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

David R. WOOSTER, Plaintiff and Appellant, v. MIDCENTURY INSURANCE COMPANY, et al., Defendants and Respondents.

No. E006809.

Decided: July 23, 1990

William J. Howard, Inc., Howard & Howard, William J. Howard, Santa Ana, and Gerald H.B. Kane, Jr., Hermosa Beach, for plaintiff and appellant. Roberts & Morgan and Matthew J. Marnell, Riverside, for defendants and respondents Midcentury Ins. Co., erroneously sued and served as Farmers Ins. Exchange, and Marjorie Hansen.


Plaintiff David R. Wooster (the insured) has appealed from a judgment entered in favor of defendants Midcentury Insurance Company (the insurer) and Marjorie Hansen (collectively defendants) after defendants' motion for summary judgment was granted.


The insured filed an action for damages against defendants.   His complaint alleged that (1) he had purchased an automobile liability insurance policy from defendant Midcentury Insurance Company, which policy required the insurer to defend him in connection with any legal actions arising out of automobile accidents;  (2) while the policy was in effect, he was involved in such an accident and was named as a defendant in the resulting lawsuit;  (3) the insurer entered into a settlement agreement for $30,000 (the policy limits) with the Simmons, the plaintiffs in that lawsuit (the claimants), but did not obtain a release of all claims the claimants had against him;  (4) this behavior constituted breach of contract, breach of the duty of good faith and fair dealing, breach of fiduciary duty and negligence;  and (5) as a result of this allegedly wrongful conduct, he had been damaged in the amount of the judgment (approximately $734,000) entered against him in the claimants' action, plus additional damages related to emotional distress.

The insurer moved for summary judgment or alternatively summary adjudication of issues on the ground that the insured could not submit facts sufficient to create a reasonable inference that a cause of action existed as to:

(1) conduct of the insurer upon which to base an award of punitive damages;

(2) conduct of the insurer upon which to base a cause of action for bad faith;

(3) conduct of the insurer amounting to a breach of the covenant to defend.

In connection with its motion, the insurer stated that its motion was based on, among other things, the court file in the case of Simmons v. Wooster and People v. Wooster.   The insurer did not make a formal request for judicial notice of these files;  however, although the insured objected to other procedural defects in the motion, he did not make any evidentiary objections.   The insurer's motion was accompanied by the insurer's separate statement of 80 undisputed facts.

The insured did not dispute any of the facts listed by the insurer as being without dispute.   Instead, the insured took the position that such facts were simply irrelevant on the issue of whether the insurer was liable for tortious breach of the insurance contract, breach of fiduciary duties, or negligence, based on his contention that the insurer had a duty to obtain a full and final release from the claimants before tendering the policy limits.   The insured also took the position that the insurer was under no duty to make “advance payments” to the claimants, “since [its] duty was to [the] insured, ․ not the claimants.”

The insured argued that the failure to obtain a release [and, implicitly, the giving of the “advance payment”] was the proximate cause of the large verdict entered against him, because, “just before the trial (the preceeding [sic] few months) the claimants had become increasingly financially desperate and would have signed a release when accepting the full policy limits ($30,000.00) thereby extinguishing their rights against [the insured] and precluding their opportunity to a trial against [the insured] wherein a substantial verdict in excess of policy limits could be obtained.”  (Original emphasis.)

The insured supported his position that the insurer's payment of the policy limits had jeopardized his tactical advantage over the claimants by reference to the deposition transcripts of the claimants and that of their attorney, Michelle A. Reinglass.   Salient portions of this testimony are quoted below.

From the deposition of Mr. Simmons:

“Q: You were asked earlier if you were ever willing to settle for the 30,000 for a complete release, and you said no.   Okay.   Let me ask you this:  assuming these things had happened, assume at the time you needed your prosthesis and it was three months before trial and they told you, ‘We'll give you the remaining money,’—whatever it is—12,000—‘but the only way you're going to get it, you've got to sign a release and let Wooster off the hook, and then we'll give it to you;  otherwise, we're not going to give you the 20,000, and we're going to go to trial’;  at that point in time, what would have been your decision?

