SCHEUCH v. WESTERN WORLD INSURANCE CO (1978)

In her complaint plaintiff alleged that defendant Western World Insurance Company, Inc., had breached a duty assertedly arising out of Insurance Code section 790.03, subdivision (h)(5), to enter into good faith negotiations to settle her claim for injuries resulting from the negligence of Western World's insured. The complaint was met with demurrer which was sustained without leave to amend.¹ The determination of this appeal from the ensuing order of dismissal turns on whether any such duty was owed to plaintiff.

Because this appeal arises following the sustaining of a demurrer there can be no dispute regarding the operative facts of the matter. As the result of the negligence of one of the employees of Circle K Riding Stables plaintiff fell from a horse and was injured while at the stables. Her demand on Circle K for compensation was reported to its insurer, Western World, which undertook the defense prior to July 21, 1974. Prior to October 17 the same year the liability of the stables had become reasonably clear. Plaintiff wrote to Western World advising the extent of her injuries and requesting to enter into settlement discussions; shortly thereafter plaintiff authorized defendant Circle K to obtain copies of all of her medical treatments. About August 21, 1975, plaintiff informed Western World of a similar case in which a girl with medical payments of $4,000 had recovered a verdict of more than $41,000; plaintiff's medicals were then more than $8,000. A month later plaintiff further advised Western World that her injuries were very severe, though their full nature and extent were still not known, that she had been hospitalized again in August, and that her estimated medical bills were approximately $10,000. Trial of the cause against Circle K was set for December 15, 1976. Beginning July 1976 plaintiff demanded $30,000 in settlement; defendant made no offer to settle. At the mandatory settlement conference plaintiff predicted a verdict of $60,000 but repeated her offer to settle for $30,000; the court agreed with plaintiff's estimate of the jury verdict. Western World offered to settle for $1,000. The matter proceeded to trial; the jury rendered a plaintiff's verdict in the amount of $56,611 and, as plaintiff was found to have been 55 percent comparatively negligent, judgment was entered for $25,474.95.

The complaint herein further alleges that at all times mentioned therein Circle K Riding Stables' liability to plaintiff had become reasonably clear; that Western World's refusal to negotiate was oppressive and malicious for the purpose of intimidation and forcing an unreasonable settlement; that Western World acted unfairly and in bad faith, made no good faith attempt to effectuate a prompt, fair and equitable settlement and had adopted a policy of so acting in such cases; that Western World was thus guilty of an unfair method of competition and an unfair and oppressive deceptive act or practice under Insurance Code 790.03; that the reasonable settlement value of plaintiff's case was $30,000 and a reasonably prudent insurance carrier would have entered into settlement negotiations and settled for this amount. Plaintiff claimed general damages of.$2.5 million, unspecified specials, and punitives of $15 million.

Section 790.03, subdivision (h)(5)² provides that it is an unfair method of competition and unfair and deceptive act or practice in the business of insurance to knowingly commit or perform with such frequency as to indicate a general business practice. “Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.” The section is part of article 6.5 of the Insurance Code, the purpose of which is to regulate trade practices in the business of insurance in accordance with the intent of Congress as expressed in what is known as the McCarran-Ferguson Act (15 U.S.C.A., ss 1011-1015). (s 790.) Until the decision of the Supreme Court in United States v. Underwriters Assn. (1944) 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440, regulation of the business of insurance had been considered to fall exclusively within the province of the states.³ Following the Underwriters Assn. decision, Congress acted to enable the states to retain this traditional authority.⁴ The Sherman and Clayton Antitrust Acts and the Federal Trade Commission Act were declared applicable to the business of insurance only to the extent such business is not regulated by state law.⁵ (15 U.S.C.A., s 1012.) Article 6.5 of the Insurance Code does so regulate the insurance business. (Addrisi v. Equitable Life Assurance Society of U.S. (9th Cir. 1974) 503 F.2d 725, 728.) In short, this portion of the Insurance Code is essentially an antitrust provision which, as the more specific act, supersedes the Cartwright Act (Bus. & Prof. Code, s 16700 et seq.) which encompasses the general antitrust law of California. (Chicago Title Ins. Co. v. Great Western Financial Corp., 69 Cal.2d 305, 322, 70 Cal.Rptr. 849, 444 P.2d 481; Greenberg v. Equitable Life Assur. Society, 34 Cal.App.3d 994, 999 fn. 2, 110 Cal.Rptr. 470.) Except for Cancino v. Farmers Ins. Group, 80 Cal.App.3d 335, 145 Cal.Rptr. 503, the few cases involving section 790.03 have been classic antitrust actions. (Shernoff v. Superior Court, 44 Cal.App.3d 406, 118 Cal.Rptr. 680; Greenberg, supra, 34 Cal.App.3d 994, 110 Cal.Rptr. 470; Addrisi, supra, 503 F.2d 725.) This court has previously determined, contrary to the position taken by at least one other jurisdiction (see Retail Clerks Welfare Fund v. Continental Gas Co. (1961) 71 N.J.Super. 221, 176 A.2d 524), that “the person to whom the civil liability runs may enforce it by an appropriate action” irrespective of governmental action against the insurer for violation of a provision of the Insurance Code. (Greenberg, supra, 34 Cal.App.3d 994, 1001, 110 Cal.Rptr. 470, 475.)

