Commercial Union Assur. Companies v. Safeway Stores, Inc.

• Citation: 96 Cal.App.3d 449,158 Cal.Rptr. 97
• Court: California Court of Appeals
• Decision Date: 29 August 1979
• Parties: COMMERCIAL UNION ASSURANCE COMPANIES and Mission Insurance Company, Plaintiffs and Appellants, v. SAFEWAY STORES, INCORPORATED, Defendant and Respondent. Civ. 42074.

Page 97

158 Cal.Rptr. 97

96 Cal.App.3d 449

COMMERCIAL UNION ASSURANCE COMPANIES and Mission Insurance Company, Plaintiffs and Appellants, v. SAFEWAY STORES, INCORPORATED, Defendant and Respondent.

Civ. 42074.

Court of Appeal, First District, Division 2, California.

Aug. 29, 1979.

For Opinion on Hearing, see 164 Cal.Rptr. 709, 610 P.2d 1038.

George A. Weinkauf, Inc., George A. Weinkauf, Jr., San Francisco, for plaintiffs and appellants.

Pillsbury, Madison & Sutro, Walter R. Allan, Bernard Zimmerman, Wendell H. Goddard, San Francisco, for defendant and respondent.

SABRAW, ^* Associate Justice.

This case presents the question of whether an insured owes a duty of good faith and fair dealing to its excess liability insurance carrier which would require it to accept a settlement offer below the threshold figure of the excess carrier's exposure where there is a substantial probability of liability in excess of that figure.

Facts :

At all times relevant herein Safeway Stores, Incorporated (hereafter Safeway) had liability insurance coverage as follows:

(a) Travelers Insurance Company and Travelers Indemnity Company (hereafter Travelers) insured Safeway for the first $50,000 of liability.

(b) Safeway insured itself for liability between the sums of $50,000 and $100,000.

(c) Commercial Union Assurance Companies and Mission Insurance Company (hereafter conjunctively referred to as Commercial) provided insurance coverage for Safeway's liability in excess of $100,000 to $20,000,000.

One Hazel Callies brought an action against Safeway in San Francisco Superior Court and recovered judgment for the sum of $125,000. Thereafter, Commercial was required to pay $25,000 of said judgment in order to discharge its liability under the excess insurance policy.

Commercial, as excess liability carrier, brought the instant action against its insured Safeway and Safeway's primary insurance carrier, Travelers, to recover the $25,000 which it had expended. Commercial alleged that Safeway and Travelers had an opportunity to settle the case for $60,000, or possibly even $50,000, and knew or should have known that there was a possible and probable liability in excess of $100,000. It was further alleged that said defendants had a duty to settle the claim for a sum less than $100,000 when they had an opportunity to do so. Commercial's complaint attempts to state two causes of action against Safeway and Travelers, one in negligence and another for breach of the duty of good faith and fair dealing.

Safeway demurred to the complaint on the grounds of failure to state a cause of action. The court sustained the demurrer with 20 days' leave to amend. When Commercial failed to amend its complaint, the complaint was dismissed as to Safeway. Commercial now appeals from the judgment of dismissal.

The Complaint Failed to State a Cause of Action for Negligence.

We initially conclude that Commercial's attempt to state a cause of action on the theory of negligence ¹ must fail in the light of California case authority to the contrary which has held that an action for breach of the implied covenant of good faith and fair dealing must be based upon bad faith. Negligence alone has been held insufficient to create liability (Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 880, 110 Cal.Rptr. 511; Brown v. Guarantee Ins. Co. (1957) 155 Cal.App.2d 679, 688-689, 319 P.2d 69). ² Hence, Commercial's attempt in its first cause of action to hold Safeway liable for its "negligence, carelessness and recklessness" in failing to settle the Callies claim was insufficient to withstand a general demurrer.

The Complaint Failed to State a Cause of Action Based on the Breach of a Self-Insured's Implied Good Faith Duty to Settle.

The present case is unusual in that the policyholder, Safeway, was self-insured for liability in an amount below Travelers' initial exposure. While this status may explain Safeway's reluctance to settle, it remains to be determined if the insured owes an independent duty to his excess carrier to accept a reasonable settlement offer so as to avoid exposing the latter to pecuniary harm.

It is now well established that an insurer may be held liable for a judgment against the insured in excess of its policy limits where it has breached its implied covenant of good faith and fair dealing by unreasonably refusing to accept a settlement offer within the policy limits (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, 661, 328 P.2d 198). The insurer's duty of good faith requires it to "settle within policy limits when there is substantial likelihood of recovery in excess of those limits." (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 941, 132 Cal.Rptr. 424, 425, 553 P.2d 584, 586.)

