at p. 877, 110 Cal.Rptr. 511.)   The court then concluded, “․ that none of these extraneous factors has any bearing on Stafford Co.'s asserted cause of action against Reserve for bad faith refusal to settle.   No settlement offer was ever made, either within policy limits, or within policy limits supplemented by the assured's net worth.   No demand for settlement was ever presented by the assured to the carrier.  (Cf. Garner v. American Mut. Liability Ins. Co., 31 Cal.App.3d 843, 107 Cal.Rptr. 604.)   No suggestion that settlement was feasible was ever made prior to judgment by anyone connected with the suit.   The case, therefore, does not involve a conflict of interest and does not present a situation in which the carrier can be found to have acted in bad faith toward its assured.   On the contrary, the interests of carrier and assured remained parallel at all times, and no divergence of interests ever developed.   Consequently, no cause of action arose on behalf of Stafford Co. against Reserve for bad faith refusal to settle, and the trial court should have entered judgment for defendant Reserve notwithstanding the verdict on the cause of action for bad faith.”  (Id. at p. 879, 107 Cal.Rptr. 604.)

A similar result was reached in Coe v. State Farm Mut. Auto. Ins. Co. (1977) 66 Cal.App.3d 981, 136 Cal.Rptr. 331 (Coe ).   The procedural scenario was almost identical to that in Merritt.   The facts varied in that the offer by the third party claimant neglected to take into account the lien claim of the worker's compensation insurance carrier.   The legal result was that the insurer had never rejected a bona fide offer to settle.   As a consequence, the trial court judgment against the insurer was reversed on appeal.  (Id. at p. 997, 136 Cal.Rptr. 331.)   In rationalizing the result it reached, the Coe court stated, “․ acceptance by [the insurer] of the ‘offer’ as made [without concurrence of the worker's compensation carrier] would have amounted to an abdication of its responsibilities to its own insured.   Specifically, it would have breached its ‘implied covenant of good faith and fair dealing’ not to ‘injure’ her rights under its policy (Crisci v. Security Ins. Co., supra, 66 Cal.2d 425 at p. 429 [58 Cal.Rptr. 13, 426 P.2d 173] ), and its obligation ‘to consider the interests of the assured equally with its own.’  (Merritt v. Reserve Ins. Co., supra, 34 Cal.App.3d 858 at p. 873 [110 Cal.Rptr. 511].)  Bad-faith refusal to accept a settlement offer cannot occur where ‘acceptance’ would itself be bad faith.   Reversal is similarly required on this basis.”  (Id. at p. 994, 110 Cal.Rptr. 511.)

In the almost 20 years since Coe, there have of course been additional decisions involving allegations of bad faith in third party cases, cases which have been resolved within the decisional framework provided by the Comunale factors as clarified, if not amplified, by Crisci and Johansen.   However, as a result of our analysis of 13 cases beginning with Brown, we trust that the point sought to be made is clear.   All the factors announced in Comunale for measuring bad faith as a factual issue are only relevant if there is a prior excess judgment against the insured in the picture, one obtained after a contested, arm's-length trial.   As happened here, as it did in Camelot, counsel became so engrossed in the application of the bad faith factors to the settlement negotiations that they overlooked that the insured assignor had never in fact been exposed to damages in the form of liability for an arm's-length, excess judgment.

Turning to another point, because of the trial court's reference in its judgment to “third party bad faith” and “first party bad faith,” and notwithstanding our earlier effort to explain the proper labeling, we deem it appropriate here to comment briefly on the evolution of so-called “first party” cases.

Our commentary begins with Justice Kaufman's decision in Fletcher v. Western National Life Ins. Co. (1970) 10 Cal.App.3d 376, 89 Cal.Rptr. 78 (Fletcher ).   In that case, although Fletcher, the plaintiff insured, had suffered disabling injuries, the insurer which had issued him a disability policy subjected him to an incredible hassle.  (Id. at pp. 388–391, 89 Cal.Rptr. 78.)

This cavalier treatment of Fletcher's claim led to his filing of an action based on allegations of intentional infliction of emotional distress.   At the trial, the insurer stipulated to the declaratory relief count alleging coverage and entitlement to benefits under the policy.   The case went to the jury on the other two counts, one for fraud in inducing Fletcher to buy the policy and the other for compensatory and exemplary damages for intentional infliction of emotional distress.   The jury brought in substantial six-figure verdicts aggregating over $1,000,000.  (Fletcher, supra, 10 Cal.App.3d 376, 385, 89 Cal.Rptr. 78.)

