Barrera v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 08 July 1969
• Docket Number: S.F. 22313
• Court: California Supreme Court
• Parties: , 456 P.2d 674 Eva BARRERA, Plaintiff, Cross-defendant, and Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant, Cross-complainant, and Respondent.

Page 106

79 Cal.Rptr. 106

71 Cal.2d 659, 456 P.2d 674

Eva BARRERA, Plaintiff, Cross-defendant, and Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant, Cross-complainant, and Respondent.

S.F. 22313.

Supreme Court of California,

In Bank.

July 8, 1969.

Boccardo, Blum, Lull, Niland, Teerlink & Bell, and Edward J. Niland, San Jose, for plaintiff, cross-defendant and appellant.

Edward I. Pollock, Los Angeles, Robert E. Cartwright, San Francisco, Theodore A. Horn, Los Angeles, Robert G. Beloud, Upland, Leo M. O'Connor, Sacramento, and Leonard Sacks, Los Angeles, as amici curiae on behalf of plaintiff, cross-defendant and appellant.

Nagle, Vale & McDowall, Vernon V. Vale, San Mateo, and Robert A. Seligson, San Francisco, for defendant, cross-complaint and respondent.

TOBRINER, Justice.

Plaintiff sued State Farm Mutual Automobile Insurance Company (hereinafter 'State Farm') to compel payment of a judgment obtained against Anthony and Sandra Alves. Plaintiff obtained the judgment against the Alveses on the ground that plaintiff, while a pedestrian, was injured by Mrs. Alves's negligent driving. Plaintiff alleged and urged the enforceability at the time of the accident of an automobile liability policy issued by State Farm to the Alveses. State Farm denied the validity of the policy, and filed a cross-complaint seeking a declaration that the policy was void Ab initio because issued in reliance on a material misrepresentation by Mr. Alves. In opposition, plaintiff contended that State Farm was estopped to rescind the policy six months after the accident because State Farm led Mr. Alves to believe that he was insured and because State Farm negligently failed to discover within a reasonable time the misrepresentation in the application tendered 1 1/2 years prior to the accident.

The trial court found that State Farm issued the automobile liability policy in reliance on a material misrepresentation, that rescission was therefore justified, and that State Farm acted promptly Upon discovery of the misrepresentation. Accordingly, the court entered judgment for State Farm on both the complaint and the cross-complaint. Plaintiff moved for a new trial, urging that the public policy expressed in California's Financial Responsibility Law impelled a finding of laches by State Farm in its belated discovery of the misrepresentations; that its failure to act promptly worked to the detriment of an innocent member of the public, who should therefore recover against the carrier. The trial court denied the motion. ¹ Plaintiff appeals. ²

We conclude that an automobile liability insurer must undertake a reasonable investigation of the insured's insurability within a reasonable period of time from the acceptance of the application and the issuance of a policy. This duty directly inures to the benefit of third persons injured by the insured. Such an injured party, who has obtained an unsatisfied judgment against the insured, may properly proceed against the insurer; the insurer cannot then successfully defend upon the ground of its own failure reasonably to investigate the application. On retrial, therefore, plaintiff, upon showing that State Farm did not, within a reasonable time, reasonably investigate the insured's insurability, may recover from State Farm, within the policy limits, the amount of the judgment she obtained against the Alveses. ³

The parties stipulated to the following facts: On April 29, 1958, Mr. Alves signed an application for automobile insurance prepared by Mr. Pucci, State Farm's agent, and on that same date, State Farm issued a policy insuring Alves against public liability for $10,000, for any one person's injury. Alves paid premiums on the policy in April 1958, October 1958, and April 1959. On November 28, 1959, Mrs. Alves, while driving a Lincoln automobile, struck plaintiff. On December 4, 1959, plaintiff's attorneys notified State Farm of plaintiff's claim. On December 8, 1959, State Farm sent a reply letter to plaintiff's attorneys. On April 22, 1960, State Farm rescinded the insurance policy and returned all premiums paid. On July 26, 1960, plaintiff sued the Alveses, and Alves forwarded a copy of the summons and complaint to State Farm. On August 2, 1960, State Farm advised the Alveses that it would not defend the action. On November 3, 1960, judgment was entered in favor of plaintiff against the Alveses.

