Crisci v. Security Ins. Co. of New Haven, Conn., S.F. 22433

• Citation: 426 P.2d 173,66 Cal.2d 425,58 Cal.Rptr. 13
• Decision Date: 21 April 1967
• Docket Number: S.F. 22433
• Court: United States State Supreme Court (California)
• Parties: , 426 P.2d 173 Rosina CRISCI, Plaintiff and Respondent, v. The SECURITY INSURANCE COMPANY OF NEW HAVEN, CONNECTICUT, Defendant and Appellant. In Bank

Page 13

58 Cal.Rptr. 13

66 Cal.2d 425, 426 P.2d 173

Rosina CRISCI, Plaintiff and Respondent, v. The SECURITY INSURANCE COMPANY OF NEW HAVEN, CONNECTICUT, Defendant and Appellant.

S.F. 22433.

Supreme Court of California,

In Bank.

April 21, 1967.

Bishop, Murray & Barry and Cyril Viadro, San Francisco, for defendant and appellant.

Lewis & Stein, Marvin E. Lewis and Pierce N. Stein, San Francisco, for plaintiff and respondent.

Edward I. Pollock, Theodore A. Horn, Los Angeles, Robert G. Beloud, Upland, and Leonard Sacks, Los Angeles, as amici curiae on behalf of plaintiff and respondent.

Edward L. Lascher, Ventura, as amicus curiae.

PETERS, Justice.

In an action against The Security Insurance Company of New Haven, Connecticut, the trial court awarded Rosina Crisci $91,000 (plus interest) because she suffered a judgment in a personal injury action after Security, her insurer, refused to settle the claim. Mrs. Crisci was also awarded $25,000 for mental suffering. Security has appealed.

June DiMare and her husband were tenants in an apartment building owned by Rosina Crisci. Mrs. DiMare was descending the apartment's outside wooden staircase when a tread gave way. She fell through the resulting opening up to her waist and was left hanging 15 feet above the ground. Mrs. DiMare suffered physical injuries and developed a very severe psychosis. In a suit brought against Mrs. Crisci the DiMares alleged that the step broke because Mrs. Crisci was negligent in inspecting and maintaining the stairs. They contended that Mrs. DiMare's mental condition was caused by the accident, and they asked for $400,000 as compensation for physical and mental injuries and medical expenses.

Mrs. Crisci had $10,000 of insurance coverage under a general liability policy issued by Security. The policy obligated Security to defend the suit against Mrs. Crisci and authorized the company to make any settlement it deemed expedient. ¹ Security hired an experienced lawyer, Mr. Healy, to handle the case. Both he and defendant's claims manager believed that unless evidence was discovered showing that Mrs. DiMare had a prior mental illness, a jury would probably find that the accident precipitated Mrs. DiMare's psychosis. And both men believed that if the jury felt that the fall triggered the psychosis, a verdict of not less than $100,000 would be returned.

An extensive search turned up no evidence that Mrs. DiMare had any prior mental abnormality. As a teenager Mrs. DiMare had been in a Washington mental hospital, but only to have an abortion. Both Mrs. DiMare and Mrs. Crisci found psychiatrists who would testify that the accident caused Mrs. DiMare's illness, and the insurance company knew of this testimony. Among those who felt the psychosis was not related to the accident were the doctors at the state mental hospital where Mrs. DiMare had been committed following the accident. All the psychiatrists agreed, however, that a psychosis could be triggered by a sudden fear of falling to one's death.

The exact chronology of settlement offers is not established by the record. However, by the time the DiMares' attorney reduced his settlement demands to $10,000, Security had doctors prepared to support its position and was only willing to pay $3,000 for Mrs. DiMare's physical injuries. Security was unwilling to pay one cent for the possibility of a plaintiff's verdict on the mental illness issue. This conclusion was based on the assumption that the jury would believe all of the defendant's psychiatric evidence and none of the plaintiff's. Security also rejected a $9,000 settlement demand at a time when Mrs. Crisci offered to pay $2,500 of the settlement.

A jury awarded Mrs. DiMare $100,000 and her husband $1,000. After an appeal (DIMARE V. CRESCI, 58 CAL.2D 292, 23 CAL.RPTR. 772, 373 P.2D 860)² the insurance company paid $10,000 of this amount, the amount of its policy. The DiMares then sought to collect the balance from Mrs. Crisci. A settlement was arranged by which the DiMares received $22,000, a 40 percent interest in Mrs. Crisci's claim to a particular piece of property, and an assignment of Mrs. Crisci's cause of action against Security. Mrs. Crisci, an immigrant widow of 70, became indigent. She worked as a babysitter, and her grandchildren paid her rent. The change in her financial condition was accompanied by a decline in physical health, hysteria, and suicide attempts. Mrs. Crisci then brought this action.

