MORROW v. BORAD (1945)

District Court of Appeal, Second District, Division 3, California.

O'MORROW v. BORAD et al.

Civ. 14822.

Decided: July 31, 1945

Musick, Burrell & Pinney, Anson B. Jackson, Jr., and Engene M. Elson, all of Los Angeles, for appellant. Benjamin J. Goodman and Laurence Berger, both of Los Angeles, for respondent Jack Borad. Hunter & Liljestrom, of Los Angeles, for respondents Firemen's Ins. Co. and Metropolitan Casualty Ins. Co.

This is an action for declaratory relief. The plaintiff O'Morrow and the defendant Borad were insured under automobile insurance policies which policies, identical in form, covering public liability and property damage, were issued by defendants Firemen's Insurance Company of Newark, New Jersey, and the Metropolitan Casualty Insurance Company of New York, Those companies will be referred to as the ‘insurer.’ On December 19, 1943, while those policies were in effect, the automobiles of plaintiff O'Morrow and defendant Borad, which were being operated by them, collided at a street intersection. Both of them claimed to have suffered personal injury and property damage as a result of the collision and they gave prompt notice of the collision to the insurer as required by the policies. Thereafter Borad, through an attorney other than the insurer's attorneys, filed a complaint against O'Morrow in the Municipal Court of the City of Los Angeles for $1,922.54 damages alleged to have resulted from the collision. On January 18, 1944, copies of the summons and complaint in that action were served upon O'Morrow. On January 19, 1944, one of O'Morrow's attorneys notified the insurer by telephone concerning the service of the summons and complaint, and the insurer then informed said attorney that Borad was also insured by the insurer, and the insurer told the attorney to discuss the matter with the manager of the Los Angeles office of the insurer, who would be in his office the next day. On January 20 the attorney for O'Morrow told the manager by telephone that in the opinion of the attorney O'Morrow had a valid affirmative claim against Borad, that O'Morrow desired to comply in all respects with the terms of his insurance policy, that since O'Morrow and Borad were insured by the same insurer it seemed obvious that the interests of O'Morrow and Borad were the opposite of the interests of the insurer, and asked the manager what his suggestions were as to the manner in which the matter should be handled; that the manager said in reply thereto that the insurer intended to employ Hunter & Liljestrom, attorneys at law, to represent the insurer and he would have those attorneys communicate immediately with O'Morrow's attorneys, and the manager asked said attorney to send the copy of the Borad complaint to the manager. On January 21, O'Morrow's attorneys wrote and sent a letter to the insurer, enclosing the copies of the summons and complaint, and stating in substance that in their opinion O'Morrow was free from negligence and his damages would exceed the jurisdiction of the Municipal Court and that O'Morrow should not only file an answer but should file a cross-complaint; that an unusual circumstance had arisen since both parties were insured by the same insurer, and that the interests of the insurer and those of O'Morrow were divergent and from ethical considerations it would seem improper for the insurer's regular counsel to represent him at least as to the cross-complaint; and that since Borad's complaint would require an answer by January 28, the attorneys for O'Morrow suggested a conference with the insurer and their counsel immediately in order to determine a proper course to pursue.

On January 26 one of the attorneys for the insurer told O'Morrow's attorneys that he had arranged for an extension of time, until after such a conference, within which O'Morrow might answer Borad's complaint. On January 27 a conference was held wherein it was tentatively agreed, subject to further conference, that an answer to Borad's complaint and a cross-complaint by O'Morrow against Borad should be interposed by both firms of attorneys, i.e., O'Morrow's attorneys, Musick, Burrel & Pinney, and the attorneys for the insurer, Hunter & Liljestrom, but with the understanding that the attorneys for the insurer would have no responsibility in prosecuting the cross-complaint.