“A: [Mr. Simmons] At that point, I would have had to agree to it.

“Q: Why is that?

“A: Well, we were in a financial bind.   In order to keep our house and everything, we would have had to accept it.

“Q: Did you give that some thought before the time they actually offered the 20,000, that you may have to do that;  you may have to sign a full release to get the additional 20,000?

“A: I don't recall them ever saying anything about the full release or anything.   I just don't recall.

“Q: What you're saying, no one ever presented you with the full release?

“A: Not that I can recall.

“Q: Okay.   But had they have, based on the fact you needed the prosthesis and you had the bills and so forth, you would have been at the end of your rope, and you would have signed;  is that correct?

“A: I would have to say yes.

“Q: Okay.   Did you ever discuss this with your wife as to whether or not, if that had happened—in other words, did you guys have any discussions between yourselves just before trial that, if the insurance company said, ‘Look, you got to sign a full release and let Mr. Wooster off in order to get any more money,’ did you ever discuss that with her?

“A: Yes.

“Q: And what was the discussion?   Can you just briefly tell us?

“A: Well, we were just, you know—we didn't want to just let him off the hook because we felt he was responsible and everything.   But at the same time, you know, we did have to live.   With just her working, it wasn't giving us enough income, you know.   So, yeah, it was just kind of borderline as to what we were going to do.   It was kind of a toss-up.

“Q: And so was the conclusion that the two of you made was if push comes to shove and Farmers says, ‘Hey, you have to sign a full release to get the rest of the money,’ then you would have signed it?

“A: I would have had to.”

From the deposition of Mrs. Simmons:

“Q: (By Mr. Howard) The discussion that you had with your husband—what was your discussion with your husband concerning if push came to shove and they said the only way you're going to get the rest of this money that you need now is you got to sign this release with Mr. Wooster?   Tell me what discussions you had with your husband about that.

“A: [Mrs. Simmons] I think, to my recollection, we discussed that we were not willing to do that.   But it was something that we would have, we felt, had to do to be able to survive.

“Q: Okay.   So in other words, you didn't want to do it?

“A: No.

“Q: But had it come down to that, and they said, ‘We'll give you the money, but we're not going to give you the money unless you sign the papers,’ then you would have done it?

“A: Yes.”

From the deposition of Ms. Reinglass:

“Q: At any time were your clients willing to release Mr. Wooster from the litigation absent his own personal contribution?

“A: [Ms. Reinglass] At any time were they willing to release him—you are saying just by the policy limits, without anything further?

“Q: Correct.

“A: Probably towards the end is about the only time they gave that serious consideration.

“Q: And why was that, do you know?

“A: Financial desperation.”

In his opposition, the insured also complained about the fact that “Neither FARMERS insured, DAVID WOOSTER, nor his own personal counsel, William Druary (who was hired by WOOSTER and paid by FARMERS) were aware of the fact that the policy limits had been paid without a release until after the trial in the underlying matter.”  (Original emphasis.)   Although the insured did not explicitly tie this failure to communicate to any particular breach of duty by the insurer, he did make a point of presenting evidence, in the form of deposition testimony of Druary and Reinglass, to support his contention that there had been a failure to communicate the settlement to him.

From the deposition of Mr. Druary:

“Q: At any time did you have any conversations with Mr. Gail or with anyone representing the insurer concerning the possibility that they might pay the balance of the policy limits without obtaining a release?

“A: [Mr. Druary] No, I never heard about that until it had already been done.

“Q: And when you heard about it, did you have any objection to it?

“A: Well, yeah, as a matter of fact, I did.

“Q: What was the nature of your objection?

“A: Well, I felt they were leaving Mr. Wooster out hanging and giving the plaintiffs money with which to finance their case against him.

“Q: Did you express that objection to either Mr. Gail or anyone with the insurer?

“A: No, because as I said, I did not find out about it until it was a done deal.”

From the deposition of Ms. Reinglass:

“Q: And then at some point in time did Mr.—did you find out that Mr. Druary knew that the case had been settled?

“A: [Ms. Reinglass] You mean that they were—

“Q: Paid the 30,000, without a full release?

“A: Yes.

“Q: When was that?

