CRUSAN v. AETNA CASUALTY AND SURETY COMPANY

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Court of Appeal, Third District, California.

Gayle CRUSAN and Reese Crusan, Plaintiffs and Appellants, v. AETNA CASUALTY AND SURETY COMPANY, Defendant and Respondent.

Civ. C008374.

Decided: April 21, 1992

Baum, Wiss & Blake, Martin Blake and David Baum, San Francisco, for plaintiffs and appellants. Sedgwick, Detert, Moran & Arnold, Roger W. Sleight and Graziella Walsh Coggan, San Francisco, for defendant and respondent. Fred J. Hiestand, San Francisco, amicus curiae, for defendant and respondent.

After obtaining a jury verdict and judgment of $833,750 plus interest and costs in an action for personal injuries and wrongful death, plaintiffs entered into a settlement agreement with their adversary while an appeal from the judgment was pending in this court.   In exchange for the total sum of $800,000, plaintiffs executed and filed a satisfaction of judgment (Code Civ.Proc., §§ 724.010, et seq.), released the adversary from any claims, known or unknown, that plaintiffs might have against it arising out of the acts or omissions which resulted in the judgment, and the adversary's appeal was dismissed with the parties bearing their own costs.   The agreement specified that it was “part of a compromise of disputed claims,” “shall not be construed or deemed to be evidence of any admission of any fact, matter or thing” and shall not be offered “in any forum as an admission [of] any liability or wrongdoing on the part of either party․”

Plaintiffs then filed an action against defendant, the adversary's insurer, for breach of Insurance Code section 790.03, subdivision (h), and for intentional infliction of emotional distress.   The trial court granted defendant's motion for summary judgment on the bad faith claim, ruling that the settlement agreement was not a conclusive judicial determination of liability as required by Moradi–Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58 for insurance bad faith actions filed prior to that decision.1

On appeal, plaintiffs cite Pon v. Fremont Indemnity Co. (1990) 217 Cal.App.3d 29, 265 Cal.Rptr. 733, decided after the trial court's ruling, for the proposition that, although the settlement constituted a “compromise of disputed claims” and contained an explicit disclaimer of liability, it resolved only the appeal, leaving the underlying judgment intact;  thus, there remained a conclusive judicial determination of liability in the underlying action.   (Id., at p. 33, 265 Cal.Rptr. 733.)

We conclude the reasoning of Pon is unpersuasive and decline to follow its lead.   Applying established rules of contract interpretation, we give effect to the parties' stipulation that the settlement was a compromise of disputed claims and did not admit liability.   As explained in the published portion of this opinion, because the underlying action was settled by means of a compromise of disputed claims which did not resolve the question of the insured's liability, plaintiffs' assent to the compromise precludes their reliance on the underlying judgment as a conclusive judicial determination of the insured's liability.2  Accordingly, we shall affirm the judgment entered in favor of defendant.

DISCUSSION

I

 Overruling Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329, Moradi–Shalal held that Insurance Code section 790.03, subdivision (h), does not confer on third parties a statutory cause of action against insurance companies for unfair claims settlement practices.  (Moradi–Shalal, supra, 46 Cal.3d at p. 304, 250 Cal.Rptr. 116, 758 P.2d 58.)   Because Moradi–Shalal limited its holding to prospective application, actions such as the case at hand, filed before the decision became final on October 17, 1988, were allowed to proceed.  (Id., at pp. 292, 305, 250 Cal.Rptr. 116, 758 P.2d 58.)

