PACIFIC NATIONAL INSURANCE COMPANY; et al., Petitioners, v. SUPERIOR COURT of the State of California, County of San Bernardino, Respondent. Philip LIPTAK, Sr., Real Party in Interest.
Petitioners here are the defendants in the underlying action in which Philip Liptak, Sr. (plaintiff) is suing Pacific National Insurance Company (Pacific National), its employee John A. Hammant, Carl Warren & Company, a licensed independent insurance adjuster, and its employee Kent Livingston, on causes of action for alleged violation of the Unfair Practices Act (Ins. Code, § 790 et seq.) and intentional infliction of emotional distress.
The defendants demurred on the grounds that no cause of action was stated. In respect to the count for intentional infliction of emotional distress it was urged that the facts pleaded failed as a matter of law to constitute the requisite outrageous conduct on the part of the defendants. In respect to the counts based on violation of the Unfair Practices Act defendants urged that plaintiff failed to allege a determination that Pacific National's insured was liable for plaintiff's damages, so no cause of action was stated against any defendant and that, in any event, neither a licensed independent adjuster nor its employees nor an insurance company's employees are “engaged in the business of insurance” within the meaning of Insurance Code section 790.01 and so those defendants are not subject to individual liability under the Act.
The trial court overruled the demurrer and defendants petitioned this court for a writ of mandate to compel the trial court to sustain the demurrer. We issued an alternative writ and the matter is now before us for determination. We conclude the demurrer should have been sustained as to all defendants on all counts.
The facts are derived from plaintiff's second amended complaint augmented by what appear to be undisputed facts taken from the parties' statements of fact in points and authorities filed in the trial court. (See Joslin v. H.A.S. Insurance Brokerage (1986) 184 Cal.App.3d 369, 228 Cal.Rptr. 878.)
On January 4, 1984, plaintiff's son, Philip Liptak, Jr., and William Sylvester Hopfer, Jr. were involved in a vehicular accident which resulted in extensive damage to plaintiff's allegedly handbuilt, custom-made vehicle. Mr. Hopfer was insured by defendant Pacific National for liability arising out of the use of his vehicle. Plaintiff filed suit against Mr. Hopfer to recover for the damage to his vehicle (action No. 225681).
Allegedly, estimates for the repair of plaintiff's vehicle were provided to Pacific National ranging from $35,000 to $40,000. On or about May 22, 1984, Pacific National offered plaintiff $10,000 in full satisfaction of his claims. On or about July 2, 1984, Pacific National's offer was increased to $20,000. Allegedly, Pacific National knew or should have known that it would cost plaintiff between $25,000 and $40,000 to repair or replace his automobile and knew at the time of both said offers that a settlement in those amounts would not constitute a fair and equitable settlement and that plaintiff could not repair or replace his automobile for the amounts offered.
At the time the $10,000 and $20,000 settlements were offered, Pacific National was represented by defendant Carl Warren & Company, a licensed independent adjuster. An employee of that company, Kent Livingston, allegedly processed the claim. However, thereafter plaintiff's claim was turned over for processing to an “in house” adjuster, John A. Hammant, an unlicensed employee of Pacific National. On or about October 4, 1984, Mr. Hammant on behalf of Pacific National notified plaintiff that all previous offers were withdrawn and an offer was made to settle the claim for a total of $2,000. It is asserted this was done to coerce plaintiff into an improvident settlement.
On January 3, 1985, plaintiff filed an action (No. 225680) for violation of the Unfair Practices Act against Pacific National, but apparently realizing the third party action had not been concluded and that the action filed January 3, 1984, was therefore premature, on March 7, 1985, the parties stipulated that action 225680 be dismissed without prejudice and that if plaintiff should decide to file another such suit a specified law firm was authorized to accept service on behalf of Pacific National and its employee John A. Hammant.
