SINTON v. HARTFORD ACCIDENT INDEMNITY COMPANY (1989)

OPINION

STATEMENT OF THE CASE AND FACTS

In 1973, plaintiff and respondent Thomas Sinton filed the complaint which underlies this action against Cal–Western Vine Corporation (Cal–Vine) and others alleging that the grapevines he had purchased from Cal–Vine in 1971 were infected with crown gall.   These vines were delivered to Sinton's property during May and June 1972, and the disease was discovered on the vines in July 1973.   On June 23, 1979, judgment was entered after a jury trial against Cal–Vine for the principal sum of $150,000.   This court affirmed the judgment against Cal–Vine on appeal on August 31, 1982.

In July 1979, defendant and appellant Hartford Accident & Indemnity Company (Hartford) was informed of Sinton's loss and put on notice that Cal–Vine was claiming coverage under a policy issued by Hartford.   Hartford had no prior knowledge of this claim.   Hartford refused to indemnify Cal–Vine or pay the judgment rendered against it on the grounds that (1) Hartford was not obligated to pay a judgment when the first notice of the claim was received after the judgment was entered, and (2) under the policy alleged to be in effect at the time, there was no coverage.   Hartford declined to participate in either the new trial motion or the appeal.

On September 22, 1982, Sinton filed the complaint which is the subject of this appeal against Hartford alleging that Hartford breached its duty to promptly and fairly settle Sinton's claim against Cal–Vine in violation of Insurance Code section 790.03, subdivision (h)(5).¹  On October 17, 1986, an amended complaint was filed which added a second cause of action against Hartford for recovery on the policy under section 11580.

The parties waived a jury and agreed the court could try the issues of fact, if any, based upon stipulated facts and evidence of which the court could take judicial notice, including the record in the underlying case of Sinton v. Cal–Vine.   The court ruled in favor of Sinton on both causes of action finding that Hartford did not meet its burden of proving it was prejudiced by Cal–Vine's failure to give timely notice of the claim or lawsuit and that Hartford's conduct in denying the claim breached the duty imposed by section 790.03, subdivision (h)(5).   The court found Sinton was entitled to receive a total of $150,000 in damages plus interest and costs.   The court allocated $100,000 of this award to the second cause of action.

DISCUSSION

I. A cause of action for statutory bad faith under section 790.03, subdivision (h)(5) may not be maintained against an insurer for postjudgment activities.

 In Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329, the court held that under section 790.03, subdivision (h)(5), a private litigant could bring an action to impose civil liability on an insurer for engaging in unfair claims settlement practices.  (Moradi–Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 294, 250 Cal.Rptr. 116, 758 P.2d 58.)  Section 790.03, subdivision (h)(5) defines this unfair claims settlement practice as “[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.”   The Royal Globe court further held that such an action could be brought against the insurer by either the insured or a third party claimant.  (Moradi–Shalal v. Fireman's Fund Ins. Companies, supra, 46 Cal.3d at p. 294, 250 Cal.Rptr. 116, 758 P.2d 58.)   However, the court concluded that the plaintiff could not sue both the insured and the insurer in the same action and that the suit against the insurer must be “ ‘postponed until the liability of the insured is first determined․’ ”  (Ibid.)   Although Moradi–Shalal overruled Royal Globe, the Moradi–Shalal decision applies prospectively only.  (Id. at p. 305, 250 Cal.Rptr. 116, 758 P.2d 58.)   Thus, Moradi–Shalal does not foreclose the statutory bad faith cause of action here.

Sinton's section 790.03 cause of action was based on Hartford's failure to settle Sinton's judgment against Cal–Vine.   As noted above, Hartford had no knowledge of this claim until after the judgment had been entered.   Hartford contends section 790.03 does not apply to the postjudgment conduct of an insurance company, and therefore, the judgment on the first cause of action must be reversed.