Although an insurance policy normally only carries an express statement of a duty to defend, an insurer's duty to settle is derived from the implied covenant of good faith and fair dealing which is part of any contract (see 4 Witkin, Summary of Cal.Law (8th ed., 1974), § 754, p. 3050, and cases collected therein). This duty was first recognized in Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d 654, 328 P.2d 198. The rationale for the "Comunale duty" was articulated by the Supreme Court at page 659, 328 P.2d at page 201: "It is common knowledge that a large percentage of the claims covered by insurance are settled without litigation and that this is one of the usual methods by which the insured receives protection. (See Douglas v. United States Fidelity & Guaranty Co., 81 N.H. 371, (127 A. 708, 712); Hilker v. Western Automobile Ins. Co., (204 Wis. 1, 231 N.W. 251,) Supra.) . . .

"The insurer, in deciding whether a claim should be compromised, must take into account the interest of the insured and give it at least as much consideration as it does to its own interest. (See Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d 652, (659), 320 P.2d 140.) When there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of the insured's interest requires the insurer to settle the claim. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing."

It has been held in California and other jurisdictions that the excess carrier may maintain an action against the primary carrier for bad faith refusal to settle within the latter's policy limits (Northwestern Mut. Ins. Co. v. Farmers' Ins. Group (1978) 76 Cal.App.3d 1031, 143 Cal.Rptr. 415; Valentine v. Aetna Ins. Co., 9th Cir., 564 F.2d 292; Estate of Penn v. Amalgamated General Agencies (Sup.App., 1977) 148 N.J.Super. 419, 372 A.2d 1124). This rule, however, is based on the theory of equitable subrogation: Since the insured would have been able to recover from the primary carrier for a judgment in excess of policy limits caused by the carrier's wrongful refusal to settle, the excess carrier, who discharged the insured's liability as a result of this tort, stands in the shoes of the insured and should be permitted to assert all claims against the primary carrier which the insured himself could have asserted (see Northwestern Mut. Ins. Co. v. Farmers' Ins. Group, supra, 76 Cal.App.3d at pp. 1040, 1049-1050, 143 Cal.Rptr. 415). Hence, the rule does not rest upon the finding of any separate duty owed to an excess insurance carrier.

Commercial argues that the implied covenant of good faith and fair dealing is reciprocal, binding the policyholder as well as the carrier (see Liberty Mut. Ins. Co. v. Altfillisch Constr. Co. (1977) 70 Cal.App.3d 789, 797, 139 Cal.Rptr. 91). It is further contended, in effect, that turnabout is fair play: that the implied covenant of good faith and fair dealing applies to the insured as well as the insurer, and thus the policy holder owes a duty to his excess carrier not to unreasonably refuse an offer of settlement below the amount of excess coverage where a judgment of liability above that amount is substantially likely to occur.

This theory, while possessing superficial plausibility and exquisite simplicity, cannot withstand closer analysis. We have no quarrel with the proposition that a duty of good faith and fair dealing in an insurance policy is a two-way street, running from the insured to his insurer as well as vice versa (Liberty Mut. Ins. Co. v. Altfillisch Constr. Co., supra, 70 Cal.App.3d at p. 797, 139 Cal.Rptr. 91; Crisci v. Security Ins. Co., supra, 66 Cal.2d at p. 429, 58 Cal.Rptr. 13, 426 P.2d 173). However, what that duty embraces is dependent upon the nature of the bargain struck between the insurer and the insured and the legitimate expectations of the parties which arise from the contract.

The essence of the implied covenant of good faith in insurance policies is that " 'neither party will do anything which injures the right of the other to receive the benefits of the agreement' " (Murphy v. Allstate Ins. Co., supra, 17 Cal.3d at p. 940, 132 Cal.Rptr. at p. 426, 553 P.2d at p. 586, quoting from Brown v. Superior Court (1949) 34 Cal.2d 559, 564, 212 P.2d 878). One of the most important benefits of a maximum limit insurance policy is the assurance that the company will provide the insured with defense and indemnification for the purpose of protecting him from liability. Accordingly, the insured has the legitimate right to expect that the method of settlement within policy limits will be employed in order to give him such protection.

No such expectations can be said to reasonably flow from an excess insurer to its insured. The object of the excess insurance policy is to provide additional resources should the insured's liability surpass a specified sum. The insured owes no duty to defend or indemnify the excess carrier; hence, the carrier can possess no reasonable...