“A: During the jury deliberations, at the conclusion of the trial.   He and I—we car pooled during the deliberations, and we also drove over to a restaurant with my clients on one day.   And he turned to me and mentioned it.

“Q: Did you—from the way he told you, was it your understanding he just found out about it?

“A: That's what he said.   He said—he goes, ‘Did your clients get the full policy limits with a’—‘Did they get the full policy limits?’

“And I said, ‘Yes, they did.’

“He asked me when.

“I told him it was shortly before trial, which date, I don't recall.   And he asked me if they signed a release.

“And I said, ‘No, we specifically settled it contingent upon no release being given.’

“He goes, ‘Both Randy and I just learned of this.’

“And I said, ‘You are kidding.’

“And he said, ‘No.’   And said, ‘You know, Randy was totally unaware that the money had been given.’

“And he asked me if it helped finance the lawsuit.

“And I said, ‘Yes, it did.’

“Q: Randy, that's Mr. Wooster?

“A: Excuse me, yes.”

Although there was evidence that neither the insured nor his attorney were told that the insurer was going to pay the full policy limits without obtaining a full release, the trial court was also presented with evidence that the insured had participated in earlier settlement conferences, and that there had been a demand by the claimants for the policy limits plus a monthly payment by the insured of $500.00 per month for 20 years:

“16. On January 18, 1985, and February 28, 1985, I personally attended settlement conferences in the litigation of Ralph Simmons, et al. vs. David R. Wooster, No. 153559 in the Superior Court of California, located in the city of Riverside.   At both conferences, the carrier for Mr. Wooster, Mid–Century Insurance Company, offered the entire policy limits of $30,000 to plaintiffs in exchange for a release of all claims.

“17. At that first conference, the attorney for plaintiffs demanded the policy limits plus payments by Mr. Wooster of $500,000 over a period of time reflected in my correspondence of February 5, 1985, Exhibit ‘N.’

“18. At the second conference, plaintiffs' attorney demanded the policy limits and payments by Mr. Wooster at $500 per month for 20 years.   Mr. Wooster brought an attorney of his own selection, Mr. Druary, to the second conference.”

To sum up, the insured took the position in his opposition that (1) regardless of the facts claimed to be undisputed, defendants had breached some duty or duties owed to him, and (2) whether or not the insurer's breach of its duties to him was a proximate cause of the resulting judgment against him was a factual question to be decided by the jury, and thus summary judgment was improper.


 Standard of Review

 When the party moving for summary judgment is the defendant, as here, it must “either negate a necessary element of the plaintiff's case or state a complete defense.  [Citation.]”  (LaRosa v. Superior Court (1981) 122 Cal.App.3d 741, 744–745, 176 Cal.Rptr. 224;  see also Weil & Brown, Cal.Prac.Guide:  Civ.Pro. Before Trial (The Rutter Group 1989) § 10:125.)

 Furthermore, a defendant moving for summary judgment who chooses to attack the plaintiff's case, as opposed to presenting a complete defense, must disprove all possible causes of action or theories of recovery set out in a plaintiff's complaint.  (Conn v. National Can Corp. (1981) 124 Cal.App.3d 630, 639–640, 177 Cal.Rptr. 445;  see also Weil & Brown, Cal.Prac.Guide:  Civ.Pro. Before Trial, supra, § 10:126.)

The defendants here undertook to attack the insured's case, rather than to establish a complete defense, by showing that there were no triable issues of fact that their conduct did not amount to a breach of the duty of good faith and fair dealing or of the duty to honor the covenant to defend, e.g., breach of the contractual duty to defend.  (See page 665 of this opinion, ante.)   As noted earlier, the insured alleged in his complaint that defendants' behavior in settling the case without obtaining a full release constituted not only breach of the duty of good faith and fair dealing and breach of contract, but also breach of fiduciary duty and negligence.

It is thus apparent that even by its own terms, defendants' motion for summary judgment did not address all possible causes of action or theories of recovery set out in the insured's complaint, as required in order to entitle defendants to summary judgment.  (Conn v. National Can Corp., supra, 124 Cal.App.3d 630, 639–640, 177 Cal.Rptr. 445;  see also Weil & Brown, Cal.Prac.Guide:  Civ.Pro. Before Trial, supra, § 10:126.)

