Jon CRANSTON, Plaintiff and Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant and Respondent.
This case addresses the question whether an insured's liability must be admitted or established in a final judgment as a condition precedent to a third party's right to bring a bad faith action (Ins. Code, § 790.03) against the insurer.
On April 20, 1982, plaintiff was injured when the motorcycle he was riding collided with an automobile owned by Fox-Stanley Photo Products (Fox) and driven by Fox's employee, John Charles Sabo, Jr. (Sabo). Plaintiff made a claim for damages which Fox reported to its insurance carrier, defendant Insurance Company of North America (INA). On September 13, 1982, plaintiff filed a personal injury action against Fox and Sabo. That suit was settled for $93,750. On August 23, 1983, plaintiff filed a release which provided among other things, “It is understood and agreed that this settlement is the compromise of a doubtful and disputed claim, and that the payment made is not to be construed as an admission of liability on the part of the parties hereby released, and that said releasees deny liability therefor and intend merely to avoid litigation and buy their peace.” INA was one of the parties expressly released from liability. However, the release also contained this provision: “[Plaintiff] specifically intends to retain any claims he may have against [INA] and its principals and agents relating to the handling and processing of his claim referred to herein against [Fox] and [Sabo].”
On September 16, 1983, the underlying action was dismissed with prejudice. On March 6, 1984, plaintiff filed this bad faith action against INA. INA sought a summary judgment claiming there was no triable issue of fact and INA was entitled to judgment as a matter of law because the liability of INA's insured (Fox) was never admitted or established. INA relied entirely upon the wording of the release which states that it should not be construed as an admission of liability, etc. The motion for summary judgment was granted, and plaintiff appeals.
The trial court relied on Williams v. Transport Indemnity Co. (1984) 157 Cal.App.3d 953, 203 Cal.Rptr. 868, as does INA. Both Williams and a later case, Heninger v. Foremost Ins. Co. (1985) 175 Cal.App.3d 830, 221 Cal.Rptr. 303, hold that a bad faith cause of action cannot be stated against an insurer without an allegation showing a final determination or admission of the insured's liability.
Heninger is more factually similar to the case before us than is Williams. In Heninger, a pleading case, plaintiff alleged he was a resident of a mobile home park which was insured by Foremost Insurance Company. Plaintiff claimed his mobile home was damaged during a severe storm because the owner of the mobile home park had allowed trees to become rotted and unsteady and they blew over in the storm damaging his trailer. Plaintiff filed a claim with the insurance company. No suit was filed. Finally, the insurance company and plaintiff settled the claim for $1,058.88. The insurance company required plaintiff to execute a release of all claims. Plaintiff struck out all language in the release purporting to release the insurance company, its agents or employees. However, there was no allegation in the bad faith action that the insurance company or its insured had admitted liability on the underlying claim. Relying on Williams, the court concluded that such an allegation was necessary to state a cause of action for bad faith under Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329. The court stated, “As we have discussed, Royal Globe causes of action may arise under circumstances other than upon determination by a final judgment, but the cases do not support nor can we perceive any legislative intent to create rights of action totally divorced from ultimate legal liability. The right of an insured party to file a direct suit against an insurer under the Royal Globe doctrine does not eliminate this requirement. [¶] Here there is an absence of any allegation of a final determination of the insured's liability of the insured [sic ] whether by way of judgment, admission or otherwise.” (Heninger v. Foremost Ins. Co., supra, 175 Cal.App.3d 830, 834–835, 221 Cal.Rptr. 303.)
In our opinion the reasoning of Heninger and Williams is faulty. Both cases are based on a misinterpretation of Royal Globe that originated in dicta in Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883, 891, 162 Cal.Rptr. 115, and was perpetuated in Nationwide Ins. Co. v. Superior Court (1982) 128 Cal.App.3d 711, 714, 180 Cal.Rptr. 464.