On January 27, after the conference and prior to any further communication from the insured or their attorneys, O'Morrow's attorneys wrote and sent a letter to the insurers wherein it was stated in substance: that since the conference the attorneys for O'Morrow had given further consideration to the conflicting interests involved and were convinced it was not to the insurer's interest to aid O'Morrow in the successful prosecution of his affirmative cause of action against Borad, who was also insured by the insurer; that it would be to the insurer's interest to defeat O'Morrow's affirmative claim; that if Borad had an affirmative claim against O'Morrow it would be to the insurer's interest to defeat that claim; that any recovery by either O'Morrow or Borad would have to be paid by the same insurer; that under such circumstances it would be improper that the insurer have any connection with the litigation and that the function of the insurer should be that of a stake-holder, abiding the result of the litigation; that it was the intention of O'Morrow's attorneys to defend O'Morrow and to prosecute his claim without any participation by the insurer; that Borad's counsel should take the same position and that an arrangement should be made between the insurer and both O'Morrow and Borad whereby the insurer should agree to pay the costs, fees of the unsuccessful litigant, and the judgment against him; and that the attorneys for O'Morrow would be glad to consult with the insurer's counsel at all times, but as to participation by the insurer's counsel in the litigation the interests of O'Morrow and the insurer were so diverse as to make that impossible. A copy of that letter was sent to Mr. Liljestrom, one of the attorneys for the insurer.

On January 28 the attorneys for the insurer wrote and sent a letter to the attorneys for O'Morrow wherein it was stated in substance: that after giving further thought to the tentative agreement and before receiving the letter of January 27 the attorneys for the insurer concluded that they should not appear on the cross-complaint; that if they felt that in representing O'Morrow in the defense against Borad's complaint there might arise any conflict in their duty to him and his insurance carrier they would not consider representing him; that the insurance carrier, in referring the defense to them, understood that they would take the position that O'Morrow was not negligent; that as to the cross-complaint the responsibility would be entirely that of O'Morrow's attorneys, Musick, Burrell & Pinney; that O'Morrow might handle the litigation as he deemed advisable, but they wished to advise him that might invalidate his coverage under his policy; that they particularly called his attention to the provision with regard to the assistance and co-operation required of the assured and the right of the company to have complete control of the defense; that the insurer insisted upon handling the defense, and unless permitted to do so would not pay any costs or attorneys' fees incurred by O'Morrow and would not waive any of its rights under the policy; and that they were enclosing a copy of a letter of January 27 which the insurer's attorneys had sent to Borad's attorney relative to their understanding with him as to additional time within which to plead.

About February 11, 1944, O'Morrow's attorneys, Musick, Burrell & Pinney filed an answer to Borad's complaint which answer was in the usual form in such cases and denied that O'Morrow was negligent and alleged contributory negligence on the part of Borad. At the time of filing the answer, said attorneys for O'Morrow also filed a cross-complaint against Borad for $6,359 damages alleged to have resulted from the collision. The cause was then transferred to the superior court. Under employment by the insurer, and on behalf of Borad, the law firm of Parker, Stanbury & Reese filed an answer to the cross-complaint.

On February 14 the insurer wrote and sent a letter to O'Morrow, and sent a copy of it to his attorneys, advising that since he had filed an answer to Borad's complaint and was proceeding with the defense of that action in violation of the terms of his policy, the insurer would not pay any costs or attorneys' fees incurred or any settlement made or any judgment rendered against him; and that the insurer reserved all its rights under the policy.

On February 23 the complaint herein for declaratory relief was filed by O'Morrow wherein he named Borad and the two insurance companies (referred to herein as the insurer) as defendants, and wherein he sought a declaration of the rights of the parties under his insurance policy, particularly as to whether under the circumstances above stated he had the right, without invalidating his insurance coverage, to defend against the Borad complaint and to prosecute his cross-complaint against Borad through competent attorneys of his own selection who should be paid by the insurer a reasonable sum for their services not to exceed the amount ordinarily paid by the insurer to its regular attorneys. By stipulation the trial of the damage action has been continued until after the determination of this appeal.

One of the provisions of the policy is:

‘II. Defense, Settlement, Supplementary Payments.

