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District Court of Appeal, Third District, California.


Civ. 5882.

Decided: May 17, 1938

Appelbaum & Mitchell, of Oakland, Mervin C. Lernhart, of Napa, and Lewis H. Cromwell, of Petaluma (Lewis N. Mitchell, of Oakland, of counsel), for appellants. Bronson, Bronson & McKinnon and John H. Painter, all of San Francisco, for respondent.

These actions were jointly brought by the plaintiffs against the Fireman's Fund Indemnity Company, a corporation, pursuant to the provisions of the Statutes of 1919, c. 367, p. 776, being an action after judgments obtained by the plaintiffs against the assureds of the indemnity company had become final and executions returned unsatisfied.

In November, 1935, plaintiff Julia Valladao and John C. Valladao recovered a judgment in the sum of $7,500 against Edwin J. Davis and Dave McClure, Jr., and on the same day plaintiffs Mary J. Katsulakis and John P. Katsulakis recovered a judgment against these same defendants in the sum of $1,000, which judgments were based upon personal injuries received by Julia Valladao and Mary Katsulakis in September, 1934.

At the time of the accident there was in full force and effect a policy of insurance in the Fireman's Fund Indemnity Company, insuring Dave McClure, Jr., against liability imposed by law upon him for bodily injuries. It also extended coverage to any person legally operating the automobile covered by the policy.

The jury returned their verdict in the present action in favor of the plaintiffs, and thereafter, notwithstanding the verdict, the trial court entered judgment in favor of defendant Fireman's Fund Indemnity Company. Thereafter a motion for a new trial on behalf of the plaintiffs was denied. This appeal is from such order and judgment.

There is little dispute as to the facts, which substantially are that defendant indemnity company issued its combination automobile liability and property damage policy to Dave McClure, Jr., which was in full force and effect and covered the truck being driven at the time of the accident. An omnibus clause also covered “any other person or persons while * * * legally operating any such automobile * * * if such * * * operation is with the permission of the named assured * * *”.

The accident happened on the highway north of Santa Rosa, about 10 o'clock on the night of September 24, 1934. McClure was driving his truck at the time, accompanied by one Bert Herbert and Edwin J. Davis. As McClure was proceeding along the highway he struck the rear of a car parked on the highway, in which car plaintiffs were seated. When the crash occurred McClure fled the scene of the accident without disclosing his identity to any one connected with the injured parties.

When a traffic officer arrived after the accident, McClure was still absent and Davis told the officer and those at the scene that he, Edwin J. Davis, was the driver. Davis had no operator's license in his own name with him at that time, but had in his possession an operator's license belonging to his brother, John K. Davis. He concealed the fact that McClure had been on the truck and stated to the officer that his name was John K. Davis, whose operator's license he had. The officer then issued a citation for reckless driving in the name of John K. Davis and handed it to Edwin J. Davis. Davis accepted the citation, and in response thereto appeared in the justice's court, and at that time, still posing as John K. Davis, pleaded not guilty to the charge of reckless driving. The first knowledge that the indemnity company had of the accident was received on the forenoon of the day after it occurred, when McClure and Edwin J. Davis reported the accident to defendant's agent in Petaluma. At that time McClure and Edwin J. Davis appeared at the agent's office, and in McClure's presence Edwin J. Davis represented himself as John K. Davis, and told the agent that he was driving McClure's truck at the time of the accident. In answer to questions by the agent, Davis narrated the accident as though he were the driver and told the agent he had borrowed McClure's truck, and that McClure was not in the truck at the time, and that he and Herbert were the sole occupants of the truck, and that he had been arrested for reckless driving. Upon this statement of fact the agent prepared a written report and sent it to the indemnity company. A day or two following this report an adjuster for the defendant interviewed McClure and Edwin J. Davis, when they again confirmed the false statements made at the time of the first report. Some days after these reports were made McClure and Davis again went to the justice's court, at which time Edwin J. Davis, answering to the name of John K. Davis, entered a plea of guilty to the charge of reckless driving under the name of John K. Davis, and paid a fine therefor.

On November 17, 1934, plaintiffs herein, suing separately, filed actions against McClure and John K. Davis; McClure was sued as the owner and John K. Davis was sued as the operator of the truck. The summons in the cases were sent by the defendants to the indemnity company.

In December, 1934, the indemnity company turned these cases over to its attorneys in Santa Rosa for the purpose of defending McClure and Davis. Early in January, McClure and Davis discussed the facts of the case with these attorneys, and they there repeated substantially the same story they had theretofore told. On the same day, one of these attorneys, with Davis and McClure, visited the scene of the accident and went over the facts in the case, and the same falsifications and concealments were again narrated without correction.

