Muriel JOHANSEN, Plaintiff and Appellant, v. CALIFORNIA STATE AUTOMOBILE ASSOCIATION INTER-INSURANCE BUREAU, Defendant and Respondent.
Plaintiff Muriel Johansen appeals from the judgment rejecting her claim that defendant liability insurer is liable for the unpaid portion of her judgment against defendant's insured including the amount in excess of the insurance policy limits.
On February 26, 1963, appellant and her husband sustained personal injuries and damage to their vehicle due to the negligent operation of a 1956 Chevrolet by Gary Dearing (‘Gary’), the minor son of the insured Joyce E. Dearing (‘Joyce’). On December 27, 1963, the Johansens sued Gary and Joyce in the Alameda County Superior Court for personal injuries and property damage.
At the time of the accident there was in full force and effect an insurance policy issued by respondent to Joyce which provided coverage up to $10,000 for bodily injury for each person, $20,000 for each occurrence and $5,000 for property damage. Respondent took the position that the accident was not covered by the policy because the car involved in the collision was either an additionally acquired vehicle not reported within 30 days or a non-owned vehicle regularly furnished for the use of the insured. Nevertheless, in a Reservation of Rights Agreement executed on February 28, 1964, respondent assumed the defense of Gary and Joyce in the damage action and retained attorney Bennett to represent them.
On May 1, 1964, respondent initiated a declaratory relief action against appellant, her husband, the Dearings and Hartford Insurance Company, appellant's uninsured motorist carrier (‘Hartford’), by which it sought a declaration that its policy did not provide coverage for the accident in question. In the declaratory relief action appellant retained the services of attorney Federspiel (who was also their attorney in the damage action), while the Dearings were represented by attorney Hawkins.
Appellant's demand for settlement of the case for $10,000, the full amount of the policy, was submitted to respondent on December 10, 1964. In a reply dated December 16, 1964, respondent maintained that if it was judicially determined that the policy in question afforded coverage to the Dearings, respondent would be willing to pay the $10,000 policy limits. At the same time respondent expressed its desire to have the matter of coverage tried prior to the damage action. Respondent repeatedly showed its willingness to pay the full policy limit if the court found coverage; and in letter to Mr. Federspiel dated March 18, 1965, Mr. Bennett suggested executing a stipulation to the effect that the $10,000 would be deposited in an escrow and would be paid to appellant along with 7 percent interest if the coverage issue were decided against respondent.
Respondent took several steps to expedite the declaratory relief action in order that it be tried prior to the damage action. Thus, it successfully defended a motion made on December 22, 1964 by the opponents to dismiss the declaratory relief action or at least to postpone it until after the conclusion of the damage action trial. On February 26, 1965, respondent moved for an order to advance the declaratory relief action, which motion was granted over the opposition of all defendants. On February 15, 1965, a letter was sent by attorney Bennett to the Dearings advising them that he would attempt to continue the trial of the damage action. Joyce, however, acting upon the advice of Mr. Hawkins, took the position that the damage action should be tried first, whereupon Mr. Bennett desisted and abandoned the motion for a continuance.
As a result, the damage action was tried first. After trial by jury, judgment was entered against the Dearings, obligating Gary to pay personal injury damages in the sum of $32,500 to appellant, $520 to her husband, $615 property damage, and $254.30 costs, and obligating Joyce to pay $5,000. Thereafter the declaratory relief action was tried, the trial judge concluding that the policy of insurance did not provide coverage for the accident in question. On appeal that judgment was reversed (Cal. State Auto. Assn. Inter-Ins. Bureau v. Dearing (1968) 259 Cal.App.2d 717, 66 Cal.Rptr. 852). Following that decision, on September 5, 1968, final judgment was entered providing that the policy did extend coverage to the Dearings and that it inured to the benefit of appellant, her husband and Hartford.
By an agreement dated February 5, 1969, Gary assigned to appellant and/or Hartford all his rights and claims against respondent for breach of contract, express or implied, arising from respondent's alleged failure to accept the settlement offer within the policy limits. Thereafter, appellant filed the present action predicating respondent's liability on three theories: (1) absolute liability; (2) bad faith liability; and (3) contractual liability for unpaid interest on the judgment. The trial court, sitting without a jury, rendered judgment in favor of respondent.