‘As respects such insurance as is afforded by the other terms of this Policy

‘(a) under Coverages G and H the Company shall

‘1. defend in his name and behalf any suit against the insured alleging such injury or destruction and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; but the Company shall have the right to make such investigation, negotiation and settlement of any claim or suit as may be deemed expedient by the Company;

‘2. pay all premiums on bonds to release attachments for an amount not in excess of the applicable limit of liability of this Policy, all premiums on appeal bonds required in any such defended suit, but without any obligation to apply for or furnish such bonds, all costs taxed against the insured in any such suit, all expenses incurred by the Company, all interest accruing after entry of judgment until the Company has paid, tendered or deposited in court such part of such judgment as does not exceed the limit of the Company's liability thereon, and expenses incurred by the insured, in the event of bodily injury, for such immediate medical and surgical relief to others as shall be imperative at the time of the accident;

‘(b) the company shall reimburse the insured for all reasonable expenses, other than loss of earnings, incurred at the Company's request. The Company agrees to pay the amounts incurred under this Insuring Agreement, except settlements of claims and suits, in addition to the applicable limit of liability of this Policy.’

Coverages ‘G and H’ referred to in the above provision are:

‘Coverage G—Property Damage Liability

‘To pay on behalf of the insured all sums which the insured shall become obligated to pay by reason of the liability imposed upon him by law for damages because of injury to or destruction of property, including the loss of use thereof, caused by accident and arising out of the ownership, maintenance or use of the automobile.

‘Coverage H—Bodily Injury Liability

‘To pay on behalf of the insured all sums which the insured shall become obligated to pay by reason of the liability imposed upon him by law for damages, including damages for care and loss of services, because of bodily injury, including death at any time resulting therefrom, sustained by any person or persons, caused by accident and arising out of the ownership, maintenance or use of the automobile.’

Another provision of the policy is: ‘The insured shall cooperate with the Company and, upon the Company's request, shall attend hearings and trials and shall assist in effecting settlements, securing and giving evidence, obtaining the attendance of witnesses, and in the conduct of suits. The insured shall not, except at his own cost, voluntarily make any payment, assume any obligation or incur any expense other than for such immediate medical or surgical relief to others as shall be imperative at the time of accident.’

The trial court concluded that appellant (O'Morrow) had violated the conditions of the policy of insurance in that he refused to permit respondents (the insurance companies) to defend in his name and on his behalf the action filed by Borad, and that he had failed to co-operate with respondents in the defense of said action. Judgment in accordance with those conclusions was entered, and the appeal is by O'Morrow from that judgment.