A few months later, on or about July 16, 1985, the third party action against the insured (225681) was settled for $25,000 in consideration of which plaintiff gave a release and filed a dismissal of the third party action with prejudice. The release stated it acquitted and discharged the insured “and all other persons, firms, corporations, associations or partnerships of and from any and all claims, actions, causes of action, demands, rights, damages, costs ․ and compensation whatsoever ․ on account of or in any way growing out of any and all known and unknown, forseen and unforseen bodily and personal injuries and property damage and the consequences thereof resulting or to result from the accident ․ which occurred on or about the 4th day of January, 1984․”
Attached to the release, however, was an “EXHIBIT ‘A’ ” in which (1) plaintiff reserved the right to file another lawsuit against Pacific National and its employees and (2) Pacific National and its employees and William S. Hopfer, Jr. specifically denied any “admission of liability.”
Thereafter the instant action (No. 228275) was filed. The second amended complaint alleges that in making the allegedly unreasonable settlement offers “defendants, and each of them, knew that plaintiff was desirous of immediately repairing, rebuilding, or replacing his totally damaged automobile, and because of [his] financial status, was relying on the financial assistance from the insurance benefits ․ promised ․ in the policy․ Nevertheless, acting fraudulently, oppressively, maliciously, and outrageously toward plaintiff with conscious disregard for his known rights and intentionally causing, or willfully disregarding the probability of causing, unjust, and cruel hardship and severe emotional distress to plaintiff,” defendants made the allegedly unreasonable offers “which caused plaintiff severe mental and emotional distress, and anguish, and consequent illness․”
In the counts based on violation of the Unfair Practice Act it was alleged that in so conducting themselves defendants and each of them violated section 790.03 by refusing “in good faith to effectuate a prompt, fair, and equitable settlement of the claim of plaintiff ․ in which the claim of liability had been reasonably clear.” (§ 790.03, subd. (h)(5).) It was more specifically alleged that in so conducting themselves defendants failed “to acknowledge and act reasonably and promptly upon communication with respective [sic] claims arising under insurance policies” in violation of subdivision (h)(2) of section 790.03; failed “to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies” in violation of subdivision (h)(3) of section 790.03; failed to attempt “in good faith to effectuate prompt, fair, and equitable settlement of plaintiff's claim in which liability has become reasonably clear” in violation of subdivision (h)(5) of section 790.03; delayed “the investigation of plaintiff's claim, by requiring plaintiff to submit a claim, and then requiring submission of subsequent formal proof of loss containing substantially the same material as contained in plaintiff's original claim” in violation of subdivision (h)(11) of section 790.03; and failed “to provide promptly a reasonable explanation of the basis [relied] on in the insurance policy ․ for the denial of [plaintiff's] claim, or for the subsequent offers of a compromise settlement” in violation of subdivision (h)(13) of section 790.03.
It was also alleged that defendants Carl Warren & Company, Kent Livingston and John A. Hammant were each acting within the course and scope of their respective employments.
Discussion of Contentions
1. Infliction of Emotional Distress
“The elements of a prima facie case for the tort of intentional infliction of emotional distress were summarized in Cervantez v. J.C. Penny [sic] Co. (1979) 24 Cal.3d 579, 593 [156 Cal.Rptr. 198, 595 P.2d 975], as follows: ‘(1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff's suffering severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the defendant's outrageous conduct. (Fletcher v. Western National Life Ins. Co. (1970) 10 Cal.App.3d 376, 394 [89 Cal.Rptr. 78, 47 A.L.R.3d 286]; Alcorn v. Anbro Engineering, Inc. (1970) 2 Cal.3d 493, 497–499 [86 Cal.Rptr. 88, 468 P.2d 216]; State Rubbish etc. Assn. v. Siliznoff (1952) 38 Cal.2d 330, 336–339 [240 P.2d 282]; 4 Witkin, Summary of Cal. Law (8th ed.) Torts, §§ 234–237, pp. 2515–2517.) ․ Conduct to be outrageous must be so extreme as to exceed all bounds of that usually tolerated in a civilized community. (Alcorn v. Anbro Engineering, Inc., supra, 2 Cal.3d at p. 499, fn. 5 [86 Cal.Rptr. 88, 468 P.2d 216]; Fuentes v. Perez (1977) 66 Cal.App.3d 163, 170 [136 Cal.Rptr. 275]; Rest.2d Torts, § 46, com. d.)’ ” (Davidson v. City of Westminster (1982) 32 Cal.3d 197, 209, 185 Cal.Rptr. 252, 649 P.2d 894.)