At the outset it must be pointed out that the present appeal is not analogous to cases where the insurer refuses to defend the insured or, after having assumed the defense, rejects a reasonable settlement offer because the liability of the insured or the extent of damages in the third party action are doubtful or subject to differing evaluations. In the instant case both Gary's liability and excess damages were considered by respondent as a virtual certainty; and, absent the coverage issue, respondent admittedly would have settled the claim by payment of the policy limits. Therefore, the narrow issue confronting us is whether or not rejection of a policy limits settlement demand on the grounds that the insured was not covered by the policy gives rise to excess liability either on the theory of absolute liability and/or bad faith.
Appellant's claim that an insurer may be held responsible under the theory of absolute liability is predicated on Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173, and certain language borrowed from Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 328 P.2d 198. However, as will be seen below, neither Crisci nor Comunale supports appellant's proposition.
It is conceded that amicus curiae in Crisci argued at great length that an insurer who fails to settle within the policy limits should be subjected to absolute liability. However, it is noteworthy that, despite expressing some dictum sympathetic to the utilitarian simplicity of the proposed rule, Crisci was ultimately decided upon the principles pronounced in Comunale (cf. Crisci v. Security Ins. Co., supra, 66 Cal.2d at pp. 430–432, 58 Cal.Rptr. 13, 426 P.2d 173).
But appellant's position that bad faith is not the crucial element in determining the insurer's liability for failure to settle within the policy limits cannot be sustained under Comunale, either.
It is to be noted that Comunale, upholding the bad faith test established by previous California cases (Brown v. Guarantee Ins. Co. (1957) 155 Cal.App.2d 679, 319 P.2d 69; Ivy v. Pacific Automobile Ins. Co. (1958) 156 Cal.App.2d 652, 320 P.2d 140), points out that when the insurer assumes the defense of the insured it thereby retains control over the litigation and settlement and is therefore liable for the entire amount of a judgment against the insured, but only if in the exercise of such control it is guilty of bad faith in refusing to settle within the policy limits (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 660, 328 P.2d 198).
Moreover, the principles laid down in Comunale directly contradict the contention that an insurer should be strictly liable for not settling the third party's claim against the insured. These principles proclaim an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. The implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty. The insurer, in deciding whether a claim should be compromised, must take into account the interest of the insured and give it at least as much consideration as it does to its own interest. When there is great risk of a recovery beyond the policy limits, so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured's interest requires the insurer to settle the claim. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing (Comunale v. Traders & General Ins. Co., supra, at pp. 658–659, 328 P.2d 198.) Thus, Comunale makes it plain that the insurer must settle only in appropriate cases where the most reasonable manner of disposing of the claim is settlement and it is liable for breach of good faith only if the refusal to settle is unwarranted. This is, of course, a far cry from the concept of strict liability which would make the breach actionable regardless of the state of mind of the insurer and/or the reasonableness of its action.
We note parenthetically that Crisci does not negate the foregoing reasoning. While stating that ‘Liability is imposed not for a bad faith breach of the contract but for failure to meet the duty to accept reasonable settlements,’ the court points out that Comunale ‘makes it clear that liability based or an implied covenant exists whenever the insurer refuses to settle in an appropriate case and that liability may exist when the insurer unwarrantedly refuses an offered settlement where the most reasonable manner of disposing of the claim is by accepting the settlement,’ and that the ‘examination of the balance of the Palmer, [Palmer v. Financial Indemnity Co., 215 Cal.App.2d 419, 30 Cal.Rptr. 204], Critz, [Critz v. Farmers Ins. Group, 230 Cal.App.2d 780, 41 Cal.Rptr. 401], and Davy [Davy v. Public National Ins. Co., 181 Cal.App.2d 387, 5 Cal.Rptr. 488] opinions makes it abundantly clear that recovery may be based on unwarranted rejection of a reasonable settlement offer * * *’ (Crisci v. Secutity Ins. Co., supra, 66 Cal.2d at p. 430, 58 Cal.Rptr. at p. 17, 426 P.2d at p. 177; emphasis added). It therefore follows that, contrary to appellant's contention, Crisci reaffirms rather than negates the proposition that the culpability of the insurer is a requisite element of liability based upon its failure to settle within the policy limits.
Appellant's insistence that certain language used in Comunale1 supports her view that the insurer who denies coverage does so at its own risk and if it is mistaken, is strictly accountable to the insured, is likewise untenable.
First, it appears from the citation itself that the liability of the insurer who denies coverage is predicated upon its wrongful refusal of a settlement offer which by very definition implies some sort of culpability. Moreover, it is elementary that language in a case should not be applied in abstracto but rather with reference to the facts of the case. When so considered, Comunale makes it evident that the insurance company there breached both its duty to defend and to settle the claim within the policy limits. Accordingly, the court held that ‘an insurer, who wrongfully declines to defend and who refuses to accept a reasonable settlement within the policy limits in violation of its duty to consider in good faith the interest of the insured in the settlement, is liable for the entire judgment against the insured even if its exceeds the policy limits.’ (Comunale v. Traders & General Ins. Co., supra at p. 661, 328 P.2d at p. 202; emphasis added.) It follows that, since in the case at bench respondent assumed the defense of the Dearings in the damage action, the rule pertaining to a dual breach pronounced in Comunale is inapposite.
