Eduardo KNATT, a Minor, et al., etc., Plaintiffs, Appellants and Respondents, v. CALIFORNIA STATE AUTOMOBILE ASSOCIATION INTER–INSURANCE BUREAU, Defendant, Cross-complainant and Respondent; Arthur J. Knatt, Cross-defendant, Appellant and Respondent.
We are concerned on these appeals with the interpretation and interrelation of the not uncommon provisions of automobile liability insurance policies, (1) disclaiming liability for bodily injury to “any insured,” and (2) promising to “defend any suit against the insured alleging ․ bodily injury ․ and seeking damages which are payable under the terms of this [policy], even if any of the allegations of the suit are groundless, false, or fraudulent.”
Arthur J. Knatt was the “named insured” under an automobile liability insurance policy (the policy) written by California State Automobile Association Inter-Insurance Bureau (CSAA). He was the father of three minor children, Eduardo, Troy, and Carlos Knatt (the minor claimants), who were “additional insureds.” While the minor claimants were passengers in the insured automobile driven by the named insured, the vehicle was involved in an accident which proximately resulted in bodily injuries to each of them.
The minor claimants, by their mother and guardian ad litem, thereafter commenced an action for declaratory relief against CSAA. They sought “a declaration regarding the duties and responsibilities of [CSAA] with respect to the said policy” and their claims. CSAA answered the complaint, and contemporaneously filed a cross-complaint against the named insured thereby bringing him into the action as a “necessary” party. By its answer, and cross-complaint against the named insured, CSAA sought a judicial declaration that it was “under no duty to defend or pay any judgment that may be entered in any law suit arising out of the accident ․” In his answer to the cross-complaint the named insured prayed, inter alia, that he be reimbursed by CSAA for attorney fees and costs “incurred in defense of the ․ Cross-Complaint herein ․”
At the trial CSAA relied upon a clause of the policy reading as follows:
“Exclusions This policy does not apply ․ (k) to liability to [sic] bodily injury to any insured; ․”
(Parenthetically, we note that no contention is made that the minor claimants' claim against the insured, or their action against CSAA, was fraudulent, or collusive, or other than in good faith. And it is now settled law that a “minor child may maintain an action for negligence against his parent.” (See Gibson v. Gibson (1971) 3 Cal.3d 914, 923, 92 Cal.Rptr. 288, 479 P.2d 648.) )
Judgment was thereafter entered in the action declaring: (1) that CSAA's “policy of insurance does not provide coverage for liability for any bodily injuries to Eduardo Knatt, Troy Knatt, or Carlos Knatt resulting from an accident ․ while they were passengers in a vehicle driven by Arthur J. Knatt;  that said defendant is under no duty to defend any of the parties hereto in any action or to pay any judgment that may be entered in any lawsuit arising out of the said accident ․;  that defendant CSAA is not obligated to pay or reimburse cross-defendant Arthur J. Knatt for any attorney's fees incurred in the defense of the complaint or cross-complaint herein.”
The minor claimants and the named insured have separately appealed from the judgment.
THE APPEAL OF THE MINOR CLAIMANTS
The minor claimants contend that the policy's clause excluding CSAA from “liability to bodily injury to any insured” 1 does not—in “ ‘clear and unmistakable language ’ ” as required by State Farm Mut. Auto. Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 201–202, 110 Cal.Rptr. 1, 514 P.2d 953, emphasis added—exclude the insurer from liability for bodily injuries suffered by them as a result of the negligent operation of the insured vehicle by their father, the named insured.
A similar argument was presented to the state's high court in California State Auto. Ass'n Inter-Ins. Bureau v. Warwick, supra, 17 Cal.3d 190, 130 Cal.Rptr. 520, 550 P.2d 1056, which related to the identical provision with which we are now concerned. The only relevant factual difference was that in Warwick it was an additionally insured wife who sought to hold CSAA liable.
The Warwick court, finding neither ambiguity nor lack of “clear and unmistakable language,” concluded “that the exclusion clause in the policy is susceptible to only one interpretation by the lay reader: that the insurer would not pay indemnity for injuries suffered by [the additionally insured wife] while she was riding as a passenger in the insured vehicle.” (17 Cal.3d p. 195, 130 Cal.Rptr. 520, 550 P.2d 1056.)