 As to any pending Royal Globe claim, Moradi–Shalal held that the lawsuit could not be maintained unless, before it was instituted, there had been a final judgment determining the insured's actual liability.  (46 Cal.3d at p. 311, 250 Cal.Rptr. 116, 758 P.2d 58.)   In this regard, the Supreme Court concluded a settlement “without more” is not a conclusive, final judicial determination of liability.  (Id., at pp. 306, 311, 250 Cal.Rptr. 116, 758 P.2d 58).   The court explained that “a settlement without more does not constitute a determination of the insured's liability” because it says nothing about a defendant's culpability, and that to allow the claimant to sue the insurer after settling the underlying claim would mean the insured's liability would have to be established in the Royal Globe action itself, a practice which, for reasons expressed in Moradi–Shalal but not pertinent here, “would cause enormous practical and policy problems.”  (Id., at pp. 308, 311–313, 250 Cal.Rptr. 116, 758 P.2d 58.)   However, a settlement which admits liability, is approved by the insurer, and is incorporated into a stipulated judgment (which we shall characterize as a “settlement with more”) does constitute a conclusive judicial determination of liability for the purposes of a Royal Globe action because, “unlike a simple settlement,” it explicitly acknowledges liability.  (California State Auto. Assn. Inter–Ins. Bureau v. Superior Court (1990) 50 Cal.3d 658, 665–666, fn. 5, 268 Cal.Rptr. 284, 788 P.2d 1156.)

Here, the underlying action against the insured was resolved by a settlement which explicitly provided that the agreement was a compromise of disputed claims, did not constitute an admission of liability, and could not be offered as evidence of liability of or wrongdoing by the insured.   Nevertheless, plaintiffs contend they obtained a conclusive judicial determination of liability since the stipulation left intact the judgment of the superior court finding the insured liable for personal injuries and wrongful death.   In plaintiffs' view, the agreement's language did not affect the “status or validity of the judgment” because, by paying “the amount of the judgment with a slight deduction as an incentive to resolve the case,” and by dismissing the appeal from the judgment, the insured and insurer “left the original judgment intact, in full force and effect, just as if no appeal had been taken.”   In essence, plaintiffs argue that theirs was a type of “settlement with more” sufficient to establish a conclusive judicial determination of liability.

Plaintiffs' contention finds support in Pon v. Fremont Indemnity Co., supra, 217 Cal.App.3d 29, 265 Cal.Rptr. 733.   Helen Pon obtained a judgment against an insured for damages arising out of a real estate transaction.   While the insured's appeal was pending, Pon and the insured executed a “Settlement Agreement” and “General Release” in which the insured agreed to pay Pon an amount less than the judgment, Pon promised not to sue or execute on the remainder, and the insured agreed to dismiss its appeal.   The Settlement Agreement provided in part:  “This Agreement represents a compromise of disputed claims, and the parties' agreement to the terms hereof shall in no manner be deemed to constitute an admission, express or implied, of liability by any party to any other person or entity, or of any fact, other than the facts set forth [herein] ․, or an admission of the merits of the position taken by any party hereto with respect to these, or any other, disputes.”   (Id., at pp. 30–31, 265 Cal.Rptr. 733.)

Thereafter, Pon filed a Royal Globe action, and the insurer obtained summary judgment on the ground that, pursuant to Moradi–Shalal, the insurance bad faith action was not viable because the aforesaid settlement did not constitute a conclusive judicial determination of the insured's liability.

In reversing, the Pon court held that “the judgment [which remained in existence after execution of the settlement], not the settlement, provided the basis for Pon's claim of a final favorable disposition [and established the insured's liability for the purposes of the Royal Globe action].”  (217 Cal.App.3d at p. 33, 265 Cal.Rptr. 733.)   The court reasoned:  “[T]he settlement agreement despite its boilerplate disclaimer of liability, resolved only the appeal [the insured] had taken from the judgment.   Nothing in the language of the agreement purported to set aside the underlying judgment.   The settlement agreement itself contemplated partial satisfaction of the judgment and Pon's promise not to execute on the unsatisfied balance.  [¶] Thus, Pon continues to enjoy the benefit of the judgment which is now final by reason of [the insured's] dismissal of the appeal with prejudice.   Nothing in the agreement overrides the parties' intent, evidenced by the procedure employed to effectuate the settlement, that the judgment retain its validity.  [¶] That judgment, now partially satisfied, remains in effect and constitutes a final judicial determination of the underlying lawsuit.”  (Ibid.;  italics in original.)

In reaching this conclusion, the Pon court ignored fundamental rules of contract interpretation.