In addition, the proposition that breach of the duty to idemnify by itself does not impose strict liability on the insurer finds strong support both in logic and in law. It is widely recognized that the insurer's duties to defend and indemnify are not coextensive, the obligation to defend being broader than the duty to indemnify. As the cases point out, the duty to defend does not turn the ultimate adjudication of coverage but upon the facts known to the insurer at the inception of the third party suit. If the allegations of the complaint show a potential liability within the policy coverage, the duty to defend arises (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 276–277, 54 Cal.Rptr. 104, 419 P.2d 168; State Farm Mut. Auto. Ins. Co. v. Allstate Ins. Co. (1970) 9 Cal.App.3d 508, 526, 88 Cal.Rptr. 246; Fireman's Fund Ins. Co. v. Chasson (1962) 207 Cal.App.2d 801, 804, 24 Cal.Rptr. 726). Considering the varying degrees of duty, the insurer's liability for failure to defend has been deemed stricter than for failure to settle within the policy limits. Thus, it has been held that, since the insurer is contractually obligated to defend the insured, its failure to so defend is a breach of contract; and reasonable or good faith belief that there is no coverage under the policy does not exonerate the company from liability. However, where the insurer does assume the defense of the insured, it may be held liable for excess damages only if it acts in bad faith in refusing to settle (Landie v. Century Indemnity Company (Mo.App.1965) 390 S.W.2d 558, 561–563; 49 A.L.R.2d 711 et seq. and cases cited therein).
Since the foregoing discussion compels the conclusion the when the insurer assumes the defense in the third party action, as respondent did here, its liability for failure to settle within the policy limits can be based solely upon bad faith, we must next examine whether in the case as bench respondent may be held accountable upon this theory.
Bad Faith Liability
The principles governing the bad faith liability of an insurer are well established. Accordingly, the obligation to exercise good faith is implied in every insurance contract. An insurer who is guilty of bad faith in refusing to settle the claim within its policy limits breaches the implied term of the contract and is liable for the entire amount of the judgment recorded against the insured, including any portion in excess of the policy limits (Comunale v. Traders & General Ins. Co., supra; Davy v. Public National Ins. Co. (1960) 181 Cal.App.2d 387, 5 Cal.Rptr. 488; Brown v. Guarantee Insurance Co., supra). While the refusal to accept a proposed settlement which, under all the circumstances, is reasonable, constitutes failure to exercise good faith, it has been held that the consideration given to the offer of settlement should be an intelligent one, should be based on a reasonable investigation, and, in determining whether an offer of settlement is warranted or reasonable, the insurer has the legal right to protect its own financial interests (Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d supra at pp. 659–660, 320 P.2d 140). In consonance with this principle, the cases in California and elsewhere recognize that, where there is a material dispute with regard to coverage, the insurance company is entitled to invoke declaratory relief procedures to seek adjudication of the coverage issue (State Farm Mut. Auto. Ins. Co. v. Allstate Ins. Co., supra, 9 Cal.App.3d at p. 527, 88 Cal.Rptr. 246; Allstate Ins. Co. v. Roberts (1958) 156 Cal.App.2d 755, 320 P.2d 90; General Ins. Co. of American v. Whitmore (1965) 235 cal.App.2d 670, 45 Cal.Rptr. 556; 15 Cal.Jur.2d § 74, pp. 232–233; Note, 21 Hastings L.J. 191 (1969); see also: Carvin v. Standard Accident Insurance Co. (6 Cir. 1968) 395 F.2d 326; Great American Insurance Company v. Ratliff (Ark.D.C. 1965) 242 F.Supp. 983; Landie v. Century Indemnity Company, supra, 390 S.W.2d at p. 567).
