Transit Casualty Co. v. Spink Corp.

• Decision Date: 15 June 1979
• Parties: TRANSIT CASUALTY COMPANY, Plaintiff and Respondent, v. SPINK CORPORATION, a corporation and American Motorists Insurance Company, a corporation, Defendants and Appellants. Civ. 16182.
• Court: California Court of Appeals Court of Appeals

Page 360

156 Cal.Rptr. 360

94 Cal.App.3d 124

TRANSIT CASUALTY COMPANY, Plaintiff and Respondent, v. SPINK CORPORATION, a corporation and American Motorists Insurance Company, a corporation, Defendants and Appellants.

Civ. 16182.

Court of Appeal, Third District, California.

June 15, 1979.

Rehearings Denied July 10, 1979.

Hearing Denied Aug. 15, 1979.

Bullen, McKone, McKinley, Gay & Keitges, Sacramento, for defendant and appellant Spink Corp.

Robert J. Glynn, Jr., Glynn, Harvey & McIntosh, San Francisco, for defendant and appellant American Motorists Ins. Co.

H. Paul Breslin, Long & Levit, Los Angeles, for plaintiff and respondent.

PARAS, Associate Justice.

Transit Casualty Company (Transit), an excess insurer, sued its policyholder, Spink Corporation (Spink), and the primary insurer, American Motorists Insurance Company (American), for their refusal to settle death and injury claims growing out of a construction site accident. The jury awarded Transit damages of $460,000. Spink and American appeal.

Spink, a Sacramento engineering firm, was the consulting engineer on a construction project owned by Carlson Development Company (Carlson). Spink was insured by a primary professional liability policy issued by American, containing a limit of $100,000 and a $15,000 deductible feature. Spink had also purchased an "umbrella" policy from Transit with $1,000,000 limit. Both policies contained a standard provision, which we shall call the "settlement clause," permitting the policyholder to refuse consent to settlement. ¹

At the construction site, an unshored trench collapsed. Two employees of a subcontractor were killed and two injured. The heirs of Henry Davis, one of the deceased workmen, brought a suit against Carlson, Spink, the prime contractor, and others. Negligence was claimed because even though safety inspectors had closed the site because of the danger presented by the unshored trench, two subcontractors continued to work on the trench. Plaintiffs charged Spink with negligent supervision of the project.

Carlson filed a cross-action against Spink, alleging that Spink had negligently failed to cause the inclusion of a hold-harmless clause in the prime construction contract and to have the project owner listed as an additional insured on the prime contractor's liability and workers' compensation policies.

When the Davis complaint was filed, Spink notified its two insurers. American had a claim manager in Sacramento. It employed a Sacramento law firm (henceforth the "defense attorneys") to handle the Spink defense. Transit's interests were in the care of a claim representative in Los Angeles. Because of the $15,000 deductible feature of its primary policy, Spink employed a Sacramento law firm as its personal counsel.

At first the defense attorneys believed they could successfully defend Spink. Transit's representative was so informed. As new facts came to light, however, the initial optimism was replaced by a recognition of potential liability, both for failure to properly supervise the job and for failure to protect the project owner with an indemnity clause. Spink's personal attorney shared these premonitions of liability and so informed Spink officials. Although Transit's representative had requested that he be kept informed, he was not told of this change of outlook.

In June 1969, a month before trial, the Davis heirs offered to settle the case for a total of $300,000. The defense attorneys recommended a $50,000 contribution to settlement. Attorneys in Spink's personal law firm had conflicting opinions regarding potential liability. Officials of the Spink firm consulted their insurance broker, who had a specialty of selling professional liability coverage to engineering firms. He thought a settlement by Spink would impair its future insurability and be disadvantageous to the engineering industry in general. Therefore he recommended that Spink refuse to settle and Spink officials accepted and were guided by this recommendation.

When the trial opened in July 1969, the trial judge recommended acceptance of the still viable $300,000 settlement offer. Spink's entire share of the recommended settlement was approximately $76,000, which of course was within the primary policy limits. The defense attorneys recommended settlement to Spink. Although the representatives of American believed that the settlement would be advantageous, they did not "pressure" Spink to settle. Officials of Spink stated that they would not settle under any circumstances, because a settlement would impair their insurability and that of the engineering industry.

The American representatives did not inform Transit's representative of these developments. The trial went badly for Spink. Testimony and court rulings resulted in gloomy forecasts of liability. Transit's representative was finally told of the pessimistic outlook and sent a lawyer to observe the trial. Settlement negotiations were never resumed. The jury returned a verdict of $632,000 against the defendants, including Carlson, Gray and Spink. The trial court then held that Spink was liable to Carlson on the latter's cross-complaint. (This bifurcated issue had been submitted to the trial judge by stipulation at the outset of the trial.)