In Coleman v. Gulf Ins. Group (1986) 41 Cal.3d 782, 226 Cal.Rptr. 90, 718 P.2d 77, plaintiffs sued the defendant's insurer for additional damages on the ground that, following a judgment in plaintiffs' favor against defendant, the insurer instigated a meritless appeal in order to achieve delay and coerce settlement.   The court held that plaintiffs' action could not be sustained on the basis of section 790.03, subdivision (h)(5).  (Id. at pp. 795–796, 226 Cal.Rptr. 90, 718 P.2d 77.)   The court first noted that subdivision (h)(5) speaks of “claims” and “claimants” suggesting that it was not intended to apply to judgments.   Further,

“the standard provided in subdivision (h)(5)—sanctioning an insurer for not attempting to effectuate settlements of claims ‘in which liability has become reasonably clear’—affords no meaningful guidance once judgment is entered.   In almost every case it could be argued that liability is ‘reasonably clear’ once a trial judgment is entered in favor of a claimant, but—in light of the fundamental nature of the right to appeal and the general considerations discussed at length in In re Marriage of Flaherty [ (1982) 31 Cal.3d 637, 183 Cal.Rptr. 508, 646 P.2d 179],—it appears quite unlikely that the Legislature intended to subject an insurer to the risk of a subsequent suit every time it exercised its right to appeal from an adverse judgment.”  (41 Cal.3d at p. 796, 226 Cal.Rptr. 90, 718 P.2d 77.)

Thus, the court concluded the more plausible interpretation of subdivision (h)(5) was that it was intended to apply only to prejudgment conduct.  (Id. at pp. 796–797, 226 Cal.Rptr. 90, 718 P.2d 77.)

Here, the trial court distinguished Coleman v. Gulf Ins. Group on the ground that Hartford did not file or instigate the filing of the appeal.   Nevertheless, Sinton's claim had been reduced to a judgment, and it was Hartford's conduct following this judgment which was the subject of the section 790.03, subdivision (h)(5) claim.   Thus, following the Supreme Court's conclusion that section 790.03, subdivision (h)(5) applies only to prejudgment conduct, the judgment on the first cause of action for statutory bad faith must be reversed.   The fact that Hartford was not involved in the appeal does not change this result.   Both the terminology used in the section, i.e., “claims” and “claimants,” and the fact that a judgment emasculates the section's “reasonably clear” liability standard, adequately support the conclusion that section 790.03, subdivision (h)(5) was not intended to apply to Hartford's alleged postjudgment conduct.

The trial court further found that “Hartford's conduct in denying the claim of the plaintiff was not post judgment activity as the provisions of California Insurance Code, section 11580, create a new claim and that the provisions of California Insurance Code, section 790.03(h)(5), are applicable to the conduct of insurance carriers with respect to such claims.”   However, this analysis does not take into account the requirement that liability on the underlying claim must be determined before the bad faith action can be successful.  (Moradi–Shalal v. Fireman's Fund Ins. Companies, supra, 46 Cal.3d 287, 306, 250 Cal.Rptr. 116, 758 P.2d 58.)   It would permit the plaintiff to simultaneously sue on the judgment and for failing to settle that judgment when, as here, liability for payment of the judgment is disputed.   Further, applying section 790.03, subdivision (h)(5) in this situation would place the insurer in the untenable position of being required to either settle the lawsuit against itself or be subject to a bad faith claim for failing to settle.   Thus, contrary to the trial court's conclusion, the constraints on and purpose of section 790.03, subdivision (h)(5) render it inapplicable to claims made pursuant to section 11580.

II. Absent proof of actual prejudice, an insurer may be held liable on a policy under section 11580 although it has no knowledge of the claim until after judgment is rendered against the insured.

 Sinton's second cause of action sought to enforce the Cal–Vine judgment against Hartford under section 11580.   That section requires an insurance policy issued in California to provide that “whenever judgment is secured against the insured ․ in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment.”  (§ 11580, subd. (b)(2).)  Section 11580 is designed to protect an injured party against the insolvency of the insured and creates a contractual relation which inures to the benefit of any person who may be negligently injured by the insured.  (Zahn v. Canadian Indem. Co. (1976) 57 Cal.App.3d 509, 512–513, 129 Cal.Rptr. 286.)   However, this right is limited to enforcing the contract according to its terms, provided the terms do not thwart the purpose of section 11580.  (Hynding v. Home Acc. Ins. Co. (1932) 214 Cal. 743, 747, 7 P.2d 999.)   Cooperation and notice provisions in insurance policies do not conflict with the statutory purpose of protecting the injured party from the insured's insolvency and, thus, are enforceable against the third party claimants.  (Id. at pp. 751–752, 7 P.2d 999.)