Finally, it is axiomatic that whether or not the insurer is guilty of bad faith is a question for the trier of fact in each case (Marsango v. Automobile Club of So. Cal. (1969) 1 Cal.App.3d 688, 696, 82 Cal.Rptr. 92; Donahue Constr. Co. v. Transport Indem. Company (1970) 7 Cal.App.3d 291, 304, 86 Cal.Rptr. 632; Palmer v. Financial Indem. Co. (1963) 215 Cal.App.2d 419, 429, 30 Cal.Rptr. 204; Brown v. Guarantee Ins. Co., supra, 155 Cal.App.2d at p. 689, 319 P.2d 69), whose findings will not be disturbed on appeal if supported by substantial evidence (Crawford v. Southern Pacific Co. (1935) 3 Cal.2d 427, 429, 45 P.2d 183; Bancroft-Whitney Co. v. McHugh (1913) 166 Cal. 140, 142, 134 P.1157; 6 Witkin, Cal. Procedure (2d ed.), § 245, pp. 4236–4237).
In view of the foregoing principles and the facts of the instant case, we conclude that the findings of the trial court that respondent entertained a good faith belief in the nonexistence of the coverage in bringing the declaratory relief action, and that it conducted the defense in the third party action in the best interest of the insured are amply supported by evidence. The record indisputably shows that respondent's belief that the accident in question was not covered by the policy was genuine and strongly supported by the circumstances. Thus, a thorough investigation carried out by respondent indicated that the car involved in the accident was excluded from the coverage of the policy because it was either an additionally acquired vehicle not reported within 30 days or a non-owned vehicle regularly furnished for the use of the insured within the meaning of the policy (see Cal. State Auto. Assn. Inter-Ins. Bureau v. Dearing, supra, 259 Cal.App.2d at pp. 719–722, 66 Cal.Rptr. 852). The reasonableness of respondent's belief was reaffirmed by the trial court which, for the reasons stated, found for respondent. The eventuality that after an extensive review the appellate court reversed the judgment does not ex post facto erase the insurer's good faith belief in the noncoverage. It is blackletter law that the reasonableness of denial of policy coverage may not be determined by hindsight, but rather with regard to the circumstances which gave rise to such belief (Hodges v. Standard Accident Ins. Co. (1961) 198 Cal.App.2d 564, 575, 18 Cal.Rptr. 17; Wasserman v. Buckeye Union Casualty Company (1972) 29 Ohio App.2d 7, 277 N.E.2d 569, 576).
Respondent's good faith was further manifested by its willingness to pay appellant the policy limits, together with interest and costs, if it lost the declaratory relief action and to deposit said amount in an escrow, and by its repeated efforts to expedite the declaratory relief action. Respondent likewise proceeded in good faith when, in view of Gary's clear liability, it suggested that the Dearings admit liability in the damage action in order to deep the verdict as low as possible and to avoid an excessive judgment.
Appellant's contention, stating in essence that the best interests of the Dearings would have required respondent to pay the policy limits regardless of the existence of coverage, and therefore the declaratory relief action should not have been brought at all or, in the alternative, it should have been postponed until after the trial of the personal injury action, reflects a misconception of law. Although it has been often emphasized that the insurer does not have the right to sacrifice the interests of the insured (Ivy v. Pacific Automobile Ins. Co., supra) and must give at least as much consideration to the interests of the insured as it gives to its own interest (Comunale v. Traders & General Ins. Co., supra; Palmer v. Financial Indem. Co., supra), no rules of law or equity have ever prescribed that the insurer must pay under a policy which does not provide coverage for the incident in question. This is particularly applicable to the instant case in which, unlike Silberg v. California (1974) 11 Cal.3d 452, 113 Cal.Rptr. 711, 521 P.2d 1103,2 there was no assurance that the insurer would ever be able to recoup the payment by lien or otherwise if the noncoverage was later confirmed in a judicial proceeding. Quite contrary to appellant's suggestion, the implied covenant of good faith and fair dealing imposes mutual obligations upon the parties requiring that either party will do anything which will impair the rights of the other (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 658, 328 P.2d 198).
In order to find that respondent was not guilty of bad faith it was, of course, not necessary for the court to make any specific finding concerning the good faith—or lack thereof—of the insureds. It should be noted, however, that there is abundant evidence in the record to support the trial court's conclusion that, in fact, the excess judgment was caused by the joint efforts of Mr. Federspiel and Mr. Hawkins whose fee-sharing arrangements cast considerable, if not conclusive, doubt on the propriety of asserting a claim of bad faith against respondent at all.
Thus, according to Mr. Hawkins' own, but reluctant, admission at trial, the higher the excess judgment against his clients—the Dearings—(and assuming that respondent would be held liable therefor) the larger would be his fee.
Since the first step in reaching that goal would be to obtain an excess judgment, the only reason for Mr. Hawkins' advice to the Dearings not to admit the liability of Gary3 and to insist on the damage action being tried first—clearly against their own interests, as the trial court correctly found—becomes apparent, albeit meritless and highly suspect.
