ANDERSON v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY

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Court of Appeal, Second District, Division 4, California.

Dann R. ANDERSON, Plaintiff and Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant and Respondent.

No. B047796.

Decided: April 10, 1991

Stephen John Gray, Manhattan Beach, for plaintiff and appellant. Spray, Gould & Bowers, Richard C. Turner, Leah Hoffman and James S. Link, Los Angeles, for defendant and respondent.

Appellant Dann R. Anderson appeals from an order of dismissal entered after the trial court sustained a demurrer to his second amended complaint without leave to amend.   He contends the trial court erred in concluding that his complaint for breach of contract and enforcement of judgment failed to state a cause of action against respondent State Farm Mutual Automobile Insurance Company.   After review, we affirm.

We set forth the relevant facts in accord with the rule which requires us to assume the allegations of the complaint to be true for purposes of this appeal.  (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 922, 216 Cal.Rptr. 345, 702 P.2d 503;  Hutnick v. United States Fidelity & Guaranty Co. (1988) 47 Cal.3d 456, 460, 253 Cal.Rptr. 236, 763 P.2d 1326.)

This is the second lawsuit arising from an automobile accident in which appellant was the passenger in a car driven by his brother Michael Anderson.   In the first action appellant sought damages for personal injuries from several parties including Toyota Motor Sales, Santa Fe Trailer Company, and U–Haul Trailer Company and his brother.   Appellant's brother, who was insured by State Farm, was represented by the law firm of Knapp, Petersen and Clarke.1  In January of 1985, appellant and his brother, by and through their respective counsel, agreed to settle the action for the policy limit of $15,000.   The motion for an order finding this settlement to be in good faith was denied without prejudice because it was not supported by declarations from which the court could determine whether the settlement was, in fact, made in good faith.   In 1986, appellant's counsel notified Michael's counsel that the settlement agreement was rescinded due to “lack of payment.” 2

In February of 1988, Knapp, Petersen and Clarke filed a motion to compel enforcement of the settlement which was previously rescinded in 1986.   That same month, at a mandatory settlement conference, Knapp, Petersen and Clarke represented that it “was ‘too early’ to make a determination as to what ․ Michael Anderson's policy limits were.”   Michael, by this time, was also represented by “additional counsel identified as Mr. Stuart Fest.”

In January, February and March of 1988, appellant reached settlement agreements with Toyota Motor Sales, Santa Fe Trailer Company and U–Haul totaling $325,000.   Knapp, Petersen and Clarke opposed the good faith settlement motions on the basis that the case “had an aggregate value of ‘$500,000.00’ and that the offers of settlement ․ were [therefore] insufficient.”

On June 22, 1988, the law firm of Spray, Gould & Bowers sent a letter via messenger to appellant's counsel in which it stated that it had been retained to represent State Farm, and that it had become aware that appellant was “exploring the possibility with Mr. and Mrs. Anderson's attorneys, Fest & Williams and Knapp, Peterson [sic] & Clarke, of entering into a stipulated judgment in the amount of $175,000.00 which is in excess of State Farm's policy limits.”   The letter advised that “State Farm does not consent to any stipulated judgment in excess of its policy limits of $15,000.00,” and declared that the attorneys who were representing the Andersons had no authority to consent to such a judgment on behalf of State Farm.   The letter further asserted that State Farm “has always accepted all settlement demands ․ for its policy limits in exchange for a release and dismissal of the Andersons and has always authorized the Andersons' attorneys, Knapp, Peterson [sic] & Clarke, to take whatever steps were necessary to protect the interests of their clients in concluding settlement within its policy.”   The letter concluded:  “State Farm would be willing to consent to your client giving a covenant not to execute to Mr. and Mrs. Anderson (without a stipulation for judgment) in exchange for an assignment of whatever rights you think they may have against State Farm.[3 ]  State Farm cannot give its consent to a judgment in excess of its policy limits especially since it has done nothing wrong and such a proposal is not an accurate representation of the value of the case or Mr. and Mrs. Andersons [sic] liability.”