The nonpayment of a single disputed claim even if wholly unreasonable does not, without more, constitute sufficiently outrageous conduct to support a cause of action for intentional infliction of emotional distress. (Soto v. Royal Globe Ins. Corp. (1986) 184 Cal.App.3d 420, 430–432, 229 Cal.Rptr. 192; Schlauch v. Hartford Accident & Indemnity Co. (1983) 146 Cal.App.3d 926, 936, 194 Cal.Rptr. 658; see also Ricard v. Pacific Indemnity Co. (1982) 132 Cal.App.3d 886, 894, 183 Cal.Rptr. 502; Everfield v. State Comp. Ins. Fund (1981) 115 Cal.App.3d 15, 20, 171 Cal.Rptr. 164; cf. Davidson v. City of Westminster, supra, 32 Cal.3d 197, 210, 185 Cal.Rptr. 252, 649 P.2d 894.)
Though plaintiff characterized the defendants' conduct as outrageous, the facts alleged in the second amended complaint simply do not depict conduct “so extreme as to exceed all bounds of that usually tolerated in a civilized community.” The demurrer should have been sustained as to that cause of action as to all defendants.
2. Application of the Unfair Practices Act to Employees
Preliminarily we observe that at the time the trial court ruled on this issue, this court had decided a case entitled Grief v. Superior Court (Mar. 14, 1986) E002375, in an opinion certified for publication (178 Cal.App.3d 984, 224 Cal.Rptr. 82) which held that an employee adjuster acting in the course and scope of his employment was not subject to personal liability under the Unfair Practices Act. That fact was brought to the attention of the trial court, but it declined to follow Grief indicating it believed the reasoning in Davis v. Continental Insurance Co. (1986) 178 Cal.App.3d 836, 224 Cal.Rptr. 66, a decision of the First Appellate District, was more persuasive.
In applying Davis rather than the decision of this court, the trial court erred in three respects. First, Davis dealt not with an employee adjuster but with a licensed independent adjuster. The distinction is crucial as we shall explain, so Davis was not controlling and Grief was. Secondly, as we shall explain, the trial court was simply incorrect on the merits. Thirdly, even if Grief was incorrect (and it was subsequently decertified for publication by order of the California Supreme Court on May 22, 1986), as a published decision of the district and division in whose jurisdiction the trial court sits, Grief was binding on the trial court and the trial court was required to follow it even if it did not agree with it. (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455, 20 Cal.Rptr. 321, 369 P.2d 937.)
It is true that where there are conflicting appellate decisions none of which is a decision of the district in which the trial court sits or when there are conflicting decisions of different divisions within the district in which the trial court sits and the divisions have equal territorial jurisdiction over it, the trial court is free to choose among the conflicting decisions. (Auto Equity Sales, Inc. v. Superior Court, supra, 57 Cal.2d 450, 456, 20 Cal.Rptr. 321, 369 P.2d 937.) However, where one of the conflicting decisions is that of a division of an appellate district having sole or primary territorial jurisdiction over the trial court or where one of the conflicting decisions is that of a division of an appellate district in which the divisions have equal territorial jurisdiction over the trial court, the trial court is bound by and must follow the decision of that division or district. Otherwise, an automatic reversal would ensue on appeal and litigational chaos would be invited. Each division of an appellate district has the power of a Court of Appeal. (Cal. Const., art. VI, § 3; see 2 Witkin, Cal.Procedure (3d ed. 1985) Courts, § 260, p. 283; cf. Auto Equity Sales, Inc. v. Superior Court, supra, 57 Cal.2d 450, 455, 20 Cal.Rptr. 321, 369 P.2d 937.)
