PERSON WESTERN INC v. STATE COMPENSATION INSURANCE FUND

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Court of Appeal, First District, Division 1, California.

PERSON–WESTERN, INC., a corporation, Plaintiff and Appellant, v. STATE COMPENSATION INSURANCE FUND, Defendant and Respondent.

Civ. 47924.

Decided: May 24, 1982

Monaco, Anderlini & Finkelstein, Evelyn S. Holzman, San Mateo, for plaintiff and appellant. Vonk, Krimen & Bjornsen, Robert Nelsen, San Francisco, for defendant and respondent.

This is an appeal from a judgment of dismissal entered pursuant to an order sustaining respondent's demurrer without leave to amend.

The amended complaint at issue asserts a cause of action for breach of the insurer's duty of good faith and fair dealing, for fraud and deceit, and for negligence.   All such claims are based upon the following pertinent allegations.

Appellant purchased worker's compensation insurance from respondent State Compensation Insurance Fund.   By the terms of the insurance contract, respondent agreed to defend appellant against all covered claims, but retained the right to “settle any claim or suit as it deems expedient․”  The policy also provided for a contingent dividend payment to appellant at the end of each policy year, with the payment and its amount dependent upon the surplus available in the fund, and to be made in accordance with the effective dividend plan.   The policy premium was based upon “the entire remuneration earned during each policy period by all officials and employees of the insured covered by this policy․”  Also, respondent's rights were subrogated to “all rights of the insured” in the event of any payment of worker's compensation benefits under the policy.

While the policy was in effect, appellant's employee filed a claim for worker's compensation benefits—ultimately paid by respondent—in the amount of $6,819.38.

The employee thereafter filed a civil action for damages against a (non-employer) third-party, alleging that the defendant was negligently responsible for all injuries suffered by the employee.   Pursuant to the subrogation clause of the insurance policy, respondent filed a complaint in intervention in the third party case asserting that the employee's injuries were not attributable to any negligence of the employer, as a reading of the complaint clearly suggests.1

The employee, with the participation of respondent, settled the third party suit before trial for $25,000, of which sum only $4,500 was paid to respondent in exchange for dismissal of the complaint in intervention.   Appellant was thereafter charged with a loss of $2,319.38 (the difference between the worker's compensation benefits paid, $6,819.38, and the amount received from the third-party tortfeasor), which was incorporated into the calculation of appellant's loss ratio.   As a result, appellant's refund under a company dividend plan was altered, and its premium rate increased, consistent with the guidelines established by the Insurance Commissioner.  (Ins.Code, § 11370 et seq.) 2

The essence of appellant's bad faith claim is that respondent breached its duty as appellant's subrogee by wrongfully, unreasonably and without settlement negotiations compromising the third-party case for less than the amount of the worker's compensation benefits paid, when the full amount of such benefits was recoverable from the third-party tortfeasor.   As the result of such bad faith, appellant argues, it absorbed the entire loss from the settlement, while respondent suffered no detriment from the failure to obtain full recovery in the third-party suit.

“In our examination of the complaint we are guided by well-settled principles governing the testing of its sufficiency by demurrer.   A demurrer admits all material and issuable facts properly pleaded.  [Citations.]  However, it does not admit contentions, deductions or conclusions of fact or law alleged therein.”  (Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713, 63 Cal.Rptr. 724, 433 P.2d 732;  Spindle v. Travelers Ins. Companies (1977) 66 Cal.App.3d 951, 953, 136 Cal.Rptr. 404.)

 We are guided, too, by the rule that in every insurance contract there is an implied covenant of good faith and fair dealing.  (See Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 659, 328 P.2d 198;  Cancino v. Farmers Ins. Group (1978) 80 Cal.App.3d 335, 343, 145 Cal.Rptr. 503.)   This implied duty requires an insurer to deal in good faith and fairly with its insured in handling an insured's claims against it (Cancino, supra, at p. 340, 145 Cal.Rptr. 503;  Richardson v. Employers Liab. Assur. Corp. (1972) 25 Cal.App.3d 232, 239, 102 Cal.Rptr. 547), and obligates an insurer to “ ‘do nothing to deprive the insured of the benefits of the policy․’ ”  (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 575, 108 Cal.Rptr. 480, 510 P.2d 1032.)

