Davy v. Public Nat. Ins. Co.

• Decision Date: 26 May 1960
• Citation: 5 Cal.Rptr. 488,181 Cal.App.2d 387
• Court: California Court of Appeals Court of Appeals
• Parties: Arthur W. DAVY, doing business under the firm name and style of Yellow Cab Company, Plaintiff and Respondent, v. PUBLIC NATIONAL INSURANCE COMPANY, a corporation, and Kurt Hitke & Co., Defendants and Appellants. Civ. 6060.

Page 488

5 Cal.Rptr. 488

181 Cal.App.2d 387

Arthur W. DAVY, doing business under the firm name and style of Yellow Cab Company, Plaintiff and Respondent, v. PUBLIC NATIONAL INSURANCE COMPANY, a corporation, and Kurt Hitke & Co., Defendants and Appellants.

Civ. 6060.

District Court of Appeal, Fourth District, California.

May 26, 1960.

Rehearing Denied June 17, 1960.

Hearing Denied July 20, 1960.

Orlan S. Friedman, Beverly Hills, for appellants.

Morris B. Chain and S. B. Gill, Bakersfield, for respondent.

COUGHLIN, Justice.

The plaintiff Davy, who conducted a business operating 27 taxi cabs under the name of Yellow Cab Company, obtained a policy of public liability insurance from the defendant insurance company covering such operation. The coverage under this policy was limited to $5,000 for injury to one person. The policy provided that the company 'shall defend' any suit brought against the insured alleging injury arising out of an accident in which any of his cabs was involved, but 'may make such investigation, negotiation and settlement of any claim or suit as it deems expedient.'

On January 8, 1956, while the aforesaid policy was in effect, a city police officer by the name of Manuel sustained serious injury as the result of a collision between the motorcycle he was riding and one of Davy's taxi cabs. Manuel was responding to an emergency call at the time of the accident. Ten days later, he sued Davy for damages in excess of $225,000. The defendant insurance company, pursuant to the terms of its policy, assumed the defense of this suit. About two weeks prior to trial, the attorney for Manuel offered to settle for $4,500 but this offer was rejected by the insurance company. A jury trial followed which resulted in a judgment in favor of Manuel for $24,268. The insurance company paid the limit of its policy, i. e., $5,000, leaving the judgment against Davy unsatisfied in the sum of $19,268. Thereupon Davy brought this action against the insurance company, its general agent, and others connected with the defense of his suit, alleging that in refusing to accept the settlement offer of $4,500 the insurance company did not act in good faith, and seeking recovery of $19,268 which was the balance due on the judgment, together with interest on that amount from the date of judgment. The matter was tried by a jury which rendered a verdict against the insurance company and the general agent in the sum of $22,400.12. Judgment was entered thereon, from which this appeal is taken.

A policy of public liability insurance by which the insurer is required to defend an action on a claim covered by such policy, and iks authorized to compromise the same within policy limits, imposes upon the insurer the obligation to exercise good faith in considering an offer of compromise within those limits. Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 659-661, 328 P.2d 198, 68 A.L.R.2d 883; Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d 652, 659, 320 P.2d 140; Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 682, 319 P.2d 69, 66 A.L.R.2d 1202. If not expressed, the obligation to exercise good faith is implied in every such contract. (Ibid.) Where an offer of settlement is the subject under consideration, the obligation so imposed on the insurer is to exercise good faith in considering the interest of the insured in the settlement. Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 661, 328 P.2d 198, 68 A.L.R.2d 883. As a consequence, an insurer guilty of bad faith in refusing to settle a claim within policy limits breaches its contract and is liable for the entire amount of a judgment recovered against its insured, including any portion in excess of policy limits. Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 660, 328 P.2d 198, 68 A.L.R.2d 883; Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d 652, 659, 320 P.2d 140; Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 319 P.2d 69, 66 A.L.R.2d 1202.

The refusal to accept a proposed settlement which, under all of the circumstances, is reasonable, constitutes a failure to exercise good faith. Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 661, 328 P.2d 198, 68 A.L.R.2d 883. Stated otherwise, an unwarranted or unreasonable rejection of an offer of compromise constitutes bad faith. Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 659, 328 P.2d 198, 68 A.L.R.2d 883.