 A contract must be construed as a whole, and the parties' intention must be ascertained from consideration of the entire contract.   (Strong v. Theis (1986) 187 Cal.App.3d 913, 918, 232 Cal.Rptr. 272.)   If possible, a court must give effect to all parts of the instrument and not leave portions of the writing useless or inexplicable.  (4 Williston on Contracts (3d ed. 1961) § 619, p. 731.)   Thus, the court may not “omit what has been inserted;  and where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all.”  (Code Civ.Proc., § 1858.)   Stated another way, “courts are not empowered under the guise of construction or explanation to depart from the plain meaning of the writing ․”  (Estate of Wemyss (1975) 49 Cal.App.3d 53, 59, 122 Cal.Rptr. 134), and an “interpretation which renders part of the instrument to be surplusage should be avoided.”  (Appalachian Ins. Co. v. McDonnell Douglas Corp. (1989) 214 Cal.App.3d 1, 12, 262 Cal.Rptr. 716.)

Without discussing these principles, the Pon court concluded that the import of the settlement agreement is measured by the fact that it did not set aside the judgment, rather than by the parties' clear expression of intent that the agreement is “a compromise of disputed claims” and “shall in no manner be deemed to constitute an admission, express or implied, of liability [of the insured] with respect to these, or any other, disputes.”

 Pon characterized the parties' statement of intent as a “boilerplate disclaimer of liability.”   Boilerplate or not, a settlement agreement must be interpreted to harmonize and give effect to all its provisions and not make a significant portion of the agreement useless surplusage.  (Code Civ.Proc., § 1858;  Appalachian Ins. Co., supra, 214 Cal.App.3d at p. 12, 262 Cal.Rptr. 716;  4 Williston on Contracts, op. cit. supra, at p. 731.)   Yet, discounting the parties' stated intent to compromise disputed claims (which we believe only can mean those claims previously resolved by the judgment) as well as their disclaimer of liability, Pon concluded that “[n]othing in the agreement overrides the parties' intent, evidenced by the procedure employed to effectuate the settlement, that the judgment retain its validity.”  (217 Cal.App.3d at p. 33, 265 Cal.Rptr. 733.)

In our view, this conclusion was erroneous because the parties' stated desire to compromise disputed claims and their disclaimer of liability are the only persuasive indications of the parties' intent in entering into the settlement.   Obviously, an explicit statement that consent to the compromise of disputed claims shall not concede liability is fundamentally at odds with an intent to preserve the underlying judgment as a final determination that the insured was liable.   Had the parties intended to compromise only their competing contentions on appeal rather than their competing claims as framed by Pon's complaint and defendant's answer (the jury's resolution of which was subsumed in the judgment), they easily could have said so.

Contrary to the Pon court's holding, the settlement agreement does not evidence an intent to accept the underlying judgment as a conclusive adjudication of the insured's liability.   Pon did not rely on the judgment to fix the amount of her recovery;  that was fixed by the settlement agreement.   Nor did Pon's execution of a partial satisfaction of judgment and a covenant not to execute on the remainder imply any intent that the judgment should be operative.   Those documents, executed for the insured's benefit, simply implied an intent to limit the plaintiff's recovery to the amount provided by the settlement agreement.   Rather, the judgment continues to exist only because the parties settled the case by a compromise of disputed claims which explicitly provides that the settlement shall not be construed as an admission of liability.   Surely, it would be absurd to interpret such an agreement as a concession that the judgment shall subsist as a finding of liability.   (County of Marin v. Assessment Appeals Bd. (1976) 64 Cal.App.3d 319, 325, 134 Cal.Rptr. 349 [the court shall avoid an interpretation which will make a contract result in absurdity].)

In essence, Pon derived the parties' intent not from what they said but from what they did not say:  although they could have, the parties did not agree to set aside the underlying judgment.   This dog-didn't-bark evidence is not compelling because, prior to Moradi–Shalal, the insured and its insurer had little incentive to insist that the underlying judgment be set aside as part of the settlement.  (Compare Afuso v. United States Fid. & Guar. Co. (1985) 169 Cal.App.3d 859, 215 Cal.Rptr. 490 and Vega v. Western Employers Ins. Co. (1985) 170 Cal.App.3d 922, 216 Cal.Rptr. 592 [approving post-settlement Royal Globe actions;  both disapproved by Moradi–Shalal ] with Nationwide Ins. Co. v. Superior Court (1982) 128 Cal.App.3d 711, 180 Cal.Rptr. 464.)   This is particularly true where, as in Pon and the case before us, the settlement agreement expressly disclaimed any admission of liability.