 Furthermore, even assuming that defendants' motion had been addressed to all possible causes of action or theories of recovery set out in the insured's complaint, the insured also contended in his opposition to the motion that defendants' failure to keep him informed of their final settlement negotiations with the claimants also constituted an aspect of the behavior of which he complained.   Defendants never addressed the legal ramifications of this aspect of the evidence at all.   Our review of applicable case law, discussed below, indicates, at least based on the state of the factual record as it currently exists, that the evidence produced by the insured in opposition to the motion, which evidence relates to defendants' alleged failure to inform the insured of their payment to the claimants of the policy limits “on the eve of trial,” (and from which evidence it can be inferred that the insured was not given a last chance to tie his own separate, over-the-policy-limit settlement with the claimants to the defendants' settlement), precludes granting defendants' motion for summary judgment, because it raises a triable issue of fact as to whether defendants' failure to keep the insured and his counsel informed of such settlement decisions constituted a breach of any duty owed to the insured.

An Insurer's Failure to Give An Insured a Chance to Participate in Negotiating a Joint Settlement of the Policy Limits And Any Amounts in Excess of the Policy Limits Which Will Have to Be Paid by the Insured Personally May Constitute a Breach of a Duty Owed to the Insured.

Generally, insurance policies give an insurer the right to settle cases in whatever manner it determines to be expedient.   Normally, a settlement will be for the benefit of the insured, and there will be no detrimental effect.   Sometimes, however, a settlement may adversely affect the insured's interests, and, under certain situations, such a settlement may constitute a breach of some duty owed by the insurer to the insured.

What duty has been breached will depend on the facts of a given situation.   For example, if the insurer simply inadvertently sends a claimant a check for the policy limits without obtaining a release, such behavior might constitute a breach of the duty to exercise due care.

If, on the other hand, the insurer knowingly settles a claim without obtaining a full release of the insured, without giving the insured a final chance to coordinate the insured's settlement of amounts demanded in excess of policy limits with the insurer's settlement, and with knowledge that such a settlement might interfere with the insured's ability to obtain as favorable a settlement of the excess-of-policy-limit demands as possible, such behavior might constitute a breach of the duty to act in good faith, i.e., the duty to act in a way which does not withhold from the insured the full benefits expected under the insurance contract.

Such behavior might also constitute a breach of the contractual duty to defend, implicit in which contractual duty would be the duty to provide the insured with as competent a defense as possible—which duty would require the insurer to keep the insured's defense counsel apprised of any settlement plans which might affect the insured's ability to settle demands for excess-of-policy-limit amounts.

Whether such behavior might constitute a breach of fiduciary duty is less clear.   Recent cases have held that the relationship between an insured and an insurer is not that of a fiduciary.  (See, e.g., Henry v. Associated Indemnity Corp. (1990) 217 Cal.App.3d 1405, 266 Cal.Rptr. 578;  State Farm Fire & Casualty Co. v. Superior Court (Durant) (1990) 216 Cal.App.3d 1222, 1226–1227, 265 Cal.Rptr. 372;  Almon v. State Farm Fire and Cas. Co. (S.D.Cal.1989) 724 F.Supp. 765.)   In any event, given the procedural posture of this case, in which the moving party did not focus on the duty to communicate to the insured its intention to make a settlement with the claimants so as to give him a final opportunity to make a joint settlement, we are in no position to determine which type of duty, if any, was breached.

Although we have not found any cases in which the facts are exactly the same as here, i.e., in which the insurer settled for the policy limits without obtaining a release of the insured, and without telling the insured that it had done so, there are a number of cases involving analogous and instructive examples of when an insurer's settlement arrangements have been held to constitute a breach of a duty to the insured.

For example, in Rothtrock v. Ohio Farmers Ins. Co. (1965) 233 Cal.App.2d 616, 43 Cal.Rptr. 716, the insureds were sued for property damages in municipal court as the result of an automobile accident.   They were served with a summons and complaint, which they delivered to the insurer.   The insurer began negotiations with the claimant's attorney, who promised no default would be taken during negotiations.   While negotiations were in progress, and unbeknownst to the insurer, the claimant's attorney did obtain a default.