(Warwick was concerned only with interpretation of the policy's subject exclusion clause. More recently the high court, addressing itself to a similar clause but to a different contention, found it to comport with the state's public policy, and with constitutional guaranties of equal protection of the laws. See Farmers Ins. Exchange v. Cocking (1981) 29 Cal.3d 383, 173 Cal.Rptr. 846, 628 P.2d 1, passim.)
We are unpersuaded by the minor claimants' argument that a distinction must reasonably be made between the additionally insured wife of Warwick, presumably able herself to drive the insured automobile, and the additionally insured eight, nine, and ten-year-old minor claimants who presumably were not. As said in Warwick : “In view of the popular and accepted meaning of the word ‘any,’ the term ‘any insured’ unmistakably refers to any person insured under the policy, whether such person is a named or unnamed insured, a driver or a passenger.” (17 Cal.3d p. 195, 130 Cal.Rptr. 520, 550 P.2d 1056.)
The appeal of the minor claimants is accordingly found meritless.
THE APPEAL OF THE CROSS–DEFENDANT NAMED INSURED
The named insured impliedly relies upon the briefs and arguments of the minor claimants in respect of the disputed obligation of the insurer to pay, within the policy's coverage limits, any judgment in favor of the minor claimants against the named insured arising out of the accident. We have, as noted, found those arguments invalid.
Express contentions of the named insured are: (1) that regardless of the insurer's obligation to so indemnify him, it was under a duty to defend him in an action brought by the minor claimants; and (2) that the insurer was under a duty to reimburse him for his reasonable attorney fees and other expenses of the instant declaratory relief action into which he was brought by the insurer's cross-complaint.
We proceed to our analysis of the first of these contentions, i. e., that CSAA was under a duty to defend its named insured if, and when, an action should be brought against him by the minor claimants.
The problem is not a simple one; we find the applicable law of this state to be uncertain.
Such an issue was seemingly resolved in 1966 by Gray v. Zurich Insurance Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168.
Gray concerned a general, or comprehensive (nonauto) liability insurance policy written in favor of one Gray. As did the policy of the case before us, its first paragraph contained what the court described as the “wide” and “basic” “primary promises ” “held out to the insured.” (Emphasis added.) The primary promises were identical to those of the case before us, but for the here irrelevant distinction between general or comprehensive (nonauto) liability insurance, and automobile liability insurance.
The primary promises of the two cases follow:
“[1.] To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury ․;
“[2.] [To] defend any suit against the insured alleging such bodily injury ․ and seeking damages which are payable under the terms of this [policy], even if any of the allegations of the suit are groundless, false, or fraudulent.” (Emphasis added.)
We note at this point that CSAA recognizes its duty ordinarily to defend such a lawsuit, even if any of the allegations are “groundless, false, or fraudulent.” It simply argues that here the minor claimants' lawsuit would not be “seeking damages which are payable under the terms of [the policy].” (See last preceding paragraph of this opinion.) The argument, as we shall see, was rejected by Gray.
The policy of Gray also contained “exclusions” which, among other things, provided that it did “ ‘not apply ․ to bodily injury ․ caused intentionally by or at the direction of the insured.’ ” (The policy of these appeals, as noted, “excluded” the insurer from liability for bodily injuries to “any insured.”)
Gray, the insured, became the defendant of a damage action in which the complaint alleged that he had “ ‘wilfully, maliciously, brutally and intentionally assaulted’ ” the plaintiff. Notified of the action, the insurer refused to defend on the ground that the damages sought were not “ ‘payable under the terms' ” of the policy because of its “exclusion” from coverage of bodily injuries caused “ ‘intentionally by ․ the insured.’ ” (Emphasis added.) Judgment was thereafter entered in the “assault” action against Gray, who had himself been obliged to provide his defense. Gray satisfied the judgment and thereafter commenced an action against the insurer for indemnification and, additionally, for the costs of the earlier litigation, including reasonable attorney fees.
In the action against the insurer, the trial court concluded that the policy, because of its exclusion of liability for intentional bodily injury, had furnished no coverage to Gray since the action (as also here claimed by CSAA) was not “seeking damages which are payable under the terms of [the policy].” Because there was no coverage, the court concluded, there was no duty to defend and thus no liability for attorney fees and costs. Judgment in favor of the insurer was entered.
