SALAS v. NATIONWIDE MUTUAL INSURANCE COMPANY

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

Cipriano SALAS and Helen Salas, Plaintiffs and Appellants, v. NATIONWIDE MUTUAL INSURANCE COMPANY;  Carl Warren & Co., Defendants and Respondents.

No. B032827.

Decided: January 26, 1989

Voorhies & Kramer, Los Angeles, and Jean Corey Ballantine, Venice, for plaintiffs and appellants. Liebman, Reiner & McNeil, Lane Quigley and John W. Evans, Los Angeles, for defendant and respondent Carl Warren & Co. Waldman, Bass, Stodel & Graham and George K. Perlee, Los Angeles, for defendant and respondent Nationwide Mut. Ins. Co.

Plaintiffs Cipriano and Helen Salas initiated this suit against defendants Nationwide Insurance Co. (Nationwide) and Carl Warren Co. (Warren) for unreasonably delaying settlement of a personal injury claim.  (Ins.Code, § 790.03, subd. (h)(5).)   Finding that plaintiffs had not conclusively established the liability of defendants' insured in the underlying action, the trial court sustained demurrers to the first amended complaint without leave to amend and entered a judgment of dismissal.   This appeal follows.

The sole issue raised here is whether a stipulated judgment entered into by the parties in an underlying personal injury action constitutes a “conclusive judicial determination of the insured's liability” (Moradi–Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 306, 250 Cal.Rptr. 116, 758 P.2d 58) for purposes of commencing a third party bad faith action against an insurer.   We conclude that it does not and thus affirm the judgment of dismissal.

Since this appeal follows the sustaining of a demurrer, we must accept as true the properly pleaded allegations of the first amended complaint.  (Serrano v. Priest (1971) 5 Cal.3d 584, 591, 96 Cal.Rptr. 601, 487 P.2d 1241;  Loehr v. Ventura County Community College Dist. (1983) 147 Cal.App.3d 1071, 1076, 195 Cal.Rptr. 576.)   Plaintiffs alleged that Cipriano Salas was injured on June 16, 1977, when the automobile he was driving was struck by a vehicle negligently operated by Nora Greshko.   Salas eventually filed a damage claim with Greshko's insurer, Nationwide, who subsequently assigned it to Warren, an independent adjuster.   On April 13, 1978, Salas and his wife, claiming loss of consortium, initiated a personal injury suit against Greshko, the City of Industry, and the County of Los Angeles.   Each defendant in that action answered denying liability and the city and county cross-complained against one another and Greshko for indemnity.   Shortly before trial, however, plaintiffs dismissed their complaint against both governmental entities and proceeded solely against Greshko.   A jury ultimately returned a verdict in favor of plaintiffs and awarded damages totalling $1.9 million.   Greshko subsequently appealed, contending that the trial court had erroneously excluded evidence crucial to her defense.

In an unpublished decision filed September 11, 1985, this court reversed the judgment in its entirety and remanded the case for a new trial on both liability and damages.   On the eve of trial, however, Greshko, without the consent of either Nationwide or Warren, entered into a stipulated judgment in favor of plaintiffs for $3 million, in exchange for a covenant not to execute.   Greshko filed but later abandoned an appeal from that judgment.

Some six months later, on January 24, 1987, plaintiffs brought the instant suit against defendants Nationwide and Warren for unfair settlement practices in violation of Insurance Code section 790.03, subdivision (h).   The trial court eventually sustained demurrers to the first amended complaint without leave to amend, finding that plaintiffs had failed to allege a prior determination or admission of the insured's liability in the underlying personal injury suit.   In so ruling, the court expressly rejected the argument that the stipulated judgment entered into between plaintiffs and Greshko was sufficient to establish a prior determination of liability.