On appeal, the judgment was affirmed.   Of interest to this commentary is Justice Kaufman's reference to Crisci as authorizing emotional distress damages in “third party” cases.  (Fletcher, supra, 10 Cal.App.3d 376, 397, 89 Cal.Rptr. 78.)   Later, he referred to Crisci and Critz and with regard to the factors applied in those cases for measuring bad faith in third party cases, he said, “[w]e think that, similarly, the implied-in-law duty of good faith and fair dealing imposes upon a disability insurer a duty not to threaten to withhold or actually withhold payments, maliciously and without probable cause, for the purpose of injuring its insured by depriving him of the benefits of the policy.   We think that, as in Crisci, the violation of that duty sounds in tort notwithstanding that it also constitutes a breach of a contract.”  (Id. at p. 401, 89 Cal.Rptr. 78.)   Thus was born the notion that the Comunale factors by which bad faith in third party cases is measured are equally applicable in first party cases where the dispute is solely between the insured and the insurer.

The issue reached the Supreme Court about three years later in Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032 (Gruenberg ).   In that case, the insurer had issued a fire insurance policy to Gruenberg, the insured.   After the insurer declined to adjust a fire loss, the insured sued, alleging that the insurers had willfully and maliciously entered into a scheme to deprive him of the benefits of his fire insurance policies.   The trial court sustained the insurer's demurrer.  (Id. at pp. 571–572, 108 Cal.Rptr. 480, 510 P.2d 1032.)

Upon review by the Supreme Court, the judgment was reversed.   (Gruenberg, supra, 9 Cal.3d 566, 581, 108 Cal.Rptr. 480, 510 P.2d 1032.)   In rationalizing the result it reached, the Gruenberg court invoked Comunale and Crisci with reference to the implied covenant of good faith and fair dealing.  (Id. at p. 573, 108 Cal.Rptr. 480, 510 P.2d 1032.)   It likewise noted that Fletcher had suggested the logical application of third party case decisional standards to first party cases.  (Id. at p. 574–575, 108 Cal.Rptr. 480, 510 P.2d 1032.)   After further extended discussion, the court observed that “․ plaintiff alleged that he suffered substantial economic losses apart from mental distress.   He alleged that he suffered loss of earnings;  that he was compelled to go out of business and that as a result he was unable to pay his business creditors;  that he incurred the costs of defending lawsuits brought against him by his creditors;  and that he incurred medical expenses.   We conclude, therefore, that since plaintiff has alleged substantial damages for loss of property apart from damages for mental distress, the complaint is sufficiently pleaded with respect to the latter element of damages.”  (Id. at p. 580, 108 Cal.Rptr. 480, 510 P.2d 1032.)   Finally, the court said, “․ we conclude that plaintiff has stated facts sufficient to constitute a cause of action in tort against defendant insurance companies for breach of their implied duty of good faith and fair dealing;  that plaintiff's failure to appear at the office of the insurers' counsel in order to submit to an examination under oath and to produce certain documents, as appearing from the allegations of the complaint, is not fatal to the statement of such cause of action;  and that plaintiff has stated facts sufficient for the recovery of damages for mental distress whether or not these facts constitute ‘extreme’ or ‘outrageous' conduct.”  (Id. at p. 581, 108 Cal.Rptr. 480, 510 P.2d 1032.)

The procession since Gruenberg has been inexorable:  Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, 460–461, 113 Cal.Rptr. 711, 521 P.2d 1103;  Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 920–921, 148 Cal.Rptr. 389, 582 P.2d 980, and Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818–819, 169 Cal.Rptr. 691, 620 P.2d 141.   These cases were analyzed at length and thereupon a black-letter rule for measuring liability in first party cases was announced in California Shoppers, Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 221 Cal.Rptr. 171.   There we stated, “[i]n determining what further must appear for there to be bad faith, the cases reflect a wide variety of language, increasingly identifiable with particular categories of cases.   After variously recognizing the rule quoted, the Gruenberg court said[,] ‘where ․ [the insurer] fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing.’  (Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d 566, 574 [108 Cal.Rptr. 480, 510 P.2d 1032], original italics deleted;  italics added.)   Of course, the converse of ‘without proper cause’ is that declining to perform a contractual duty under the policy with proper cause is not a breach of the implied covenant.”  (Id. at p. 54, 221 Cal.Rptr. 171, italics in original.)