On appeal Gray reversed. Finding the effect of the policy's exclusionary clause irrelevant on the appeal, the court held the insurer liable for the amount of the earlier judgment against Gray. Its rationale was as follows: “ ‘Having defaulted such agreement the company is manifestly bound to reimburse its insured for the full amount of any obligation reasonably incurred by him. It will not be allowed to defeat or whittle down its obligation on the theory that plaintiff himself was of such limited financial ability that he could not afford to employ able counsel, or to present every reasonable defense, or to carry his cause to the highest court having jurisdiction, ․ Sustaining such a theory ․ would tend ․ to encourage insurance companies to similar disavowals of [defense] responsibility with everything to gain and nothing to lose.’ ” (65 Cal.2d p. 280, 54 Cal.Rptr. 104, 419 P.2d 168; and see Arenson v. National Auto. & Cas. Ins. Co. (1957) 48 Cal.2d 528, 539, 310 P.2d 961.) It was further held that Gray was entitled to “the costs, expenses and attorney's fees incurred in defending such suit.” (Gray, as noted, had made no request for such attorney fees of the later action which was then before the court.)
Gray had considered the reasonable expectation of the parties from the policy's primary promises. It recognized also that “the duty to defend is broader than the obligation to indemnify.” (Emphasis added; see Fresno Economy Import Used Cars, Inc. v. United States Fid. & Guar. Co. (1977) 76 Cal.App.3d 272, 278, 142 Cal.Rptr. 681; Val's Painting & Drywall, Inc. v. Allstate Ins. Co. (1975) 53 Cal.App.3d 576, 584, 126 Cal.Rptr. 267.) For the duty to indemnify would attend only a claim covered by the policy and adjudged valid, while the duty to defend would exist even where the claim, as noted, is “groundless, false, or fraudulent.”
The Gray court then held that the “broad sweep” of the policy's primary promise to defend against any (nonauto) personal injury liability suit “would lead the insured reasonably to expect defense of any [such] suit regardless of merit or cause.” “[C]learly [the court said], these promises, without further clarification, would lead the insured reasonably to expect the insurer to defend him against suits seeking damages for bodily injury, whatever the alleged cause of the injury, ․” (65 Cal.2d pp. 272, 273, 54 Cal.Rptr. 104, 419 P.2d 168.)
The Gray court then directly addressed the contention upon which CSAA here relies. It pointed to the policy's primary promise's qualifying language “[to] defend any suit ․ seeking damages which are payable under the terms of this” policy. It stated: “But the insurer argues that the third party suit must seek ‘damages which are payable under the terms of this endorsement’ ; it contends that this limitation modifies the general duty to defend ․ [¶] The very first paragraph as to coverage, however, provides that ‘the company shall defend any such suit against the insured alleging such bodily injury’ although the allegations of the suit are groundless, false or fraudulent. This language, in its broad sweep, would lead the insured reasonably to expect defense of any suit regardless of merit or cause.” (65 Cal.2d pp. 272–273, 54 Cal.Rptr. 104, 419 P.2d 168.)
Gray then accepted, arguendo, the insurer's contention that because of the policy's exclusionary clause, it had no duty to indemnify Gray. It stated, “[E]ven upon this basis, we find a duty to defend,” 2 and reiterated “that the insured would reasonably expect a defense by the insurer in all [nonauto] personal injury actions against him.” 3 (Emphasis added; 65 Cal.2d pp. 268, 278, 54 Cal.Rptr. 104, 419 P.2d 168.)
Under this holding of Gray the instant contention of CSAA is manifestly invalid, and the superior court's determination that CSAA was not bound to defend against the minor claimants' action was erroneous.
But more recently (1976) the high court decided the above mentioned case of California State Auto. Ass'n Inter-Ins. Bureau v. Warwick, 17 Cal.3d 190, 130 Cal.Rptr. 520, 550 P.2d 1056. The court, as we have pointed out, found no liability of the insurer to indemnify Warwick, the named insured, because of bodily injuries suffered by his wife, an additional insured. That issue was broadly discussed by the court. No discussion whatever attended the related but independent question of the insurer's duty to defend; the only such consideration appears in the high court's terse summary: “The court declared that the insurer did not have a duty to defend or indemnify Warwick. Defendants appeal from the judgment. We affirm.” (Emphasis added; 17 Cal.3d p. 192, 130 Cal.Rptr. 520, 550 P.2d 1056.)