Royal Globe held that an injured third party could maintain an action against the insurer of the negligent party for damages resulting from the insurer's conduct violating Insurance Code section 790.03.1 The Supreme Court also held that the bad faith suit should not be brought until the action between the injured third party and the insured is “concluded.” This holding was made in the context of a single suit brought by the third party against both the insured and the insurer. The court stated, “Finally, we agree with defendant that plaintiff may not sue both the insurer and the insured in the same lawsuit.” (Royal Globe Ins. Co. v. Superior Court, supra, 23 Cal.3d at p. 891, 153 Cal.Rptr. 842, 592 P.2d 329.) The court gave three reasons for this conclusion: 1) the inadmissibility of evidence of insurance to prove negligence or wrongdoing (Evid. Code § 1155); 2) “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,” (id., at p. 892, 153 Cal.Rptr. 842, 592 P.2d 329) and; 3) damages suffered by the injured third party as a result of the insurer's actions or nonaction may best be determined after the conclusion of the suit against the insured.
In Doser v. Middlesex Mutual Ins. Co., supra, 101 Cal.App.3d at page 891, 162 Cal.Rptr. 115, the court elevated the second reason (for the Supreme Court's determination that the bad faith action should not be tried in the same suit against the insured) to a condition precedent to the maintenance of a bad faith action. The statement was mere dicta in Doser. The court noted that the action it reviewed was “not a case where the plaintiff was a third party claimant suing the insurer directly for failing to settle in violation of the provisions of the Unfair Practices Act (Ins. Code, § 790 et seq.), as contemplated by Globe, supra, [23 Cal.3d] at pages 884–885 [153 Cal.Rptr. 842, 592 P.2d 329].” (Id., at p. 891, 153 Cal.Rptr. 842, 592 P.2d 329.) The court then went on to say, “However, even under the reasoning in Globe, ‘․ the third party's suit may not be brought until the action between the injured party and the insured is concluded ․ [and] liability of the insured is first determined․’ (Royal Globe Ins. Co. v. Superior Court, supra, 23 Cal.3d at pp. 884, 892 [153 Cal.Rptr. 842, 592 P.2d 329].)” (Ibid.) We note that between the word “concluded” and the bracketed “and” in the above quote, the court omitted seven pages of text from the Royal Globe opinion. Thus, the connection linking the two phrases as requirements of, or conditions precedent to, a bad faith action was created by the Doser court's unique reading of Royal Globe.
As noted, the abridged quote in Doser is mere dicta; however, it was adopted and expanded in Nationwide Ins. Co. v. Superior Court (1982) 128 Cal.App.3d 711, 180 Cal.Rptr. 464. That court, at pages 713–714, 180 Cal.Rptr. 464, states, “In Royal Globe it was held for the first time that a cause of action for damages can be maintained by an injured third party against the insurer of a negligent party for damages resulting from its conduct violating the provisions of Insurance Code section 790.03. However, the court also held that the injured third party may not institute such an action until a judgment establishing the liability of the insured has been secured. ” A simple reading of Royal Globe shows this is patently untrue, but courts have been struggling with this erroneous interpretation ever since. Cases decided after Nationwide Ins. Co. v. Superior Court, supra, 128 Cal.App.3d 711, 180 Cal.Rptr. 464, have made inroads into the “final judgment” requirement. Numerous cases have held a settlement of the underlying suit is a sufficient “conclusion” to allow the third party to bring suit under section 790.03. (See Rodriguez v. Fireman's Fund Ins. Co. (1983) 142 Cal.App.3d 46, 190 Cal.Rptr. 705; Trujillo v. Yosemite-Great Falls Ins. Co. (1984) 153 Cal.App.3d 26, 200 Cal.Rptr. 26; Afuso v. United States Fid. & Guar. Co. (1985) 169 Cal.App.3d 859, 215 Cal.Rptr. 490; Vega v. Western Employers Insurance Co. (1985) 170 Cal.App.3d 922, 216 Cal.Rptr. 592.) Still, the upshot of the courts' statements in Doser and Nationwide is that a bad faith action under section 790.03 is like a malicious prosecution action; a successful conclusion in favor of the injured third party is a condition precedent to a lawsuit against the insurance company. (See Babb v. Superior Court (1971) 3 Cal.3d 841, 846–847, 92 Cal.Rptr. 179, 479 P.2d 379; Kachig v. Boothe (1971) 22 Cal.App.3d 626, 639, 99 Cal.Rptr. 393.)
