MORADI SHALAL v. FIREMAN FUND INSURANCE COMPANIES (1986)

Plaintiff, Parvaneh Moradi-Shalal, appeals from an order ¹ sustaining a demurrer without leave to amend to her first amended complaint for bad faith against defendant, Fireman's Fund Insurance Companies (hereinafter Fireman's Fund).

CONTENTION

Plaintiff contends that her suit for damages against the insured third party tortfeasor, which was settled and dismissed with prejudice, is concluded for purposes of commencing an action against the third party's insurer for violation of Insurance Code section 790.03, subdivision (h).²

FACTS

On July 7, 1983, plaintiff was injured when the automobile she was driving was involved in an accident with another vehicle insured by Fireman's Fund.   On April 24, 1984, and June 6, 1984, plaintiff's attorney wrote a letter to Fireman's Fund submitting evidence of damages and requesting settlement of the claim against its insured.   Fireman's Fund did not acknowledge either of the demand letters and allegedly made no attempt to enter into a settlement.

On June 21, 1984, plaintiff filed suit against the insured to prevent the running of the statute of limitations.   On September 21, 1984, a settlement was reached and the case was dismissed with prejudice on October 19, 1984.

On October 4, 1984, plaintiff commenced a bad faith action seeking compensatory and punitive damages against Fireman's Fund based on its alleged failure to effectuate a prompt, fair and equitable settlement of her claim in violation of section 790.03, subdivision (h).   Fireman's Fund's general demurrer to the complaint was sustained with leave to amend.

On January 31, 1985, plaintiff filed her first amended complaint “For Damages for Unfair and Deceptive Insurance Business Practices.”   In that complaint, plaintiff alleged the following:  Fireman's Fund was an insurer which had issued a liability policy to its insured covering injuries and damages resulting from the operation of motor vehicles;  that plaintiff had sustained bodily injuries, medical expenses, and other damages when, on July 7, 1983, the automobile of Fireman's Fund's insured negligently struck plaintiff's vehicle;  that plaintiff on April 24, 1984, and June 6, 1984, mailed letters to Fireman's Fund submitting evidence of her damages and requesting settlement of her claim;  and alleged that Fireman's Fund did not acknowledge or act upon [those communications], did not promptly investigate or process the claim, and did not attempt in good faith to effectuate a prompt, fair, and equitable settlement of the claim, in which liability was reasonably clear.

On March 29, 1985, Fireman's Fund's demurrer to plaintiff's first amended complaint was sustained without leave to amend.   The court based its decision primarily on the fact that plaintiff's failure to obtain a final judgment against the insured precluded her from maintaining an action against Fireman's Fund.   The court also noted that its ruling was not in conflict with Rodriguez v. Fireman's Fund Ins. Co. (1983) 142 Cal.App.3d 46, 190 Cal.Rptr. 705.

DISCUSSION

“Notwithstanding facts unclearly stated, lack of precise form or language, insertion of irrelevant facts and requests for inappropriate relief, the rule is that if, upon consideration of all the facts therein stated, liberally construed, it appears plaintiff is entitled to any judicial relief against defendant, the complaint will withstand the demurrer.”  (Air Quality Products, Inc. v. State of California (1979) 96 Cal.App.3d 340, 347, 157 Cal.Rptr. 791.)

“For purposes of this appeal, those factual allegations of the [first amended] complaint which are properly pleaded are deemed admitted by defendant's demurrer.”  (Thompson v. County of Alameda (1980) 27 Cal.3d 741, 746, 167 Cal.Rptr. 70, 614 P.2d 728.)

I

Plaintiff contends that her bad faith action against Fireman's Fund is not precluded by her failure to obtain a “final judgment” against the insured.   Relying on Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d 46, 190 Cal.Rptr. 705, she maintains that “a ‘final judgment’ was not required under Royal Globe, and that an underlying action which is settled and dismissed with prejudice is ‘concluded’ for purposes of commencement of an action against the insurer for breach of statutory duties under section 790.03.”

In Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 884, 153 Cal.Rptr. 842, 592 P.2d 329, the Supreme Court held that a third party may sue an insurer for violating the duty imposed by section 790.03, subdivision (h), only after the action between the injured party and the insured is “concluded.”   The Royal Globe court concluded, however, that plaintiff could not sue the insurer and the insured in the same action (Id., at p. 891, 153 Cal.Rptr. 842, 592 P.2d 329) and went on to state:  “[U]nless 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.   In addition, damages suffered by the injured party as a result of the insurer's violation of subdivisions (h)(5) and (h)(14) may best be determined after the conclusion of the action by the third party claimant against the insured.   Thus, plaintiff's claim against defendant was brought prematurely and the trial court should have sustained defendant's demurrer and granted the motion for judgment on the pleadings on that ground.”  (Id., at p. 892, 153 Cal.Rptr. 842, 592 P.2d 329.)   Respondent argues that “[t]he decision of the California Supreme Court in Royal Globe Insurance Company v. Superior Court, 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329 (1979), should be overruled.”   It is not for a Court of Appeal to “overrule a decision of the California Supreme Court.”   (Auto Equity Sales v. Superior Court (1962) 57 Cal.2d 450, 455, 20 Cal.Rptr. 321, 369 P.2d 937.)

The obvious purpose of requiring the “conclusion” set forth in the Royal Globe case is to avoid prejudicing the defense of the insured in the underlying case and to ascertain the amount of the damages, if any, suffered by the injured plaintiff, not to shield an errent insurer from the consequences of its tortious breach of its duties to that injured claimant.   The language in Royal Globe “until the liability of the insured is first determined” was not necessary to and did not serve the purpose of determining any of the facts or issues of that case which deferred the determination of the 790.03 action until after the conclusion of the underlying action.

The word “concluded” as used in Royal Globe was first interpreted in Nationwide Ins. Co. v. Superior Court (1982) 128 Cal.App.3d 711, 714, 180 Cal.Rptr. 464, a case not involving a settlement or release, but rather a judgment in an underlying case against a Nationwide insured, which judgment was still on appeal at the time a writ of mandate was sought by Nationwide to compel the San Bernardino Superior Court to vacate its order overruling Nationwide's demurrer to the third party's section 790.03 complaint on the ground that the judgment in the underlying action was not final because that case was still on appeal and that, therefore, that case had not been “concluded.”   Division Two of the Fourth District of the Court of Appeal issued the writ.

A year later in Rodriguez v. Fireman's Fund Ins. Co., supra, however, Division Five of this district of the Court of Appeal expanded the definition of the term “concluded” to include a situation, where the liability of the insured is admitted and the underlying lawsuit is settled and dismissed with prejudice.  (142 Cal.App.3d at p. 53, 190 Cal.Rptr. 705.)

The factual setting of Rodriguez is similar to the instant case.   In Rodriguez, the plaintiff's car was rear ended by a vehicle insured by Fireman's Fund.   The plaintiff suffered serious injuries in the collision and sued the insured.   Fireman's Fund failed to acknowledge the plaintiff's settlement demands for three years.   It then offered her a $200,000 statutory settlement pursuant to the provisions of Code of Civil Procedure section 998.   She accepted the statutory offer but advised Fireman's Fund that she was “reserving” her rights to proceed against it for “bad faith and tortious conduct” arising from the handling of her claim.   Thereafter, the action against the insured was voluntarily dismissed with prejudice.

The plaintiff, Rodriguez, then filed a Royal Globe action alleging that Fireman's Fund made no attempt to effectuate a prompt, fair and equitable settlement of her claim.   Fireman's Fund's demurrer to the complaint was sustained by the trial court without leave to amend.   The trial court ruled that a third party claimant could not bring action against an insurer without first obtaining a judgment against the insured.

The appellate court reversed the trial court's order, holding that “[w]hile a preferred conclusion of an action is by final judgment, in cases where the liability of the insured is admitted and the underlying lawsuit is concluded by the statutory acceptance of an offer (Code Civ.Proc., § 998) followed by a judgment entered thereafter or an injured plaintiff's motion to dismiss with prejudice, the requirements of Royal Globe are satisfied.”  (Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d at p. 53, 190 Cal.Rptr. 705;  emphasis in original;  see also Heninger v. Foremost Ins. Co. (1985) 175 Cal.App.3d 830, 221 Cal.Rptr. 303, by the same division of this court that decided Rodriguez.)