To satisfy Spink's liability on the judgments held by Davis' heirs and Carlson, the Spink firm paid $15,000, American $100,000, and Transit $175,000. And in September 1970, Transit contributed $285,000 to settle other death and injury claims resulting from the trench collapse. Transit then filed this suit. It charged that the unwarranted rejection of settlement by Spink and American had forced the Davis case to trial, to Transit's ultimate direct damage, and had also increased the settlement outlay on the other death and injury claims.

I

Transit's suit rests upon a variation of the duty-of-reasonable-settlement concept. Every insurance policy includes an implied covenant of good faith and fair dealing and that neither party will injure the interests of the other; the duty requires an insurer to settle when settlement is appropriate; in deciding whether to settle, the insurer must give the interests of its insured at least as much consideration as its own; when a settlement within the policy limits is available and will avoid the danger of a claim exceeding the policy limits, and is otherwise reasonable under all the circumstances, a good faith regard for the insured requires the carrier to settle. (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429, 58 Cal.Rptr. 13, 426 P.2d 173; Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 659, 328 P.2d 198.) Wrongful refusal to settle constitutes both a breach of contract and a tort. (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574, 108 Cal.Rptr. 480, 510 P.2d 1032; Crisci v. Security Ins. Co., supra, 66 Cal.2d at p. 434, 58 Cal.Rptr. 13, 426 P.2d 173.)

The implied covenant of good faith and fair dealing does not burden the carrier alone; it is reciprocal, binding the policyholder as well as the carrier. (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 658, 328 P.2d 198; Liberty Mut. Ins. Co. v. Altfillisch Constr. Co. (1977) 70 Cal.App.3d 789, 797, 139 Cal.Rptr. 91.)

In the variant of the refusal-to-settle syndrome involved here, the excess insurer has sued both the policyholder and the primary carrier. A recent California decision, Northwestern Mut. Ins. Co. v. Farmers' Ins. Group (1978) 76 Cal.App.3d 1031, 143 Cal.Rptr 415, and decisions of other jurisdictions, have sustained this kind of claim on the theory that the excess carrier is equitably subrogated to the position of the policyholder, whose exposure to payment is brought about by the primary carrier's refusal to settle. (Valentine v. Aetna Ins. Co. (9th Cir. 1977) 564 F.2d 292; American Fidelity & Cas. Co. v. All American Bus Lines (10th Cir. 1951) 190 F.2d 234; Peter v. Travelers Insurance Company (C.D.Calif.1974) 375 F.Supp. 1347; Continental Casualty Co. v. Reserve Ins. Co. (1976) 307 Minn. 5, 238 N.W.2d 862; Estate of Penn v. Amalgamated General Agencies (1977) 148 N.J.Super. 419, 372 A.2d 1124; cf. Universal Under. Ins. Co. v. Dairyland Mut. Ins. Co. (Ariz.1967) 102 Ariz. 518, 433 P.2d 966; Bloom, Recovery Against Primary Insurer by Excess Carrier for Bad Faith or Negligent Failure to Settle (April 1969) Ins.Counsel J., p. 235; Knepper, Relationships Between Primary and Excess Carriers in Cases Where Judgment or Settlement Value Will Exhaust the Primary Coverage (July 1953) Ins.Counsel J., p. 207.)

Equitable subrogation is a legal device which permits a party who has been required to satisfy a loss created by a third party's wrong to step into the shoes of the loser and recover from the wrongdoer. (Offer v. Superior Court (1924) 194 Cal. 114, 118-119, 228 P. 11.) An insurance carrier thus may recoup a loss inflicted on its policyholder by equitable subrogation to the policyholder's claim. (See, e. g., Continental Cas. Co. v. Zurich Ins. Co. (1961), 57 Cal.2d 27, 37, 17 Cal.Rptr. 12, 366 P.2d 455; Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 429, 296 P.2d 801.)

The subrogee's rights, of course, can rise no higher than those of the subrogor. On this theory, American contends that the excess insurer, as subrogee, is defeated by the bad faith of the policyholder who refused to settle within the limits of the primary policy. ²

American's contention rests on the assumption that equitable subrogation is a Sine qua non of the excess insurer's suit. The assumption will not survive analysis. Equitable subrogation is a descendant of historic equity practice; it is utilized as a device to achieve a just result by clothing a party with a right of recovery when he would otherwise be defeated by lack of privity. (Meyer Koulish Co. v. Cannon (1963) 213 Cal.App.2d 419, 423, 28 Cal.Rptr. 757; see also Offer v. Superior Court, supra, 194 Cal. 114, 228 P. 11.) Tested as an...