The upshot of this analysis of the two kinds of cases is that the insurer in first party cases has substantially more leeway to avoid being charged with breach of the implied covenant.   In California Shoppers, we determined that Royal Globe Insurance Company did have proper cause when it declined to accept tender of defense of the Uneedus action and thus had not breached the implied covenant in so doing.

We concede again the tedious nature of our analysis of the evolution of third party cases involving breach by insurers of the implied covenant of good faith and fair dealing and then the parallel development of first party cases based on the same provocation.   However, we have deemed it necessary because of the disservice to the trial court by counsel on both sides.   It makes no sense in view of the dynamics of the cases above analyzed to refer to “third party bad faith” or to “first party bad faith.”

As the foregoing analysis reveals, in both third party cases and first party cases, the first party insured is always the target of insurer bad faith.   As a matter of accepted parlance, the cases have come to be characterized on the basis of whether two parties or three parties are involved in the overall legal transaction.   If the dispute is solely between the insured and the insurer concerning the latter's alleged liability to pay benefits to the insured because of a loss suffered for which he or she has purchased insurance coverage, that is a first party case.   If the dispute involves three parties:  a claimant, the insured and the insurer, where the claimant has made a demand for policy limits available under a public liability (indemnity) policy, that is a third party case.   The latter remains as such regardless of whether the insured asserts breach of the implied covenant or whether the claimant, as assignee of the insured, asserts the breach.

We refer counsel to Heredia v. Farmers Ins. Exchange (1991) 228 Cal.App.3d 1345, 279 Cal.Rptr. 511, and particularly to language which expresses the concept we have endeavored to explain.   The court quotes with agreement a preliminary observation by Farmers prior to its contention on a pivotal issue.  “And Farmers ‘believes that the law of this State as it relates to “insurance bad faith” is that the conduct of an insurer does not rise to the level of a tort unless and until the insurer unreasonably fails or refuses to provide the insurance available whether it be the policy limits in an appropriate “third party” case or the benefits of the policy of insurance in an appropriate “first party” case.’ ”  (Id. at p. 1359, 279 Cal.Rptr. 511, original emphasis.)

In other words, if there is bad faith present, it is always traceable to the insurer.   If the bad faith conduct arises in a dispute solely between the insured and the insurer, that is a “first party” case in the usual parlance.   If the bad faith conduct takes the form of a failure to agree to a demand for policy limits by a third party claimant, followed by entry of an excess judgment against the insured, that is a “third party” case in the usual parlance.

 As the rules in the two types of cases have now evolved, there is a clearly recognizable difference in the criteria applied in the respective groups of cases.   In first party cases, as finally held in California Shoppers, an insurer can be charged with breach of the implied covenant if it acts upon the claim adversely to the insured's interest without proper cause.   This affords considerable leeway for honest mistakes and good faith decisions in dealing with the insured.   In third party cases, an insurer who declines a demand for policy limits does so at its peril if later a judgment is entered in the claimant's action against the insured for an amount in excess of policy limits.

Of course, the case now before us, although in the third party case mold, never reached a point calling for application of the Comunale factors.   This is because the insured was never exposed to liability for an excess judgment.   Until that happened, there was no reason to explore the nature and extent of the settlement negotiations, i.e., to apply the Comunale factors.

 Finally, evaluating the case under the theory on which it was tried, there was no evidence whatsoever to show that defendant ever had breached the implied covenant, even assuming a later excess judgment.   Two events are decisive.   By letter of June 13, 1988, Exhibit 7, counsel for plaintiff stated, among other things, that “it is our position that there no longer exists policy limits of $15,000 since thirty (30) days have elapsed.”   There was never any retreat from that position.   As a result, the case is similar to Merritt, supra, 34 Cal.App.3d 858, 110 Cal.Rptr. 511, where no demand was ever made.   Here the demand was withdrawn after the lapse of only 30 days and before the defendant had had a fair opportunity to evaluate the claim.   In our view, this was the legal equivalent of no demand at all.  (Id. at p. 877, 110 Cal.Rptr. 511.)