We disagree with any thought that a “final judgment,” presumably after a trial, is a “conclusion” to be preferred to a settlement.   As we summarize the California settlement case law in Fisher v. Superior Court (1980) 103 Cal.App.3d 434, 441, 163 Cal.Rptr. 47:

“ ‘ “ ‘The law wisely favors settlements․' ”  (Potter v. Pacific Coast Lumber Co., 37 Cal.2d 592, 602 [234 P.2d 16];  and see People ex rel. Dept. Pub. Wks. v. Douglas, 15 Cal.App.3d 814, 820 [93 Cal.Rptr. 644];  Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 696 [319 P.2d 69];  Cilibrasi v. Reiter, 103 Cal.App.2d 397, 400 [229 P.2d 394];  Lamb v. Herndon, 97 Cal.App. 193, 203 [275 P. 503].)  “[I]t is the policy of the law to discourage litigation and to favor compromises of doubtful rights and controversies, made either in or out of court.”  (Hamilton v. Oakland School Dist., 219 Cal. 322, 329 [26 P.2d 296];  see also Central Basin etc. Wat. Dist. v. Fossette, 235 Cal.App.2d 689, 705 [45 Cal.Rptr. 651].)  Settlement agreements “ ‘are highly favored as productive of peace and goodwill in the community, and reducing the expenses and persistency of litigation.’ ”  (McClure v. McClure, 100 Cal. 339, 343 [34 P. 822];  see also Estate of Johanson, 62 Cal.App.2d 41, 56 [144 P.2d 72].)' ”

 Nor do we agree with the Heninger court's reading of Royal Globe as requiring a final determination of liability as long as the underlying action has been “concluded.”   A settlement coupled with a dismissal of a case with prejudice concludes that case in every sense and amounts to a retraxit.³  It therefore allows the determination of whether persons in the business of insurance violated any of the provisions of section 790.03 in their handling of the underlying case.

Fireman's Fund argues that Rodriguez is factually distinguishable from the instant case in that here, the settlement was not based upon a statutory offer and plaintiff did not expressly reserve her rights to proceed against Fireman's Fund for bad faith.   After carefully reviewing the court's decision in Rodriguez, we conclude that the purported factual distinctions raised by Fireman's Fund are insignificant.

The fact that settlement of the Rodriguez case was by way of a section 998 offer to allow judgment is not significant.   Subdivision (e) of that section makes clear that “[a]ny judgment entered pursuant to [that] section shall be deemed to be a compromise settlement.”  Rodriguez does not require that a settlement be reached in a particular manner in order for the underlying action to be deemed “concluded” within the meaning of Royal Globe.   What the case does require is that a settlement, by statutory offer or otherwise, be followed by entry of judgment or dismissal with prejudice, thereby effectively precluding any further litigation on the same subject matter between the same parties.⁴  (Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d at p. 54, 190 Cal.Rptr. 705.)   The instant case meets this requirement as it was dismissed with prejudice on or about October 19, 1984, as part of, and at the conclusion of the settlement.

Moreover, the Rodriguez court made plain that in “both Doser [Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883, 162 Cal.Rptr. 115] and Nationwide, the holding of Royal Globe Ins. Co. v. Superior Court, supra, 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329, was solely applied to the factual setting in each respective case.   Neither case appears to have interpreted or amplified the holding of Royal Globe to limit all third party direct actions to final judgments resulting from trial.”  (Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d at p. 53, 190 Cal.Rptr. 705;  emphasis in original.)

The issue of whether Rodriguez requires a settling plaintiff to expressly reserve her rights before she can bring a subsequent bad faith action against the insurer, was addressed by this court in Trujillo v. Yosemite-Great Falls Ins. Co. (1984) 153 Cal.App.3d 26, 28–29, 200 Cal.Rptr. 26, but only in the narrow context of facts distinguishable from Rodriguez.   Even so, we concluded that the trial court erred in failing to allow the plaintiff therein to amend so as to bring that case within Rodriguez if he were able to do so.