The issue posited by the instant appeal arises from, but is not expressly resolved by, the California Supreme Court's recent decision in Moradi–Shalal v. Fireman's Fund Ins. Companies, supra, 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58.   Although the court in that case prospectively abolished statutory bad faith causes of action against insurers (see Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329) 1 , it held that existing third party suits based upon violations of the Unfair Practices Act may be maintained only if there is a “conclusive judicial determination of the insured's liability.”  (Moradi–Shalal v. Fireman's, supra, 46 Cal.3d at pp. 305–306, 250 Cal.Rptr. 116, 758 P.2d 58.)   Absent such a final resolution, the court concluded that neither an admission of fault nor a settlement of the underlying action would suffice to establish the insured's liability.2  (Id. at p. 311, 250 Cal.Rptr. 116, 758 P.2d 58.)   An actual verdict or judgment of liability against the insured is an absolute prerequisite to any suit against an insurer for unfair settlement practices.  (Ibid.)

In our case, plaintiffs essentially argue that the stipulated judgment entered in the underlying action, unlike the settlement in Moradi–Shalal 3 , conclusively established Greshko's liability for purposes of commencing suit against the insurers.4  Before proceeding to a discussion of this issue, however, we briefly address plaintiffs contention that the judgment entered on the jury verdict in the personal injury action, combined with Greshko's failure to contest the sufficiency of the evidence on her appeal, adequately established the insured's liability under Moradi–Shalal.

 Although plaintiffs correctly point out that the jury in the underlying action returned a verdict in their favor, they attribute little or no significance to the fact that the resulting judgment was reversed in its entirety on appeal.  “The effect of an unqualified reversal ․ is to vacate the judgment, and to leave the case ‘at large’ for further proceedings as if it had never been tried, and as if no judgment had ever been rendered.”  (9 Witkin, Cal. Procedure (3rd ed. 1985) Appeal, § 625, 606;  see also Odlum v. Duffy (1950) 35 Cal.2d 562, 564, 219 P.2d 785;  Sichterman v. R.M. Hollingshead Co. (1931) 117 Cal.App. 504, 506, 4 P.2d 181.)   This long established rule applies, of course, regardless of the reasons justifying the reversal.   Here, because of certain erroneous evidentiary rulings which occurred during trial, we reversed and remanded the case to the superior court for a new trial on all issues raised by the pleadings.   Under the circumstances, the jury's finding of fault, having fallen with the judgment, could not serve as a basis for alleging that Greshko's liability was conclusively established in the personal injury action.

 Turning now to the primary issue raised by this appeal, we conclude that the stipulated judgment entered in the underlying tort action does not constitute a final judicial determination of liability within the meaning of Moradi–Shalal.   The reasoning of that case makes it clear that no enforceable claim accrues against an insurer until the insured's culpability or fault has in fact been established.   Explaining that “an injured claimant has a right of recovery under Royal Globe only upon proof that the insured was actually liable to the third party claimant” (Moradi–Shalal, supra, 46 Cal.3d 287, 308, 250 Cal.Rptr. 116, 758 P.2d 58), the court observed:  “If the insured is not liable for the claimant's injury, the claimant has no right to damages from the insured, and the claimant cannot be permitted to recover for ‘unfair conduct’ by the insurer in refusing to settle an underlying unmeritorious claim.”  (Ibid.)  Even a cursory reading of the decision makes it obvious that the court contemplated having the issue of liability litigated in an adversary proceeding, as opposed to merely having the case settled, prior to the commencement of a bad faith action.   Viewed in this light, the phrase “conclusive judicial determination,” as used in Moradi–Shalal, can only reasonably be interpreted to require an actual adjudication of the insured's liability in the underlying action.   To hold otherwise would be contrary to the Supreme Court's clear intent in restricting the viability of pending Royal Globe actions.

