Camelot by the Bay Condominium Owners' Assn. v. Scottsdale Ins. Co.

• Decision Date: 28 July 1994
• Docket Number: No. D017054,D017054
• Citation: 27 Cal.App.4th 33,32 Cal.Rptr.2d 354
• Court: California Court of Appeals Court of Appeals
• Parties: CAMELOT BY THE BAY CONDOMINIUM OWNERS' ASSOCIATION, INC., Plaintiff and Appellant, v. SCOTTSDALE INSURANCE COMPANY, Defendant and Appellant.

Page 354

32 Cal.Rptr.2d 354

27 Cal.App.4th 33

CAMELOT BY THE BAY CONDOMINIUM OWNERS' ASSOCIATION, INC., Plaintiff and Appellant, v. SCOTTSDALE INSURANCE COMPANY, Defendant and Appellant.

No. D017054.

Court of Appeal, Fourth District, Division 1, California.

July 28, 1994.

Rehearing Denied Aug. 23, 1994.

Epsten & Grinnell and Douglas W. Grinnell, San Diego, for plaintiff and appellant.

Mower, Koeller, Nebeker & Carlson, William A. Nebeker and Les W. Robertson, San Diego, for defendant and appellant.

HUFFMAN, Acting Presiding Justice.

Scottsdale Insurance Company (Scottsdale) appeals a judgment for damages and attorney's fees and costs in the amount of $626,513.74 entered against it after court trial in an action by Camelot by the Bay Condominium Owners' Association, Inc. (Camelot). Camelot brought this action for damages for breach of the covenant of good faith and fair dealing as assignee of a policyholder of On appeal, Scottsdale first makes a group of related arguments that it did not breach its covenant of good faith and fair dealing in the insurance policy by refusing to settle the underlying lawsuit for an amount within the monetary policy limits, since there was never any threat of a judgment against Breihan in excess of the policy limits. In Scottsdale's view, it justifiably refused to settle noncovered risks, even if Breihan were thereby exposed to personal liability for claims not covered by the insurance policy. Scottsdale additionally contends that it did not breach its covenant of good faith and fair dealing and therefore Breihan was not authorized to breach the policy provisions by entering into the stipulated judgment. Scottsdale further makes contentions that the stipulated judgment entered into by Breihan was not valid and cannot bind Scottsdale because it was collusive, unreasonable in amount, and does not legally obligate Breihan to pay the resulting judgment because of the covenant not to execute; further, Scottsdale argues that Camelot was improperly awarded attorney's fees and prejudgment interest. In its cross-appeal, Camelot contends that this is not an appropriate case for the application of the doctrine of comparative bad faith (California Casualty Gen. Ins. v. Superior Court (1985) 173 Cal.App.3d 274, 218 Cal.Rptr. 817.)

Scottsdale, the developer of Camelot's premises, Breihan Development, Inc. (Breihan). Camelot cross-appeals the judgment insofar as it represents a reduction by 30 percent of the damages awarded in Camelot's favor, representing Breihan's comparative fault. All of these claims arise out of an underlying action between Camelot and Breihan for construction defects (Camelot by the Bay v. Breihan Development, Inc. (Super.Ct. San Diego County, 1989, No. 610814), the underlying action), in which Breihan agreed with Camelot to have a stipulated judgment in the amount of $675,000 entered against it in exchange for a covenant not to execute, coupled with an assignment of Breihan's rights against Scottsdale to Camelot.

Scottsdale's first group of arguments is dispositive of this appeal, and we need not reach the further issues raised concerning the binding effect of the stipulated judgment reached in this instance, nor concerning the application of comparative bad faith to these facts. Under Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 328 P.2d 198 (Comunale) and its progeny, an insurer's refusal to settle a claim under its policy is unwarranted and a breach of the implied covenant of good faith and fair dealing in the policy "[w]hen 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, ..." (Id. at p. 659, 328 P.2d 198, italics added.) The "reasonableness" of an insurer's disposition of the claim is measured chiefly in relation to the estimated risk of the claimant's recovery beyond the policy limits. Here, the insurance policy monetary limits were $1 million, and Camelot's potential claim was never greater than $937,245. Camelot sought to settle the underlying action for construction defects for $300,000 and, after Scottsdale declined to settle the case for that amount, Camelot and Breihan reached the agreement for the stipulated judgment for $675,000. However, Breihan was never exposed to a potential excess verdict over its policy limits, and there was thus no risk of recovery beyond those policy limits to require Scottsdale, as a reasonable or prudent insurer, to dispose of the claim by settling within the policy limits.

