Johansen v. California State Auto. Ass'n Inter-Ins. Bureau
| Decision Date | 24 September 1974 |
| Docket Number | INTER-INSURANCE |
| Court | California Court of Appeals Court of Appeals |
| Parties | Muriel JOHANSEN, Plaintiff and Appellant, v. CALIFORNIA STATE AUTOMOBILE ASSOCIATIONBUREAU, Defendant and Respondent. Civ. 31889. |
Russell W. Federspiel, Raymond H. Hawkins, Oakland, for plaintiff-appellant.
Ropers, Majeski, Kohn, Bentley & Wagner, Michael J. Brady, Eugene J. Majeski, Redwood City, for defendant-respondent.
Plaintiff Muriel Johansen appeals from the judgment rejecting her claim that defendant liability insurer is liable for the unpaid portion of her judgment against defendant's insured including the amount in excess of the insurance policy limits.
On February 26, 1963, appellant and her husband sustained personal injuries and damage to their vehicle due to the negligent operation of a 1956 Chevrolet by Gary Dearing ('Gary'), the minor son of the insured Joyce E. Dearing ('Joyce'). On December 27, 1963, the Johansens sued Gary and Joyce in the Alameda County Superior Court for personal injuries and property damage.
At the time of the accident there was in full force and effect an insurance policy issued by respondent to Joyce which provided coverage up to $10,000 for bodily injury for each person, $20,000 for each occurrence and $5,000 for property damage. Respondent took the position that the accident was not covered by the policy because the car involved in the collision was either an additionally acquired vehicle not reported within 30 days or a non-owned vehicle regularly furnished for the use of the insured. Nevertheless, in a Reservation of Rights Agreement executed on February 28, 1964, respondent assumed the defense of Gary and Joyce in the damage action and retained attorney Bennett to represent them.
On May 1, 1964, respondent initiated a declaratory relief action against appellant, her husband, the Dearings and Hartford Insurance Company, appellant's uninsured motorist carrier ('Hartford'), by which it sought a declaration that its policy did not provide coverage for the accident in question. In the declaratory relief action appellant retained the services of attorney Federspiel (who was also their attorney in the damage action), while the Dearings were represented by attorney Hawkins.
Appellant's demand for settlement of the case for $10,000, the full amount of the policy, was submitted to respondent on December 10, 1964. In a reply dated December 16, 1964, respondent maintained that if it was judicially determined that the policy in question afforded coverage to the Dearings, respondent would be willing to pay the $10,000 policy limits. At the same time respondent expressed its desire to have the matter of coverage tried prior to the damage action. Respondent repeatedly showed its willingness to pay the full policy limit if the court found coverage; and in letter to Mr. Federspiel dated March 18, 1965, Mr. Bennett suggested executing a stipulation to the effect that the $10,000 would be deposited in an escrow and would be paid to appellant along with 7 percent interest if the coverage issue were decided against respondent.
Respondent took several steps to expedite the declaratory relief action in order that it be tried prior to the damage action. Thus, it successfully defended a motion made on December 22, 1964 by the opponents to dismiss the declaratory relief action or at least to postpone it until after the conclusion of the damage action trial. On February 26, 1965, respondent moved for an order to advance the declaratory relief action, which motion was granted over the opposition of all defendants. On February 15, 1965, a letter was sent by attorney Bennett to the Dearings advising them that he would attempt to continue the trial of the damage action. Joyce, however, acting upon the advice of Mr. Hawkins, took the position that the damage action should be tried first, whereupon Mr. Bennett desisted and abandoned the motion for a continuance.
As a result, the damage action was tried first. After trial by jury, judgment was entered against the Dearings, obligating Gary to pay personal injury damages in the sum of $32,500 to appellant, $520 to her husband, $615 property damage, and $254.30 costs, and obligating Joyce to pay $5,000. Thereafter the declaratory relief action was tried, the trial judge concluding that the policy of insurance did not provide coverage for the accident in question. On appeal that judgment was reversed (Cal. State Auto. Assn. Inter-Ins. Bureau v. Dearing (1968) 259 Cal.App.2d 717, 66 Cal.Rptr. 852). Following that decision, on September 5, 1968, final judgment was entered providing that the policy did extend coverage to the Dearings and that it inured to the benefit of appellant, her husband and Hartford.
By an agreement dated February 5, 1969, Gary assigned to appellant and/or Hartford all his rights and claims against respondent for breach of contract, express or implied, arising from respondent's alleged failure to accept the settlement offer within the policy limits. Thereafter, appellant filed the present action predicating respondent's liability on three theories: (1) absolute liability; (2) bad faith liability; and (3) contractual liability for unpaid interest on the judgment. The trial court, sitting without a jury, rendered judgment in favor of respondent.
At the outset it must be pointed out that the present appeal is not analogous to cases where the insurer refuses to defend the insured or, after having assumed the defense, rejects a reasonable settlement offer because the liability of the insured or the extent of damages in the third party action are doubtful or subject to differing evaluations. In the instant case both Gary's liability and excess damages were considered by respondent as a virtual certainty; and, absent the coverage issue, respondent admittedly would have settled the claim by payment of the policy limits. Therefore, the narrow issue confronting us is whether or not rejection of a policy limits settlement demand on the grounds that the insured was not covered by the policy gives rise to excess liability either on the theory of absolute liability and/or bad faith.
Appellant's claim that an insurer may be held responsible under the theory of absolute liability is predicated on Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173, and certain language borrowed from Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 328 P.2d 198. However, as will be seen below, neither Crisci nor Comunale supports appellant's proposition.
It is conceded that amicus curiae in Crisci argued at great length that an insurer who fails to settle within the policy limits should be subjected to absolute liability. However, it is noteworthy that, despite expressing some dictum sympathetic to the utilitarian simplicity of the proposed rule, Crisci was ultimately decided upon the principles pronounced in Comunale (cf. Crisci v. Security Ins. Co., supra, 66 Cal.2d at pp. 430-432, 58 Cal.Rptr. 13, 426 P.2d 173).
But appellant's position that bad faith is not the crucial element in determining the insurer's liability for failure to settle within the policy limits cannot be sustained under Comunale, either.
It is to be noted that Comunale, upholding the bad faith test established by previous California cases (Brown v. Guarantee Ins. Co. (1957) 155 Cal.App.2d 679, 319 P.2d 69; Ivy v. Pacific Automobile Ins. Co. (1958) 156 Cal.App.2d 652, 320 P.2d 140), points out that when the insurer assumes the defense of the insured it thereby retains control over the litigation and settlement and is therefore liable for the entire amount of a judgment against the insured, but only if in the exercise of such control it is guilty of bad faith in refusing to settle within the policy limits (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at p. 660, 328 P.2d 198).
Moreover, the principles laid down in Comunale directly contradict the contention that an insurer should be strictly liable for not settling the third party's claim against the insured. These principles proclaim 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. 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. 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 (Comunale v. Traders & General Ins. Co., supra, at pp. 658-659, 328 P.2d 198.) Thus, Comunale makes it plain that the insurer must settle only in appropriate cases where the most reasonable manner of disposing of the claim is settlement and it is liable for breach of good faith only if the refusal to settle is unwarranted. This is, of course, a far cry from the concept of strict liability which would make the breach actionable regardless of the state of mind of the insurer and/or the reasonableness of its action.
We note parenthetically that Crisci does not negate the foregoing reasoning. While stating that 'Liability is imposed not for a bad faith breach of the contract but for failure to meet the duty to accept reasonable settlements,' the court...
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