As we see it, the court's repeated reference to a “judicial determination” of liability, as opposed to some unilateral or bilateral expression of fault between the insured and the third-party claimant, unambiguously shows that a stipulated judgment is an inadequate foundation for the commencement of a statutory bad faith action against an insurer.   We are convinced that where such a judgment is negotiated by counsel for the parties in the underlying action and entered without the consent of the insurer that it does not and cannot satisfy the requirements of Moradi–Shalal.   A judgment so obtained is tantamount to nothing more than a settlement followed by a dismissal of the action which, under the principles we have discussed, cannot serve as a basis for a third party suit under Insurance Code section 790.03 et seq.   As we observed in Zalta v. Billips (1978) 81 Cal.App.3d 183, 190, 144 Cal.Rptr. 888 (cited with approval in Moradi–Shalal, supra, 46 Cal.3d 287, 308, 311, 250 Cal.Rptr. 116, 758 P.2d 58), the fact of such a settlement obviously “says nothing about a defendant's liability, his nonliability, his freedom from fault, or his culpability․”  Even if we were to view the entry of a stipulated judgment as an admission of liability, that would not suffice to support a Royal Globe action.  (Moradi–Shalal, supra, 46 Cal.3d at p. 311, 250 Cal.Rptr. 116, 758 P.2d 58.)   In any event, the judgment entered here, no matter how construed or denominated, was not the product of a judicial determination of liability.   Once the insured and the third-party claimants concluded their stipulation, the entry of the subsequent judgment constituted little more than a simple ministerial act which in no way involved an adjudication of fault or culpability.

Although we are aware of those cases holding that a stipulated judgment is ordinarily no less conclusive than a judgment entered after contested proceedings (see e.g., Gates v. Superior Court (1986) 178 Cal.App.3d 301, 309, 223 Cal.Rptr. 678;  Ellena v. State of California (1977) 69 Cal.App.3d 245, 260, 138 Cal.Rptr. 110;  Avery v. Avery (1970) 10 Cal.App.3d 525, 529, 89 Cal.Rptr. 195;  Lea v. Shank (1970) 5 Cal.App.3d 964, 972, 85 Cal.Rptr. 709), they have no application here.   As previously noted, defendants in our case neither participated in nor consented to the stipulation negotiated by counsel for Greshko and plaintiffs.   That agreement provided for a $3 million settlement of the underlying tort action in exchange for plaintiffs' covenant not to execute against Greshko's assets.   It requires little imagination to conclude that the sole purpose of this arrangement was to convert plaintiffs' personal injury suit against Greshko into a bad faith action against Nationwide and Warren.5  In any event, the judgment entered by the trial court was only conclusive and res judicata as to the issues extant in the underlying action and as to the principals who were parties thereto.   (Ellena v. State of California, supra, 69 Cal.App.3d at p. 260, 138 Cal.Rptr. 110, and cases cited therein;  Lea v. Shank, supra, 5 Cal.App.3d at p. 972, 85 Cal.Rptr. 709;  Kaiser Foundation Hospitals v. Superior Court (1967) 254 Cal.App.2d 327, 335, 62 Cal.Rptr. 330.)   Inasmuch as defendants did not consent to the stipulation and were not parties to the agreement as entered, we think it clear that neither was bound by the judgment.   Defendants were entitled, therefore, to challenge the finding of liability purportedly established by that judgment in any subsequent action.   Under these circumstances, plaintiffs could not assert that the stipulated judgment had adversely determined the issue of the insured's liability in their suit against Nationwide and Warren.

The stipulated judgment upon which plaintiffs rely is analogous to the settlement reached in Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883, 162 Cal.Rptr. 115.   Although that case did not involve a third party Royal Globe claim, the court's rejection of a collusive settlement agreement as evidence of liability foreshadowed the ruling in Moradi–Shalal.   In Doser, the heirs of a decedent killed in a plane crash initiated a wrongful death action against the estate of the alleged tortfeasor.   As a result of events not here material, the estate had available to it proceeds payable under a liability policy issued by Middlesex.   Although the limit of that policy was $100,000, the heirs agreed to compromise their claims for $980,000 in return for a general release.   The parties additionally agreed that in lieu of a monetary settlement, the estate would assign all claims and causes of action which it might have against Middlesex to the heirs.   The wrongful death action was subsequently placed in abeyance while the heirs proceeded directly against the insurer for the alleged bad faith breach of the insurance contract.   That suit sought to recover as damages the $980,000 which the parties had agreed to in their compromise of the underlying claim.   Middlesex argued, of course, that the estate had not suffered any legal liability because there had been no final judgment in the wrongful death action, and thus the heirs, as assignees, had no cause of action to assert.

