Pruyn v. Agricultural Ins. Co.

• Citation: 42 Cal.Rptr.2d 295,36 Cal.App.4th 500
• Decision Date: 30 June 1995
• Docket Number: No. B073235,B073235
• Court: California Court of Appeals
• Parties: , 95 Cal. Daily Op. Serv. 5176, 95 Daily Journal D.A.R. 9041 Wilhelmina B. PRUYN, Plaintiff and Appellant, v. AGRICULTURAL INSURANCE COMPANY, etc., et al., Defendants and Respondents.

Page 295

42 Cal.Rptr.2d 295

36 Cal.App.4th 500, 95 Cal. Daily Op. Serv. 5176,

95 Daily Journal D.A.R. 9041

Wilhelmina B. PRUYN, Plaintiff and Appellant, v. AGRICULTURAL INSURANCE COMPANY, etc., et al., Defendants and Respondents.

No. B073235.

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

June 30, 1995.

As Modified July 12, 1995.

As Modified on Denial of Rehearing July 27, 1995.

Perona, Langer & Beck, Ronald Beck, Ellen R. Serbin, Long Beach, for plaintiff and appellant.

Zimmerman & Kahanowitch, Brian F. Zimmerman, Robert Cohen, Dee-Ann Jenkins, Encino, Knapp, Petersen & Clarke, Cynthia A. Trangsrud, JoAnn Montoya, Glendale, Federman, Gridley, Gradwohl & Flaherty, Lawrence B. Haile, Black, Compean, Hall & Lenneman, Michael D. Compean, Tricia A. McCarthy, Kirtland & Packard, Robert A. Muhlbach, Los Angeles, Garland O. Bell, Pasadena, Wilson, Kenna & Borys, Garth Goldberg, Los Angeles, Sedgwick, Detert, Moran & Arnold, Alan J. Freisleben, Todd A. Picker, Irvine, Haight, Brown & Bonesteel, Roy G. Weatherup, Michael J. Leahy, Jon M. Kasimov, Santa Monica, Hillsinger & Costanzo, John H. Walsh and Timothy M. Twomey, San Diego, for defendants and respondents.

CROSKEY, Associate Justice.

Plaintiff and appellant Wilhelmina B. Pruyn ("plaintiff") appeals from a judgment which dismissed her complaint brought against multiple insurance companies under the "direct action" provisions of the Insurance Code. (Ins.Code, § 11580(b)(2).) ¹ The trial court sustained the objections to plaintiff's pleading by the defendant and respondent insurers ² without leave to amend.

Plaintiff filed this action against the defendant insurers to enforce a stipulated judgment entered in her favor after she had settled a claim for damages which she had previously asserted in the underlying action We disagree and hold that when, as plaintiff alleges happened here, a liability insurer wrongfully denies coverage or refuses to provide a defense, then the insured is free to negotiate the best possible settlement consistent with his or her interests, including a stipulated judgment accompanied by a covenant not to execute. Such a settlement will raise an evidentiary presumption in favor of the insured (or the insured's assignee) with respect to the existence and amount of the insured's liability. The effect of such presumption is to shift the burden of proof to the insurer to prove that the settlement was unreasonable or the product of fraud or collusion. If the insurer is unable to meet that burden of proof then the stipulated judgment will be binding on the insurer and the policy provision proscribing a direct action against an insurer except upon a judgment against the insured after an "actual trial" will not bar enforcement of the judgment.

against the insured Rolling Hills Community Association of Rancho Palos Verdes ("RHCA"). The settlement included a covenant not to execute on the judgment against RHCA. The defendant insurers contend that such a judgment may not be enforced against them as a matter of law.

As plaintiff has alleged such facts, or claims that she can do so, it was error for the trial court to sustain the pleading objections of the defendant insurers without leave to amend and to dismiss plaintiff's complaint.

FACTUAL AND PROCEDURAL BACKGROUND ³

Prior to June 1987, plaintiff owned a home in the City of Rolling Hills. Unfortunately, her home was located adjacent to that part of the Palos Verdes Peninsula, known as the "Flying Triangle," which was threatened by an ancient landslide.

Land movement in the Flying Triangle area began in approximately 1972. However, it was not discovered until early in 1980 when a landslide manifested itself. Over time, this land movement substantially affected plaintiff's property, causing it to move, buckle, split, crack and subside; in addition, her property also sustained a loss of lateral support. RHCA, a private homeowners association, owned, controlled and maintained all of the common areas surrounding plaintiff's home including roads, drains, canyons and water channels. Rather than attempt to repair the damage to her property, plaintiff sold her home in 1987 at a price which was substantially below the amount it would have commanded had the property not been damaged.