The parties further stipulated that plaintiff did not consent to, or concur in, any rescission or attempted rescission between State Farm and the Alveses. They further agreed that on September 6, 1958, five months after the issuance of the original policy, State Farm paid to, or on behalf of, Mr. Alves a claim arising out of the comprehensive coverage provisions of the policy in effect at that time.

The record discloses the following facts as to the application for insurance and the misrepresentations. In April 1958 Mr. Alves purchased a Chevrolet from one Roberti, a used-car salesman. Roberti arranged with Pucci, State Farm's agent, that he come to the agency in order to obtain insurance for Alves's car. Both Alves, who was 24 years old at the time, and Pucci testified that Alves did not read the application, and that Pucci filled in the answers to the questions.

Question 18 on the application stated: 'Has your license to drive or registration been suspended, revoked or refused, to the applicant or any member of his household in the last five years?' Contrary to the Department of Motor Vehicles (hereinafter 'DMV') report on Mr. Alves which evidenced one suspension and two probation orders within the five years preceding April 1958, a 'No' answer appeared on the application in response to question 18.

Alves testified that Pucci did not call this question to his attention and, further, that he showed Pucci his driver's license, which bore a 'Probation' stamp on it. Pucci testified that although he did not specifically recall asking this question, he always, as a matter of practice, made such an inquiry and a related one concerning prior cancellations of insurance. Pucci further testified that he did not see Alves's driver's license, and that he could not remember the manner in which he obtained the license number that he had included in the application. Considered as a whole, the evidence as to whether or not Alves misstated his past driving record to Pucci is conflicting: we must therefore accept the trial court's finding of misrepresentation. ⁴

Alves and Pucci further testified that in November 1959, prior to the accident injuring plaintiff, Alves called Pucci and requested a transfer of his policy to a Lincoln automobile which he had just purchased. In reliance on the April 1958 application, Pucci filled in the transfer application. Following company practice, Pucci did not require that Alves sign the application.

Maurice Hammer, an insurance broker for the previous two years, and prior thereto an agent for Allstate Insurance for three years, testified that the general custom and practice of the insurance industry was to obtain DMV reports in connection with applications, either as a basis for determining rates or insurability of the risk.

With respect to State Farm's policy on initial applications, Pucci testified that State Farm always issued a policy when he gave a binding receipt to the applicant. The binding receipt provided for insurance coverage for 30 days from the date of the receipt, even if the company subsequently refused to approve the risk. Pucci handed Alves a binding receipt on April 28, 1958.

Daniel Priest, an underwriting superintendent of State Farm, testifying as to State Farm's investigative policies, stated that State Farm orders DMV reports and makes other inspections 'on a judgment basis.' In some cases State Farm does check on statements made by its applicants; but 'in other cases the underwriting people just passed on the risk based on the statement on the application as submitted.' In response to the question whether State Farm customarily checks the driving record of an insured when a claim is presented against him, Priest stated: 'Again, it depends upon the nature of the claim, the type of claim situation, circumstances involved, things of this nature. * * * We don't have any fixed custom or practice.' He further stated that once a claim has occurred the claims, rather than the underwriting, department, determines whether the claim is sufficiently 'significant' to warrant an investigation. Before any claim has been made against the insured, the underwriter handling the file exercises the discretion to decide whether to obtain a DMV report. Priest further testified that the cost of an entire investigation in 1958 was $3.35, and that the cost of a DMV check was only 25 cents.

Although at the time of his application in April 1958 Alves, then being under 25 years of age, fell within the class of applicants who received the greatest number of spot checks, State Farm did not begin its investigation until February 4, 1960, more than two months after plaintiff was injured, and almost two years after the initial application. After discovering that Alves's file did not contain a DMV report, the underwriting department requested one. On February 12, 1960, it received a reply from the department; on March 2, 1960, it obtained the report. Prior to obtaining the report, and in response to an underwriter's question whether to cancel Alves's policy, the claims department on February 16 responded that it was in the process of developing evidence for rescission. On April 22, State Farm notified Alves of the rescission of his policy.

The evidence suggests that State Farm, in failing to investigate Alves's insurability and to obtain a DMV report, pursued a policy of saving minor costs on its part at the expense and sacrifice of the interests of its insured and those of the general public who were the potential victims of the insured's...