On appeal from a judgment in favor of the insurer, Division Three of this court held that no cause of action for breach of the implied covenant could arise until the insured incurred a binding judgment in excess of the policy limit.   It then noted, “The rationale of the cases requiring a judgment as a condition precedent to an insured's cause of action against an insurer becomes manifest when we deal with the issue of damages in this case.   We are concerned here not only with the fact of damages being clearly established, but the certainty of the amount thereof as well.  [Citation.]  The glaring flaw in the Doser Heirs' case against Middlesex is the unprecedented manner in which they arrived at the $980,000 damage figure.   They bootstrapped their damages with the ingenious assistance of counsel.”  (Doser v. Middlesex Mutual Ins. Co., supra, 101 Cal.App.3d 883, 892, 162 Cal.Rptr. 115.)

In a passage particularly applicable to our case, the Doser court observed:  “No judge or jury ever considered the facts of the wrongful death case and came up with an appropriate verdict on which a judgment could be based.   No agreement as to damages was ever reached in which a representative of the insurance company participated.”  (Ibid.)  After describing the circumstances of how the heir's attorney had orchestrated the purported “compromise” and the subsequent filing of the bad faith suit, the opinion concluded:  “Here, [counsel] acting virtually alone set the amount of damages, albeit on behalf of his clients and as an expert in the field of aircraft accident litigation.   We know of no legal precedent condoning such action, nor do we propose to author an opinion which would become such authority.   Such a worthless paper transaction cannot support the Doser Heirs' damage claim in their cause of action against Middlesex.  [¶ ]  The Doser Heirs' assigned cause of action was invalid because the liability of Middlesex to the Estate has not been determined in a manner approved by the case law or contemplated by the insurance contract.   The adverse resolution of this issue is dispositive of the appeal.”  (Id. at pp. 893–894, 162 Cal.Rptr. 115.)

We agree with defendants that the stipulated judgment entered in our case is even more egregious than the purported compromise of claims occurring in Doser.   Here, the agreement between the parties was premised on plaintiffs' covenant not to execute against Greshko, thus eliminating any personal exposure she might face because of the judgment.   As a result, Greshko had little interest in negotiating in good faith either the issue of liability or the extent of the damages suffered by plaintiffs.   The $3 million judgment stipulated to as allegedly representing Greshko's liability had the personal injury action been pursued through trial, was arrived at solely by the “ingenious assistance of counsel.”  (Doser v. Middlesex, supra, 101 Cal.App.3d 883, 892, 162 Cal.Rptr. 115.)   It substantially exceeded the jury's award of $1.9 million in the first trial and in no way represented a good faith determination of liability or damages.   As in Doser, “[s]uch a worthless paper transaction” (id. at p. 894, 162 Cal.Rptr. 115) cannot support plaintiffs' damage claim in their action against Nationwide and Warren.

To reiterate, we hold that the only reasonable interpretation of the Supreme Court's decision in Moradi–Shalal is to require an actual adjudication of the insured's liability as a condition precedent to the maintenance of an action against an insurer for violation of Insurance Code section 790.03 et seq.   It is uncontroverted in the instant case that the insured's liability has never been so determined, and there are no policy considerations favoring an exception to the foregoing requirement which would permit plaintiffs' suit to proceed.   In so concluding, we emphasize that Moradi–Shalal did not merely limit private causes of action against insurers under section 790.03, but abolished them in their entirety.   The limited exception for pending actions was created solely “in the interest of fairness to the substantial number of plaintiffs who have already initiated their suits in reliance on Royal Globe.”  (Id. 46 Cal.3d at p. 305, 250 Cal.Rptr. 116, 758 P.2d 58.)   We, therefore, decline to construe the requirement of a “conclusive judicial determination of liability” in any broader fashion than absolutely necessary.   This interpretation comports with the manifest intent of the Supreme Court in halting the unnecessary proliferation of statutory bad faith suits against insurers in this state.