This evidence and the court's finding also point up the dangerous breeding ground of nefarious litigation which would be created by a rule of strict liability as suggested by amicus curiae in Crisci. By adroit, cooperative maneuvering on the part of the third-party plaintiff's counsel and the insured's personal counsel, an excess judgment, a veritable legal ‘straw man’ can easily be set up, exposing the insurer to liability without fault. Such a rule would amount to nothing more than a form of economic blackmail which should be vigorously condemned rather than passively contemplated by the courts.
The bad faith rule—consistently followed in California—is a sound, salutary principle. It permits an Excess recovery against those insurance carriers which refuse to acknowledge their obligations (as defined in the long line of decisions which we have cited in this opinion) and at the same time recognizes that every refusal to settle on the demand of others whose interests may not be parallel with—but in fact may well be a adverse to—those of the insurer is not asserted in bad faith.
Appellant's additional argument that respondent's repeated attempts at getting the declaratory relief action tried first amounted to a breach of the Reservation of Rights Agreement and thereby to bad faith, is not borne out by the record either. While the agreement in question concededly contained language to the effect that the parties (respondent and the Dearings) ‘desire . . . to postpone the determination of their respective rights and liabilities under the policy until the questions of the insured's legal liability for damages arising out of such accident and the amount thereof, if any, has been definitely determined,’ the trial court properly found that said agreement did not change any rights or obligations because the agreement expressed only the intentions of the parties to preserve the status quo. Furthermore, the expediting of the declaratory relief action so that it be tried prior to the personal injury action clearly would have been in the interest of the insured. The record indicates that the Dearings, for all practical purposes, were personally judgment-proof. In view of this fact, Mr. Federspiel's testimony that the personal injury action would have been dropped against the Dearings if the declaratory relief action had resulted in a determination of noncoverage is entirely convincing.
Liability for Unpaid Interest
Appellant's last major contention is that respondent breached the express terms of the contract providing for payment of interest on the judgment. Appellant's point is well taken.
Pursuant to the supplementary payments provisions of the insurance policy, respondent agreed to pay ‘all interest on the entire amount of any judgment therein which accrues after entry of the judgment and before the Bureau has paid . . .’ (emphasis added).
In the face of these provisions the record shows the total judgment was $33,889.30, on which respondent paid $19,692.19 ($19,392.40 on November 22, 1968 and $299.79 on May 12, 1969). Respondent admitted that of the amount paid, $8,302.89 represented 3 1/2 years interest on the total amount of the judgment. Since the judgment in the personal injury action was entered on March 25, 1965, simple mathematics show that the interest on the judgment was paid only up to September 25, 1968, not up to November 22, 1968 as prescribed by the policy. It follows that respondent is duly chargeable for the unpaid interest, which appellant contends and respondent conceded at oral argument to be the sum of $375.08.
We finally note that we have considered with care appellant's additional contentions, in which she attacks virtually all of the findings of the trial court for alleged insufficiency of evidence. We find no merit to any of those claims.
The judgment is modified so as to provide that appellant take the sum of $375.08 by virtue of the unpaid interest accrued on the judgment from September 25, 1968 to November 22, 1968, and so modified is affirmed. Each party to bear its own costs.
1. The language relied upon by appellant reads as follows: ‘We do not agree with the cases that hold there is no liability in excess of the policy limits where the insurer, believing there is no coverage, wrongfully refuses to . . . settle the claim. [Citations.] An insurer who denies coverage does so at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer's breach of the express and implied obligation of the contract.’ (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 660, 328 P.2d at p. 201; emphasis added.)
2. We note that Silberg is distinguishable also in other respects from the case at bench. Silberg did not deal with a wrongful refusal to settle a third party claim within the policy limits, but a straight refusal to pay the insured the medical insurance benefits under a medical insurance policy. Furthermore, unlike here, where the declaratory relief action was brought by respondent in order to determine the existence of coverage, the workmen's compensation proceeding in Silberg was instituted by the insured and the insurer did nothing to seek an adjudication of the coverage issue. As a result of the insurer's breach of contract, in Silberg the insured was not able to get proper medication, was subjected to great hardship, and was deprived of the very benefit which he contracted for. Under those circumstances, the court properly held the insurer liable for ass the detriment resulting from the breach of contract.
3. Although liability was admitted immediately prior to commencement of the damage action trial, it came about only after Joyce and Mr. Bennett attended a chambers conference in which the trial judge in that case expressed his opinion that she should follow Mr. Bennett's advice.
KANE, Associate Justice.
TAYLOR, P. J., concurs.