Hamilton v. Maryland Cas. Co.

• Decision Date: 07 March 2002
• Docket Number: No. S087346.,S087346.
• Citation: 117 Cal.Rptr.2d 318,27 Cal.4th 718,41 P.3d 128
• Parties: William HAMILTON et al., Plaintiffs and Respondents, v. MARYLAND CASUALTY COMPANY, Defendant and Appellant.
• Court: California Supreme Court

117 Cal.Rptr.2d 318

27 Cal.4th 718

41 P.3d 128

William HAMILTON et al., Plaintiffs and Respondents, v. MARYLAND CASUALTY COMPANY, Defendant and Appellant.

No. S087346.

Supreme Court of California.

March 7, 2002.

Low, Ball & Lynch, Jonathan Margolis, Monterey, Thomas Mulvihill and Christopher E. Arras, San Francisco, for Defendant and Appellant.

Horvitz & Levy, Peter Abrahams and L. Rachel Helyar, Encino, for American International Companies, State Farm General Insurance Company, Truck Insurance Exchange and Mercury General Insurance Company as Amici Curiae on behalf of Defendant and Appellant.

Neumeyer & Boyd, Carol Boyd and Katherine A. Tatikian, Los Angeles, for AXA Global Risks (UK) Ltd. and Sirius International Insurance Corporation as Amici Curiae on behalf of Defendant and Appellant.

Sonnenschein Nath & Rosenthal, Paul E.B. Glad, Michael A. Barnes, San Francisco, and Sonia Renee Martin for National Association of Independent Insurers, American Insurance Association, Fireman's Fund Insurance Company, International Insurance Company and Allstate Insurance Company as Amici Curiae on behalf of Defendant and Appellant.

Altshuler, Berzon, Nussbaum, Berzon & Rubin, Altshuler, Berzon, Nussbaum, Rubin & Demain, Michael Rubin, Michael E. Wall; McGuinn, Hillsman & Palefsky and Cliff Palefsky, San Francisco, for Plaintiffs and Respondents.

WERDEGAR, J.

A liability insurer agrees to defend its insured against a personal injury lawsuit. After the insurer refuses a settlement demand within the policy limits, the claimant and the insured, without the insurer's participation, agree on a settlement. Under the settlement agreement, a stipulated judgment in excess of the policy limits is entered, the claimant agrees not to execute the judgment against the insured, and the insured assigns to the claimant the insured's cause of action for breach of the insurer's duty to accept a reasonable settlement demand. The trial court approves the settlement as made in good faith pursuant to Code of Civil Procedure section 877.6.

In a subsequent action by the claimant, as the insured's assignee, against the insurer for breach of contract, is the amount of the stipulated judgment presumptively binding on the insurer as to the damages suffered by the insured as a result of the alleged contract breach? We conclude it is not; a defending insurer cannot be bound to a settlement to which it has not agreed and in which it has not participated, even where the settlement has been approved under Code of Civil Procedure section 877.6. In this circumstance, we further conclude, the claimant may not maintain an action for breach of the duty to settle because, in light of the settlement before trial and the covenant not to execute against the insured, the stipulated judgment is insufficient to prove that the insured suffered any damages from the insurer's breach of its settlement duty. We therefore affirm the judgment of the Court of Appeal, which ordered judgment entered for the defendant insurer.

Factual and Procedural Background¹

Victoria Lee Parker and VLP Enterprises, Inc. (collectively VLP), owned and operated a San Diego franchise of Great Expectations Creative Management, Inc. (Great Expectations), a dating service. Maryland Casualty Company (Maryland) issued to VLP two successive commercial insurance policies, each with a $1 million policy limit.

In March 1990, William Hamilton, Paula Arnett, Susan Choate, Thomas Fort, Yvonne Kaut and others (claimants or plaintiffs), clients of various Great Expectations franchises, filed a complaint in Contra Costa County Superior Court, naming as defendants Great Expectations, each of its franchises, and the owners of each franchise. Claimants alleged the defendants had invaded the common law, constitutional, and statutory privacy rights of their clients and prospective clients by secretly recording, amplifying and broadcasting their confidential conversations. The complaint stated a proposed class made up of all persons who had been interviewed at any Great Expectations franchise. The complaint sought injunctive relief, statutory damages of the greater of $3,000 per incident or three times each class member's actual damages, and punitive damages.