In due time answers to the complaints were prepared on behalf of McClure and John K. Davis, read, and by them duly verified and then filed. These answers affirmatively admitted that McClure's truck was being driven by John K. Davis, but denied negligence upon the part of the operator, and set up contributory negligence as a defense. Again, a month or two later, McClure and Edwin J. Davis called at the office of the attorneys representing them for the purpose of discussing their depositions, which were to be taken by the plaintiffs. At that time they again discussed the facts in detail and again made the same misstatements.

On March 2d, the day before the depositions of McClure and Davis were to be taken, they, accompanied by their personal attorney, Mr. Carpenter, called upon Mr. Murphy, a member of the firm of attorneys who had been retained by the indemnity company to represent them, and then and there informed Mr. Murphy the stories which they had theretofore told were false,––that McClure was driving the truck at the time of the accident, and that Davis was merely a passenger in the truck, and not the driver. At that time McClure also informed Murphy for the first time that he had run away from the scene of the accident and had concealed himself. He said he had done so for the reason that he had been in trouble prior to that time arising out of a charge of driving while intoxicated, and that he was afraid his driver's license would be revoked.

Immediately following this disclosure Murphy communicated with the San Francisco office of the indemnity company, and then informed McClure and Davis that the indemnity company was withdrawing from their defense, and that Murphy himself and his firm were withdrawing as their attorneys. Murphy also immediately advised the attorney for plaintiffs that his firm was withdrawing as attorneys for McClure and Davis, and that no depositions could be taken at the time set. Later other attorneys were substituted as attorneys for McClure and Davis.

An amended answer setting up the true facts was filed, and it was stipulated at the trial that Davis' name was “Edwin J.” rather than “John K.” At this trial, held November 10, 1935, judgments were entered in favor of plaintiffs and against McClure and Davis.

In March, 1936, the present action was filed. To this the indemnity company set up as an affirmative defense a breach by McClure and Davis of the cooperation clause in the policy of insurance. After a verdict for plaintiffs, the trial judge granted defendant's motion for a judgment notwithstanding the verdict. It is from that order this appeal is taken.

The cooperation clause contained in the policy issued by the indemnity company to McClure, and about which the issues here raised revolve, reads as follows:

“Co–operation of Assured:––E. The assured shall not voluntarily assume any liability, nor incur any expense, other than for immediate surgical relief, nor settle any claim, except at the assured's own cost. The assured shall not interfere in any negotiation for settlement, nor in any legal proceeding, but whenever, requested by the Company, and at the Company's expense, the assured shall aid in securing information and evidence and the attendance of witnesses, and shall co–operate with the Company (except in a pecuniary way) in all matters which the Company deems necessary in the defense of any suit or in the prosecution of any appeal.”

The able judge, writing an opinion giving his reasons for setting aside the verdict of the jury, said:

“Ordinarily the question of whether a co–operation clause in such a policy has been violated is a question of fact for the jury. Before such a breach may be held to have occurred it must be shown to have been of a material nature and subsequently prejudicial to the rights of the insurer. There are cases, however, where the question is one of law for the court and which should not be submitted to a jury.” We are in accord with this statement of the law. We differ, however, as to its application in the present case.

The trial judge relied largely upon two California Cases, Hynding v. Home Acc.Ins. Co., 214 Cal. 743, 7 P.2d 999, 85 A.L.R. 13, and Purefoy v. Pacific Automobile Indem. Exch., 5 Cal.2d 81, 53 P.2d 155. We, however, after considerable study, have concluded these cases rather support the contention of plaintiffs here.

In Hynding v. Home Acc. Ins. Co., supra, the action was against an insurance carrier to recover the amount of a judgment previously obtained against the assured. In the answer of the company to the complaint the company set up that their insured had failed to cooperate with the company in obtaining information and witnesses, and had failed to attend the trial and testify. The policy of insurance sued upon contained the usual stipulations requiring the insured to report accidents and to cooperate with the company in securing evidence, and in effecting settlements and in prosecuting appeals. The court said (page 1002): “We are also of the opinion, and we think most of the authorities are agreed, that the provision must be one reasonably necessary for the protection of the insurance company, and one which can readily be complied with by the assured; and that the violation of the condition by the assured cannot be a valid defense against the injured party unless in the particular case it appears that the insurance company was substantially prejudiced thereby. * * * To require the co–operation of the assured to the extent of attendance at the trial, when he is a material and important witness, is a perfectly reasonable condition. Failure to testify may be as damaging as failure to give notice of the accident or of the suit. There is, of course, no obligation on his part to testify favorably to the company's interests, but here his report of the accident indicated that a defense existed, and it would normally be expected that his testimony would bear this out. Under these circumstances the company was clearly prejudiced by his failure to appear. In any event, the question of such prejudice should have been considered below.” The defendant had in the case just mentioned set up as a defense in its answer that the insured had failed to cooperate. At the trial plaintiff moved to strike from the answer this defense, which was granted.