The insurer agreed to settle the action, and sent the claimant's attorney release forms.   The claimant's attorney, meanwhile, procured a default judgment, and returned the executed releases, together with a satisfaction of judgment, to the insurer, which filed the satisfaction of judgment.

In the meantime, the insureds filed an action for personal injury against the claimant for the loss of one insured's leg as a result of the same accident.   The claimant's attorney answered, and as an affirmative defense pleaded the municipal court judgment as a bar and res judicata on the issue of liability.

The insurer moved to set aside the default and default judgment.   The motion was granted, and on appeal the order setting aside the default was affirmed.   For some reason not apparent from the record, the insurer nonetheless again settled the municipal court case for the same amount, and then requested a dismissal of the action with prejudice as to the insureds.

Thereafter, in the personal injury action, the claimant's attorney amended his answer to raise the dismissal with prejudice as res judicata and collateral estoppel.   The trial court dismissed the insureds' personal injury action, and, not surprisingly, the insureds sued the insurer, alleging that it had failed to act reasonably in agreeing to the dismissal with prejudice, because it knew, or should have known, of the legal effect of such a dismissal on their personal injury action.   The insurer moved for summary judgment, which was granted.   The insureds appealed.   The court of appeal stated:

“It would appear that defendants' general course of conduct in connection with the handling of their insurance obligation to the [insureds] was tainted with singular disregard of their assured's interests.   Five days after the filing of [the claimant's] action in the municipal court, Ohio knew of [the insured's] claim for personal injuries, yet suffered a default to initially stand even though taken by [the claimant's] attorney in violation of his agreement and in addition thereto paid [the claimant] $250 as a settlement․

“Even were we to assume for the sake of argument that [the insurer] might mistakenly have believed originally that a default had no legal significance as an admission of the complaint's allegations, still, after [the claimant] had pleaded the default and payment to [him] of $250 as res judicata, [the insurer was] thereby put upon notice.   When [the insurer] then had the default judgment set aside and later filed a dismissal with prejudice obtained for a consideration, the violation of legal obligation to the [insureds] was compounded by the taking of positive and fatal action against their interests as distinguished from mere neglect․

“After being advised of [the insured's] claim against [the claimant] for personal injuries, [the insurer] had no legal right to actively compromise her potential for legal recovery by its conduct in handling the municipal court action.   It actively placed her in a losing position.   In California, the law is settled that mere employment of an attorney to represent a client in litigation, while it may carry the power to legally bind the client, does not carry with it the legal right, without the knowledge or consent of the client, to compromise with impugnity [sic] that litigation for reasons foreign to the client's substantial rights or best interests.  [Citations.]

“Whether [the insured] would have recovered against [the claimant in the personal injury action] had [the insurer] properly fulfilled [its] legal obligations to her is of course unknown.  [The insurer] sparked the demise of her cause of action ․ and effectively blocked any opportunity to consolidate with it the [claimant's action].  [It is] therefore proximately responsible for her total legal immobility in that pursuit unless it be found that no means were still available to [the insured] to prevent the municipal court action from becoming res judicata, that is, by transfer or injunction.  [Citation.]

“As an aid in considering the question of violation of legal care, as is claimed by [the insured], let us consider a comment by one of America's great justices.   Justice Holmes, in Schlemmer v. Buffalo R. & P.R. Co., [1907], 205 U.S. 1, 12 [27 S.Ct. 407, 409, 51 L.Ed. 681] ․, defined negligence as follows:  ‘Negligence consists in conduct which common experience or the special knowledge of the actor [or knowledge reasonably attributable to him] shows to be so likely to produce the result complained of, under the circumstances known to the actor, that he is held answerable for that result, although it was not certain, intended, or foreseen.’ ”  (Id., at pp. 622–623, 43 Cal.Rptr. 716.)