VLP tendered the defense of the invasion of privacy claims against it to Maryland, which accepted, retaining an attorney to represent VLP. In June 1991, after overruling several demurrers to the complaint, the superior court appointed a special master for discovery and settlement matters. The master stayed all discovery and motions.

In June 1993, claimants demanded $1 million to settle with VLP. Maryland refused to pay the demand, countering with an offer to settle for $150,000. After these negotiations produced no settlement, VLP, without Maryland's participation, entered into a September 1993 settlement agreement with claimants as part of a global settlement between claimants and all the defendants. Under the terms of the global settlement, the defendants agreed to discontinue any further electronic eavesdropping on prospective clients. The Great Expectations franchisor agreed to provide, "by and through" its franchises, discount coupons to class members. Some defendants and insurers, not including VLP or Maryland, also contributed cash to an initial settlement fund of over $2 million. VLP further agreed to have a stipulated judgment entered against it in the amount of $3 million, and to assign to claimants any breach of contract claim it might have against Maryland, in return for which claimants agreed not to execute the judgment against VLP. Maryland neither approved nor opposed the settlement. The special master recommended to the superior court that it approve the settlement, reporting his belief that it reasonably reflected claimants' potential success and the defendants' potential liability, was in the best interests of the class, and had been reached through arm's length negotiation. The superior court thereafter certified a plaintiffs' class, for purposes of settlement only, comprised of all individuals who had participated in a preliminary membership interview at one of the franchises. It confirmed the settlement as a good faith settlement, pursuant to Code of Civil Procedure section 877.6, declaring it to be "fair, reasonable, non-collusive and in good faith," and entered judgment in favor of claimants and against VLP.

In December 1994, claimants, as VLP's assignees, instituted the present action against Maryland, seeking damages for breach of the insurance contract on the theory that VLP was entitled to contractual damages from Maryland for Maryland's failure to accept claimants' settlement offers.

Maryland moved for summary judgment, arguing that because it at all times was defending the action brought by claimants against its insured, its insured's liability could not be fixed by agreement of the parties in the underlying case, but had to be determined by trial. Absent either an actual trial or the insurer's refusal to defend, a stipulated judgment, especially one coupled with a covenant not to enforce, could not be binding on the insurer. The superior court rejected Maryland's arguments and denied its motion for summary judgment.

Claimants then filed a motion for summary judgment against Maryland, arguing that the insurer had breached its contractual duties by failing to accept their offer to settle their claims against VLP for $1 million and that the $3 million stipulated judgment was presumptive evidence, which Maryland had done nothing to rebut, of VLP's damages from the breach. The trial court agreed there was no factual dispute as to Maryland's breach of the covenant of good faith and fair dealing. Without discussing damages or the presumptive force of the stipulated judgment, the court entered judgment in favor of claimants for $3 million, plus prejudgment interest. Maryland appealed from the judgment, including from the trial court's denial of Maryland's own summary judgment motion.

The Court of Appeal reversed. An action for breach of the settlement duty cannot be brought against a defending insurer, the court held, until a judgment after trial has been entered against the insured. Only if the insurer has denied coverage or refused to defend may the insured recover the amount of a settlement made without the insurer's participation. The action here was "prematurely filed," according to the appellate court, in that "it cannot be determined if the failure to settle will cause actual injury to the insured until the defense has been completed and actual damage to the insured has been ascertained." The court concluded judgment should have been entered for Maryland rather than for claimants, and so ordered.

We granted review on claimants' petition.

Discussion

From the covenant of good faith and fair dealing implied by law in all contracts, and from the liability insurer's duty to defend and indemnify covered claims, California courts have derived an implied duty on the part of the insurer to accept reasonable settlement demands on such claims within the policy limits. (Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 401, 97 Cal. Rptr.2d 151, 2 P.3d 1.) "[A]n insurer is required to act in good faith in dealing with its insured. Thus, in deciding whether or not to settle a claim, the insurer must take into account the interests of the insured, and when there is a great risk of recovery beyond the policy limits, a good faith consideration of the insured's interests may require the insurer to settle the claim within the policy limits. An unreasonable refusal to settle may subject the insurer to liability for the entire amount of the judgment rendered against the insured, including any portion in excess of the policy limits. (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658-661 [328 P.2d 198, 68 A.L.R.2d 883].)" (Safeco Ins. Co. v. Superior Court (1999) 71 Cal.App.4th 782,...