In determining whether an offer of settlement is warranted or reasonable, although the insurer has the right to protect its own interests, it does not have the right to sacrifice the interests of the insured. Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d 652, 659, 320 P.2d 140. To comply with its obligation of good faith in the premises, the insurer must take into account and give at least as much consideration to the interests of the insured as it gives to its own interests. Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 659, 328 P.2d 198, 68 A.L.R.2d 883; Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d 652, 660, 320 P.2d 140. The decision on such a matter must be based not only on the probable benefit or detriment ensuing to the insurer, but also and equally upon a consideration of the probable benefit or detriment ensuing to the insured. If 'there is a 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.' Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 659, 328 P.2d 198, 201, 68 A.L.R.2d 883.

The exercise of good faith under circumstances such as those present in this case requires not only an equal consideration of the interests of the insured along with those of the insurer, but also requires that the consideration given to the offer of settlement should be an intelligent one; should be based on a reasonable investigation; and should be made by persons reasonably qualified to make a decision respecting the risks involved. Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d 652, 660, 320 P.2d 140. On the other hand, the duty to exercise good faith is not commensurate with the duty to exercise the care of an ordinarily prudent person under the same circumstances. Bad faith and negligence are not legally synonymous. Appel v. Morford, 62 Cal.App.2d 36, 40, 144 P.2d 95. In this state, the liability of an insurer to an insured for refusing to accept an offer of compromise resulting in a judgment beyond policy limits arises only from a breach of the covenant to exercise good faith and not from a failure to exercise due care. Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 687, 319 P.2d 69, 66 A.L.R.2d 1202; Noshey v. American Automobile Ins. Co., 6 Cir., 68 F.2d 808, 809.

In addition to other obligations, the covenant to exercise good faith imposes upon the insurer the duty to communicate to the insured the results of any investigation indicating liability in excess of policy limits, and any offers of settlement which have been made, so that he may take proper steps to protect his own interests. Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d 652, 660, 320 P.2d 140.

Good faith implies honesty, fair dealing and full revelation. Hilker v. Western Automobile Ins. Co., 204 Wis. 1, 231 N.W. 257, 235 N.W. 413, 415. Bad faith implies dishonesty, fraud and concealment. Appel v. Morford, 62 Cal.App.2d 36, 40, 144 P.2d 95. Neither mistaken judgment nor unreasonable judgment is the equivalent of bad faith. Neel v. Barnard, 24 Cal.2d 406, 418, 150 P.2d 177. As a consequence, liability upon the part of the insurer for refusal to accept an offer of settlement may not be predicated upon its failure to correctly predict the outcome of the action it is defending.

Applying the foregoing general rules to a situation such as that present in the case at bar, we conclude that an insurer acts in good faith in rejecting an offer of settlement after it has undertaken a reasonably diligent investigation to determine the facts of the case, is acting upon the opinion of a reasonably qualified legal advisor, and is of the honest belief that the risk of an adverse verdict is one which it would assume if there were no limits to its policy, providing the insured is informed of the offer of settlement, furnished with the results of the investigation made, and advised of the opinion upon which the rejection is based. Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 319 P.2d 69, 66 A.L.R.2d 1202; Hilker v. Western Automobile Ins. Co., 204 Wis. 1, 231 N.W. 257, 235 N.W. 413; Christian v. Preferred Acc. Ins. Co., D.C., 89 F.Supp. 888, 890.

The primary issue on this appeal concerns the sufficiency of the evidence to support the implied finding of the jury that the defendant insurance company did not exercise good faith in refusing to accept the offer to settle the Manuel case for $4,500.

When the sufficiency of the evidence to sustain a verdict is questioned on appeal, the inquiry of the Appellate Court is limited to the ascertainment of the existence of any evidence, whether direct or indirect, which will support the verdict. Richter v. Walker, 36 Cal.2d 634, 640, 226 P.2d 593; In re Estate of Bristol, 23 Cal.2d 221, 223, 143 P.2d 689; Roberts v. Karr, 178 Cal.App.2d 535, 3 Cal.Rptr. 98. A determination respecting the presence or absence of good faith involves an inquiry into motive, intent and state of mind. Conclusions concerning such matters, in most cases, are founded upon inferences. On appeal it must be assumed that the jury drew every favorable inference reasonably deducible from the facts which will support its determination. Hamilton v. Pacific Elec. Ry. Co., 12 Cal.2d 598, 602, 86 P.2d 829; State of California v. Day, 76 Cal.App.2d 536, 549, 173 P.2d 399; Garland v. Hirsh, 74 Cal.App.2d 629, 636, 169 P.2d 405. The evidence in the case at bar establishes that the...