The appellant (O'Morrow) contends that the insurer was disqualified to defend him against Borad's complaint or to prosecute his cross-complaint against Board for the reason that the interests of the insurer were in conflict with the interests of O'Morrow. He argues that the insurer, being the insurer of both parties—O'Morrow and Borad, would be required to pay the judgment (within the limit of the policy) which O'Morrow might obtain against Borad upon his cross-complaint and therefore it would be to the interests of the insurer to defeat him on his cross-complaint; that the matter of defending him against the complaint of Borad, being inextricably interwoven with the matter of prosecuting the cross-complaint, could not be presented in the trial as a matter separate and apart from the cross-complaint, and since the insurer was clearly disqualified to represent O'Morrow on the cross-complaint, he was likewise disqualified to defend him against the claim of Borad; that appellant's right to recover damages from Borad is as substantive a right, if the facts entitle him to such recovery, as is his right to a successful defense against Borad's complaint; that when a person places the defense or prosecution of his legal rights in the hands of another, a relationship of trust is created where the person to whom the defense is entrusted is the trustee and the other person is the cestui que trust, and the trustee must act in the utmost good faith toward the cestui que trust in protecting his rights, nor only with reference to a defense of the cestui que trust but as to an affirmative claim of the cestui que trust arising out of the same transaction which is necessarily inextricably and indivisibly bound up with his rights from a defensive standpoint; that a person assuming to act as a trustee who has an interest in conflict with those of the beneficiary is disqualified from acting as trustee, except when the beneficiary with full knowledge of the motives of the trustee permits the trustee to act for him (citing Section 2230 of the Civil Code); that the beneficiary O'Morrow, having knowledge of the motives of the insurer to protect itself against the affirmative claim of O'Morrow, has chosen not to permit the insurer to act as his trustee; that he is not obligated to do it under the express terms of the insurance policy, since it obligates the insurer in a wholly unilateral way to furnish a defense for the insured but it does not obligate the insured to permit the insurer to conduct his defense; that he is not obligated to do it under the statute, and if there were any conflict between the requirements of the insurance policy and the statute, the statute would prevail; that considerations of public policy would prevail also over such a provision of the insurance policy; that the conflict in interests between O'Morrow and the insurer is one of the insurer's own making, resulting from its chosen method of doing business—holding itself out to the general public to insure all comers and taking the chance and assuming the risk of the occurrence of such a situation as the one that has arisen here, where two of its assured in good faith assert claims against each other under conditions covered by their insurance policies; that the insurer by insuring two persons who are involved in the same collision, has so changed its position toward O'Morrow from that which normally exists between an insurer and the assured where the insurer has no interest on the other side of the controversy, as to prejudice the rights of O'Morrow if he entrusts the litigation to the insurer, and the insurer is thereby estopped to compel O'Morrow to entrust it with the litigation; that the insurer can conduct the litigation only through attorneys who are its employees, and if the attorneys employed by the insurer should be in active charge of the litigation as counsel of record for O'Morrow, a relationship of highest trust and confidence would be created between the principal, which is the insurer acting through its employee attorneys, and O'Morrow, who is the nominal client of the insurer's attorneys; that by reason of that relationship, created by the insurer, and the conflicting interests between the insurer and O'Morrow the insurer is disqualified from conducting the litigation in behalf of O'Morrow and has waived its rights, if any it had, to defend him; and that the proposal by counsel herein for the insurer, that the insurer have control of the defense for O'Morrow by one firm of attorneys and have control of the defense for Borad against the cross-complaint by another firm of attorneys and that the attorneys selected by O'Morrow have the responsibility of the cross-complaint, is wholly impractical and impossible since the issues of negligence and contributory negligence must be tried at the same time and there is no line of demarkation in such a case between the evidence for the defense and the evidence on the cross-complaint, and that if the insurer's two sets of attorneys have been successful in their examinations up to the theoretical point where evidence on the cross-complaint should begin, the negligence of O'Morrow and Borad will have been established and the cause of action on the cross-complaint will have been destroyed. Appellant also contends that the insurer is disqualified to defend Borad for the same reasons that it is disqualified to defend O'Morrow.

The insurer (respondent) asserts that appellant has the right to prosecute his cross-complaint against Borad, and that it has not contended that the provisions of the policy gave it any control over the cross-complaint. It does contend that it has the right to control O'Morrow's defense to Borad's complaint through one firm of attorneys, and to control Borad's defense to O'Morrow's cross-complaint through another firm of attorneys. It contends further that O'Morrow has violated the co-operation clause of the policy by filing an answer to Borad's complaint and by notifying the insurer that he (O'Morrow) intended to defend against Borad's complaint without any participation therein by the insurer.

O'Morrow was entitled not only to present a defense against Borad's complaint, but he was entitled to present evidence under his cross-complaint against Borad. Likewise Borad was entitled to present a defense against O'Morrow's cross-complaint and to present evidence under his complaint against O'Morrow. The insurer is willing that O'Morrow, through attorneys of his own selection, have the responsibility for his cross-complaint, but it insists that it has the right to control, through attorneys of its own selection, the defense on each side of the controversy. If it should successfully defend each side there would be no recovery against it on either the cross-complaint or the complaint, and then of course it would not be required to pay a judgment under either insurance policy. The issues in the collision case, as to liability, being negligence and contributory negligence, it would seem that when the evidence necessary upon those issues had been presented under Borad's complaint by Borad's attorneys and under O'Morrow's answer thereto by the insurer's attorneys, there would not be any further evidence, on the subject of liability, available for presentation under the cross-complaint by O'Morrow's attorneys. Under such conditions, where the defenses of O'Morrow and Borad would be controlled by attorneys selected by the insurer, the delegation of responsibility for the cross-complaint to attorneys selected by O'Morrow would not afford them an adequate opportunity to represent him properly on the cross-complaint.