Turning to the substantive aspect of the question, section 790.01, which enumerates those to whom the Unfair Trade Practices Act applies, reads: “This article applies to reciprocal and interinsurance exchanges, Lloyds insurers, fraternal benefit societies, fraternal fire insurers, grants and annuities societies, insurers holding certificates of exemptions, motor clubs, nonprofit hospital associations, agents, brokers, solicitors, surplus line brokers and special lines surplus line brokers as well as all other persons engaged in the business of insurance.” Plaintiff of course recognizes that employee claim adjusters are not within any of the specifically enumerated classifications in section 790.01. He urges, however, that an employee adjuster comes within the final catch-all category, “all other persons engaged in the business of insurance.” We do not agree.
First, and perhaps most fundamentally, employees are not engaged in business of any kind. Employees of an insurance company and employees of an independent adjusting agency are employed in the insurance industry but they are simply not “engaged in the business of insurance.”
Secondly, all the persons and entities and categories of persons and entities specifically enumerated in section 790.01 must be licensed to engage in business.1 It is a cardinal principle of statutory construction that “[p]articular expressions qualify those which are general.” (Civ.Code, § 3534.) Thus, catch-all classifications are generally not to be construed to include persons outside the category delineated by the persons and entities specifically enumerated. (See California Coastal Com. v. Quanta Investment Corp. (1980) 113 Cal.App.3d 579, 606–607, 170 Cal.Rptr. 263; Campbell v. Board of Dental Examiners (1975) 53 Cal.App.3d 283, 285, 125 Cal.Rptr. 694, disapproved on other grounds in California Teachers Assn. v. San Diego Community College Dist. (1981) 28 Cal.3d 692, 701, 170 Cal.Rptr. 817, 621 P.2d 856.) Because all of the persons and entities and categories of persons and entities specifically enumerated in section 790.01 as being subject to the Act are required to be licensed, it is doubtful that unlicensed employees of licensed persons or entities were intended by the Legislature to be covered by the Act.
Finally, the origins of the legislation must be taken into account. The Unfair Practices Act derives from model legislation drafted by the National Association of Insurance Commissioners as regulatory legislation. It is unlikely that such regulation was intended to extend to the numerous employees of persons and firms engaged in the business of insurance. We believe the Department of Insurance would be startled to learn that it has regulatory authority over such persons whose identities and places of employment are probably not even known to it.
Nor is the power to discipline or directly control such unlicensed persons necessary to the proper regulation of the business of insurance. As long as the regulatory authority has the power to discipline and regulate the activities of the licensed or regulated employer, it has all the persuasive power required to effectively control the conduct of the employer's employees.
It has been suggested that if employees are not held personally liable under the Act, where an employee adjuster has violated the statute by conduct outside the course and scope of his or her employment the employer might escape liability, leaving the injured claimant without a remedy.2 In this case it is sufficient to note that the plaintiff has alleged in each instance that the two employee defendants were at all times acting within the course and scope of their respective employments. We observe, however, that in any case it is hard to perceive how a person whose duty it is to evaluate and adjust claims could be found to have acted outside the course and scope of his or her authority in declining to accept or make a particular settlement offer.
We conclude that nonlicensed employees of insurers and independent adjusters are not persons engaged in the business of insurance within the meaning of section 790.01 and are not subject to personal civil liability on account of conduct in the course and scope of their employment alleged to be in violation of the Act.
3. Application of the Unfair Practices Act to the Insurer and the Licensed Independent Adjuster
There can be no question but that the Act applies to the insurer Pacific National. It also appears to be settled that the Act applies to a licensed independent adjuster. Several cases have analyzed the problem and so held. (Davis v. Continental Insurance Co., supra, 178 Cal.App.3d 836, 224 Cal.Rptr. 66; Bodenhamer v. Superior Court (General Adjustment Bureau) (1986) 178 Cal.App.3d 180, 223 Cal.Rptr. 486.) We agree.
4. Violation of Unfair Practice Act: “Conclusion” and “Determination of Liability”
In Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329, it was held that third party claimants as well as insureds might maintain a civil action for damages against an insurance company for practices violating the provisions of subdivision (h) of Insurance Code section 790.03. (Id., at pp. 885–888, 153 Cal.Rptr. 842, 592 P.2d 329.) However, it was also held that the plaintiff could not sue both the insurer and its insured in the same lawsuit.
