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Court of Appeal, Second District, Division 7, California.

Helen Rosemarie CLARKE, Plaintiff and Appellant, v. FIREMAN'S FUND INSURANCE COMPANIES, Defendant and Respondent.

No. B026768.

Decided: March 11, 1988

Contos & Bunch and Julia Dragojevic, Woodland Hills, for plaintiff and appellant. Haight, Dickson, Brown & Bonesteel, Roy G. Weatherup, Dennis J. Moriarty and Jose H. Garcia, Santa Monica, for defendant and respondent.

Plaintiff appeals from a judgment (order of dismissal) entered after the court sustained defendant's demurrer to plaintiff's complaint without leave to amend.   The issue on this appeal is whether a determination of liability of the insured is a prerequisite to a third-party action for unfair claims settlement practices where the third party has settled her underlying claim against the insured.


Because a general demurrer admits the truth of all material factual allegations in the complaint (Molien v. Kaiser Foundation Hospitals (1980) 27 Cal.3d 916, 919, 167 Cal.Rptr. 831, 616 P.2d 813), we deem the following alleged facts to be true:  In January 1983 plaintiff was injured as a result of a slip and fall accident on the premises of defendant's insured, Lodge Number 702 of The Loyal Order of the Moose (Lodge).   Plaintiff filed an action for damages against Lodge in December 1983 and in April 1984 she made a demand for settlement on defendant insurer and provided defendant with proof that her injuries were proximately caused by the negligent conduct of its insured.   Defendant refused to engage in any settlement negotiations with respect to her claims and made no offer of settlement until July 1985.   Defendant knew or should have known that payment of plaintiff's claim was necessary to her well-being and sustenance, but defendant willfully delayed for more than two and one-half years in paying such claim, which was settled immediately before trial.   Such conduct constitutes a violation of defendant's statutory duties pursuant to Insurance Code section 790.03, subdivisions (h)(4), (h)(5) and (h)(13).1

Defendant demurred both generally and specially to the complaint.   The minute order for the hearing on demurrer states that the demurrer is sustained without leave to amend and “Compromise between parties [in]sufficient to initiate this cause of action.”   Plaintiff appeals from the order of dismissal subsequently entered upon the sustaining of the demurrer.


Insurance Code section 790.03 provides in pertinent part:  “The following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance․  [¶] (h) Knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices:  ․ [¶] (4) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured.   [¶] (5) Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.  [¶] (13) Failing to provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the offer of a compromise settlement.”

Our Supreme Court in Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329, held that “a third party claimant may sue an insurer for violating subdivisions (h)(5) and (h)(14), but that the third party's suit may not be brought until the action between the injured party and the insured is concluded.”  (Id., at p. 884, 153 Cal.Rptr. 842, 592 P.2d 329, emphasis added.)   The court in Royal Globe made it clear that in relying on such a statutory cause of action, a claimant “does not seek to rely upon the violation of the insurer's duty to its insured to settle plaintiff's claim.   Rather, she relies upon the insurer's duty owed to her as a claimant under subdivisions (h)(5) and (h)(14) of section 790.03, a duty created by those statutory provisions and owed directly to plaintiff as a claimant.”  (Id., at p. 890, 153 Cal.Rptr. 842, 592 P.2d 329.)