In Ivy v. Pacific Automobile Ins. Co. (1958) 156 Cal.App.2d 652, 320 P.2d 140, the attorney hired by the insurer to represent its insured entered into a stipulation that effectively resulted in a $75,000 judgment against the insured, an amount $25,000 in excess of the policy limits.   This arrangement was made without the insured's knowledge, but under an arrangement in which the insurer would pay the policy limits and the claimant covenanted not to execute against the insured's personal assets, but instead to proceed against a second insurance policy.

The appellate court held that the covenant not to execute did not fully protect the insured (id., at p. 663, 320 P.2d 140), and held that the insurer had breached its duty of good faith and fair dealing by failing to inform him of the settlement arrangements before entering into them:

“The insurance company has the legal right to try and protect its own financial interests, but when those interests conflict with those of the insured, the company must, in good faith, give consideration to the interests of its insured.   It has no right to sacrifice the interests of the insured in order to protect its own interests․   By the terms of the insurance policy the control of the defense of the action is turned over to the insurer, and the insured is precluded from interfering in any settlement procedure.   But when liability in excess of the policy limits is involved the insured's interests become directly involved.   It is then that the duty to act in good faith becomes important.   In order to avoid liability under the bad faith rule the insurance company must give at least as much consideration to the financial well-being of the insured as it does to its own interests․  [I]n order to act in good faith the company, as a minimum, must make a diligent effort to ascertain the facts upon which a good faith judgment may be predicated, where possible excess liability is involved, must communicate the result of such investigation to the insured, and must inform him of any settlement offers that may affect him, so that the insured may take proper steps to protect his own interests.”  (Id., at pp. 659–660, 320 P.2d 140.)

“Enough has been said to indicate that the covenant not to execute did not fully protect Ivy.   The insurance company had no legal right to settle the Smith action for an amount in excess of the policy limits without informing Ivy.   The insured had a legal right to decide for himself whether he would settle for an amount of $25,000 in excess of the policy limits, and, if so, whether he was willing to accept the covenant not to execute for his sole protection.   He was deprived of this right.   Such deprivation amounted to a breach of the duty owed by the company to him.”  (Id., at p. 663, 320 P.2d 140.)

Most of the cases in which an insurer has been found liable for bad faith breach of the covenant of good faith and fair dealing involve situations in which the insurer refused to settle within policy limits, thus exposing the insured to a verdict in excess of the policy limits.   Here, of course, the insurer settled for the policy limits.   The problem, as we see it, is not so much that the insurer settled with the claimant, as that it did so without notifying the insured that it was about to do so without obtaining a full release, thus possibly precluding the insured from making a final attempt to coordinate his settlement of the claimants' demands for amounts in excess of coverage with the insurer's settlement of the demand within policy limits so that the claimants might have been presented with a package deal versus obtaining the wherewithal to fund the litigation against the insured.   Such a situation, even though the policy limits are paid out, may also form the basis of an action for bad faith breach of the covenant of good faith and fair dealing.

For example, in Continental Cas. Co. v. United States Fid. & Guar. Co. (N.D.Cal.1981) 516 F.Supp. 384, the claimant had been seriously injured by a sales representative who was working for two different companies, L and G, at the time of the accident.

The sales representative was insured by CSAA for $30,000.   Company L was insured by ICA for $100,000, and carried excess coverage of $5 million with Continental Casualty Co. (Continental.)   Company G was insured for $200,000 by USFG, and had excess coverage of $1 million, also with Continental.

The claimant made an initial demand for $500,000 to settle with the sales representative and both companies.   USFG informed its insured, G, that there was a settlement demand of $500,000, that the claimant's injuries were serious, and that if a judgment were rendered for the claimant it might be in excess of G's $200,000 policy limits.   USFG also suggested that G might desire to obtain independent counsel.

The claimant then made a new demand, offering to settle for $400,000, of which $200,000 would be paid by USFG (USFG's insured's, G's, policy limits) $120,000 by the insured, G, in the form of a ten-year note at a reasonable interest rate, $30,000 by CSAA (CSAA's insured's, the sales representative's, policy limits), and $50,000 by ICA (one-half of ICA's insured's, L's, policy limits).   The claimant's attorney noted, in connection with this demand, that a judgment might exceed $1 million dollars.