 The insurer is entitled to control any action in which it represents or is subrogated to the rights of its insured, including settlement negotiations.  (Northwestern Mut. Ins. Co. v. Farmers' Ins. Group (1978) 76 Cal.App.3d 1031, 1043, 143 Cal.Rptr. 415.)   However, embraced in the insurer's duty to attempt to effect a reasonable settlement is a corresponding obligation to give as much consideration to the interests of the insured as it does to its own.  (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d 654, 659–660, 328 P.2d 198;  Northwestern Mut. Ins. Co. v. Farmers' Ins. Group, supra, 76 Cal.App.3d at p. 1043, 143 Cal.Rptr. 415;  Shapero v. Allstate Ins. Co. (1971) 14 Cal.App.3d 433, 437–438, 92 Cal.Rptr. 244.)

 The question before us is whether an insurer has the duty to refrain from settlement of a subrogation claim in a third party case for less than the worker's compensation insurance benefits previously paid by it, where the result will be a loss to the insured.3  It thus becomes necessary to briefly examine the nature of the subrogation relationship between a worker's compensation insurer and its insured.

 The Labor Code provides the employer, or its worker's compensation insurance carrier in the event of subrogation, with three basic methods of recovering worker's compensation benefits paid or to be paid from a third party tortfeasor:  “․ the employer ‘may bring an action directly against the third party (§ 3852), join as a party plaintiff or intervene in an action brought by the employee (§ 3853), or allow the employee to prosecute the action himself and subsequently apply for a first lien against the amount of the employee's judgment, less an allowance for litigation expenses and attorney's fees (§ 3856, subd. (b)).’ ”  (Associated Construction & Eng. Co. v. Workers' Comp. Appeals Bd. (1978) 22 Cal.3d 829, 833, 150 Cal.Rptr. 888, 587 P.2d 684;  Del Monte Corp. v. Superior Court (1982) 127 Cal.App.3d 1049, 1052, 179 Cal.Rptr. 855.)   The code also permits an employer who has not completely reimbursed the employee to receive credit before the Workers' Compensation Appeals Board for money obtained in a third party judgment in the employee's favor.  (Lab.Code, § 3861.)  (Ibid.)  Thus, the clear legislative intent is to assure that employers are reimbursed for all amounts advanced under worker's compensation law when the employee recovers judgment against or settles with a third party.  (Fuchs v. Western Oil Fields Supply (1972) 25 Cal.App.3d 728, 738, 102 Cal.Rptr. 74, disapproved on other grounds Quinn v. State of California (1975) 15 Cal.3d 162, 176, 124 Cal.Rptr. 1, 539 P.2d 761.)

In the instant case, the insurer, upon payment of compensation to the injured employee in accordance with the policy, became subrogated to the rights of the employer and thereby entitled to enforce appellant's recovery rights against the third party.  (Ins.Code, § 11662; 4  Van Nuis v. Los Angeles Soap Co. (1973) 36 Cal.App.3d 222, 228, fn. 3, 111 Cal.Rptr. 398;  Tate v. Superior Court (1963) 213 Cal.App.2d 238, 244, 28 Cal.Rptr. 548;  National Auto Ins. Co. v. Cunningham (1940) 41 Cal.App.2d 828, 833, 107 P.2d 643.)   The insurer elected to pursue recovery from the third party by means of a complaint in intervention filed in the employee's civil action for damages.   And as noted, respondent insurer had complete control of all aspects of that claim for reimbursement.  (Northwestern Mut. Ins. Co. v. Farmers' Ins. Group, supra, 76 Cal.App.3d 1031, 1043, 143 Cal.Rptr. 415.)

An additional factor deserves consideration.   The employee's injuries were not, according to the admitted allegations of the amended complaint (Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d 566, 572, 108 Cal.Rptr. 480, 510 P.2d 1032), caused by any concurrent negligence of the employer.   Consequently, our high court's decision in Witt v. Jackson (1961) 57 Cal.2d 57, 17 Cal.Rptr. 369, 366 P.2d 641, does not require that the employee's damages be reduced, even proportionately, under comparative negligence concepts,5 by the amount of worker's compensation benefits received.   (DeCruz v. Reid (1968) 69 Cal.2d 217, 226–227, 70 Cal.Rptr. 550, 444 P.2d 342;  Curtis v. State of California (1982) 128 Cal.App.3d 668, 681–682, 180 Cal.Rptr. 843.)   Neither should the employer's reimbursement be reduced.   Thus, respondent had no justifiable reason to seek a compromised or proportionate settlement in the present case.

 Under such circumstances, it is our view that appellant has sufficiently pleaded causes of action for breach of the implied covenant of good faith and fair practices.   Where no concurrent negligence of the employer justifies reduction of the claim for reimbursement, we conclude that a worker's compensation insurer may act in bad faith by settling a reimbursement claim in a third-party suit for less than the full amount of worker's compensation benefits paid, if such settlement will, as alleged here, ultimately result in a loss to the insured employer without detriment to the insurer.