Three reasons were articulated by the court in Royal Globe for the rule that a claimant may not sue both the insurer and insured in the same lawsuit.   First, “[s]ection 1155 of the Evidence Code provides that evidence of insurance is inadmissible to prove negligence or wrongdoing.   The obvious purpose of the provision is to prevent the prejudicial use of evidence of liability insurance in an action against an insured.  [Citations.]  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.”  (23 Cal.3d at p. 891, 153 Cal.Rptr. 842, 592 P.2d 329.)   Second, “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, emphasis added.)   Third, “damages suffered ․ as a result of the insurer's [violations] may be best determined after the conclusion of the action by the third party claimant against the insured.”  (Ibid., emphasis added.)   Although the court used derivatives of the word “concluded” in several instances when discussing the underlying lawsuit, in one instance the court referred to the liability of the insured first being “determined.”   We do not read Royal Globe as requiring a final judgment on the issue of liability either expressly or by implication because the court did not address the issue of the elements of such statutory causes of action, and an opinion is not authority for a proposition not therein considered.  (Valentine v. City of Oakland (1983) 148 Cal.App.3d 139, 149, 196 Cal.Rptr. 59).   Rather, the court was simply articulating reasons supporting its prohibition of a joint trial of the insured and insurer, and in this regard, pointed out that simultaneous discovery against the insurer may prejudice the defense of the insured, which prejudice would not be present in the case if the liability of the insured “is first determined.”

Some courts have fastened on the language in Royal Globe used to articulate the reason for the prohibition on a joint trial against the insured and insurer and have concluded that an element of such a third party suit is a final determination of liability of the insured.2  (See, e.g. Heninger v. Foremost Ins. Co. (1985) 175 Cal.App.3d 830, 833–835, 221 Cal.Rptr. 303.)

While some courts have acknowledged that settlement of the underlying action constitutes a sufficient “conclusion” of the action under Royal Globe, (see, e.g., Williams v. Transport Indemnity Co. (1984) 157 Cal.App.3d 953, 959, 203 Cal.Rptr. 868;  Rodriguez v. Fireman's Fund Ins. Companies, Inc. (1983) 142 Cal.App.3d 46, 55, 190 Cal.Rptr. 705), they have gone on to require either an admission of liability by the insurer (see Rodriguez, supra, 142 Cal.App.3d at p. 55, 190 Cal.Rptr. 705), or a final determination of the insured's liability as an additional prerequisite to a cause of action.  (Heninger v. Foremost Ins. Co., supra, 175 Cal.App.3d at pp. 833–834, 221 Cal.Rptr. 303.)   With due respect, we decline to follow Heninger, and the Williams line of cases upon which it is based, because we do not read either Insurance Code section 790.03, subdivision (h) or Royal Globe as requiring a final determination of liability of the insured and we do not find any persuasive policy reasons for imposing such a requirement under the facts of the instant case where the underlying action was concluded by settlement.

One justification for the requirement that liability be finally determined relied upon by the court in Heninger is that “otherwise these prohibitions on unfair claims settlement practices would create a form of statutory liability without fault.  ‘It is fundamental that an insurance contract is, by nature, an indemnity contract․’  [Citation.]  The general rule of indemnity is that no liability accrues as an enforceable claim against an insurer until recovery of a final judgment against the indemnitee.   [Citation.].”  (175 Cal.App.3d at p. 834, 221 Cal.Rptr. 303.)   In the case of a statutory action by a third party claimant, however, the claimant is not suing under the insurance contract or asserting rights under principles of indemnity.   Rather, the claimant is asserting a separate primary right independent of the insurance contract and imposed by statute.   The conclusion that the absence of a determination of the insured's liability creates a form of “statutory liability without fault” is also incorrect as it confuses liability of the insured for the underlying tort with liability of the insurer for statutory violations.   Curiously, a line of cases has developed which stands for the proposition that in the case of an insured suing his insurer for breach of statutory duties under section 790.03, a determination of liability is not a prerequisite:  “The duty of an insurer to its insured is more extensive than is its duty to a third party claimant․  If, as concluded above, a duty to act reasonably and in good faith can arise prior to settlement, then a duty to comply with the statutory requirements of section 790.03, subdivision (h) can also arise prior to and independently of a final determination of the insured's liability.”  (Bodenhamer v. Superior Court (1987) 192 Cal.App.3d 1472, 1480, 238 Cal.Rptr. 177;  Carter v. Superior Court (1987) 194 Cal.App.3d 424, 427, 239 Cal.Rptr. 723.)