USFG refused to pay more than $25,000.   It made no attempt to ascertain whether its insured, G, was willing to contribute the requested $120,000 or any lesser amount, or to negotiate the demand with the claimant.

At a second settlement conference, USFG offered $50,000, ICA offered $50,000 on behalf of L, and CSAA offered $30,000 on behalf of the sales representative.   This offer was refused.

The matter went to trial, and a verdict of $743,895 was returned against the sales representative and G only.   Continental, the excess insurer for G, paid $513,895 of the judgment.   CSAA paid $30,000 on behalf of the sales representative, and USFG paid $200,000 plus costs on behalf of G.   The judgment was affirmed on appeal.

Continental, G's excess insurer, then brought an action against USFG for breach of its duty of good faith and fair dealing.   It moved for partial summary judgment.   The United States District Court for the Northern District of California granted its motion.   Noting that Continental, as excess insurer, stood in the shoes of the insured in regard to asserting a claim for amounts paid out in excess of the primary insurer's policy limits (id., at pp. 387–388), the court relied on the following principles of California law:

First, “[b]ecause the carrier retains the contractual right to investigate, to negotiate and to defend or settle the action against its insured, and rejection of a settlement demand may subject the insured to substantial loss, the carrier has the duty ‘to consider in good faith the interests of the assured equally with its own and evaluate settlement offers as though it alone carried the entire risk of loss.’ ”  (Id., at p. 387, quoting Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 871, 110 Cal.Rptr. 511, and referencing also Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 660, 328 P.2d 198.)

Second, “[t]he test for whether the insurer has given good faith consideration to its insured's interests is whether a prudent carrier without policy limits would have accepted the demand.”  (Id., citing Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173.)

The District Court then considered USFG's contention that because it never received a demand within policy limits, the duty of good faith and fair dealing never arose, because no conflict between it and its insured was created, and concluded:

“This kind of conflict [between the interests of the insurer and those of the insured] plainly is not limited to situations in which plaintiff's demand is within policy limits.   The Merritt court acknowledged the existence of certain obligations on the part of the carrier when a demand in excess of limits is received.   When that occurs, the court said, ‘[o]bviously the first step is for the carrier ․ to communicate the offer [demand] to the assured.’  [Citation.]   But the carrier's duty does not stop there.   It has an implicit duty to inquire whether, assuming hypothetically its own willingness to pay its policy limits, the insured is willing to make the requisite contribution to bring about a settlement at a figure in excess of the policy limits.   If the insured is agreeable, an obvious conflict arises between the carrier and the insured, imposing on the carrier a duty to act in good faith in deciding whether to pay its limits.   The Merritt court summarized the applicable law as follows:

“ ‘While much remains obscure in this field of the law it is apparent from this summary that (1) the legal rules relating to bad faith come into effect only when a conflict of interest develops between the carrier and its insured;  (2) a conflict of interest only develops when an offer to settle an excess claim is made within policy limits or when a settlement offer is made in excess of policy limits and the assured is willing and able to pay the excess.’  [34 Cal.App.3d at p. 877, 110 Cal.Rptr. 511] (emphasis added)․

“Had USF & G asked its insured whether it would contribute $120,000 (a not disproportionate contribution considering the generally acknowledged magnitude of exposure in the case) and been advised affirmatively, it would then have been in exactly the same position as though a demand within policy limits had been made.   As the Merritt court pointed out, a demand within ‘feasibility limits of the assured's resources' creates a conflict of interest and would have activated USF & G's duty of good faith․”  (Id., at pp. 388–389, 110 Cal.Rptr. 511, fn. omitted.)

In Allen v. Allstate Ins. Co. (9th Cir.1981) 656 F.2d 487, the insured faced a potential verdict of five times his policy limits.   The claimant offered to settle for the policy limits of $100,000, but, nevertheless, the insurer decided, because the wrongful death action against the insured had been bifurcated into separate liability and damages stages, to wait to see if the claimant could establish its insured's liability before offering to settle.   Needless to say, this tactic was not in the best interests of the insured:

“[The insurer's belief that it could postpone settlement until liability was established and still avoid liability for bad faith] could only rest on the assumption that [the claimant], as a victorious plaintiff, would be as willing to settle within [the insurer's] policy limits as she was when but a hopeful one.   Given [the claimant's] obvious and extensive losses, only slight reflection on [the insurer's] part would have been needed for [it] to realize that its own (and its insured's) negotiating strength would be weakened if not destroyed if the liability stage of the wrongful death action were lost.   There was a sufficient basis for the jury to conclude that [the insurer] had been far more solicitous of its own financial interests than of its insured's.”   (Id., at p. 490.)

