Critz v. Farmers Ins. Group

• Decision Date: 18 November 1964
• Citation: 41 Cal.Rptr. 401,230 Cal.App.2d 788,12 A.L.R.3d 1142
• Court: California Court of Appeals Court of Appeals
• Parties: , 12 A.L.R.3d 1142 Betty J. CRITZ, Plaintiff and Appellant, v. FARMERS INSURANCE GROUP, Defendant and Respondent. Civ. 10830.

Page 401

41 Cal.Rptr. 401

230 Cal.App.2d 788, 12 A.L.R.3d 1142

Betty J. CRITZ, Plaintiff and Appellant, v. FARMERS INSURANCE GROUP, Defendant and Respondent.

Civ. 10830.

District Court of Appeal, Third District, California.

Nov. 18, 1964.

Hearing Denied Jan. 13, 1965.

Clifford R. Lewis, Sacramento, for appellant.

Kroloff, Brown, Belcher & Smart, Stockton, William B. Boone, Santa Rosa, for respondent.

FRIEDMAN, Justice.

Plaintiff Betty Critz was a passenger in an automobile driven by her husband. They were involved in a collision with an automobile driven by David Arnold. Arnold lost control of his vehicle while trying to negotiate a curve; his automobile crossed over to the opposite side of the road and crashed head-on into the Critz car. Mrs. Critz received numerous injuries, including the loss of sight in one eye and fractures of the neck and jaw. Arnold had liability insurance issued by defendant Farmers Insurance Group, with a coverage limit of $10,000 for injuries to one person.

Date of the accident was February 19, 1960. Defendant commenced an investigation of the accident. Almost five months after the accident, on July 8, 1960, plaintiff offered to settle her claim against Arnold for $10,000, the policy amount. The offer was made through Clifford Lewis, a Sacramento attorney, and took the form of a letter which required acceptance or rejection within one week. Without notifying Arnold of the offer, defendant replied with a counteroffer of $8,250.

At that point Mr. Lewis prepared a document and secured David Arnold's signature to it. The document recited that Mrs. Critz' settlement offer had been unreasonably rejected by Arnold's insurer and subjected Arnold to potential personal liability in excess of the policy limit. The document purportedly assigned to Mrs. Critz any right of action Arnold might have against his insurance company. In it Mrs. Critz undertook to hold Arnold free and harmless from all efforts to collect an injury judgment from him personally.

Through Mr. Lewis, plaintiff then filed an injury suit against Arnold. In ignorance of the purported assignment, Farmers Insurance Group undertook defense of the suit. Several months later the insurance company learned of the assignment. It then offered to settle the case for $10,000 but Mrs. Critz refused. The action then went to trial. The defense offered no evidence to exonerate Arnold as the culpable driver except evidence tending to show that plaintiff's husband had been under the influence of alcohol at the time of the accident. The jury returned a $48,000 verdict against Arnold.

In the present suit Mrs. Critz seeks recovery of $38,000 from Farmers Insurance Group in her role as asserted assignee of Arnold. Gravamen of the complaint is the charge that the insurance company rejected the $10,000 settlement offer with a view only to its own financial interest and without regard to its obligation to protect David Arnold. By stipulation, there was a preliminary trial under an agreed statement of facts, aimed solely at adjudication of the assignment's validity. The trial court held that the assignment was void. Judgment for defendant was entered and this appeal followed.

The stipulated facts approximate the narrative description given above. An additional circumstance, stipulated only for the purpose of the preliminary trial, may be worthy of note--that at the time of the July 8 settlement offer, Mr. Lewis represented Mrs. Critz only for the purpose of presenting the offer, and that she employed him on a contingency fee basis only after rejection of the offer.

The agreed statement was supplemented by copies of two reports made to defendant by D. E. Silker of its Sacramento claims office. One report dated March 14, 1960, less than a month after the accident, stated in part: 'This appears to be an obvious case of liability. Injuries to Mrs. Critz are very serious and it appears her claim will exceed serious and it appears her claim will exceed our policy limits. I have informed Mr. Critz we had a minimum policy; in fact my primary reason for keeping this under control was by making the approach that we wanted to save something on our policy and if he secured the services of an attorney, he would be fortunate to get his wife's expenses. In this respect, he believes his medicals will exceed or approach $5,000.'

