Comunale v. Traders & General Ins. Co.

Citation328 P.2d 198,50 Cal.2d 654,68 A.L.R.2d 883
CourtUnited States State Supreme Court (California)
Decision Date22 July 1958
Parties, 68 A.L.R.2d 883 Anthony J. COMUNALE, Plaintiff and Appellant, v. TRADERS & GENERAL INSURANCE COMPANY, a corporation, Defendant and Respondent. L. A. 24975.

Newlin, Tackabury & Johnston and Frank R. Johnston, Los Angeles, for appellant.

W. P. Smith and Henry F. Walker, Los Angeles, for respondent.

H. Thomas Ellerby, Los Angeles, amicus curiae on behalf of respondent.

GIBSON, Chief Justice.

Mr. and Mrs. Comunale were struck in a marked pedestrian crosswalk by a truck driven by Percy Sloan. Mr. Comunale was seriously injured, and his wife suffered minor injuries. Sloan was insured by defendant Traders & General Insurance Company under a policy that contained limits of liability in the sum of $10,000 for each person injured and $20,000 for each accident. He notified Traders of the accident and was told that the policy did not provide coverage because he was driving a truck that did not belong to him. When the Comunales filed suit against Sloan, Traders refused to defend the action, and Sloan employed competent counsel to represent him. On the second day of the trial Sloan informed Traders that the Comunales would compromise the case for $4,000, that he did not have enough money to effect the settlement, and that it was highly probable the jury would return a verdict in excess of the policy limits. Traders was obligated to defend any personal injury suit covered by the policy, but it was given the right to make such settlement as it might deem expedient. Sloan demanded that Traders assume the defense and settlement of the case. Traders refused, and the trial proceeded to judgment in favor of Mr. Comunale for $25,000 and Mrs. Comunale for $1,250.

Sloan did not pay the judgment, and the Comunales sued Traders under a provision in the policy that permitted an injured party to maintain an action after obtaining judgment against the insured. See Ins. Code, § 11580, subd. (b)(2). In that suit judgment was rendered in favor of Mr. Comunale for $10,000 and in favor of Mrs. Comunale for $1,250. This judgment was satisfied by Traders after it was affirmed in Comunale v. Traders & General Ins. Co., 116 Cal.App.2d 198, 253 P.2d 495.

Comunale obtained an assignment of all of Sloan's rights against Traders and then commenced the present action to recover from Traders the portion of his judgment against Sloan which was in excess of the policy limits. The jury returned a verdict in Comunale's favor, but the trial court entered a judgment for Traders notwithstanding the verdict.

The following questions are presented on Comunale's appeal from the judgment: (1) Did Sloan have a cause of action against Traders for the amount of the judgment in excess of the policy limits? (2) Was Sloan's cause of action against Traders assignable? (3) Was the cause of action barred by the statute of limitations?

Liability in Excess of the Policy Limits

In determining whether Traders is liable for the portion of the judgment against Sloan in excess of the policy limits, we must take into consideration the fact that Traders not only wrongfully refused to defend the action against Sloan but also refused to accept an offer of settlement within the policy limits. It is not claimed the settlement offer was unreasonable in view of the extent of the injuries and the probability that Sloan would be found liable, and Traders' only reason for refusing to settle was its claim that the accident was not covered by the policy. Because of its wrongful denial of coverage, Traders failed to consider Sloan's interest in having the suit against him compromised by a settlement within the policy limits.

There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. Brown v. Superior Court, 34 Cal.2d 559, 564, 212 P.2d 878. This principle is applicable to policies of insurance. Hilker v. Western Automobile Ins. Co., 204 Wis. 1, 231 N.W. 257, 258 (affirmed on rehearing, 235 N.W. 413). In the Hilker case it is pointed out that the rights of the insured 'go deeper than the mere surface of the contract written for him by the defendant' and that implied obligations are imposed 'based upon those principles of fair dealing which enter into every contract.' 231 N.W. at page 258. 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, 37 A.L.R. 1477; Hilker v. Western Automobile Ins. Co., supra. Under these circumstances the implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty.

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, 320 P.2d 140. When there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing to 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.

There is an important difference between the liability of an insurer who performs its obligations and that of an insurer who breaches its contract. The policy limits restrict only the amount the insurer may have to pay in the performance of the contract as compensation to a third person for personal injuries caused by the insured; they do not restrict the damages recoverable by the insured for a breach of contract by the insurer.

The decisive factor in fixing the extent of Traders' liability is not the refusal to defend; it is the refusal to accept an offer of settlement within the policy limits. Where there is no opportunity to compromise the claim and the only wrongful act of the insurer is the refusal to defend, the liability of the insurer is ordinarily limited to the amount of the policy plus attorneys' fees and costs. Mannheimer Bros. v. Kansas Casualty & Surety Co., 149 Minn. 482, 184 N.W. 189, 191. In such a case it is reasoned that, if the insured has employed competent counsel to represent him, there is no ground for concluding that the judgment would have been for a lesser sum had the defense been conducted by insurer's counsel, and therefore it cannot be said that the detriment suffered by the insured as the result of a judgment in excess of the policy limits was proximately caused by the insurer's refusal to defend. Cf. Lane v. Storke, 10 Cal.App. 347, 350, 101 P. 937. This reasoning, however, does not apply where the insurer wrongfully refuses to accept a reasonable settlement within the policy limits.

Most of the cases dealing with the insurer's failure to settle involve an insurer who had assumed the defense of the action against the insured. It is generally held that since the insurer has reserved control over the litigation and settlement it is liable for the entire amount of a judgment against the insured, including any portion in excess of the policy limits, if in the exercise of such control it is guilty of bad faith in refusing a settlement. Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 682, 319 P.2d 69; Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d 652, 320 P.2d 140; see Annotation, Duty of Liability Insurer to Settle or Compromise, 40 A.L.R.2d 168, 178; Roos, A Note on the Excess Problem, 26 Cal. State Bar J. 355, 356. Those cases are, of course, factually distinguishable from the present one since Traders never assumed control over the defense. However, the reason Traders was not in control of the litigation is that it wrongfully refused to defend Sloan, and the breach of its express obligation to defend did not release it from its implied duty to consider Sloan's interest in the settlement.

We do not agree with the cases that hold there is no liability in excess of the policy limits where the insurer, believing there is no coverage, wrongfully refuses to defend and without justification refuses to settle the claim. See State Farm Mut. Auto. Ins. Co. v. Skaggs, 10 Cir., 251 F.2d 356, 359, and Fidelity & Casualty Co. of New York v. Gault, 5 Cir., 196 F.2d 329, 330. An insurer who denies coverage does so at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer's breach of the express and implied obligations of the contract. Certainly an insurer who not only rejected a reasonable offer of settlement but also wrongfully refused to defend should be in no better position than if it had assumed the defense and then declined to settle. The insurer should not be permitted to profit by its own wrong.

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