Brown v. Guarantee Ins. Co.

• Decision Date: 03 December 1957
• Citation: 319 P.2d 69,66 A.L.R.2d 1202,155 Cal.App.2d 679
• Court: California Court of Appeals Court of Appeals
• Parties: , 66 A.L.R.2d 1202 Charles BROWN, Plaintiff and Appellant, v. GUARANTEE INSURANCE COMPANY, a corporation, Defendant and Respondent. Civ. 22405.

Page 69

319 P.2d 69

155 Cal.App.2d 679, 66 A.L.R.2d 1202

Charles BROWN, Plaintiff and Appellant, v. GUARANTEE INSURANCE COMPANY, a corporation, Defendant and Respondent.

Civ. 22405.

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

Dec. 3, 1957.

Rehearing Denied Jan. 2, 1958.

S. M. Dana, Hollywood, for appellant.

Spray, Gould & Bowers, Los Angeles, for respondent.

Ned Good, Herbert L. Hirson, Theodore A. Horn, Richard Oliver, Edward I. Pollock, David Pollock, Edgar Simon, John K. Sloan, Myron L. Garon, Los Angeles, Ellis J. Horvitz, Bevery Hills, amici curiae on behalf of appellant.

FOX, Acting Presiding Justice.

Plaintiff has appealed from an order sustaining defendant's demurrer without leave to amend and from the judgment entered thereon. Plaintiff's complaint alleges the following: that he was injured by the negligent driving of one Charles M. Weisenberg (hereinafter referred to as the insured); that as a result he suffered damages in excess of $15,000; that before the accident defendant had, for a good and valuable consideration, issued and delivered to the insured a policy of public liability insurance which purported to indemnify the insured for bodily injury up to and including $5,000 (for any one person) which the insured might become liable to pay by reason of the operation of his motor vehicle; that defendant was required to act in good faith and with care in representing and protecting the insured in any claim or litigation arising from the operation of his vehicle; that plaintiff commenced an action against the insured; that the law firm which defendant hired to defend the action did not act in the best interests of the insured; that defendant did not act in the best interests of the insured and 'did not exercise the good faith required of [it] by law in the handling of said claim and litigation on behalf of the assured'; that plaintiff offered to settle the litigation for $5,000; that defendant refused to make any offer of compromise before trial; that at the trial defendant made offers of settlement in the amounts of $3,000, $3,500, and $4,000, but at no time would pay the policy limit; that defendant 'throughout maintained that unless [it] could save some money on the settlement, [it] had no reason to settle'; that this attitude was in complete disregard of the insured's rights and best interests; that throughout the handling of the litigation the insured 'was not notified of the status of any settlement, [and] was not advised regarding protecting his own rights and interest in this matter'; that plaintiff recovered judgment against the insured in the sum of $15,000; that defendant thereafter paid the sum of $5,000 plus $138.50 in costs, and there remains a balance of $10,000 on the judgment which is still unsatisfied; that defendant refused to perform its obligations to the insured, and was 'negligent and acted in bad faith in refusing to accept the compromise offer of the plaintiff in view of the facts within [its] knowledge regarding the plaintiff's expenses and severity of his injuries and the fact that the liability of the assured was clear'; that by reason of defendant's negligence and bad faith and refusal to perform its obligation, the insured was damaged in the sum of $10,000; that the insured was forced to file a bankruptcy petition in the United States District Court for the Southern District of California; that the bankruptcy trustee assigned all the interest of the insured in any and all claims against defendant to the plaintiff herein.

The first question which must be determined by this court is whether or not an insured has a cause of action against the insurer for the latter's wrongful refusal to settle a claim against the former. Concomitantly this court must ascertain the character and limitations of such a cause of action. It is our conclusion that when an insurer engages in compromise negotiations of a claim against the insured, it owes the insured a duty to exercise good faith, for the breach of which it is liable in damages.