Michael Anderson concluded “he had been abandoned by State Farm․” 4  He thereafter “directly through his private counsel and in conjunction with State Farm's retained insurance defense attorney” negotiated a settlement of the claim.   The terms of the settlement agreement provided that judgment would be entered against Michael Anderson in the sum of $175,000.   Appellant agreed not to execute upon the judgment, and Michael Anderson assigned to appellant his rights to proceed against State Farm for damages in the sum of $175,000 allegedly caused by State Farm's breach of contract.   The prayer requested damages “[i]n the amount of $175,000.00 (minus the amount of $15,000.00).” 5

The trial court concluded that the alleged facts were insufficient to state a cause of action for breach of contract because there was no allegation that State Farm, in fact, abandoned its insured or failed to defend its insured.   The court further concluded that there had been “[n]o final judicial determination of the insured's liability․”  The court explained that “to place a stamp of approval on the stipulation entered into by the insured and the plaintiff herein creates great opportunity for fraud and abuse.”

Appellant contends this ruling was error.   He asserts that respondent's failure to pay policy proceeds promptly constitutes a breach of its duty to settle, that respondent's continued participation in the litigation after nonpayment of the settlement and “refusal to be responsible for any excess liability over policy limits” constitutes a breach of the duty to indemnify, that respondent's failure to keep its insured informed in combination with its previously specified failures constitutes an abandonment of its contractual obligations to its insured, and that appellant was entitled to reach a settlement and proceed directly against respondent.

I

We note at the outset of this discussion that although this action is brought by a third party claimant against an insurance company, it is, by virtue of the assignment, brought in a first party posture.   Our initial inquiry is, therefore, whether the facts alleged are sufficient to constitute a cause of action by an insured against his insurer for breach of contractual duties.

Respondent acknowledges that a cause of action may be stated by an insured or its assignee based upon a failure to settle.   Respondent argues that no such cause of action has been stated in this case because an essential element, to wit, a judgment in excess of policy limits, has not been alleged.

Respondent relies on Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883, 162 Cal.Rptr. 115.   In that case the underlying wrongful death action was resolved when the executor of an estate agreed to a compromise settlement of a claim against the estate in the sum of $980,000, and the plaintiffs agreed to accept in full satisfaction of their claim an assignment of the estate's claims and causes of action against the insurance company for proceeds of applicable policies of insurance.  (101 Cal.App.3d at p. 888, 162 Cal.Rptr. 115.)   The subsequent action against the insurance company was tried to a jury.   The jury found that the insurance company breached its implied covenant of good faith and fair dealing by failing to defend the estate and by failing to settle when presented with a demand letter.   The jury also found the estate breached its implied covenant of good faith and fair dealing with its insurer.  (101 Cal.App.3d at p. 890, 162 Cal.Rptr. 115.)

Division Three of this court reversed, holding that because the entire underlying case had been dismissed, “[n]o legal liability was ever imposed․  Therefore, no cause of action ever arose in the ․ [h]eirs.”  (101 Cal.App.3d at p. 891, 162 Cal.Rptr. 115.)   The Doser court explained:  “No judge or jury ever considered the facts of the wrongful death case and came up with an appropriate verdict on which a judgment could be based.   No agreement as to damages was ever reached in which a representative of the insurance company participated.  [Counsel] Cathcart on behalf of the Doser Heirs merely ‘compromised’ their claim for damages against the Estate for $980,000, a figure $480,000 in excess of their original claim, ․ and $880,000 in excess of the ․ policy.”  (101 Cal.App.3d at p. 892, 162 Cal.Rptr. 115.)   The Doser court noted that the amount of the damages had been set by the plaintiffs' attorney “acting virtually alone,” and concluded that this “worthless paper transaction” could not support a cause of action against the insurance company.  (101 Cal.App.3d at p. 894, 162 Cal.Rptr. 115.)

This case is factually distinguishable from Doser because in this case the agreement has been reduced to judgment.   Respondent briefly asserts in a footnote that this distinction is of no significance.   The issue cannot be so easily dismissed in light of two recent cases.

In California State Auto. Assn. Inter–Ins. Bureau v. Superior Court (1990) 50 Cal.3d 658, 268 Cal.Rptr. 284, 788 P.2d 1156 (hereafter CSAA ), the parties to the underlying personal injury action stipulated, in a written agreement signed by the defendant's insurer, that the insured admitted liability, that he agreed to pay damages in the sum of $175,000, and that the plaintiff reserved her rights against the insurance company.   The California Supreme Court held that this judgment was a “ ‘final judicial determination’ ” of the insured's liability for purposes of a subsequent action against the insurer.