Section 790.03, subdivision (h)(5), however, makes no distinction between claimants and insureds, and thus the duty thereunder to third party claimants does by implication arise prior to settlement and therefore independently of a final determination of the insured's liability.   In fact, that provision “was intended to apply only to prejudgment conduct.”  (Coleman v. Gulf Ins. Group (1986) 41 Cal.3d 782, 796–797, 226 Cal.Rptr. 90, 718 P.2d 77 [filing a meritless appeal from an adverse judgment against its insured does not give rise to violation of section 790.03, subdivision (h)(5) ].)

The court in Sych v. Insurance Co. of North America (1985) 173 Cal.App.3d 321, 220 Cal.Rptr. 692 articulated another justification for a prior determination of liability that is based on principles of res judicata.   In Sych, the third party claimant lost in the underlying action which resulted in a jury verdict and judgment in favor of the insured.   The claimant then sued the insurer for, inter alia, violations of section 790.03.   In upholding the trial court's ruling that the claimant failed to state a cause of action because she could not plead a finding of liability against the insured, the court stated that 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.  (173 Cal.App.3d at p. 327, 220 Cal.Rptr. 692.)   The court went on to explain that “Moreover, principles of public policy and res judicata mandate this result․  [¶] Appellant's contention that res judicata is inapplicable because insurers were neither parties nor privies nor issues identical is specious.   She repleaded here the exact claim of professional negligence against Doctor Innes that was previously concluded adversely.   Res judicata bars relitigation of an issue previously adjudicated between the same parties or their privies to final judgment on the merits․  [¶] The doctrine of res judicata represents strong public policy promoting judicial economy by minimizing repetitive litigation, preventing inconsistent judgments which undermine the integrity of the judicial system, and providing repose by preventing a person from being harassed by vexatious litigation.”  (Id., at p. 328, 220 Cal.Rptr. 692.)

We do not express any opinion on the application of res judicata principles to the facts in Sych.   However, we do note that the same result could be obtained in Sych by considering the complaint as revealing on its face a valid affirmative defense based on the application of res judicata principles to the issue of whether liability of the insured became reasonably clear.   Apparently, the res judicata argument would be that a final judgment of no liability on the part of the insured necessarily means that liability could not be “reasonably clear” under the statute—i.e., that the issue under the statute is subsumed within the issue of liability as determined by the prior judgment.   This defense would be available whether or not a prerequisite to such a cause of action is a determination of liability of the insured.

However, in the case of a pretrial settlement, such as in the instant case, there has been no adjudication of the issue of liability and a settlement does not act as an admission of liability of either the insured or the insurer.   (Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d 46, 55, 190 Cal.Rptr. 705.)   Thus, allowing a claimant to settle the underlying lawsuit and still assert a statutory cause of action against the insurer does not foster repetitive litigation and cannot result in inconsistent adjudications.   In fact, from the standpoint of judicial economy, a rule requiring a final determination of liability would result in claimants having little incentive to settle the underlying lawsuit because to do so would destroy their bad faith claims.   Claimants would thus be placed in a situation of choosing between the vindication of two primary rights.

Respondent offers no authority for its statement that, as applied to cases which settle prior to trial, liability of the insured cannot be proved in the same legal proceeding in which an insurer's breach of statutory duties is adjudicated.   Respondent argues that a final determination of liability serves the purpose of fixing the claimant's damages.   This same rationale was advanced by the court in Williams, which stated that the “conclusion of the action against the insured provides some means of assessing the extent of the insured's liability and hence, the damaging effect of the insurer's violation of its statutory duty.”  (157 Cal.App.3d 953, 961, 203 Cal.Rptr. 868.)   While Royal Globe does contain language that damages suffered by the injured party may best be determined after the conclusion of the action between the claimant and the third party (23 Cal.3d 880, 892, 203 Cal.Rptr. 868), we do not interpret such language as requiring that the issues of liability or damages be adjudicated in the underlying lawsuit.