In connection with the latter holding the court stated: “Finally, we agree with defendant that plaintiff may not sue both the insurer and the insured in the same lawsuit. Section 1155 of the Evidence Code provides that evidence of insurance is inadmissible to prove negligence or wrongdoing․ A joint trial against the insured for negligence and against the insurer for violating its duties under subdivision (h) would obviously violate both the letter and spirit of the section.
“Moreover, unless the trial against the insurer is postponed until the liability of the insured is first determined, the defense of the insured may be seriously hampered by discovery initiated by the injured claimant against the insurer. In addition, damages suffered by the injured party as a result of the insurer's violation of subdivisions (h)(5) and (h)(14) may best be determined after the conclusion of the action by the third party claimant against the insured. Thus, plaintiff's claim against defendant was brought prematurely and the trial court should have sustained defendant's demurrer and granted the motion for judgment on the pleadings on that ground.” (Royal Globe Ins. Co. v. Superior Court, supra, 23 Cal.3d 880, 891–892, fn. omitted, emphasis added, 153 Cal.Rptr. 842, 592 P.2d 329.)
Based upon these statements it has been said that Royal Globe requires as prerequisites to an action for violation of the statute (1) conclusion of the third party action (see, e.g., Smith v. Interinsurance Exchange (1985) 167 Cal.App.3d 301, 304, 213 Cal.Rptr. 138; Industrial Indemnity Co. v. Mazon (1984) 158 Cal.App.3d 862, 865, 204 Cal.Rptr. 885; Rodriguez v. Fireman's Fund Ins. Co. (1983) 142 Cal.App.3d 46, 53, 190 Cal.Rptr. 705; Nationwide Ins. Co. v. Superior Court (1982) 128 Cal.App.3d 711, 714, 180 Cal.Rptr. 464; cf. Vega v. Western Employers Ins. Co. (1985) 170 Cal.App.3d 922, 925, 216 Cal.Rptr. 592); and (2) a determination of the insured's liability (see, e.g., Heninger v. Foremost Ins. Co. (1985) 175 Cal.App.3d 830, 834, 221 Cal.Rptr. 303; Sych v. Insurance Co. of North America (1985) 173 Cal.App.3d 321, 326–327, 220 Cal.Rptr. 692; Williams v. Transport Indemnity Co. (1984) 157 Cal.App.3d 953, 962, 203 Cal.Rptr. 868).
The reasons identified in Royal Globe for these requirements were (1) the illegality of disclosing the existence of insurance in the action to determine whether or not the insured was liable (Evid.Code, § 1155); (2) the potential for interference with the insurer's defense of the insured by discovery proceedings relating to the insurer's handling of the claim; and (3) the recognition that generally the third party claimant's damages resulting from the alleged mishandling of the claim could best be assessed and determined after resolution of the action between the third party claimant and the insured. (Royal Globe Ins. Co. v. Superior Court, supra, 23 Cal.3d 880, 891–892, 153 Cal.Rptr. 842, 592 P.2d 329; see Cal.Practice Guide, Bad Faith (1986) § 9:91, p. 9–25.)
Except in rare cases, the “conclusion” requirement presents no problem. Here, for example, there was a settlement of the third party action, a release was given and a dismissal with prejudice was filed. Thus, the third party action has been concluded. (Rodriguez v. Firemen's Fund Ins. Co., supra, 142 Cal.App.3d 46, 53–55, 190 Cal.Rptr. 705; cf. Afuso v. United States Fid. & Guar. Co. (1985) 169 Cal.App.3d 859, 863, 215 Cal.Rptr. 490.)
Aside from some language that may have been a bit overbroad, our decision in Nationwide Ins. Co. v. Superior Court, supra, 128 Cal.App.3d 711, 180 Cal.Rptr. 464, is not to the contrary. In Nationwide a third party action had been filed which had not been concluded either by final judgment or by settlement. Since no settlement was involved our discussion centered on the question whether an action is concluded by a judgment which is being appealed. Rather obviously if the conclusion of the third party action against the insured is to be established by means of a judgment, the judgment must be a final one; otherwise the parties might find themselves back in the trial court retrying the third party action following a reversal on appeal. However, a lawsuit need not be concluded by a judgment following litigation. Dismissal of an action with prejudice by agreement of the parties is as final a conclusion of a lawsuit as can be had.