We thus find ourselves confronted with conflicting, and apparently irreconcilable, rules of the state's high court. We must, respectfully, “choose between two lines of decisions that cannot be reconciled.” (Estate of Brooks (1946) 28 Cal.2d 748, 754, 171 P.2d 724; and see People v. Ashley (1954) 42 Cal.2d 246, 262–263, 267 P.2d 271 [cert. den., 348 U.S. 900, 75 S.Ct. 222, 99 L.Ed. 707]; 6 Witkin, Cal. Procedure (2d ed. 1971) Appeal, § 692, p. 4608, (1981 supp.) pp. 115–116.) In our determination of the “better rule” (op. cit., § 692, p. 4609) we are admonished to consider the “trend of authority” (Smith v. Workmen's Comp. App. Bd. (1968) 69 Cal.2d 814, 825, 73 Cal.Rptr. 253, 447 P.2d 365), the greater weight of authority elsewhere (6 Witkin, Cal. Procedure (2d ed. 1971) Appeal, § 691, p. 4606), and the extent to which each of the opposing rules was argued and considered in the supportive authority (McDowell & Craig v. City of Santa Fe Springs (1960) 54 Cal.2d 33, 38, 4 Cal.Rptr. 176, 351 P.2d 344).
The high court has also, and frequently, taught that: “ ‘[C]ases, of course, are not authority for propositions not there considered.’ ” (People v. Belleci (1979) 24 Cal.3d 879, 888, 157 Cal.Rptr. 503, 598 P.2d 473; People v. Ceballos (1974) 12 Cal.3d 470, 481, 116 Cal.Rptr. 233, 526 P.2d 241; In re Tartar (1959) 52 Cal.2d 250, 258, 339 P.2d 553.) And there appears near unanimity throughout the states of the nation, in judicial rejection of the “contention quite frequently made by insurance companies ․ to the effect that the insurer's obligation to defend is limited to cases establishing the ultimate liability of the insurer to indemnify the insured, ․” (See Annot., Liability Insurer—Duty to Defend (1956) 50 A.L.R.2d 475–480, and cases cited.)
Moreover, applying Gray's rationale to the case before us, it becomes manifest that the named insured, from the policy's first primary promise —“To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury”—entertained the “reasonable expectation” that the insurer would defend him against an action seeking such damages.
Under the above authority we hold, on the facts and the insurance policy of the case before us, that CSAA was obligated as a matter of law to furnish its named insured a defense against the claims of the additional insureds, the minor claimants.
We come now to the remaining contention of the cross-defendant named insured's appeal, i. e., that CSAA was under a duty to reimburse him for the reasonable attorney fees and expenses of the instant declaratory relief action. (It will be remembered that the named insured was obliged to incur attorney fees and other expenses in responding to CSAA's cross-complaint, and litigating his right to the defense which had been promised him.)
Again we have no certain precedent to guide us. In Gray, as pointed out, Gray did not seek his attorney fees of the later action in which his right to such a defense was vindicated.
Early California authority would beyond any doubt compel a holding that the named insured was, as ruled by the trial court of this case, not entitled to attorney fees reasonably incurred by him in the pending action.
The earliest such authority we find is O'Morrow v. Borad (1946) 27 Cal.2d 794, 167 P.2d 483, where O'Morrow because of his insurer's conflict of interest sought a declaratory adjudication that he was entitled to defend, at his insurer's expense, a third-party tort liability action brought against him. The high court agreed, holding the insurer “liable for any judgment, costs of suit, and reasonable attorneys' fees which O'Morrow may incur in defending himself” in the third-party tort liability action. But, the court said (p. 801, 167 P.2d 483): “[T]here is no basis for allowing O'Morrow the reasonable expense of counsel in the present suit for declaratory relief. He has not brought himself within any of the few exceptions to the general rule that, in the absence of contract or statutory provision, the services of an attorney must be paid for by the client who employs him.”
But more recently California's courts appear to have departed from the strict concept that the right to attorney fees depends upon statute or an express contract therefor between an insurer and its insured. The forerunner of this departure must reasonably be deemed the well-known case of Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173.