The Insurance Code contains no such requirement. Section 790.03, subdivision (h)(5) prohibits an insurance company from “[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.” (Emphasis added.) A cause of action arises under the statute when an insurance company does not attempt in good faith to effectuate a settlement of a claim “in which liability has become reasonably clear,” not when a judgment on the claim has been entered against the insured in the third party's favor or when the insured has admitted liability. Royal Globe only determined that the third party's action against the insurance company should not be tried in conjunction with the third party's suit against the insured; it did not require liability be settled.
In Jackson v. State Farm Mutual Auto. Ins. Co. (1983) 148 Cal.App.3d 1179, 196 Cal.Rptr. 474, the insurance company's demurrer was sustained on the theory plaintiff failed to plead facts showing liability had become reasonably clear because it was determined at trial the insurance company's insured was only 20% at fault and another tortfeasor was 80% at fault. The appellate court reversed holding a determination as to when “liability has become reasonably clear” under section 790.03, subdivision (h)(5) is not dependent on facts as they exist at the time of trial, but rather upon facts known to the insurer at the time the third party claim is made and during settlement negotiations. The court stated, “While the fact that the insured was held to be jointly and severally liable may ultimately be relevant to a determination of whether the liability of the insured had become reasonably clear to the insurer at the time of the claim by the plaintiff, it is not determinative. The question of whether liability has become reasonably clear contemplates an examination of the facts known to the insurer at the time the third party claim is made. The question of whether the insurer acted in good faith to effectuate a prompt, fair, and equitable settlement requires a comparison of how the insurer dealt with the claimant in relation to the facts concerning liability that the insurer had or should have had in its possession.” (Id. at p. 1186, 196 Cal.Rptr. 474.) The court concluded, “As long as an insurer knows facts or through a reasonable investigation would learn of facts from which liability of its insured has become reasonably clear, then the insurance company must make a reasonable attempt to settle for a reasonable amount, taking into consideration, among other things, the potential liability of its insured.” (Id. at p. 1187, 196 Cal.Rptr. 474.)
However, both Heninger v. Foremost Ins. Co., supra, 175 Cal.App.3d 830, 221 Cal.Rptr. 303, and Williams v. Transport Indemnity Co., supra, 157 Cal.App.3d 953, 203 Cal.Rptr. 868, still require an admission of liability or a judgment finding liability as a condition precedent to a bad faith suit. The stated reason for this requirement is that an insurance company should not have a duty to settle unless its insured is actually liable. The Williams court, at page 960, 203 Cal.Rptr. 868, reasoned, “It is fundamental that an insurance contract is, by nature, an indemnity contract; no enforceable claim accrues against the insurer until the insured's liability is in fact established. [Citations.] Therefore, however well isolated facts may seem to indicate a time when liability had become reasonably clear to the insurer, if the insured had no liability in actual fact, the insurer can have breached no duty to settle a third party claim. As a consequence, the essential preliminary inquiry in any action alleging the insurer's violation of Insurance Code section 790.03, subdivision (h)(5) must be whether the insured was liable in actuality for the third party claimant's injury.”
Such reasoning, however, seems to fly in the face of the clear language of section 790.03, subdivision (h)(5), stated above. Both courts seem to confuse the contractual duty an insurer owes to its insured based on its indemnity contract and the completely different statutory duty imposed by section 790.03, subdivision (h)(5). They are separate and distinct; one is dependent on liability of the insured, the other on the precise legislative language “ ․ in which liability has become reasonably clear.” (§ 790.03, subd. (h)(5).) Thus, we reject both the reasoning and holding of both Heninger and Williams.
We hold, on the facts before us, a question of fact exists whether the insured's liability was “reasonably clear” within the meaning of section 790.03, subdivision (h)(5) so as to trigger the insurance company's duty to make a good faith attempt to settle. Additionally, the fact the case had not proceeded to judgment, and plaintiff executed a release stating the insured did not admit liability, should be evidentiary pieces relevant to that factual determination along with other relevant facts such as the accident reports, and other information available to the insurance company at the time the claim was made.
Accordingly, we find an admission or determination of liability is not a condition precedent to a bad faith action. Under these circumstances the trial court erred in granting summary judgment in favor of the insurance company since a triable issue of fact exists as to whether the insured's liability had become reasonably clear at the time the insurance company rejected plaintiff's settlement demands.
The summary judgment is reversed.
1. All statutory references are to the Insurance Code, unless otherwise indicated.
TROTTER, Presiding Justice.
CROSBY and WALLIN, JJ., concur.