The policy here requires the insured to notify Hartford of the occurrence alleged to be covered under the policy as soon as practicable, to forward every demand, notice, summons or process received to Hartford immediately and to cooperate with Hartford in settling or conducting lawsuits.   The policy further provides that no action shall lie against Hartford unless, as a condition precedent, there has been full compliance with all of the terms of the policy.   As noted above, Hartford did not receive notice of Sinton's lawsuit against Cal–Vine until after judgment was entered.   Nevertheless, the trial court found Sinton was entitled to recover the policy limits of $100,000 plus interest and costs under the second cause of action.

In general, an insurer may assert defenses to a section 11580 cause of action based upon a breach of a condition of the policy such as a notice clause, but the breach cannot be a valid defense unless the insurer was substantially prejudiced thereby.  (Campbell v. Allstate Ins. Co. (1963) 60 Cal.2d 303, 305, 306, 32 Cal.Rptr. 827, 384 P.2d 155;  Abrams v. American Fidelity & Cas. Co. (1948) 32 Cal.2d 233, 237, 239, 195 P.2d 797;  Hynding v. Home Acc. Ins. Co., supra, 214 Cal. 743, 752, 7 P.2d 999.)   This has been the law in California for over 57 years.  (Hynding, supra, 214 Cal. at p. 752, 7 P.2d 999.)   The burden of proving prejudice is on the insurer.   (Campbell v. Allstate Ins. Co., supra, 60 Cal.2d at p. 306, 32 Cal.Rptr. 827, 384 P.2d 155.)   In reaching this conclusion, the Campbell court disapproved Margellini v. Pacific Automobile Ins. Co. (1939) 33 Cal.App.2d 93, 99–100, 91 P.2d 136, which had held that prejudice “must be presumed” as a matter of law from the breach of a cooperation clause.  Campbell explained that no statutory basis for such a presumption existed and that presumptions should not be created in the absence of compelling reasons for doing so.   Although it may be difficult for an insurer to prove prejudice in some situations, it ordinarily would be at least as difficult for the injured person to prove a lack of prejudice, which involves proving a negative.   Thus, “we are of the view that a judicially created presumption of prejudice, whether conclusive or rebuttable, is unwarranted.”  (Campbell v. Allstate Ins. Co., supra, 60 Cal.2d at p. 307, 32 Cal.Rptr. 827, 384 P.2d 155;  see also Billington v. Interinsurance Exchange (1969) 71 Cal.2d 728, 737, 79 Cal.Rptr. 326, 456 P.2d 982;  Evid.Code, § 500.)   Moreover, actual prejudice must be shown.  (Northwestern Title Security Co. v. Flack (1970) 6 Cal.App.3d 134, 141, 85 Cal.Rptr. 693.)   The insurer must establish at the very least that if the policy condition had not been breached, “there was a substantial likelihood the trier of fact would have found in the insured's favor.”  (Billington v. Interinsurance Exchange, supra, 71 Cal.2d at p. 737, 79 Cal.Rptr. 326, 456 P.2d 982.)

The trial court found Hartford had “failed to meet the burden of proving it was actually and substantially prejudiced by the failure of the insured to cooperate with the insurer or to give notice to the insurer of the claim and action by Thomas Sinton at an earlier time.”   The court further determined that Hartford was not actually or substantially prejudiced and that the claims in the underlying action were “vigorously and competently resisted by counsel acting on behalf of all defendants.”   Hartford contends it was prejudiced as a matter of law, and therefore, the trial court's ruling was error.