At the outset it should be noted that we are dealing with the situation where the injured party offers to settle for an amount within the limits of the policy. Beyond these limits the power of the insurer to act in behalf of the insured ceases. The conflict of interest which arises when an offer is made to settle for a sum closely approaching the policy limits is thoroughly considered in the recent case of Radcliffe v. Franklin National Ins. Co., 208 Or. 1, 298 P.2d 1002, at pages 1011-1012: 'If the limit is $5,000, the complaint seeks $40,000 damages, and the plaintiff offers to accept $4,000 as satisfaction, the conflict of interests between insurer and insured is apparent. In the conflict each thinks of his own weal. The insured, prompted by a desire to be free from uncertainty, may demand that the insurer settle a claim which is completely unfounded, but in policies such as the one before us, the insurer limits its promise to 'sums which the insured shall become obligated to pay by reason of the liability imposed upon him by law for damages.' When the insurer rejects a compromise offer of $4,500 under a policy of $5,000 in a case in which $50,000 damages are sought, it thrusts virtually all of the risk upon the insured. In the hope of saving $4,500, the insurer forces the insured to incur a hazard of $45,000. The observation just made is not intended as criticism of insurers. The conflict of interest is bound to continue so long as policies are written for limited protection. Problems of the kind which confront us could be simplified by including in policies a provision stating what should be done in such situations. Such a policy was written and was before the court in Georgia Life Ins. Co. v. Mississippi Cent. R. Co., 116 Miss. 114, 76 So. 646. There the policy provided for double coverage when a compromise offer was rejected.

'In resolving problems such as the one before us, any one of several approaches to the issues may present itself. The solution may be sought in the terms of the policy itself, and the court may attempt to resort to contract law. Or the insurer may be viewed as a fiduciary, possibly as an agent, and thereupon the court will employ the principles of law which govern an agent's relationship to his principal. In such situations the law generally demands good faith. Or the courts may turn to tort law and hold that the insurer in dealing with the defense, including the matter of settlements, must exercise due care.'

Many of the cases recognizing the insured's cause of action against the insurer for wrongful refusal to settle are discussed in the Radcliffe case, supra. In addition there is an excellent classification of the cases on this subject in 40 A.L.R.2d 168. The compiler of the annotation states (at pages 171-172) that 'the vast majority of the courts have held, and it is probably the accepted rule in all jurisdictions at this time, that the insurer is bound to give some consideration to the insured's interest in such a situation, and the pronounced split in the decisions involves the question whether the insurer's obligation is only to act in 'good faith' to the insured in considering such an offer, or whether it is required to exercise 'due care' and is liable for a negligent rejection of the compromise.'

As yet no appellate court in this state has passed upon the question now before this court. However, a Ninth Circuit case, Christian v. Preferred Acc. Ins. Co., D.C., 89 F.Supp. 888, 890, has held such an action exists in California and is based upon bad faith rather than negligence. The court stated: 'Ordinarily under the terms of the policy the insurer is in full charge of the litigation, to the exclusion of the insured in the preparation of the defense, negotiation for settlement and other steps in the lawsuit. Its actions affect not only its own possible liability but also the possible liability of the insured which arises if the recovery exceeds the limits of the insurance contract. This casts upon the insurer the obligation of good faith, the breach of which gives rise to a cause of action in favor of the insured for any damage thereby sustained by him.' In reaching its decision the court relied upon a San Francisco Superior Court case, Wong & Marr v. Metropolitan Cas. Ins. Co., decided December 7, 1948. The court quoted (89 F.Supp. at page 890) from the written opinion in the Wong & Marr case as follows: 'Since this responsibility of an insurance company is read into the relationship between the insurer and the insured, and justly so, it would appear that the obligation of the insurer should not be extended beyond the duty of exercising good faith in the conduct of the matters arising from that relationship, particularly in the absence of legislation creating a different or higher standard. If the insurer has exercised good faith in all of its dealings under its policy, and if the settlement which it has rejected has been fully and fairly considered and has been based upon an honest belief that the insurer could defeat the action or keep any possible judgment within the limits of the policy, and its judgments are based on a fair review of the evidence after reasonable diligence in ascertaining the facts, and upon sound legal advice, a court should not subject the insurer to further liability if it ultimately turns out that its judgment is a mistaken judgment. Such a responsibility could hardly be claimed to be in contemplation of the insurance relationship.'

The reasoning of the court in Hilker v. Western Automobile Ins. Co., 204 Wis. 1, 231 N.W. 257; 204 Wis. 12, 235 N.W. 413, 414-415, is particularly appropriate here: 'In express terms the contract imposes no duty at all a breach of which makes the insurer liable to the insured for a failure to settle or compromise a claim. However, all courts are agreed that the insurer does owe to the insured some duty in this respect. ...