For the reasons stated above, we believe Pon's holding that the underlying judgment could support a Royal Globe action was erroneous.   In concluding that the parties resolved only the appeal and not the underlying claims, Pon rendered meaningless the agreement's compromise of disputed claims and disclaimer of liability by, in effect, mistakenly rewriting the settlement while interpreting it.  (See, e.g., Code Civ.Proc., § 1858;  Appalachian Ins. Co., supra, 214 Cal.App.3d at p. 12, 262 Cal.Rptr. 716;  Diaz v. United California Bank (1977) 71 Cal.App.3d 161, 172, 139 Cal.Rptr. 314;  Wemyss, supra, 49 Cal.App.3d at p. 59, 122 Cal.Rptr. 134;  Hinckley v. Bechtel Corp. (1974) 41 Cal.App.3d 206, 211, 116 Cal.Rptr. 33.)   Accordingly, we decline plaintiffs' invitation to apply Pon to the case before us.

Here, the parties explicitly identified the settlement agreement as a “compromise of disputed claims.”   In context, it is plain that the disputed claims being compromised were the very ones the judgment had resolved, but which were subject to further litigation on appeal.  (See Nish Noroian Farms v. Agricultural Labor Relations Bd. (1984) 35 Cal.3d 726, 735, 201 Cal.Rptr. 1, 677 P.2d 1170.)   There is no indication that this compromise included an agreement to accept and be bound by the jury's determination of liability.   To the contrary, the agreement provided:  “The parties further acknowledge and agree that the acceptance of the terms of this Agreement shall not be construed or deemed to be evidence of any admission of any fact, matter or thing.   Neither this Agreement nor any of its terms shall be offered or received as evidence in any proceeding or in any forum as an admission [of] any liability or wrongdoing on the part of either party or on the part of their respective privities hereby identified herein.”

This prohibition on the use of the settlement agreement as evidence of the insured's liability would have been futile had the insured agreed to accept the final judgment as a determination that it was liable for plaintiffs' injuries.   If such were the case, the compromise of disputed claims and disclaimer of liability clause simply would have closed the barn door after the horses had departed and would constitute nothing more than meaningless surplusage.

Construing the agreement as a whole to give effect to its main purpose and not to defeat the mutual objectives of the parties as expressed in its terms (County of Marin, supra, 64 Cal.App.3d at p. 325, 134 Cal.Rptr. 349), we conclude that, although the compromise of disputed claims left the underlying judgment intact, the judgment does not constitute a final, conclusive determination of the insured's liability because the parties' explicit intent to compromise their disputed claims with a disclaimer of liability precludes use of the judgment to establish liability.   A contrary interpretation akin to that reached in Pon would fly in the face of well-established rules of contract interpretation and result in an absurdity.  (Ibid.)

Because plaintiffs were unable to allege the conclusive judicial determination of liability required by Moradi–Shalal, the trial court properly granted defendant's motion for summary judgment and correctly entered judgment in its favor.  “A defendant is entitled to summary judgment if the record establishes as a matter of law that none of the plaintiff's asserted causes of action can prevail.”  (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1107, 252 Cal.Rptr. 122, 762 P.2d 46.)

II **

DISPOSITION

The judgment is affirmed.

FOOTNOTES

1.   The trial court sustained the demurrer to plaintiffs' emotional distress claim, holding that defendant's conduct was not extreme or outrageous and the action was barred by the statute of limitations.

2.   In the unpublished portion of this opinion, we reject plaintiffs' contention that the trial court erred in concluding that their emotional distress claim is barred by the statute of limitations.   Thus, we need not address plaintiffs' challenge to the trial court's ruling sustaining the demurrer to the emotional distress claim because defendant's conduct was not “extreme or outrageous.”

FOOTNOTE.   See footnote *, ante.

SCOTLAND, Associate Justice.

PUGLIA, P.J., and BLEASE, J., concur.

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