Crisci announced the rule that a consideration for the primary promises of a contract of liability insurance, “as insurers are well aware, is the peace of mind and security it will provide in the event of an accidental loss, ․” (Emphasis added; 66 Cal.2d p. 434, 58 Cal.Rptr. 13, 426 P.2d 173.) We opine that few things are better calculated to disrupt an insured's peace of mind and sense of security than his insurer's declaratory relief lawsuit disclaiming any duty to defend, as promised, a threatened action for damages for personal injuries. Sometimes the insured, with a meritorious defense, will not have the means to defend either action, and be obliged to default, thus (in vindication of Gray's above-noted prophecy, 65 Cal.2d p. 280, 54 Cal.Rptr. 104, 419 P.2d 168) “ ‘to encourage insurance companies to similar disavowals of responsibility with everything to gain and nothing to lose.’ ”
Crisci's premise has frequently been elaborated by the same court. “The implied promise [of Crisci] requires [the insurer] to refrain from doing anything to injure the right of the [insured] to receive the benefits of the agreement. ” (Egan v. Mutual Of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818, 157 Cal.Rptr. 482, 598 P.2d 452 [cert. den., 445 U.S. 912, 100 S.Ct. 1271, 63 L.Ed.2d 597], emphasis added; and see Johansen v. California State Auto. Ass'n Inter-Ins. Bureau (1975) 15 Cal.3d 9, 20, 123 Cal.Rptr. 288, 538 P.2d 744; Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, 460, 113 Cal.Rptr. 711, 521 P.2d 1103.)
Attending the principle announced by Crisci has been a closely related rule: “In interpreting [an insurance] policy, we must take cognizance of the reasonable expectations of the parties in entering into the agreement.” (Holz Rubber Co., Inc. v. American Star Ins. Co. (1975) 14 Cal.3d 45, 56, 120 Cal.Rptr. 415, 533 P.2d 1055; and see Herzog v. National American Ins. Co. (1970) 2 Cal.3d 192, 197, 84 Cal.Rptr. 705, 465 P.2d 841; Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263, 269, fn. 5, 54 Cal.Rptr. 104, 419 P.2d 168; Atlantic Nat. Ins. Co. v. Armstrong (1966) 65 Cal.2d 100, 112, 52 Cal.Rptr. 569, 416 P.2d 801; Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862, 869–870, 27 Cal.Rptr. 172, 377 P.2d 284.) We think it manifest that no person will reasonably expect to be put to the travail and expense of a lawsuit with his insurer over its duty to defend, according to its primary promise, a personal injury action against him.
A violation of an insurer's covenant with its insured will occur when the insurer unreasonably breaches its primary promise to defend, or to indemnify. (Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 818, 157 Cal.Rptr. 482, 598 P.2d 452; Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 920–922, 148 Cal.Rptr. 389, 582 P.2d 980; Javorek v. Superior Court (1976) 17 Cal.3d 629, 643–644, 131 Cal.Rptr. 768, 552 P.2d 728; Johansen v. California State Auto. Ass'n Inter-Ins. Bureau, supra, 15 Cal.3d 9, 14–18, 123 Cal.Rptr. 288, 538 P.2d 744; Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573–575, 108 Cal.Rptr. 480, 510 P.2d 1032.) Such a violation will sound in tort, in breach of contract, and in breach of the implied covenant of good faith. (Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d p. 574, 108 Cal.Rptr. 480, 510 P.2d 1032; and see Commercial Union Assurance Companies v. Safeway Stores, Inc. (1980) 26 Cal.3d 912, 920–921, 164 Cal.Rptr. 709, 610 P.2d 1038.) And a lack of such good faith will be established when the insurer shall “erroneously,” or “improperly,” fail to abide by the policy's promises; actual “bad faith” or “misconduct” is not essential. (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d pp. 921–922, 148 Cal.Rptr. 389, 582 P.2d 980, fn. 5; Johansen v. California State Auto. Ass'n Inter-Ins. Bureau, supra, 15 Cal.3d p. 16, 123 Cal.Rptr. 288, 538 P.2d 744, fn. 4; Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d p. 574, 108 Cal.Rptr. 480, 510 P.2d 1032; Crisci v. Security Ins. Co., supra, 66 Cal.2d 425, 430, 58 Cal.Rptr. 13, 426 P.2d 173; State Farm Mut. Auto. Ins. Co. v. Allstate Ins. Co., supra, 9 Cal.App.3d 508, 530, 88 Cal.Rptr. 246.)
