MURPHY v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY (1986)

Plaintiff Lori Murphy sued defendant State Farm Mutual Automobile Insurance Company for unreasonably delaying settlement of plaintiff's personal injury claim.  (Ins.Code, § 790.035, subd. (h)(5).) ¹  Summary judgment was granted in favor of State Farm because plaintiff had not conclusively established State Farm's insured was liable to the plaintiff in the underlying action.

The issue on appeal is whether plaintiff must prove as a condition precedent to bringing a direct claim against the insurer (§ 790.03 et seq.) the insured's liability has been admitted or determined in an underlying lawsuit.   We conclude there is no such requirement and reverse.

The undisputed facts of the underlying lawsuit may be summarized as follows:

On November 23, 1981, the date of the accident, Furman Parker was insured by State Farm.   The traffic report identified Parker's vehicle as the offending vehicle.

State Farm asserted nonliability based on the mistaken belief plaintiff would be unable to prove the involvement of Parker.

On February 22, 1982, plaintiff filed a complaint against Parker for personal injuries and property damage.   Parker answered denying all liability.

On May 13, 1982, Parker's deposition established his involvement in the accident.   Parker's private attorney recommended payment of the policy limits.   State Farm agreed to pay the policy limits and tendered a release to the plaintiff.   Plaintiff signed the release containing the following denial of liability:

“[T]he undersigned hereby releases and forever discharges Furman C. Parker, Luda Parker [sic;  Linda A. Parker] their heirs, executors, administrators, agents and assigns, and all other persons, firms or corporations liable or who might be claimed to be liable, none of whom admit any liability to the undersigned but all expressly deny any liability, from any and all claims, demands, damages, actions, causes of action or suits of any kind or nature whatsoever, and particularly on account of all injuries, known and unknown, both to person and property, which have resulted or may in the future develop from an accident which occurred on or about the 23rd day of November, 1981, at or near Pomona.”  (Emphasis added.)

After plaintiff signed the release, State Farm paid the policy limits and the action was dismissed with prejudice settling the lawsuit against Parker.

DISCUSSION

We note initially section 790.03, subdivision (h)(5), requires the insurer to attempt “in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.”   It does not require the insured's disability be admitted or determined in an underlying lawsuit.

Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329 allowed an individual injured through the negligence of an insured to sue the insured's insurer for unfair claims practices pursuant to section 790.03, subdivision (h)(5).   The court concluded the third party suit may not be brought until the action between the injured party and the insured is concluded.  (Id., at p. 884, 153 Cal.Rptr. 842, 592 P.2d 329.)

The Royal Globe court, having decided the case, could not resist one “finally” and one “moreover.”

“Finally, we agree with defendant that plaintiff may not sue both the insurer and the insured in the same lawsuit.  Section 1155 of the Evidence Code provides that evidence of insurance is inadmissible to prove negligence or wrongdoing.   The obvious purpose of the provision is to prevent the prejudicial use of evidence of liability insurance in an action against an insured.  (See, e.g., Citti v. Bava (1928) 204 Cal. 136, 139 [266 P. 954];  Rising v. Veatch (1931) 117 Cal.App. 404, 406 [3 P.2d 1023].)  A joint trial against the insured for negligence and against the insurer for violating its duties under subdivision (h) would obviously violate both the letter and spirit of the section.  [Fn. omitted.]

“Moreover, unless 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․”  (Id. 23 Cal.3d at pp. 891–892, 153 Cal.Rptr. 842, 592 P.2d 329.)

The gratuitous language included in the “moreover” (“unless the trial against the insurer is postponed until the liability of the insured is first determined”) has caused some courts deciding cases after Royal Globe to require a two-prong condition precedent as a prerequisite to imposing liability: ²  the action between the injured parties and the insured be finally concluded and liability of the insured be admitted or determined in the underlying lawsuit.  (Heninger v. Foremost Ins. Co. (1985) 175 Cal.App.3d 830, 833–834, 221 Cal.Rptr. 303;  Williams v. Transport Indemnity Co. (1984) 157 Cal.App.3d 953, 962, 203 Cal.Rptr. 868;  Rodriguez v. Fireman's Fund Ins. Co. (1983) 142 Cal.App.3d 46, 53, 190 Cal.Rptr. 705.)   We believe a reading of Royal Globe indicates this result is both unintended and unwarranted.  Royal Globe was primarily concerned with third party claims against the insurer and the insured in the same action.