In Purefoy v. Pacific Automobile Indem. Exch., supra, plaintiff recovered a judgment against W. S. Austin and Jack Austin, his minor son, for personal injuries sustained by plaintiff as a result of the negligent operation by the son of the automobile owned by the father. Thereafter plaintiff commenced an action to recover the amount of the judgment against Pacific Automobile Indemnity Exchange, the insurance carrier. The trial court rendered judgment for defendant, holding that Austin had violated conditions of the policy requiring the insured to give immediate notice of the accident. The fact was that the insurer first learned of the accident some three and one–half months after the accident, when it received a letter from the attorney for the injured party, asking for the address of the insured. The company immediately tried to communicate with their client and sent letters to him at the address given in the policy, and elsewhere, but were unable to locate him until he was served with summons some year and three months after the accident.

Affirming the judgment of the trial court, the Supreme Court held that Austin had failed to give immediate notice of the accident as required in his policy, and upon the facts found prejudice to the injured party sufficient to justify the trial court finding in favor of the indemnity exchange. In regard to the necessity of showing prejudice in the matter of noncooperation, the court said (page 158):

“Respondent contends that as liability insurance is not compulsory, but voluntary, effect must be given to express conditions between the parties to the contract of insurance, as in the case of other types of contracts, without a showing of prejudice.

“We are not disposed at this time to enter upon a further consideration of the conflicting decisions as to whether prejudice must be shown, for we are of the view in the instant case, as we were in the Hynding Case, supra, that prejudice sufficiently appeared, and the court below so found.”

In Panhans v. Associated Indemnity Corp., 8 Cal.App.2d 532, 47 P.2d 791, 795, Panhans had been injured by an automobile belonging to one King, who was insured by a policy of public liability insurance issued by the Associated Indemnity Company and he (Panhans) recovered a judgment against the indemnity company. The main defense urged by the indemnity company at the trial was the alleged breach by King of the cooperation clause in the insurance policy. One of the grounds urged on appeal was that the trial court erred in instructing the jury to the effect that in order to relieve itself of responsibility under the policy, the insured must show that the breach, if any there was, affected the material condition of the policy and that the breach operated to the substantial prejudice of the insurance carrier. There the reviewing court had before it and considered the cases of Hynding v. Home Accident Insurance Co., supra, and Purefoy v. Pacific Auto. Indem. Exch., supra, and said (page 792):

“And there are two recent cases (Hynding v. Home Acc. Ins. Co., 214 Cal. 743, 7 P.2d 999, 85 A.L.R. 13, and Purefoy v. Pacific Automobile Indemnity Exchange (Cal.Sup.) 46 P.2d 143) which deal directly with this class of policy; and in each case it was held in substance that before the insurer may relieve itself of liability to a third person for any breach of the cooperation clause by the insured occurring subsequent to the happening of the event which makes the policy operative in favor of such third person, it is essential for the insurer to establish by evidence that a material provision of the co–operation clause was breached and that the insured suffered substantial prejudice thereby.”

The trial court also cited and relied upon the reasoning in the case of Allegretto v. Oregon Automobile Insurance Co., 140 Or. 538, 13 P.2d 647. The facts are similar in that there, as here, the insured falsely represented that another was driving the car. On that statement an answer was prepared and filed. The true facts were learned shortly before the date of trial, and the answer was amended to conform to the facts. The court there held on appeal that a directed verdict should have been granted in favor of defendant upon the ground that a prejudicial breach of the policy appeared as a matter of law. It is to be noted, however, in the Allegretto Case the true facts were not made known until two or three days before the trial; that by an amendment in open court the jury were made acquainted with the facts that the insured was a falsifier, and further, due to the shortness of time intervening between the discovery of the truth and the trial, the company had no opportunity to prepare a defense or consider a settlement.