Recent cases have departed even further from the strict “contractual attorney fee relationship” rule of O'Morrow v. Borad, supra, 27 Cal.2d 794, 167 P.2d 483. The relationship between the insurer and its insured is now deemed fiduciary in nature. (Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 820, 157 Cal.Rptr. 482, 598 P.2d 452; Spindle v. Chubb/Pacific Indemnity Group (1979) 89 Cal.App.3d 706, 712, 152 Cal.Rptr. 776.) Such a relationship “may be said to exist whenever trust and confidence is reposed by one person in the integrity and fidelity of another.” (Estate of Cover (1922) 188 Cal. 133, 143, 204 P. 583; Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67 Cal.App.3d 19, 31, 136 Cal.Rptr. 378.)
Upon the insurer's violation of its covenant, it will be liable to its insured in “compensatory damages for all detriment proximately caused by that breach (see Civ.Code, § 3333).” (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910, 922, 148 Cal.Rptr. 389, 582 P. 980; emphasis added.) The insured in such a case is entitled to “ ‘the full amount which will compensate [him] for all the detriment caused by the insurer's breach of the express and implied obligations of the contract.’ ” (Johansen v. California State Auto. Ass'n Inter-Ins. Bureau, supra, 15 Cal.3d 9, 15, 123 Cal.Rptr. 288, 538 P.2d 744.) And manifestly, those damages will include the insured's attorney fees and costs, reasonably incurred, in a separate action such as that before us, where the insurer improperly claims no duty under its primary promise to defend.
Such a conclusion harmonizes our law with what we believe to be the weight of out-of-state authority, which we now briefly review (the emphasis is ours):
“This duty to defend is entirely separate and distinct from, and not dependent upon, the insurer's liability to pay, ․ Thus, an unjustified refusal by the insurer to properly carry out that duty constitutes a breach of contract subjecting it to liability for any damages suffered by the insured as a result thereof, ․ including any attorney's fees incurred by the insured in bringing a declaratory judgment action to establish the insurer's breach, ․” (Riviera Beach Vol.F. Co., Inc. v. Fidelity & C. Co. of N.Y. (D.Md.1975) 388 F.Supp. 1114, 1120); “Although there is some difference of opinion in cases dealing with declaratory judgments brought by an insurer against its insured, we conclude that the insured herein is entitled to recover reasonable attorney fees. This action was brought to serve the sole interest of the insurer and arises out of Motorists' basic unwillingness to defend a suit in which it had a clear legal duty to defend, ․ The rationale behind allowing attorney fees to date in defending the negligence action is that the insured must be put in a position as good as that which he would have occupied if the insurer had performed its duty. The fact that the insurer brings a declaratory judgment action after it has failed in its duty to defend should not require the insured to incur expenses which he cannot recover.” (Motorists Mutual Insurance Co. v. Trainor, 33 Ohio St.2d 41 (1973) 294 N.E.2d 874, 878); “An insured is entitled to recover the expenses of defending a declaratory judgment [sic] brought as a result of an insurer's breach of its obligation to defend a tort action related to its disclaimer ․” (Glens Falls Ins. Co. v. United States Fire Ins. Co. (1973) 41 A.D.2d 869, 342 N.Y.S.2d 624, 627 [affd. by Court of Appeals in 34 N.Y.2d 778, 358 N.Y.S.2d 773, 315 N.E.2d 813 (1974) ]; Brown v. United Stated Fid. & Guaranty Co. (1974) 46 A.D.2d 97, 361 N.Y.S.2d 232, 234).
To the same effect see National Indemnity Company v. Harper (W.D.Mo.1969) 295 F.Supp. 749, 757; Standard Accident Ins. Co. of Detroit v. Hull (S.D.Cal.1950) 91 F.Supp. 65, 68; Brohawn v. Transamerica Insurance Company (1975) 276 Md. 396, 347 A.2d 842, 851; Cohen v. American Home Assurance Company (1969) 255 Md. 334, 258 A.2d 225, 239; Johnson v. General Mut. Ins. Co. (1969) 24 N.Y.2d 42, 48–50, 298 N.Y.S.2d 937, 246 N.E.2d 713; Sykes v. Midwestern Indemnity Company (1973) 38 Ohio Misc. 64, 311 N.E.2d 906, 910.