The real problem is whether there must have been a determination or admission of the insured's liability as a prerequisite to the maintenance of an action for damages under the Unfair Practices Act (sometimes hereafter, the “predetermination” rule). The existing decisions are divided in their answers to the question.3 We conclude the correct answer is yes.
We think it unquestioned and unquestionable that a determination at some point that the insured was liable is a prerequisite to recovery by a third party claimant against a liability insurer. In the first place a policy of liability insurance is an indemnity contract in respect to which the insurer generally has no liability unless its insured was liable for the claimant's injury. (Heninger v. Foremost Ins. Co., supra, 175 Cal.App.3d 830, 833–834, 221 Cal.Rptr. 303; Williams v. Transport Indemnity Co., supra, 157 Cal.App.3d 953, 964, 203 Cal.Rptr. 868.) Secondly, even if the dissenting justice in the Williams case was correct that the duty of an insurer to attempt in good faith to effectuate fair and equitable settlements arises at the time the insured's liability becomes reasonably clear (see § 790.03, subd. (h)(5)), if it were ultimately determined that the insured was not liable for the claimant's injury, it is difficult to perceive how the claimant could prove any recoverable damages proximately caused by the insurer's failure to settle. Since no indemnity was owing under the policy, no part of the attorney fees incurred by claimant in the litigation would be recoverable (Brandt v. Superior Court (1985) 37 Cal.3d 813, 817, 210 Cal.Rptr. 211, 693 P.2d 796) even assuming a third party can otherwise recover attorney fees in respect to benefits due under the insured's policy, a question not yet decided. To the extent that Pray by and through Pray v. Foremost Ins. Co. (9th Cir.1985) 767 F.2d 1329, 1330, indicates the contrary, it would appear to be incorrect.
Having concluded that establishment of the insured's liability at some point is a prerequisite to the recovery by a third party claimant, the question is presented why the liability of the insured might not be determined as well in the statutory violation action as in an action by the third party claimant against the insured. The reason it may not is the same as the principal reason given by the California Supreme Court for its decision in Royal Globe: section 1155 of the Evidence Code prohibits the introduction of “[e]vidence that a person was, at the time a harm was suffered by another, insured wholly or partially against loss arising from liability for that harm ․ to prove negligence or other wrongdoing.” (See Royal Globe Ins. Co. v. Superior Court, supra, 23 Cal.3d 880, 891–892, 153 Cal.Rptr. 842, 592 P.2d 329.) In an action for violation of the Unfair Practices Act, not only would the trier of fact be aware the defendant is an insurer, but proof of the existence of an insurance policy affording coverage for the event resulting in the plaintiff's injury would be an essential part of the plaintiff's case. Evidence Code section 1155 prohibits that.
We also observe that trial of the issue of the insured's liability in the statutory violation action after conclusion of the third party action against the insured would leave the insurer at a distinct disadvantage: once the third party claimant's action against the insured was settled and dismissed with prejudice, the insured would have little incentive to appear and testify in his or her own behalf or to assist the insurer in martialling evidence of his or her nonliability.
Finally, although the court's statement in Royal Globe that the claimant's damages might best be ascertained at the conclusion of the claimant's action against the insured (23 Cal.3d at p. 892, 153 Cal.Rptr. 842, 592 P.2d 329), may not have been necessary to the decision strictly speaking, it was nevertheless no idle observation. As previously explained, if ultimately the insured were determined not to be liable for the third party's injury, it would seem unlikely, if not impossible, the claimant would be able to prove any legally recoverable damages were proximately caused by the alleged violation of the statute.