So too here, it would take little reflection by the insurer to realize that its insured's negotiating strength would be weakened, if not destroyed, if the claimants were provided with a “war chest.”   That being so, the insurer obviously at least should have made a final attempt to coordinate a settlement offer with the insured before paying the claimants the policy limits on the eve of trial, a period notably conducive to obtaining settlements.

We do not believe that our conclusion here will lead to the “severe repercussions” feared by defendants, i.e., that requiring insurers to communicate with and cooperate with insureds in attempting to negotiate a joint settlement will preclude either partial or complete payment of policy limits by the insurer to clearly injured claimants.

Contrary to the implications of defendants' concerns in this regard, we have not held that the insurer must withhold either partial or complete payment of policy limits from an injured claimant so as to allow the insured an unlimited amount of time to coerce the claimant into settlement of both the policy limits and in-excess-of-policy-limits amounts.   Such a holding would fly in the face of statutory duties imposed upon insurers by the Insurance Code.   Although claimants no longer have a private cause of action under Insurance Code section 790.03 (Moradi–Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58), insurers still have a duty, under subdivision (h)(5) of that section, to “attempt[ ] in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.”

 Instead, we have merely held that an insurer, when it is faced with a claim for amounts over the policy limit, and when it is unable to obtain a general release of its insured even if it pays the policy limits, must let its insured know that it intends to pay the policy limits, or the final portion thereof, and must cooperate with the insured and give the insured a reasonable opportunity to participate in an attempt to make a joint settlement of the claim.

Because partial payments may, as defendants point out, also act as “war chests” from which litigation may be funded, this may mean that the insurer must make a careful assessment of the potential liability involved before making partial payments (presumably such is already naturally the case) and discuss the effect of partial payment with the insured and the insured's counsel before making such payment, so as to give the insured an opportunity to settle the case then.   Conceivably the insured might suggest that rather than making a partial payment, the insurer and the insured first should attempt to negotiate a joint settlement.   However, because of the insurer's obligation to claimants under section 790.03, the insured would not have an absolute veto of the insurer's right to make a partial payment to an injured claimant once the insurer had given the insured an opportunity to participate in an attempt to work a joint settlement.

It may be, of course, that the defendants here will be able to produce uncontradicted evidence that there was no point in telling the insured that they were about to settle with the claimants for the policy limits, because the insured had categorically refused to contribute anything toward a joint settlement of policy and over-policy-limits claims.   However, given the current state of the record on appeal, there remains a triable issue of fact as to whether or not the defendants' failure to inform the insured of its final settlement arrangements was a proximate cause of the judgment entered against him in the underlying personal injury action, and therefore the judgment entered following the order granting defendants' motion for summary judgment must be reversed.1


The judgment is reversed.


1.   Defendants also argue that “this court should not allow a lawsuit which has as one of its hidden purposes to benefit the claimants.”   The “hidden motive” believed by defendants to exist here is that the claimants, upon whose testimony the insured now relies to argue that but for the insurer's payment of the policy limits to the claimants he would have been able to obtain a settlement and release, thus avoiding the entry of a judgment against him, have a motive for now lying about the kind of settlement they would have accepted, because their hope of recovering on their judgment against the insured is dependent upon the insured recovering from defendants in this action.All we are faced with here is whether or not defendants were entitled to summary judgment.   Because defendants failed to produce evidence to negate all triable issues of fact as to whether they breached a duty to the insured, we must reverse.   The parties' hidden motives, if any, and the claimants' credibility regarding what amount they would have settled, are factual questions which may not properly be resolved in this appeal.

TIMLIN, Associate Justice.

DABNEY, Acting P.J., and McDANIEL *, J., concur.

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