Moreover, we conclude the trial court erred in equating the noncovered defects at the construction project with the defects which were clearly covered by the insurance policy, and by finding that Scottsdale was required to settle the case in order to cap Breihan's potential loss for both covered and noncovered defects. On this record, the trial court erred in finding Scottsdale had breached the implied covenant of good faith and fair dealing and had acted in bad faith in declining to settle the case under these circumstances. Accordingly, there was no basis for Breihan as the insured to "settle around" the carrier, nor for the trial court to hold Scottsdale was bound by that stipulated judgment in the underlying action. We reverse the judgment with directions to enter judgment for Scottsdale.

FACTUAL AND PROCEDURAL BACKGROUND

The underlying action was a construction defect lawsuit filed by Camelot against Breihan for alleged construction deficiencies at a 23-unit residential condominium complex developed and built by Breihan, primarily through services provided by subcontractors. Sales of the Camelot condominiums occurred in 1985 and 1986. Scottsdale provided liability coverage to Breihan for the period between April 1985 and April 1987. The insurance policies were comprehensive general liability policies with broad form endorsement, with $1 million limits of liability. ¹ After suit was filed, Scottsdale initially refused to provide a defense to Breihan, based upon erroneous allegations in the complaint, which were immediately corrected by Camelot's counsel to alleged that the deficiencies alleged occurred in late 1986 or 1987, within Scottsdale's policy period. Scottsdale then hired counsel, attorney Douglas McCorquodale and his associate, Rebecca Ryan, to defend Breihan's interest under a reservation of rights letter dated July 11, 1989. An answer was filed in July 1989 along with a cross-complaint against several subcontractors engaged in the construction of the project.

Camelot offered to compromise its claims against Breihan in July 1989 in the amount of $280,000 (Code Civ.Proc., § 998), but Breihan's retained counsel did not recommend acceptance of that offer based on the insufficient information he had at the time and because he did not believe the offer was made in good faith. Scottsdale then sent a letter dated August 14, 1989, to Breihan, stating that it would not accept the offer based on insufficient information to evaluate the nature and extent of Camelot's claims, and because it was unclear what portion of the claims were covered or not covered by the insurance policy. Scottsdale informed Breihan that it might wish to consider settling with Camelot or responding to the offer in some other fashion.

Breihan's retained counsel continued to prepare a defense against Camelot's allegations, hiring experts, conducting discovery, and filing motions. Attorney's fees amounted to approximately $200,000 for retained defense counsel. Depositions of several Camelot homeowners were taken by April 1990, in which they claimed numerous defective conditions at the project, including instances of physical injury to tangible property which had occurred during the insurance policy period. Scottsdale raised statute of limitations defenses to a number of the claimed defects. Trial was set for September 24, 1990, and a mandatory settlement conference was held July 23, 1990. Retained defense counsel for Breihan appeared, but he had no settlement authority and no settlement offers were made. By July 31, 1990, plaintiff's expert's reports showed that its total claimed cost of repair was over $850,000, and plaintiff planned to present a total claim of $937,245.

In August and September 1990, retained defense counsel Ryan informed Scottsdale that in her opinion Camelot's claim was higher than any eventual jury award, but a judgment in the construction defect case would probably exceed $300,000. She thus requested Scottsdale, more than once, to grant settlement authority in the amount of $300,000. Scottsdale refused, seeking additional information concerning manifestation dates and consequential damages. At that time, Camelot was demanding $300,000 to settle the dispute. Its $850,000 cost of repair estimate included both covered and noncovered items. Camelot obtained settlements with various subcontractors amounting to approximately $78,000.

As of the September 13, 1990 settlement conference date, Camelot's settlement demand was $300,000, and Scottsdale's own attorney, William Nebeker, was authorized to make a settlement offer of $75,000, up from the $35,000 previously offered. At the same time, Scottsdale was claiming it would not pay a penny in coverage or settlement, citing an alienated premises exclusion as the rationale for its settlement posture. The settlement judge, Judge Milliken, urged settlement in the range of $300,000 and advised The settlement conference was continued to September 24, 1990. No Scottsdale representatives appeared except for attorney Nebeker, who was given $90,000 settlement authority, based on defense cost of repair estimates of $90,000 (not including certain repair costs such as fog coating, retaining wall repairs, and past investigatory and repair expenses). Scottsdale relied partially on the alienated premises exclusion in the policy for rejecting the $300,000 settlement offer, and...