The CSAA court recognized that a stipulated judgment, or consent decree, has the dual character of a contract and a judicial decree.   It noted, however, that a stipulated judgment entered pursuant to Code of Civil Procedure section 664.6 is “indeed a judgment” (50 Cal.3d at p. 664, 268 Cal.Rptr. 284, 788 P.2d 1156) which the trial court could refuse to enter if it was determined to be unjust.  (Ibid.)  This fact, together with the insurer's clear intent to be bound by the stipulation, supported the conclusion that the stipulation was entitled to collateral estoppel effect in the subsequent action against the insurer.  (50 Cal.3d at pp. 664–665, 268 Cal.Rptr. 284, 788 P.2d 1156).

In CSAA, as in the case before us, the issue was raised upon the pleadings, rather than upon the taking of evidence.   In CSAA, however, in contrast to the case before us, the insurer's intent was clear from its signature on the written agreement.   The court cautioned that its holding was to be narrowly construed:  “If ․ the insurer had not received reasonable notice of the settlement, or were not allowed to control the insured's defense in the proceedings, any stipulated judgment would only be presumptive evidence of the insured's liability.  [Citations.]”  (50 Cal.3d at pp. 665–666, fn. 5, 268 Cal.Rptr. 284, 788 P.2d 1156).

CSAA was followed in Fremoire v. Allstate Ins. Co. (1990) 225 Cal.App.3d 788, 275 Cal.Rptr. 559.   In Fremoire, an underlying action for personal injuries was resolved when the insured defendant, who was represented by counsel hired by her insurer, accepted plaintiffs' offer of settlement and a stipulated judgment was entered against her.   The complaint in the subsequent third party bad faith action alleged that the insurer's “ ‘designated representatives' ” consented to the agreement and executed the judgment.   (225 Cal.App.3d at p. 792, 275 Cal.Rptr. 559.)   The insurer's demurrer was sustained without leave to amend on the ground that the complaint failed to allege a conclusive judicial determination of the insured's liability as required by the holding of Moradi–Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58.

Division Seven of this court reversed, reasoning that since the stipulation did not expressly reserve from its scope the issue of the insured's liability the issue had been the subject of a final judicial determination.  (Fremoire v. Allstate Ins. Co., supra, 225 Cal.App.3d at p. 796, 275 Cal.Rptr. 559.)   Therefore, a cause of action was stated against the insurer.   In reaching this conclusion, the court rejected Allstate's argument that the case was distinguishable from CSAA because it did not sign the stipulation.   Allegations that Allstate hired defense counsel, that its “ ‘designated representatives' ” participated in the compromise and that Allstate subsequently executed the judgment were held to support the conclusion that Allstate was bound by the stipulation.  (Fremoire v. Allstate Ins. Co., supra, 225 Cal.App.3d at p. 797, 275 Cal.Rptr. 559.)

In the case before us, the complaint alleges that the insurance company hired defense counsel who participated in the action and the stipulated judgment.   It is clear, however, from the letter of objection dated June 22, 1988, that at that point respondent had no control over the insured's defense, that it did not participate in the compromise and that it did not intend to be bound by the stipulated judgment.   The facts before us are, therefore, distinguishable from both Fremoire and CSAA.

If, after respondent's letter of objection, the underlying case had been tried, then the issues of liability would have been tested and respondent would not be heard to complain of the results.   An assignee of an insured should not, however, be allowed to bind the insurer to a settlement entered as a stipulated judgment simply because he felt he was abandoned.

Further, it appears from the face of the complaint, despite the insured's subjective conclusion of abandonment, that he was, at all times, provided with counsel.   Therefore, the facts alleged failed to demonstrate that the insured was, in fact, abandoned by his insurer.   Under these circumstances the stipulated judgment is neither enforceable against respondent nor entitled to res judicata effect on the issue of the insured's liability.

Conversely, lest our conclusion in this regard be misconstrued, we point out that insurance companies should not be allowed to escape the consequences of their actions by the simple expedient of retaining new counsel at the last minute to object to tactics which they may, at an earlier point in time, have approved, or worse, directed.

We hold that no final judgment has been alleged which is binding on respondent.   Therefore, the complaint failed to state a cause of action against respondent and the demurrer was properly sustained without leave to amend.

The order of dismissal is affirmed.   Each party to bear its own costs.

ARLEIGH M. WOODS, Presiding Justice.

GEORGE and EPSTEIN, JJ., concur.