Whether the failure of the insured to give notice of the claim or action until after judgment proves prejudice as a matter of law is a question of first impression in California.   Hartford relies on the Idaho Supreme Court case of Viani v. Aetna Insurance Company (1972) 95 Idaho 22, 501 P.2d 706 in support of its position that it does.

In Viani, three insurance companies were potentially liable for a judgment rendered against the insured.   However, one of the insurers, American Casualty, did not receive notice of the lawsuit until after the judgment was final.   After reviewing cases from other jurisdictions, the court noted there were three views regarding whether prejudice to the insurer in this situation is material in the absence of excuse or waiver.

The position taken in some jurisdictions is that a “substantial breach” of a condition precedent relating to notice not excused, legally justified or waived, gives rise to a rebuttable presumption of prejudice to the insurer.  (501 P.2d at p. 713.)   However, other courts take the position that despite a breach of the “notice condition precedent” the insurer must show actual or substantial prejudice to its position.   The Viani court noted that, although not clear with respect to a condition precedent, this is the position which is apparently taken by California.  (Ibid.)  The third view, which the Viani court adopted, holds that lack of prejudice to the insurer is immaterial where the insured failed to perform the condition precedent of giving notice of suit and forwarding summons and complaint within a reasonable time.  (Id. 501 P.2d at pp. 713–714.)   The Viani court noted the rule it relied on in releasing the insurer from the obligations imposed by the contract does not follow the trend of the California cases.   Thus, the reasoning of Viani v. Aetna Insurance Company is not persuasive here.

Hartford also relies on Independent Sch. Dist. No. 1, etc. v. Jackson (Okla.1980) 608 P.2d 1153 and Wood v. Duckworth (1986) 156 Mich.App. 160, 401 N.W.2d 258.   In both of those cases, however, the court found the insurer was prejudiced by late notice under the specific facts.   In Independent Sch. Dist. No. 1, etc. v. Jackson, the insurer did not receive notice of the suit until after a default judgment had been entered, and in Wood v. Duckworth notice was not received until after the insured had admitted liability.   Here, however, the insured disputed liability, and the judgment was not entered until after a trial was held.   Thus, these cases do not support Hartford's contention that the failure to receive notice until after the judgment requires a finding of prejudice as a matter of law.

In Louisiana, as in California, the insurer must prove actual prejudice in order to deny a claim on the basis of not receiving notification as stipulated in the policy.  (Champion v. Panel Era Mfg. Co. (La.App.1982) 410 So.2d 1230, 1236.)   Nevertheless, in Hallman v. Marquette Casualty Company (La.App.1963) 149 So.2d 131, where the insurer was totally ignorant of the plaintiff's claim under the policy until demand for payment of the default judgment was made, the Louisiana Court of Appeal stated that “an insurer need not show that its rights have been prejudiced by the insured's failure to comply with the policy requirement as to forwarding of suit papers in order to be relieved of liability under the policy.”  (At p. 135.)   Thus, this case would appear to support Hartford's position.   However, as noted by the Louisiana Court of Appeal in Miller v. Marcantel (La.App.1969) 221 So.2d 557, 559, although the result in Hallman was correct because the insurer was actually prejudiced by the entry of a default judgment, the rule recited in Hallman was not consistent with Louisiana law.   The court further explained the rationale for requiring a showing of actual prejudice as follows:

“The function of the notice requirements is simply to prevent the insurer from being prejudiced, not to provide a technical escape-hatch by which to deny coverage in the absence of prejudice nor to evade the fundamental protective purpose of the insurance contract to assure the insured and the general public that liability claims will be paid up to the policy limits for which premiums were collected.”  (221 So.2d at p. 559.)