 We acknowledge the “policy of the law to discourage litigation and to favor compromise and voluntary settlements of doubtful rights and controversies, made either in or out of court.  [Citations.]”  (Central Basin etc. Water Dist. v. Fossette (1965) 235 Cal.App.2d 689, 705, 45 Cal.Rptr. 651.)   Still, we feel that settlement may not be made by an insurer at the expense of the interests of its insured.   Of course, the insurer has the power to settle if the costs of a less-than-full-value settlement are not imposed upon the insured.   Accordingly, it is our view that appellant's first amended complaint adequately states causes of action based upon respondent's bad faith.

We also find that appellant's amended complaint satisfactorily pleads a cause of action for fraud and deceit.

 The essential allegations of a fraud action are:  (1) a misrepresentation;  (2) knowledge of its falsity;  (3) an intent to defraud;  (4) justifiable reliance upon the misrepresentation by the party claiming fraud;  and (4) resulting damages.  (Roberts v. Ball, Hunt, Hart, Brown & Baerwitz (1976) 57 Cal.App.3d 104, 109, 128 Cal.Rptr. 901;  Universal By-Products, Inc. v. City of Modesto (1974) 43 Cal.App.3d 145, 151, 117 Cal.Rptr. 525.)   The required misrepresentation may be either express or implied.   (Universal By-Products, Inc., supra, at p. 151, 117 Cal.Rptr. 525.)

 A fraud cause of action may also be based upon nondisclosure or concealment where the defendant is in a fiduciary or other confidential relationship which imposes a duty of disclosure.  (Cooper v. Jevne (1976) 56 Cal.App.3d 860, 866, 128 Cal.Rptr. 724;  Black v. Shearson, Hammill & Co. (1968) 266 Cal.App.2d 362, 367, 72 Cal.Rptr. 157.)   According to Civil Code section 1710, subdivision (3), deceit is defined as, “The suppression of a fact, by one who is bound to disclose it, or who gives information or other facts which are likely to mislead for want of communication of that fact; ․”

 Here, respondent insurer has an established confidential relationship with appellant.  (Barrera v. State Farm Mut. Auto Ins. Co. (1969) 71 Cal.2d 659, 668, fn. 5, 669, 79 Cal.Rptr. 106, 456 P.2d 674;  Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 270, 54 Cal.Rptr. 104, 419 P.2d 168.)   We think the alleged failure of respondent to act in good faith as impliedly represented, or, in the alternative, its failure to disclose an intent to settle the third party action detrimental to appellant's interests, states a viable cause of action sounding in fraud.  (Cooper v. Jevne, supra, 56 Cal.App.3d 860, 866, 128 Cal.Rptr. 724;  Wetherbee v. United Insurance Co. of America (1968) 265 Cal.App.2d 921, 932, 71 Cal.Rptr. 764.)

The judgment is reversed, and the case remanded to the trial court.

FOOTNOTES

1.   According to appellant's pleading, the third party tortfeasor parked his vehicle next to a curb and negligently failed to set the parking brake.   The vehicle crashed through a construction site, and struck appellant's employee.

2.   Actually, appellant received a favorable modification of its rate and dividend compensation due to the amount received in settlement of the third-party case, but not as favorable as it would have been had the full amount of the worker's compensation benefits been recovered.

3.   It is already well-established that a liability insurer owes its insured a duty to effect reasonable settlement of a claim against the insured within its policy limits when there is substantial likelihood of recovery in excess of those limits.  (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 940–942, 132 Cal.Rptr. 424, 553 P.2d 584;  Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, 14–15, 123 Cal.Rptr. 288, 538 P.2d 744.)   In Johansen, supra, at page 16, 123 Cal.Rptr. 228, 538 P.2d 744, our high court noted that, “[w]henever it is likely that the judgment against the insured will exceed 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.’ ”

4.   Section 11662 states:  “Whenever any employer is insured against liability for compensation with any insurer, such insurer is subrogated to the rights of the employer to recover losses arising out of any of the following acts by the insurer:  [¶]  (a) Assuming the liability of the employer for compensation in the manner provided by the law relating thereto.  [¶]  (b) Payment of any compensation for which the employer is liable.   Such insurer may enforce any such subrogated rights in its own name.”

5.   See Associated Construction & Eng. Co. v. Workers' Comp. Appeals Bd., supra, 22 Cal.3d 829, 842, 150 Cal.Rptr. 888, 587 P.2d 684.

NEWSOM, Associate Justice.

ELKINGTON, Acting P. J., and LEVINS, J.,* concur.

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