“Prior to making an actual statutory acceptance of Fireman's offer, Ms. Rodriguez notified Fireman's Fund of her intention to reserve her rights to proceed against it for bad faith.   Fireman's made no attempt to withdraw the offer or condition it upon full release of itself and its insured․”  (Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d 46, 56, fn. 7, 190 Cal.Rptr. 705.)   Indeed, had it done so, it would on that ground alone have exposed itself to a charge of bad faith.

The Rodriguez court recognized the “possibility that a defendant's desire for settlement may be blunted if he cannot be sure his file on the case is closed.”  (Id., at p. 56, 190 Cal.Rptr. 705.)   The court, however, also recognized “the equal if not greater possibility of abuse by insurance companies who might entice a settlement by unfair practices, then seek to hide behind the cloak of that settlement.”  (Id., at p. 56, 190 Cal.Rptr. 705.)

 This danger of abuse is present whether or not there is a reservation of rights to proceed against the insurer.   Moreover, to interpret Rodriguez as requiring such a reservation of rights would in many instances allow an insurer to escape liability for egregious violations of its statutory duties as imposed under section 790.03, subdivision (h).   This is precisely what the court in Rodriguez aimed to prevent as evidenced by the court's statement:  “No [insurer] should gain an advantage from [its] own wrong.”  (142 Cal.App.3d at p. 56, 190 Cal.Rptr. 705.)   Accordingly, we hold that plaintiff's failure to plead an express reservation of rights does not render her complaint demurrable.

In her first amended complaint plaintiff alleged that “[o]n or about June 6, 1984, Plaintiff, by and through her attorneys, requested again by letter to said Defendants a response to and settlement of Plaintiff's claim and notified said Defendants that Plaintiff reserved rights of action under California Insurance Code, Section 790.03(2), (3) & (5).   Said Defendants did not acknowledge or act upon the communication, did not promptly investigate or process the claim, and did not attempt in good faith to effectuate a prompt fair, and equitable settlement of the claim, in which liability was reasonably clear.”

A mere three and one-half months later the settlement was consummated.   According to the first amended complaint, the material factual allegations which we are compelled to accept as true, at the time of that settlement Fireman's Fund had notice of plaintiff's intentions to reserve her rights of action under section 790.03, subdivisions (h)(2), (3) and (5).

Therefore, even under the broadest possible reading of Trujillo in respondent's favor, appellant's complaint satisfies any supposed requirement of notice of reservation of rights.

We, however, go further and agree with Division Three of the Fourth District in its decisions in Afuso v. United States Fid. & Guar. Co. (1985) 169 Cal.App.3d 859, 864, 215 Cal.Rptr. 490 and Vega v. Western Employers Insurance Co. (1985) 170 Cal.App.3d 922, 924, 216 Cal.Rptr. 592, that no express reservation of rights need be alleged in a complaint, such as the one at bench.   Nor do we conclude that such a reservation need be proved at trial.

 The underlying action is against Fireman's Fund's insured, not Fireman's Fund itself.   The cause of action pled in the complaint herein is a direct cause of action against Fireman's Fund for its alleged tortious violation of subdivisions of section 790.03.   It is clear to us that the release of a cause of action against an insured for that insured's negligent act, omission or actionable fault in one accident or occurrence does not, by reason of that release alone, insulate that insured's insurer from the consequences of the insurer's own separate tortious violation of the provisions of section 790.03 and its subdivisions during its handling of that claim or suit.

To the extent that Trujillo states otherwise or may be interpreted as requiring the pleading of an express reservation of rights against a releasee's insurer, we disapprove it.

We must next determine whether the insured's liability has been conclusively established, that being a prerequisite to bringing an unfair practice bad faith action against the insurer.  (Royal Globe Ins. Co. v. Superior Court, supra, 23 Cal.3d 880, 891–892, 153 Cal.Rptr. 842, 592 P.2d 329;  Nationwide Ins. Co. v. Superior Court, supra, 128 Cal.App.3d 711, 714, 180 Cal.Rptr. 464;  Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d 46, 53, 190 Cal.Rptr. 705;  Williams v. Transport Indemnity Co. (1984) 157 Cal.App.3d 953, 958–960, 203 Cal.Rptr. 868.)