It is true, we believe, that third party claimants will have some disincentive to settle their claims against the insured because of the requirement they establish the insured's liability as a prerequisite to suing the insurer for an asserted statutory violation. But several observations must be made in respect to this problem. One, the “predetermination” rule appears to be mandated by Evidence Code section 1155 and the damages and causation problems that would exist were the rule otherwise. Two, if the rule were otherwise, insurers would have an equally great disincentive to settle actions aginst their insureds, knowing they would immediately thereafter face a new suit for alleged violation of the statute in which the liability of the insured, the very issue compromised and settled in the first action, would be litigated, now perhaps without the active interest and support of the insured. This disincentive would have the potential for creating a conflict of interest between the insurer and its insured in nearly every litigated case: it would be to the insured's interest to settle; it would be to the insurer's interest not to settle the claim against the insured unless it could at the same time resolve the potential statutory violation claim against itself.
Thus, viewed from all sides, the “predetermination” rule would appear to produce a better balance, avoid creating additional conflict of interest problems between insurers and their insureds and in the long run act as a stimulus to the settlement of all claims at one time, a better prospect for the administration of justice than the “settle then sue” scenario that results from a contrary rule. (See Cal.Practice Guide, Bad Faith (1986) §§ 9:105, 9:106, p. 9–29.)
We therefore conclude that Heninger, Sych and Williams were correct in holding or otherwise indicating that a determination or admission of the insured's liability is a prerequisite to the maintenance of an action by a third party claimant for violation of the statute.
Let a peremptory writ of mandate issue to the San Bernardino Superior Court commanding it to vacate its order overruling the defendants' demurrer and to enter a new and different order sustaining the demurrer. Although it appears to us unlikely on the basis of the present record, it may be that plaintiff can plead additional facts showing a viable claim. The trial court is directed therefore to afford plaintiff 30 days' leave to amend if he is so advised and thereafter to proceed in accordance with law.
I dissent from that portion of the majority's opinion requiring both a conclusion and a determination of liability against the insured as a condition precedent to a meritorious third party claim against an insurer alleging unfair settlement practices in violation of Insurance Code section 790.03, subdivision (h)(5).
I agree with the majority the underlying action between the insured and the third party must be finally concluded. I further agree the insured's liability must be established as a prerequisite to recovery by a third party claimant. I disagree with the majority's determination the insured's liability may not be determined in the statutory violation action against the insurer by the third party claimant.
The majority erroneously concludes Royal Globe Insurance Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329, and Evidence Code section 1155 prohibit the liability of the insured and the statutory violation be determined together.1
Supporting this conclusion the majority reasons: “In an action for violation of the Unfair Practices Act, not only would the trier of fact be aware the defendant is an insurer, but proof of the existence of an insurance policy affording coverage for the event resulting in the plaintiff's injury would be an essential part of the plaintiff's case.” Evidence Code section 1155 prohibits that.
“We also observe that trial of the issue of the insured's liability in the statutory violation action after conclusion of the third party action against the insured would leave the insurer at a distinct disadvantage: once the third party claimant's action against the insured was settled and dismissed with prejudice, the insured would have little incentive to appear and testify in his or her own behalf or to assist the insurer in martialling evidence of his or her nonliability.”
This analysis is faulty and without legal or factual support.
Is a “predetermination” rule mandated by Evidence Code section 1155? The answer is “No” for several reasons. First, this is a direct action against an insurer for unfair settlement practices in handling the claim by a third party against its insured. The nature of the action requires the trier of fact be aware the defendant was an insurer. Second, proof of the existence of an insurance policy affording coverage for the event resulting in the plaintiff's injury is not an essential part of the plaintiff's case. The issue to be determined by the trier of fact is the liability of the insured and not coverages afforded by the policy. Third, the insured would not be insured wholly or partially against any loss arising out of a statutory violation by the insurer. And, finally, the trier of fact would be concerned with insurance only as it relates to the conduct of the insurer and its bad faith, not whether it relates to the insured's liability for a third party's injuries. (See B.A.J.I. No. 12.99.)