 Otherwise, on August 30, 1989, a representative of defendant confirmed an earlier oral offer of the $15,000 policy limits.   That offer was rejected.   Moreover, it was only after the offer of policy limits had been made and rejected that the antecedent, traffic-collision action went to non-binding arbitration.   Thus, the facts do not fit the usual bad faith scenario in third party cases.   Assuming the antecedent, traffic-collision action had proceeded to an actual trial resulting in an arm's-length judgment for $65,927, such excess judgment would not have been the result of defendant's failure to offer policy limits.   Defendant did make such an offer well before there was any exposure to liability for an excess judgment.   All that the record here shows, as earlier suggested, is a clumsy effort to “orchestrate” a bad faith case against defendant without a clear understanding of the Critz factors.   For there to be bad faith, there must be a refusal to pay a demand for policy limits which refusal leads directly to a judgment in excess of those limits against the insured in contested, arm's-length litigation.   Even that could not have happened here.

 At oral argument, counsel for plaintiff, after conceding that “I do not do much appellate work,” argued that we could not dispose of the appeal on grounds other than those briefed.   Broadly speaking, counsel was partly right.  Section 68081 of the Government Code provides, “[b]efore the Supreme Court, a court of appeal, or the appellate department of a superior court renders a decision in a proceeding other than a summary denial of a petition for an extraordinary writ, based upon an issue which was not proposed or briefed by any party to the proceeding, the court shall afford the parties an opportunity to present their views on the matter through supplemental briefing.   If the court fails to afford that opportunity, a rehearing shall be ordered upon timely petition of any party.”   Mindful of this statutory provision, we wrote to counsel for defendant, as earlier noted, inviting a letter brief on the issue which, in our view is dispositive of the appeal.  (See fn. 3.)   Counsel responded appropriately;  thus, we are now able to dispose of the appeal on legally correct grounds and to do so within the parameters set out by section 68081 of the Government Code.

Aside from the procedural requirements imposed by that section, counsel is mistaken in his assumption that, in disposing of a given appeal, we are limited to the grounds briefed, even if legally untenable, as here.   As observed by Witkin, “․ since the court may decide a case on any proper points or theories, whether urged by counsel or not, there is no reason why it cannot examine the record, do its own research on the law, or accept a belated presentation.”  (9 Witkin, Cal.Procedure (3d ed. 1985) Appeal, § 480, p. 471;  cf. Banco Do Brasil, S.A. v. Latian, Inc. (1991) 234 Cal.App.3d 973, 999, fn. 41, 285 Cal.Rptr. 870.)

From any viewpoint, the litigation here never should have happened, especially after counsel for plaintiff blundered into the hapless arrangements suggested in his letter of December 28, 1989.   In any event, based upon the foregoing analysis, because the insured was never exposed to a judgment in excess of policy limits, defendant never breached the implied covenant of good faith and fair dealing.   As a result, neither the insured nor plaintiff assignee ever suffered any monetary damages.   Thus, it was error to award them.

DISPOSITION

The judgment is reversed with directions to the trial court to enter judgment in favor of defendant, including its costs.   Costs on appeal are awarded to defendant.

FOOTNOTES

FOOTNOTE.  

1.   We do not understand how plaintiff could reject an offer by defendant insurer to perform under its insurance contract with the insured.   We suspect it was part of a scheme to try to “orchestrate” a “bad faith” scenario against defendant insurer.

2.   As above indicated, such characterization is one with which we are unfamiliar and one to which we can find no reference as such in the authorities.  (Infra.)

3.   In the letter to counsel for defendant inviting a letter brief, we also stated, “[t]he court will appreciate receiving your letter no later than May 19, 1995.   Counsel for plaintiff may or may not respond as he sees fit.   In other words, his research on these same questions would be welcome but not required, the court's assumption being that the law is the law regardless of who is looking for it.”   Counsel for plaintiff did not submit a letter brief in response to our letter of April 17, 1995.

4.   Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329 (Royal Globe ).

5.   Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 328 P.2d 198 (Comunale ), discussed (post ).

6.   That is precisely what occurred in the trial court here, i.e., the settlement negotiations were evaluated “in a vacuum.”

7.   We are reminded of the comment by Justice Kaus in White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 221 Cal.Rptr. 509, 710 P.2d 309, that “[t]he problem is not so much the theory of the bad faith cases, as its application.   It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insured can later trot out as evidence of bad faith.”  (Id. at p. 900, fn. 2, 221 Cal.Rptr. 509, 710 P.2d 309.)

McDANIEL, Associate Justice.* FN* Retired Associate Justice of the Court of Appeal, Fourth District, senior judge status (Gov.Code, § 75028.1), sitting under assignment by the Chairperson of the Judicial Council.

RAMIREZ P.J., and RICHLI J., concur.