In a later report, dated June 13, 1960, Silker told his company: 'This appears to be a case of liability. Even though the claimant [Mr. Critz] had been drinking, we have been unable to locate evidence that this contributed to the accident. I noted he was on his way to the Olympics when the accident occurred.

'It is obvious that Mrs. Critz's case has a value far in excess of our limits and I suggest a settlement figure of $8250. As indicated before, I have advised the family that they could not expect the policy on her case.'

Without regard to a policy limit on liability, an insurer may be liable for the entire amount of a judgment against its insured if it has been guilty of bad faith in refusing an offer of settlement within the policy limit. An authoritative statement of the rule appears in Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 658-659, 328 P.2d 198, 200-201, 68 A.L.R.2d 883: '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. [Citation.] This principle is applicable to policies of insurance. [Citation.] * * * 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. [Citation.] 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. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing.'

The rule is considered and applied to varying situation, in Martin v. Hartford Acc. & Indem. Co., 228 A.C.A. 200, 39 Cal.Rptr. 342; Palmer v. Financial Indem. Co., 215 Cal.App.2d 419, 30 Cal.Rptr. 204; Hodges v. Standard Accident Ins. Co., 198 Cal.App.2d 564, 18 Cal.Rptr. 17; Davy v. Public National Ins. Co., 181 Cal.App.2d 387, 5 Cal.Rptr. 488; Ivy v. Pacific Auto. Ins. Co., 156 Cal.App.2d 652, 320 P.2d 140; and Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 319 P.2d 69, 66 A.L.R.2d 1202. (See also Annot., Duty of Liability Insurer to Settle or Compromise, 40 A.L.R.2d 168; Note, 10 Hast.L.J. 198.)

The policyholder's damage claim against the insurer is assignable. (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 661, 328 P.2d 198; Brown v. Guarantee Ins. Co., supra, 155 Cal.App.2d at pp. 693, 695, 319 P.2d 69; see Note, 46 Cal.L.Rev. 633.) In this case the defense asserts that David Arnold had no existing cause of action against it when he made his purported assignment to Mrs. Critz; that a possibility, a merely potential chose in action, cannot be assigned (citing Civ.Code, sec. 1045, and Orkow v. Orkow, 133 Cal.App. 50, 23 P.2d 781); thus, that Arnold possessed nothing to transfer to Mrs. Critz but a potential, inchoate claim which could not be the subject of an assignment. In any event, defendant contends that such an assignment violates public policy and is for that reason void.

The assignment from Arnold to Mrs. Critz represents an unorthodox tactic which has not previously confronted the courts. ¹ Its novelty lies in its timing. In the fairly standardized situation, the policyholder assigns his damage claim to the injured person after the latter recovers a judgment exceeding the policy limit; or, being driven into bankruptcy by the personal judgment against him, is succeeded by the trustee in bankruptcy, who then files suit against the insurer or assigns the cause of action to the judgment creditor. (See, for example, Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d 654, 328 P.2d 198; Martin v. Hartford Acc. & Indem. Co., supra, 228 A.C.A. 200, 39 Cal.Rptr. 342.) Here, in contrast, David Arnold had not been fastened with an excess judgment, had not even been named as formal defendant in a personal injury suit, when he executed the assignment document.

Some courts have held that the insured has no cause of action against his insurance company until such time as he suffers and satisfies a judgment in excess of the policy limit. This view has been rejected in California and a number of other states. (See cases cited 40 A.L.R.2d at pp. 190-195.) In Brown v. Guarantee Ins. Co., supra, 155 Cal.App.2d at page 690, 319 P.2d at page 75, the court says: '* * * logic and reason support the contrary view that the insured's cause of action arises when he incurs a binding judgment in excess of the policy limit.' Defendant relies upon the quoted statement to support the argument that its insured, having incurred no judgment at the time of the attempted assignment, could not make an effective assignment. The court's remark was made without reference to the problem of assignability. The court meant only that prepayment of the judgment was not a requisite to suit against the insurer; not that an assignment could not possibly precede the personal injury judgment.

By the terms of its policy the liability insurer reserves control over the lawsuit and the settlement procedures. (Comunale v. Traders & General Ins. Co., 50 Cal.2d at p. 660, 328 P.2d 198; Ivy v. Pacific Auto. Ins. Co., supra, 156 Cal.App.2d at p. 660, 320 P.2d 140.) An offer to settle for a sum approaching the monetary...