Inasmuch as plaintiffs never obtained a final determination of the insured's liability, their first amended complaint failed to state a cause of action against either defendant.   It necessarily follows that the trial court properly sustained the demurrers without leave to amend and dismissed the suit.

The judgment of dismissal is affirmed.

FOOTNOTES

1.   In Royal Globe, the court held that third party claimants as well as insureds might maintain a civil action for damages against an insurance company for practices violating the provisions of Insurance Code section 790.03, subdivision (h).   The court placed at least one condition on such a suit:  “the third party's suit may not be brought until the action between the injured party and the insured is concluded.”   (Id. 23 Cal.3d at p. 884, 153 Cal.Rptr. 842, 592 P.2d 329.)  Royal Globe did not discuss, however, whether a determination of the insured's liability is a necessary element of the “conclusion” requirement, and whether an action may be concluded by settlement as opposed to final judgment.   That omission alone generated considerable confusion, as evidenced by the number of conflicting appellate opinions attempting to interpret it, and criticism by various commentators.   One of the practical effects of the decision was to encourage excessive settlement demands and inflated settlement payments by insurers who wished to avoid further litigation.   Third party claimants also were encouraged to file suit against insurers who refused to acquiesce to their demands.   These various adverse social and economic consequences eventually led the court to reconsider its holding.  (See Moradi–Shalal, supra, 46 Cal.3d at pp. 301–305, 250 Cal.Rptr. 116, 758 P.2d 58.)

2.   In so holding, the court made it clear that its “predetermination rule precludes a claimant who has settled his underlying claim against the insurer from subsequently suing the insurer for damages for statutory bad faith committed in the process of reaching the settlement.   The rule is supported in part by section 790.03's purpose of encouraging prompt and reasonable settlements of claims, as well as by various other legal and practical considerations.”  (Moradi–Shalal, supra, at p. 311, 250 Cal.Rptr. 116, 758 P.2d 58.)

3.   In Moradi–Shalal, the underlying personal injury action had been concluded by a settlement followed by a dismissal with prejudice.

4.   We note here that our Supreme Court has yet to determine the applicability of section 790.03 to insurance adjusters.   Under existing authority, however, adjusters have been found to fall within the statutory definition of “persons engaged in the business of insurance” (Ins.Code, § 790.01) and therefore to be subject to the proscriptions of the Unfair Practices Act.  (See Davis v. Continental Ins. Co. (1986) 178 Cal.App.3d 836, 224 Cal.Rptr. 66;  Bodenhamer v. Superior Court (1986) 178 Cal.App.3d 180, 223 Cal.Rptr. 486.)   We make no attempt to prophesy whether or not the Supreme Court will ultimately reject this interpretation.   If it does, plaintiffs will, of course, be precluded from proceeding against Warren, an independent adjuster, under that theory.   If it does not, such recourse will be available, assuming they have otherwise stated a cause of action.   For our purposes, therefore, we need only determine whether plaintiffs' amended complaint states a cause of action based upon unfair insurance practices.   As we shall explain, we have concluded that no such action exists in the instant case under the holding in Moradi–Shalal.

5.   Under the circumstances presented here, defendants would have been entitled to set aside the judgment on the ground of fraud and collusion under Code of Civil Procedure section 473 or by a separate suit in equity.  (See Villarruel v. Arreola (1977) 66 Cal.App.3d 309, 136 Cal.Rptr. 19.)

COMPTON, Acting Presiding Justice.

GATES and FUKUTO, JJ., concur.