The majority's determination a conclusion of the third party action against the insured would leave the insurer at a distinct disadvantage is unsupported by empirical data or legal authority. I assume the insurer would have available to it the depositions, investigative reports, and tape recorded statements of its insured. The insurer would have martialled all evidence of its insured's nonliability. The insured would undoubtedly respond to a subpoena. If the insured had been treated fairly by the insurer, cooperation should be assured. Absent some unforeseen event, the insurer should not suffer any disadvantage.
I believe the establishment of a “predetermination” rule is not mandated by Evidence Code section 1155 and could adversely affect settlements. Third party claimants with meritorious claims would not be inclined to settle their claims absent the insurer's acknowledging the insured's liability. This would increase the possibilities of trial.
Insurers would not have a disincentive to settle actions against their insureds even if they know a new action for alleged violation of the statute in which the liability of the insured would be litigated. Economics would demand the insurer attempt to limit its liability and not expose itself to additional general and punitive damages. In addition, the insurer may still escape responsibility by litigating its insured's liability.
The entire statutory scheme under Insurance Code section 790.03, subdivision (h)(5), was designed to require the insurer to attempt to effectuate a prompt, fair and equitable settlement. The settlement of all potential liability of the insured should be the primary concern of the insurer. Any equitable settlement is contingent on a determination of the liability of the insured. The best interests of the insured, insurer, and third party claimant mandate an early determination of the insurer's liability. The “predetermination” rule devised by the majority does not promote this goal.
I would hold determination or admission of the insured's liability is a prerequisite to recovery and not a prerequisite to stating a viable cause of action.
1. The entities listed in section 790.01 are required to be licensed by the following sections, respectively: reciprocal and interinsurance exchanges, § 1350; Lloyds insurers, § 700; fraternal benefits societies, §§ 11013 and 11014; fraternal fire insurers, § 9080.1; grants and annuities societies, §§ 11520 and 11520.5; insurers holding certificates of exemption, § 700; motor clubs, § 12160; nonprofit hospital associations, § 11504; agents, brokers, and solicitors, §§ 31–33 and 1631 et seq.; surplus line brokers and special lines surplus line brokers, § 1765.
2. See Farah v. Superior Court (Wilson) (1986) 186 Cal.App.3d 1520, 1530, 231 Cal.Rptr. 461 [86 Daily Journal D.A.R. 3777]. We disagree with both the reasoning and result in the Farah decision, which is not yet final.
3. Determination of liability not required: Afuso v. United States Fid. & Guar. Co., supra, 169 Cal.App.3d 859, 863, 215 Cal.Rptr. 490; Interinsurance Exch. of the Auto. Club of So. Cal. v. Superior Court (Andujo) (1986) 187 Cal.App.3d 526, 231 Cal.Rptr. 885 [86 Daily Journal D.A.R. 3933 (not yet final) ]. Determination of liability required: Heninger v. Foremost Ins. Co., supra, 175 Cal.App.3d 830, 834, 221 Cal.Rptr. 303; Sych v. Insurance Co. of North America, supra, 173 Cal.App.3d 321, 326–327, 220 Cal.Rptr. 692; Williams v. Transport Indemnity Co., supra, 157 Cal.App.3d 953, 964, 203 Cal.Rptr. 868; Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d 46, 55–56, 190 Cal.Rptr. 705.)This issue appears to be presently before the California Supreme Court in such cases as Nelson v. GAB Business Services, Inc. ((1986) 179 Cal.App.3d 610, 224 Cal.Rptr. 595, review gr. July 31, 1986 (L.A. 32223)), Moradi-Shalal v. Fireman's Fund Ins. Companies ((1986) 181 Cal.App.3d 136, 226 Cal.Rptr. 333, review gr. Jul. 31, 1986 (L.A. 32222)), and Murphy v. State Farm Mut. Auto. Ins. Co. (1986) 185 Cal.App.3d 320, 229 Cal.Rptr. 633, review gr. Nov. 26, 1986 (L.A. 32279).
1. Evidence Code section 1155 provides:“Evidence that a person was, at the time a harm was suffered by another, insured wholly or partially against loss arising from liability for that harm is inadmissible to prove negligence or other wrongdoing.”
KAUFMAN, Acting Presiding Justice.
McDANIEL, J., concurs.