In the instant case the facts were known to the defendant some six months before the cause came to trial. Also by stipulation, not in open court, an amended answer was filed admitting McClure to have been the driver. The case was tried on the merits, and no reference was made at the trial to the arrest or the plea of guilty by Mr. Davis to the charge of reckless driving, nor was any reference made during the course of the trial that in the original answer which had been filed by the attorneys for the indemnity company, it was alleged that Davis and not McClure was driving. At the trial Davis and McClure stipulated that McClure was acting as the agent of Davis; that McClure was the owner of the truck, and that McClure was driving the truck at the time of the accident. No reference was made at the trial with regard to the original report turned in to the indemnity company, nor to any ground upon which the indemnity company denied liability, nor to the fact that at the time of the accident Davis had told the officer that he, Davis, was the driver of the truck.

In the Allegretto Case, supra, the amendment had the effect of apprising the jury of the fact that one of the insured had not, in the first instance, told the truth. It will also appear in the Allegretto Case, supra, that the insurance company had a substantial defense as to liability, for in that case there was a dispute as to who was driving the car, and under the policy in that case if he were not the driver of the car, no liability at all existed as far as the company was concerned.

Here, judgment was against both McClure and Davis. It did not matter which of the parties was driving because both were equally insured, for in the instant case the policy specifically provided under its omnibus clause that any person legally operating the automobile with the permission of the owner was covered by the terms of the policy.

Norton v. Central Surety, etc., Co., 9 Cal.App.2d 598, 51 P.2d 113, is an action against an insurance carrier to recover the amount of a judgment previously obtained against the insured. The defense on the part of the company was a breach of the cooperation clause in the policy. The jury found against the company and judgment was entered, from which it appealed. Without quoting at length, the reviewing court, on appeal, held that the issue as to whether there had been a lack of cooperation sufficient to constitute a breach of the policy was one of fact, citing several cases in support thereof, and also citing the Hynding Case and the Panhans Case to the effect that a violation of the conditions regarding the cooperation on the part of the insured was not a valid defense against an injured person unless it clearly appeared the insurance company was substantially prejudiced thereby, and the burden of proving both the breach and the prejudice was upon the insurer. In the case now before us the implied findings of the jury were against the insurance company.

Appellants cite several cases from foreign jurisdictions in support of their contention. Among others is Petersen v. Preferred Accident Ins. Co. of N.Y., 114 N.J.L. 180, 176 A. 897, where the insured failed to make a statement that he had been driving, and had informed the company that the driver had been another, and gave as his reason therefor, if the real driver had become known it would have appeared that he had no driver's license and that he would have been arrested therefor. The court held that regardless of what the truth may have been, he did, before the trial, cooperate and truthfully state the real facts.

In Rockmiss v. New Jersey Manufacturers' Ass'n Fire Ins. Co., 112 N.J.L. 136, 169 A. 663, the assured gave one statement, but about a month later gave the company a further statement to the effect that his original version was not true. The insurance company claimed that because of the original statement they were deprived of making an advantageous settlement of the claim. The court held that the company, having had ample time to investigate and prepare for trial, suffered no detriment by reason of the alleged breach of the provisions of the contract.

Furthermore, an examination of the cooperation clause in the policy in the instant case reveals that there is no forfeiture clause contained therein, and forfeiture not being favored either in law or in equity, will not be enforced unless the right thereto is clear and certain. Shirley v. American Automobile Insurance Company, 163 Wash. 136, 300 P. 155. That omission was also noted in the Hynding Case, supra.

From an examination of the entire record before us we rather believe the real question here was not one of contributory negligence but of the amount of liability only. The report of the special agent of the company sent to investigate the accident reveals that Mr. Valladao was driving along the highway when a blowout occurred, causing the rim of the rear wheel to lock itself about the wheel, making it impossible to move the car. He left the car and his guests while he went to Santa Rosa for a mechanic. On the rear of plaintiffs' car was a four–inch floodlight burning, and one of the women in the party also stood behind the car with a flashlight to warn approaching traffic. The road was dry, and the night clear. More than a dozen cars had passed without any trouble whatever. Many witnesses would testify as to the presence of the large white light and the red tail–light, both clearly visible. A straight road of one–half to three–quarters of a mile extended back from the stalled car. The recommendation of the investigator was,

“There is no question but that we are absolutely liable and should endeavor to get out of it the best way we can.”

From what has been said, and what is shown by the record, we cannot say that the company was prejudiced by the conduct of its assured as a matter of law.

The judgment of the trial court must therefore be reversed, and it is so ordered.

Mr. Presiding Justice PULLEN delivered the opinion of the court.

I concur: THOMPSON, J.