Nor do we find any authority in Royal Globe for the contention that a final judgment on such issues is necessary to make certain the amount of damages sustained by a claimant because of an insurer's wrongful conduct.   Under the facts of the instant case, appellant is not attacking the amount of the settlement as being unreasonably low in comparison to the insured's liability and damages suffered in the underlying accident.   Rather, she is claiming the settlement came too late, which delay also caused her to needlessly incur attorney fees and expenses.   The complaint expressly charges respondent with wrongfully withholding the settlement funds and delaying her use of such funds until immediately before trial.   Therefore, the calculation of damages in the instant case is a relatively routine matter which will not involve an evaluation of the injuries sustained in the underlying personal injury action.   Nor will it involve a comparison of such damages to the insured's share of liability.   Once the other elements of the statutory cause of action are met, the calculation of damages in the instant action will simply be the damages caused by the loss of use of the settlement funds during the period of the alleged wrongful delay and the additional expenses appellant claims she was forced to expend in the underlying personal injury suit due to the delay.   Therefore, even if there were here alleged an admission or determination of liability of the insured, such determination would not be of particular assistance in assessing the damages allegedly caused by the insurer's conduct.   We do not mean to imply that a complex damage issue will destroy the cause of action, but note that the justification for the holdings in cases like Heninger and Williams does not withstand scrutiny when applied to the allegations in the instant case.

We conclude that as long as the underlying personal injury suit has been concluded pursuant to Royal Globe, a determination of the liability of the insured is not an additional prerequisite to an action under the statutory provisions alleged in the instant complaint.   The demurrer was thus improperly sustained.   Respondent interprets appellant's brief as raising only the issue of whether the complaint states a cause of action under subdivision (h)(5) of section 790.03.   We do not read appellant's brief here or the record below as raising only the issue of the requirement of a final determination in the context of an alleged violation of that one section, but consider appellant's brief as having adequately raised the issue in the context of the alleged violations of subdivisions (h)(4) and (h)(13) as well.

In light of our determination, we do not need to address appellant's contention that, had a determination of liability of the insured been a prerequisite to her action, the court erred in failing to grant her leave to amend to allege the missing element.


The judgment (order of dismissal) is reversed.   Appellant is entitled to recover her costs on appeal.


1.   Although the complaint does not indicate the disposition of the underlying personal injury suit, respondent's reply brief indicates that the settlement was accompanied by a release of the insured and dismissal of the suit.   We thus infer that there is no issue on appeal as to whether the underlying suit has been concluded.   The issue is whether conclusion of the action is sufficient to state a cause of action under section 790.03, subdivision (h), or whether there must also be alleged a final determination of the liability of the insured.

2.   This issue is presently being considered by our Supreme Court.   The following list does not purport to be a complete list of cases pending before the Supreme Court in which the issue is presented:  Moradi–Shalal v. Fireman's Fund Ins. Companies (1986) 190 Cal.App.3d 1162, 181 Cal.App.3d 136, 226 Cal.Rptr. 333 review granted July 31, 1986 (L.A. 32222);  Appleton v. Chubb Group of Insurance Companies (L.A. 32221) [nonpub. opn.];  Nelson v. GAB Business Services, Inc. (1986) 198 Cal.App.3d 233, 224 Cal.Rptr. 595, review granted July 31, 1986 (L.A. 32223);  Murphy v. State Farm Mut. Auto. Ins. Co. (1986) 194 Cal.App.3d 1118, 229 Cal.Rptr. 633, review granted Nov. 26, 1986 (L.A. 32279);  Cranston v. Insurance Co. of North America (1986) 193 Cal.App.3d 668, 229 Cal.Rptr. 560, review granted Dec. 11, 1986 (L.A. 32285).

LILLIE, Presiding Justice.

THOMPSON and JOHNSON, JJ., concur.

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