Appellant's position is that section 790.03, subdivision (h)(5), imposes on the insurer an independent duty to one injured by the insurer's insured to enter into good faith settlement negotiations with the injured person once the insured's liability to that person has become reasonably clear.⁶ This is rather a startling proposition.⁷ The covenant of good faith and fair dealing which requires an insurer to effect reasonable settlement of a claim against the insured within its policy limits arises out of the contract of insurance. (Johansen v. California State Auto Assn. Inter-Ins. Bureau, 15 Cal.3d 9, 18, 123 Cal.Rptr. 288, 538 P.2d 744; Crisci v. Security Ins. Co., 66 Cal.2d 425, 430, 58 Cal.Rptr. 13, 426 P.2d 173; Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 658-659, 328 P.2d 198.) The duty arising out of the implied covenant is enforceable by the named insured and, under the third party beneficiary doctrine, one on the same footing as the named insured. (Cancino v. Farmers Ins. Group, 80 Cal.App.3d 335, 339-340, 145 Cal.Rptr. 503 (one loading insured vehicle “insured”); Northwestern Mut. Ins. Co. v. Farmers' Ins. Group, 76 Cal.App.3d 1031, 1042-1044, 143 Cal.Rptr. 415 (permissive user “insured”); see also Johansen v. California State Auto Assn. Inter-Ins. Bureau, 15 Cal.3d 9, 13-14, 123 Cal.Rptr. 288, 538 P.2d 744.) Neither the third party beneficiary doctrine nor any other theory, however, has successfully extended the duty of the insurer beyond these limits. Murphy v. Allstate Ins. Co., 17 Cal.3d 937, 944, 132 Cal.Rptr. 424, 553 P.2d 584, and Zahn v. Canadian Indem. Co., 57 Cal.App.3d 509, 514, 129 Cal.Rptr. 286 expressly reject the contention that the third party beneficiary doctrine creates any duty to settle on the part of the insurer vis-a-vis an injured claimant not insured under the policy. Murphy, supra, 17 Cal.3d at page 944, 132 Cal.Rptr. 424, 553 P.2d 584, also rejected the notion that the Financial Responsibility Law (Veh.Code, s 16000 et seq.) creates any such duty.⁸ We believe appellant's effort to found such a duty on section 790.03, subdivision (h)(5), must be similarly rejected.

The duty to settle, and its attendant obligation to enter into good faith settlement discussions, is one aspect of the covenant of good faith and fair dealing (Crisci, supra, 66 Cal.2d at p. 430, 58 Cal.Rptr. 13, 426 P.2d 173; Comunale, supra, 50 Cal.2d at p. 659, 328 P.2d 198) which is implied in law. (Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 574, 108 Cal.Rptr. 480, 510 P.2d 1032.) “The duty to settle is implied in law to protect the insured from exposure to liability in excess of coverage as a result of the insurer's gamble on which only the insured might lose.” (Murphy, supra, 17 Cal.3d at p. 941, 132 Cal.Rptr. at p. 426, 553 P.2d at p. 586.) Where there is no such risk to the insured there is no duty to settle. (Ibid.; see Shapero v. Allstate Ins. Co., 14 Cal.App.3d 433, 92 Cal.Rptr. 244.) Obviously the interests of the person injured by the insured are remote from those considerations which gave rise to judicial declaration of an implied in law duty to settle.

Section 790.03, subdivision (h)(5), imposes no duty on an insurer which had not already been judicially declared prior to its enactment in 1972. In the Greenberg case already cited, while reaching the conclusion that the person to whom civil liability runs for breach of section 790.03 may enforce it by appropriate action, we noted “Any other construction would overturn by implication the rule of Crisci v. Security Ins. Co., 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173. Insurance Code section 790.03 was amended after the trial of the case at bench to add subdivision (h)(5) which defines as an unfair trade practice by an insurer the refusal to exercise good faith to effectuate settlements of claims.” (34 Cal.App.3d at p. 1001, fn. 5, 110 Cal.Rptr. at p. 475.) What was implicit there we now make explicit: Section 790.03, subdivision (h)(5), represents a legislative embodiment of the law for the purpose of regulating the business of insurance, as previously declared by the Supreme Court of this state. Appellant would have us hold that the Legislature not only endorsed judicial declaration of the duty to settle but greatly expanded it to include injured claimants not the insureds among the persons to whom the duty is owed. We find no justification for such a conclusion.

The order of dismissal is affirmed.

FOOTNOTES

1.  Though the complaint purported to state only one cause of action, it also alleged a breach of contract, with plaintiff claiming to be a third party beneficiary of the insurance contract between Western World and its insured. In her response to demurrer plaintiff characterized this allegation as “surplusage,” and no question with respect thereto is raised on appeal. It would appear in any event that third party beneficiary analysis would avail plaintiff nothing.

2.  Unless otherwise indicated all statutory references are to the Insurance Code.

3.  The reason for this was that the business of insurance was not deemed commerce within the meaning of the Commerce Clause (U.S. Const., art. 1, s 8, cl. 3). (Paul v. Virginia (1868) 8 Wall. 168, 183, 75 U.S. 168, 183, 19 L.Ed. 357.)

4.  “Congress declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.” (15 U.S.C.A., s 1011.)

5.  “Nothing in this chapter shall render the said Sherman Act inapplicable to any agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation.” (15 U.S.C.A., s 1013, subd. (b).)

6.  It does not appear that the amount of the judgment against Circle K Riding Stables was in excess of its insurance coverage. In any case appellant did not sue as assignee of any right of action Circle K might have against its insurer.

7.  The granting of petition for hearing in Royal Globe Ins. Co. v. Superior Court (3 Civ. 17489) on June 1, 1978, places the issue before our Supreme Court.

8.  Of related interest is the court's rejection (17 Cal.3d at p. 946, 132 Cal.Rptr. 424, 553 P.2d 584) of the further argument that plaintiff could proceed against the insurer for breach of the duty owed to its insured by way of a creditors' suit under Code of Civil Procedure, section 720.

LILLIE, Acting Presiding Justice.

THOMPSON and HANSON, JJ., concur.