“Royal Globe ․ provided that the claimant may not sue both the insurer and the insured in the same action.   Three reasons for that holding were given.   First, evidence of insurance is inadmissible to prove negligence or wrongdoing.  (Evid.Code, § 1155.)   The purpose of this statute is to prevent the prejudicial use of evidence of liability insurance, and a joint trial of insurer and insured would violate the letter and spirit of that provision.   Second, the defense of the insured may be ‘seriously hampered’ by discovery initiated by the claimant against the insurer.   Third, damages suffered by the claimant as a result of the insurer's bad faith actions may best be determined after his action against the insured is concluded.   (Royal Globe Ins. Co. v. Superior Court, supra, 23 Cal.3d at pp. 891–892 [153 Cal.Rptr. 842, 592 P.2d 329.)]”  (Industrial Indemnity Co. v. Mazon (1984) 158 Cal.App.3d 862, 865, 204 Cal.Rptr. 885.)

Clearly, under these circumstances, a postponement of the trial against the insurer is necessary.   This reasoning, while eliminating the prejudice to the insurer in a joint trial, does not mandate the insured's liability must first be determined in the underlying lawsuit.  (See Afuso v. United States Fid. & Guar. Co. (1985) 169 Cal.App.3d 859, 863, 215 Cal.Rptr. 490.)

The settlement of all potential liability of the insured should be the primary concern of the insurer.   Any equitable settlement is contingent on a determination of the liability of the insured.   The best interests of the insured, insurer, and the third party claimant mandate an early determination of the insured's liability.

Once the insured's liability becomes reasonably clear, section 790.03, subdivision (h)(5), requires the insurer to attempt to effectuate a prompt, fair and equitable settlement.   When the insured's liability becomes reasonably clear is only one factor to be utilized in determining whether the breach of the insurer's duty to settle occurred.

There is no requirement that the duty of the insurer to settle can only be activated by a determination of its insured's liability in an underlying lawsuit.   It is the breach of the insurer's duty to settle which gives rise to the cause of action by a third party.

We do not intend to imply the insured's liability is not an element of pleading and proof in a later action for bad faith.   We are satisfied the insured's liability may properly be determined in the underlying lawsuit or in a later action for bad faith.   Cases following Royal Globe have confused the prerequisite for imposing liability with the necessary pleading requirements to state a cause of action.

We recognize the possibility our decision might encourage the filing of bad faith lawsuits and discourage settlement.   We are confident these factors are outweighed by the equal, if not greater possibility of abuse by insurance companies who might entice a settlement by unfair practices and then seek to hide behind the cloak of that settlement.  (Rodriguez v. Fireman's Fund Ins. Co., supra, 142 Cal.App.3d 46, 56, 190 Cal.Rptr. 705.)   We are further mindful any increase in Royal Globe actions following settlement of nuisance suits can be controlled by three factors:  (1) the ethics of the marketplace, (2) the increased cost of litigation, and (3) the judicious use by the trial courts of Code of Civil Procedure section 128.5.

Accordingly, we hold the trial court erred in granting a summary judgment in favor of the defendant based on the lack of an admission of, or proof of, defendant's insured's liability in the underlying lawsuit.

Judgment is reversed.

FOOTNOTES

1.   Unless otherwise indicated, all section references in this opinion are to the Insurance Code.

2.   We are only concerned with whether liability must be admitted or determined in the underlying lawsuit.   This action has been finally concluded by a release of all claims followed by a dismissal with prejudice.

RICKLES, Acting Presiding Justice.

McDANIEL and TAYLOR *, JJ., concur.