A few months later, on April 13, 1988, plaintiff filed an action for damages against RHCA. ⁴ In her complaint, she alleged causes of action for (1) diversion of surface water, (2) negligence, (3) nuisance, (4) breach of contract, (5) breach of fiduciary duty and (6) inverse condemnation. The gravamen of her complaint was that RHCA and others had negligently constructed, maintained and operated roads, drainage, channels and culverts and had allowed water to enter and erode canyons within the Flying Triangle area. Plaintiff alleged that RHCA's negligence and that of its employees and agents was responsible for the damage to plaintiff's property and for her loss of its use.

RHCA was served with plaintiff's complaint in March of 1990 and tendered defense of the action to each of the defendant insurers. Over a period of years, including the period relevant to the RHCA actions described in plaintiff's complaint, RHCA had been insured by several insurers which provided both primary and excess liability coverage. ⁵ Plaintiff's action was tendered to the Left without a defense from its liability insurers, and having already defended and settled (for $4 million) separate litigation on these same claims involving other homeowner claimants, ⁷ RHCA entered into negotiations with plaintiff to settle her case without a trial. The settlement which was reached provided that RHCA would stipulate to a judgment in the amount of $650,000 and give an assignment of its rights against the defendant insurers in exchange for plaintiff's covenant not to execute on the judgment against RHCA. Indeed, the settlement agreement included plaintiff's express recognition that "no monies shall be paid by RHCA as a result of [plaintiff's claim]." In the agreement, RHCA conceded liability and agreed that any potential judgment could have been substantially in excess of the $650,000 settlement. ⁸ With respect to the assignment of its rights against the insurers, RHCA agreed that such assignment included any right of action founded upon a "... breach of duty to defend, breach of duty to indemnify, breach of contract, [and] any and all rights to satisfaction of any judgment in [an action] under any contract of insurance."

defendant insurers but each of them denied coverage and refused to provide a defense to RHCA. ⁶

Plaintiff, joined by RHCA, filed a motion for an order determining the settlement to be in good faith. (Code of Civ.Proc., § 877.6.) ⁹ A copy of the motion was served upon each of the defendant insurers. ¹⁰ However, none of the insurers responded or appeared On February 14, 1992, plaintiff filed the instant action in which she seeks to enforce the stipulated judgment against the several insurers pursuant to Insurance Code section 11580, subdivision (b)(2). The defendant insurers responded variously with demurrers and motions for judgment on the pleadings. Without going into unnecessary procedural details, the insurers asserted two principal legal objections to plaintiff's complaint: a stipulated judgment against the insured, coupled with a covenant not to execute, (1) is not binding upon an insurer who has not consented thereto and (2) does not result in a determination of the amount of the insured's obligation after an "actual trial" as required by the "no action" clause in the several liability policies. ¹²

                to oppose the motion.  On January 11, 1991, the motion was heard by the Hon.  Frank Baffa, the same judge who had spent nearly a year trying the Evans case which had resulted in a jury determination of RHCA's liability for these same alleged acts of negligence.  (See fn. 7, ante.)   Judge Baffa granted plaintiff's motion. 11  A stipulation for judgment in the sum of $650,000 was signed and the judgment was entered on February 22, 1991
                

The trial court, in making its ruling in favor of the defendant insurers, was obviously concerned about the potential for fraud and collusion between plaintiff and RHCA; however, because it also perceived some confusion and conflict in the appellate decisions, the trial court decided to expedite an appellate resolution of the issues raised by sustaining the insurers' objections. ¹³ The insurers' pleading objections were all sustained without leave to amend and a judgment of dismissal was entered. This timely appeal followed.

ISSUE PRESENTED

This case presents two important questions with respect to the consequences of a liability insurer's wrongful denial of coverage or refusal to provide a defense. Where an insured, wrongfully abandoned by his or her liability insurer, enters into a settlement with the third party claimant in order to bring the underlying litigation to an end on the best possible terms and the settlement is manifested by a stipulation for judgment accompanied by a covenant not to execute, (1) under what circumstances can such judgment be enforced against the insurer and (2) what impact, if any, will the policy's "no action" clause have on any suit against the insurer?

DISCUSSION

1. Standard of Review

In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. " 'We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially Given this standard of review, we necessarily accept as the foundation of this opinion that there was at least a potential for coverage under each of the primary policies and that those insurers owed to RHCA a defense to plaintiff's action. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295-296, 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153.) ¹⁴ It...