The liability of an insurer in excess of its policy limits for failure to accept a settlement offer within those limits was considered by this court in Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 328 P.2d 198, 68 A.L.R.2d 883. It was there reasoned that in every contract, including policies of insurance, there is an implied covenant of good faith and fair dealing that neither party will do anything which will injure the right of the other to receive the benefits of the agreement; that it is common knowledge that one of the usual methods by which an insured receives protection under a liability insurance policy is by settlement of claims without litigation; that 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 the duty; that in determining whether to settle the insurer must give the interests of the insured at least as much consideration as it gives to its own interests; and that 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.' (50 Cal.2d at p. 659, 328 P.2d at p. 201.)

In determining whether an insurer has given consideration to the interests of the insured, the test is whether a prudent insurer without policy limits would have accepted the settlement offer. (Kinder v. Western Pioneer Ins. Co., 231 Cal.App.2d 894, 900, 42 Cal.Rptr. 394; Critz v. Farmers Ins. Group, 230 Cal.App.2d 788, 798, 41 Cal.Rptr. 401; Martin v. Hartford Acc. & Indem. Co., 228 Cal.App.2d 178, 183, 39 Cal.Rptr. 342; Davy v. Public National Ins. Co., 181 Cal.App.2d 387, 400, 5 Cal.Rptr. 488; see Hodges v. Standard Accident Ins. Co., 198 Cal.App.2d 564, 579, 18 Cal.Rptr. 17.)

Several cases, in considering the liability of the insurer, contain language to the effect that bad faith is the equivalent of dishonesty, fraud, and concealment. (See Critz v. Farmers Ins. Group, supra, 230 Cal.App.2d 788, 796, 41 Cal.Rptr. 401; Palmer v. Financial Indem. Co., 215 Cal.App.2d 419, 429, 30 Cal.Rptr. 204; Davy v. Public National Ins. Co., supra, 181 Cal.App.2d 387, 396, 5 Cal.Rptr. 488.) Obviously a showing that the insurer has been guilty of actual dishonesty, fraud, or concealment is relevant to the determination whether it has given consideration to the insured's interest in considering a settlement offer within the policy limits. The language used in the cases, however, should not be understood as meaning that in the absence of evidence establishing actual dishonesty, fraud, or concealment no recovery may be had for a judgment in excess of the policy limits. Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d 654, 658--659, 328 P.2d 198, makes it clear that liability based or an implied covenant exists whenever the insurer refuses to settle in an appropriate case and that liability may exist when the insurer unwarrantedly refuses an offered settlement where the most reasonable manner of disposing of the claim is by accepting the settlement. Liability is imposed not for a bad faith breach of the contract but for failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing. Moreover, examination of the balance of the Palmer, Critz, and Davy opinions makes it abundantly clear that recovery may be based on unwarranted rejection of a reasonable settlement offer and that the absence of evidence, circumstantial or direct, showing actual dishonesty, fraud, or concealment is not fatal to the cause of action.

Amicus curiae argues that, whenever an insurer receives an offer to settle within the policy limits and rejects it, the insurer should be liable in every case for the amount of any final judgment whether or not within the policy limits. As we have seen, the duty of the insurer to consider the insured's interest in settlement offers within the policy limits arises from an implied covenant in the contract, and ordinarily contract duties are strictly enforced and not subject to a standard of reasonableness. Obviously, it will always be in the insured's interest to settle within the policy limits when there is any danger, however slight, of a judgment in excess of those limits. Accordingly the rejection of a settlement within the limits where there is any danger of a judgment in excess of the limits can be justified, if at all, only on the basis of interests of the insurer, and, in light of the common knowledge that settlement is one of the usual methods by which an insured receives protection under a liability policy, it may not be unreasonable for an insured who purchases a policy with limits to believe that a sum of money equal to the limits is available and will be used so as to avoid liability on his part with regard to any covered accident. In view of such expectation an insurer should not be permitted to further its own interests by rejecting opportunities to settle within the policy limits unless it is also willing to absorb losses which may result from its failure to settle.

The proposed rule is a simple one to apply and avoids the burdens of a determination whether a settlement offer within the policy limits was reasonable. The proposed rule would also eliminate the danger that an insurer, faced with a settlement offer at or near...