Nevertheless, contrary authority is to be found in this state and others.
Other California cases found clinging to the O'Morrow v. Borad rule, or where the above-noted developing authority apparently was unraised by the parties and unconsidered by the courts, follow: Lowell v. Maryland Casualty Co. (1966) 65 Cal.2d 298, 302, 54 Cal.Rptr. 116, 419 P.2d 180; Twentieth Century-Fox Film Corp. v. Harbor Ins. Co. (1978) 85 Cal.App.3d 105, 114–115, 149 Cal.Rptr. 313; Patterson v. Insurance Co. of North America (1970) 6 Cal.App.3d 310, 317–318, 85 Cal.Rptr. 665; Carroll v. Hanover Insurance Co. (1968) 266 Cal.App.2d 47, 50, 71 Cal.Rptr. 868; Spiva v. Phoenix Indemnity Co. (1959) 167 Cal.App.2d 496, 498–499, 334 P.2d 614; Fazzino v. Insurance Co. of North Amer. (1957) 152 Cal.App.2d 304, 309, 313 P.2d 178.
We have also found the following out-of-state contrary opinions: Gerhardt v. Continental Ins. Cos. (1966) 48 N.J. 291, 225 A.2d 328, 334; Brown Bag Company v. Bituminous Casualty Corp. (1969) 117 Ill.App.2d 287, 254 N.E.2d 577, 581; Inland Mutual Insurance Company v. Hightower (1962), 274 Ala. 52, 145 So.2d 422, 431; Maryland Casualty Co. v. Sammons (1940) 63 Ga.App. 323, 11 S.E.2d 89, 91–92; Lujan v. Gonzales (1972) 84 N.M. 229, 501 P.2d 673, 682–683; Olsen v. Preferred Risk Mutual Insurance Company (1969) 284 Minn. 498, 170 N.W.2d 581, 587; Cincinnati Ins. Co. v. Shelby Mut. Ins. Co. (Tenn.App.1975) 542 S.W.3d 822, 825; Shepard Marine Const. Co. v. Maryland Cas. Co. (1976) 73 Mich.App. 62, 250 N.W.2d 541, 543. Typical of their holdings is: “Every person, natural or artificial, has a right to have his rights under a contract adjudicated ․ whether the issues are made affirmatively or defensively, without paying the attorney's fees of the opposite party in such a suit.” (Maryland Casualty Co. v. Sammons, supra, 11 S.E.2d 89, 92.)
We are of the opinion that it must now reasonably be said—contrary to the early conclusion of O'Morrow v. Borad, supra, 27 Cal.2d 794, 801, 167 P.2d 483, (see p. 426, ante ), and its adherent authority—that upon an insurer's wrongful rejection of its promise to defend, it is under a contractual duty to pay the insured's attorney fees reasonably incurred in establishing his right to such a defense. In such a case, as noted, there has been “ ‘the insurer's breach of the express and implied obligations of the contract’ ” (emphasis added; Johansen v. California State Auto. Ass'n Inter-Ins. Bureau, supra, 15 Cal.3d 9, 15, 123 Cal.Rptr. 288, 538 P.2d 744), for which the insured may recover “compensatory damages for all detriment proximately caused by that breach” (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910, 922, 148 Cal.Rptr. 389, 582 P.2d 980).
We hold that where, as here, an insurer has according to Gray made a primary promise to defend against third-party tort liability claims and wrongfully refuses to defend against such a claim, it will bear the insured's expenses, including reasonable attorney fees, of any declaratory relief action brought to determine the insurer's liability to defend or to indemnify under its policy.
The judgment is affirmed as to the minor claimants, plaintiffs Eduardo Knatt, Troy Knatt, and Carlos Knatt. It is reversed as to cross-defendant Arthur J. Knatt. The cause is remanded to the superior court for further proceedings not inconsistent with the views we have expressed.
My colleagues decide that while CSAA had no liability under its policy for bodily injury to the minor claimants, it was nevertheless obligated to defend its insured in an action brought against him for bodily injury by the minor claimants, and for that reason it was also obligated to reimburse its insured for attorney fees incurred in defending against CSAA's cross-complaint in the declaratory relief action brought against CSAA by the minor claimants to determine coverage. I concur in the first conclusion, but I am constrained to dissent from the latter two conclusions because (assuming arguendo that the third follows from the second) I believe the second conclusion is contrary to higher authority by which we are bound.