The insured's liability may be established by (1) a final judgment against the insured (Nationwide Ins. Co. v. Superior Court, supra, 128 Cal.App.3d 711, 714, 180 Cal.Rptr. 464) or (2) an express admission of the insured's liability (Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d 46, 53, 190 Cal.Rptr. 705).

In Rodriguez, plaintiff alleged that the accident from which the underlying action arose was the result of the “sole negligence” of the insured.  (Id., at p. 49, 190 Cal.Rptr. 705.)   The court held that by demurring to plaintiff's complaint, Fireman's Fund had accepted the truth of this allegation and therefore had admitted the liability of its insured.  (Id., at p. 55, 190 Cal.Rptr. 705.)

 In the case before us we are presented with a substantially identical situation.   In her first amended complaint, plaintiff alleged that the insured's vehicle “negligently struck plaintiff's vehicle, proximately causing bodily injuries, medical expenses, and other damages to the plaintiff.”   Fireman's Fund demurred to the complaint, thereby accepting the truth of this allegation for the purpose of the demurrer which is before us (see Thompson v. County of Alameda, supra, 27 Cal.3d 741, 746, 167 Cal.Rptr. 70, 614 P.2d 728;  and Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d 46, 190 Cal.Rptr. 705), thereby admitting the liability of its insured.   A dismissal with prejudice was filed in the underlying action following settlement of that case against respondent's insured and before the filing of the first demurrer to the complaint in this case.

The order dismissing the action is reversed with directions to the trial court to overrule the demurrer, and allow defendant a reasonable time within which to answer the complaint.

FOOTNOTES

1.   An order sustaining a demurrer without leave to amend is a nonappealable order.  (9 Witkin, Cal. Procedure (3d ed. 1985) Appeal, § 82, p. 105.)   Under rule 2(c) of the California Rules of Court, however, we treat the notice of appeal as a valid notice of appeal from the trial court's subsequent order of dismissal.   The order of dismissal is a final judgment from which an appeal can be taken.  (Jeffers v. Screen Extras Guild, Inc. (1951) 107 Cal.App.2d 253, 254, 237 P.2d 51.)

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

3.   “ ‘A retraxit is equivalent to a verdict and judgment on the merits of the case and is deemed to be a bar to another suit for the same cause between the same parties․  [¶] Where the parties to an action settle their dispute and agree to a dismissal, it is a retraxit and amounts to a decision on the merits and as such is a bar to further litigation on the same subject matter between the parties.’  [Citation.]”  (Datta v. Staab (1959) 173 Cal.App.2d 613, 621, 343 P.2d 977, emphasis added.)Respondent argues that “[i]f the dismissal with prejudice was, in fact, equivalent to a determination of the merits of the plaintiff's case for all purposes, then the plaintiff would also be barred from denying that the settlement accepted by her represented the fair value of her personal injury claim.   Such a conclusion would, of course, bar any Royal Globe action, since there would be no damages.”This argument fails, however, to distinguish between the nature and cause of the damages available against the insured tortfeasor on the one hand, and against the insurer of that tortfeasor on the other hand.The recovery, if any, against the original insured tortfeasor is for the damages proximately (or legally) resulting from that insured's tortious conduct.   The recovery, if any, against the insured tortfeasor's insurer is only for those damages which proximately (or legally) result from the insurer's separate tortious conduct in handling the claim,—which is necessarily conduct separate from and subsequent to the original tort by the insured tortfeasor.

4.   If Rodriguez were limited solely to its facts, any plaintiff who wished to file a subsequent action against the insurer for unfair business practices, and who did not receive a statutory offer of settlement, would be required to proceed to trial in the underlying action in order to preserve the right to proceed against the insurer.   Such a course would not only discourage settlement and consume unnecessary judicial time, but it would also lessen the salutory effect of the statutory duties imposed on insurers by section 790.03, subdivision (h).

McCLOSKY, Associate Justice.

KINGSLEY, Acting P.J., and SHIMER, J.*, concur.