In Weaver Bros., Inc. v. Chappel (Alaska 1984) 684 P.2d 123, the Alaska Supreme Court was presented with a fact situation similar to the one here.   There, the insurer was first notified of the accident when sued for contribution following a judgment in favor of the injured parties six years after the accident.   The court held that even in this extreme case of untimely notice the insurer had to prove it had actually been prejudiced by the delay before its liability would be extinguished, and the existence of prejudice was a question of fact.  (Id. at pp. 125–126.)   The court explained “the notice requirement is designed to protect the insurer from prejudice.   In the absence of prejudice, regardless of the reasons for the delayed notice, there is no justification for excusing the insurer from its obligations under the policy.”  (Id. at p. 125.)   Both Washington and Oregon also require the insurer to prove it has actually been prejudiced by the delay when notice is not received until after trial.  (Pulse v. Northwest Farm Bur. Ins. Co. (1977) 18 Wash.App. 59, 566 P.2d 577;  Halsey v. Fireman's Fund Ins. Co. (1984) 68 Or.App. 349, 681 P.2d 168.)

Because California law requires the insurer to prove actual prejudice from a breach of a notice condition when notice is received before trial, the logical approach is to follow the Alaska, Washington, and Oregon courts in applying this rule to situations where the notice is not received until after judgment.   As explained above, the notice requirement is designed to protect the insurer from prejudice, not to provide a means of extinguishing its liability to injured third parties.   We recognize the California Supreme Court has stated in dicta “[t]he ‘general rule’ is that an insurer is not bound by a judgment unless it had notice of the pendency of the action.”  (Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 238, 178 Cal.Rptr. 343, 636 P.2d 32.)   However, this “general rule” is not incompatible with a rule requiring the insurer to prove actual prejudice from a lack of notice.   If prejudice is proved, the insurer will not be bound by the judgment.   One can speculate that, “in general,” the insurer will be able to prove such prejudice.   This most certainly would be the case if a default judgment were entered against the insured.

Hartford argues it is grossly unfair to require an insurance company to prove prejudice from the insured's failure to give notice of the claim before trial and judgment because once a judgment is entered against the insured the “ball-game is over” insofar as the insurance company's right to defend on the policy.   According to Hartford, the company has “lost forever” the right to investigate the claim for settlement purposes which is the essence of the cooperation and notice conditions of the policy.

An answer to Hartford's argument is that although once the judgment was entered, Hartford lost the right to investigate the claim for pretrial settlement purposes, it nonetheless retained the right to investigate the claim for posttrial settlement purposes.   Upon notice of the judgment, it had the right to review the trial proceedings, to confer with counsel for Cal–Vine, and to participate in the new trial motion, and if it were not successful in getting a new trial, to participate in the appeal;  all under a “reservation of rights” agreement with its insured.   Hartford, however, elected not to do this.   Rather, it elected to straight-arm the plaintiff by denying all liability under the policy;  first, on the ground it had received no notice of the prejudgment claim, and second, on the ground the claim was not within the policy coverage in any event.   By denying all liability under these circumstances, Hartford assumed the risk it might later be held liable on the policy.   Furthermore, when Hartford was sued on the policy after the judgment had become final by the appeal, it again had the right to review the trial record, to talk with and depose the parties, attorneys and witnesses who had participated in the trial and to explore all possible facets of the case to determine if it actually had been prejudiced by the failure of its insured to give the notice required by the policy.   Thus, the ball game was not really over for Hartford when the judgment was entered.

Hartford has asked this court to make a fundamental change in the insurance law of this state, i.e., to hold that where an insurance company has not received notice from its insured of a claim covered by the policy before a judgment is entered on the claim, prejudice is conclusively presumed to have been suffered by the company.   Such a change would, in our view, come close to thwarting the legislative intent embodied in section 11580, which is that an injured person is entitled to recover on a policy once the insured's liability has been established by a final judgment.   We decline the invitation to take such a significant public policy step;  only the Supreme Court or the Legislature should embark on this path.

III–V ***.

The judgment is reversed on the first cause of action.   The judgment is affirmed on the second cause of action in favor of Sinton in the amount of $100,000 plus interest on that sum from June 23, 1979, and trial court costs.   Costs on appeal to be borne by each party.

FOOTNOTES

1.   All statutory references are to the Insurance Code unless otherwise indicated.

FOOTNOTE.   See footnote *, ante.

FRANSON, Presiding Justice.

BAXTER and DIBIASO, JJ., concur.