Counsel herein for the insurer state that one of its material rights under the insurance policy is the right to compromise, and that if it had control of O'Morrow's defense through attorneys of its own selection it might effect a compromise with Borad (whom it was defending through attorneys of its own selection), and that such a compromise would in no way prejudice O'Morrow on his cross-complaint against Borad. In such circumstances the insurer would be in reality negotiating a settlement with itself, since it would be employing the attorneys representing both sides. Assuming, under those circumstances, that O'Morrow had a strong case against Borad on his cross-complaint, it would be to the interest of the insurer to pay, on behalf of O'Morrow, some comparatively small amount to Borad in settlement of his claim against O'Morrow. Proof that O'Morrow's attorneys of record (selected by the insurer) had settled Borad's affirmative claim against O'Morrow, which claim arose out of the identical collision that was the basis of O'Morrow's cross-complaint, would have a prejudicial effect upon the cross-complaint.

If the insurer were to undertake the defense of O'Morrow through its own attorneys, it and the attorneys would owe him their undivided allegiance to his cause and the duty of acting in utmost good faith in his behalf. The relationship between them and him should be one of the highest trust and confidence. Likewise the insurer and its attorneys would owe the same high duties to Borad whom they are defending on O'Morrow's cross-complaint. The attorneys selected by the insurer to defend O'Morrow and the attorneys selected by the insurer to defend Borad, even though they are members of different law firms and nominally would be the attorneys for the opposing parties O'Morrow and Borad, are in fact employed by the insurer to represent its interests and they owe their allegiance to their client, the insurer. The interests of the insurer are in conflict with the interests of O'Morrow and Borad. The interests of the attorneys employed by the insurers to represent said persons, whose interests are in conflict with the interests of the insurer, are likewise in conflict with the interests of O'Morrow and Borad.

Usually in an automobile collision case which is before the court, the persons involved in the collision, if insured, are insured in different companies. In such usual case the interests of the insurer and the insured are not in conflict and the insurer has the right to defend the insured. The collision case herein is unusual in that the persons involved in the collision were insured by the same insurer and each person has an affirmative claim against the other, with the result that the interests of the insurer are in conflict with the interests of each insured. One of the insured herein, having filed his answer through attorneys of his own selection and having notified the insurer that he will defend without any participation therein by the insurer, has been notified by the insurer that he had thereby violated the co-operation clause of his policy. The question arises as to whether, under these unusual circumstances, the insurer should forego its right to defend the insured which it has in the usual case where there is no conflict of interests between the insurer and the insured, or whether the insured should forego his fundamental right, based upon considerations of public policy, to be represented in his defense by an attorney at law whose interests are not in conflict with his interests. If it should be held that O'Morrow violated the co-operation clause by reason of his election, under the peculiar circumstances herein, to rely upon his right to be represented by attorneys of his own selection whose interests are not in conflict with his interests then he is without insurance. The insurer is in the business of insuring persons for compensation, taking chances and risks of various kinds including the occurrence of such an unusual situation as the one here presented where two of its assured have affirmative claims against each other arising from the same automobile collision. O'Morrow purchased insurance in order to be insured and to avoid the chances and risks of financial loss in the event of an automobile collision. As between the two, the insurer which asserts its right to defend the insured when its interests are in conflict with his interests, and the insured who will be without insurance if he has violated the co-operation clause by relying upon his fundamental right to be represented by one whose interests are not in conflict with his interests, the question should be resolved in favor of the insured. The insurer is disqualified to defend O'Morrow through attorneys of its own selection for the reason that the interests of the insurer are in conflict with the interests of O'Morrow. The insurer, under the unusual circumstances here, is estopped to compel O'Morrow to entrust it with the control of his defense. The insurer being disqualified, as above stated, O'Morrow did not violate the co-operation clause. The insured, O'Morrow, is entitled to defend against the complaint of Borad through competent attorneys of his own selection.