As my colleagues observe, California State Auto. Ass'n Inter-Ins. Bureau v. Warwick (1976) 17 Cal.3d 190, 130 Cal.Rptr. 520, 550 P.2d 1056, “related to the identical provision with which we are now concerned” (ante, p. 422). And there, the Supreme court affirmed the trial court's conclusion that “the insurer did not have a duty to defend ․” (17 Cal.3d at p. 192, 130 Cal.Rptr. 520, 550 P.2d 1056.) While the statement is terse, and without supporting analysis, we are not free to assume that it was made inadvertently, and my colleagues do not suggest otherwise. Rather, they conclude that Warwick together with Gray pose “conflicting and apparently irreconcilable, rules of the state's high court” (ante, p. 425), justifying our selection of the “better rule” (ante, p. 425). It is on this point that I disagree. In my view, the conclusion that a higher court has posited conflicting and apparently irreconcilable rules should be reached only after careful analysis of the facts and issues in the relevant cases, with a view to harmonizing their holdings if at all possible. In this case, I believe it is possible.
Insurance policies typically link the insurer's duty to defend to the insurer's duty to pay, and it has not been held or stated that they may not rightfully do so. Nor has it been held or stated, regarding this link, that the insurer would have a duty to defend even if it was clear to all that in no possible manner could the insurer incur a duty to pay. Insurers, however, have rather consistently attempted to abandon the defense of an insured if the area of litigation was one in which they expected, or at least hoped, there would be no duty to pay.
Gray is one of a notable line of cases in which the courts have rejected these attempted abandonments, reasoning that the insurer's expectations, or hopes, matter less than the reasonable expectations of the insured. In Gray, Justice Tobriner identified three factors which, in that case, gave rise to the insured's reasonable expectation of being defended: the exclusionary clause under which the insurer disclaimed the duty to pay did not “conspicuous[ly], plain[ly] and clear[ly]” relate to the duty to defend (65 Cal.2d 263, at p. 273, 54 Cal.Rptr. 104, 419 P.2d 168); the operative exclusionary term—“intentionally”—was itself ambiguous (ibid.); and the factual basis of the insurance claim was one that “clearly presented the possibility [of] damages that were covered by the indemnity provisions of the policy.” (Id., at p. 277, 54 Cal.Rptr. 104, 419 P.2d 168).
In Warwick, the first factor was presumably present: the exclusionary clause was no more identified with the duty to defend than in Gray. But in Warwick the court, as my colleagues observe, found no ambiguity in the exclusionary clause. And, the matter being one solely of contract interpretation, there were no disputed facts relevant to the determination of coverage. These differences could reasonably, and we must assume did, account for a different result.
My colleagues follow Warwick as regards interpretation of the exclusionary clause. I believe we are obliged to follow Warwick as regards the duty to defend as well. I would therefore deny the appeal of the cross-defendant named insured.
1. The questionable syntax is here immaterial. (See California State Auto. Ass'n Inter-Ins. Bureau v. Warwick (1976) 17 Cal.3d 190, 195, fn. 4, 130 Cal.Rptr. 520, 550 P.2d 1056.)
2. “On the other hand,” Gray asserts (65 Cal.2d pp. 274–275, 54 Cal.Rptr. 104, 419 P.2d 168), the duty to defend will not extend to claims not covered by the policy's primary promise such as where the claim is for “auto” liability and the policy's coverage is “nonauto,” or the claim is for a stairway injury and the policy's primary promise refers only to “auto” inflicted injuries.
3. Performance of its duty to defend would in no way estop or prejudice the insurer in its right to later disclaim liability for indemnification under an exclusionary clause, or otherwise. An insurer may, and often does, defend under a reservation of such right. (See Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263, 279, 54 Cal.Rptr. 104, 419 P.2d 168; State Farm Mut. Auto. Ins. Co. v. Allstate Ins. Co. (1970) 9 Cal.App.3d 508, 527, 88 Cal.Rptr. 246; Val's Painting & Drywall, Inc. v. Allstate Ins. Co., supra, 53 Cal.App.3d 576, 585–586, 126 Cal.Rptr. 267.)
ELKINGTON, Acting Presiding Justice.
NEWSOM, J., concurs.