As above stated, a further contention of O'Morrow is that the insurer should pay for the services of his attorneys in defending him against Borad's complaint. It appears that it was the intention of O'Morrow to prosecute an affirmative claim against Borad irrespective of whether Borad prosecuted an affirmative claim against O'Morrow. Before the complaint of Borad was filed, O'Morrow had employed attorneys to file a complaint against Borad. If O'Morrow's complaint had been filed and Borad had answered without filing a cross-complaint, the insurer would not have been required to pay for the services of O'Morrow's attorneys in prosecuting his complaint, since the insurance policy did not provide that the insurer should prosecute an affirmative claim for the insured. After Borad had filed his complaint, O'Morrow was required to defend against that complaint, and it was necessary for O'Morrow to file a cross-complaint, if he intended to prosecute an affirmative claim against Borad. O'Morrow's defense and his cross-complaint, as to liability, are based upon the same evidence. As above stated, when his defense is completed there will be nothing more to prove, as to liability, under the cross-complaint. It therefore appears that if O'Morrow had prosecuted his affirmative claim against Borad in an independent action, as he intended to do, the services rendered by his attorneys would have been the same as they would be in defending against Borad's complaint and in prosecuting O'Morrow's cross-complaint. O'Morrow was prevented from proceeding in an independent action by the filing of the Borad complaint, and O'Morrow's plan to prosecute his cross-complaint against Borad was interfered with by the insurer's insistence, under the peculiar circumstances herein, that it be permitted to defend O'Morrow through its attorneys. Since O'Morrow is entitled, under the decision herein, to defend through attorneys of his own selection, and since the evidence on his defense is included in the evidence on his cross-complaint, he is in the same position, as to prosecuting his affirmative claim, as he was in before Borad filed his complaint. It might be argued that he is not in the same position, as he was in when he intended to file an independent action, for the reason that at that time he was not confronted with the necessity of making a defense, an of course the insurer was not then obligated to defend him; and that when Borad filed his complaint it became necessary to make a defense, and since the premium paid by O'Morrow included payment for a defense the insurer should be required to pay for the defense even though O'Morrow is prosecuting a cross-complaint. It is correct that O'Morrow was not confronted with a defense when he was preparing to file an independent action, but that distinction between his position at that time and his position now is not a practical one. The insurer is willing to defend him through its attorneys and insists upon doing so, and if O'Morrow's cross-complaint were not involved he would be willing undoubtedly to be defended by the insurer. Under the peculiar circumstances of this case, where the insurer is disqualified to defend O'Morrow because he insists upon his right to prosecute his cross-complaint, the legal services to be rendered in his behalf are the same, for all practical purposes, as they were before the Borad complaint was filed. Being in the same position, for all practical purposes, as he was in originally when he intended to file an independent action and to pay for the services of his attorneys, it would result in a profit to him, not a reimbursement, if the insurer were required to pay for the services of his attorneys on the theory that the attorneys were defending him when in fact by such services he would be accomplishing his original object of prosecuting an affirmative claim against Borad. The insurer should not be required to pay for the services of O'Morrow's attorneys in defending him.

Another contention of O'Morrow is that the insurer should pay for the services of his attorneys in prosecuting this declaratory relief proceeding. Although the insurer had notified him that he had violated the co-operation clause and had thereby invalidated his insurance coverage, it was not necessary that he proceed in a declaratory relief action. He could have proceeded to trial in the damage case with his own attorneys and if successful on his cross-complaint, and consequently successful in his defense, it would not be material whether his insurance coverage was valid or not, since he would not be liable for damages as a result of the collision; and if not successful in his defense against Borad's complaint and the insurer should still contend that he had invalidaed his insurance, he could then have a judicial determination of that matter. If he was solicitous about proceeding in that manner and wanted the protection of a declaratory relief judgment, the insurer should not be required to pay his attorneys' fees in this declaratory relief proceeding.

Borad is entitled to defend against the cross-complaint through attorneys of his own selection. He is not entitled to his attorneys' fees in such defense.

The judgment is reversed. Appellant to recover his costs.

PARKER WOOD, Justice.

DESMOND, P. J., and SHINN, J., concur.