Johansen v. California State Auto. Assn. Inter-Ins. Bureau

• Citation: 538 P.2d 744,123 Cal.Rptr. 288,15 Cal.3d 9
• Decision Date: 11 August 1975
• Docket Number: S.F. 23229,INTER-INSURANCE
• Parties: , 538 P.2d 744 Muriel JOHANSEN, Plaintiff and Appellant, v. CALIFORNIA STATE AUTOMOBILE ASSOCIATIONBUREAU, Defendant and Respondent.
• Court: California Supreme Court

Page 288

123 Cal.Rptr. 288

15 Cal.3d 9, 538 P.2d 744

Muriel JOHANSEN, Plaintiff and Appellant, v. CALIFORNIA STATE AUTOMOBILE ASSOCIATION INTER-INSURANCE BUREAU, Defendant and Respondent.

S.F. 23229.

Supreme Court of California,

In Bank.

Aug. 11, 1975.

Rehearing Denied Sept. 10, 1975.

Russell W. Federspiel, Oakland, and Raymond H. Hawkins, Berkeley, for plaintiff and appellant.

Robert E. Cartwright, San Francisco, Edward I. Pollock, Los Angeles, William H. Lally, Sacramento, Arne Werchick, San Francisco, Elmer Low, Pasadena, Ned Good, Los Angeles, David B. Baum, San Francisco, Stephen I. Zetterberg, Claremont, Robert G. Beloud, Upland, and Leonard Sacks, Pico Rivera, as amici curiae on behalf of plaintiff and appellant.

Roberts, Majeski, Kohn, Bently & Wagner, Michael J. Brady and Eugene J. Majeski, Redwood City, for defendant and respondent.

Haight, Lyon, Smith & Dickson and Roy G. Weatherup, Los Angeles, as amici curiae on behalf of defendant and respondent.

TOBRINER, Justice.

In a prior action for damages arising out of an automobile accident, plaintiff Muriel Johansen obtained a judgment of $33,889.30 against Gary and Joyce Dearing, a sum well in excess of the Dearings' automobile insurance policy limits. Although the Dearings' insurance carrier, defendant in the instant action, assumed the Dearings' defense in the earlier suit, it refused, during the course of that litigation, to accept a settlement offer within policy limits because it believed that the accident did not fall within the policy's coverage.

In a subsequent declaratory judgment action, however, the Court of Appeal determined that defendant's policy did in fact cover the accident. (California State Auto. Assn. Inter-Ins. Bureau v. Dearing (1968) 259 Cal.App.2d 717, 66 Cal.Rptr. 852.) The insurer then paid plaintiff the portion of the judgment falling within the policy limits but refused to accept liability for the balance. The Dearings thereafter assigned their rights against the insurer to Ms. Johansen, who commenced the present action to recover the unpaid portion of her judgment. The superior court ruled in favor of defendant insurer, and plaintiff now appeals.

For the reasons discussed below, we conclude that the judgment must be reversed. California authorities establish that an insurer who fails to accept a reasonable settlement offer within policy limits because it believes the policy does not provide coverage assumes the risk that it will be held liable for all damages resulting from such refusal, including damages in excess of applicable policy limits. In the instant case, defendant contended and the superior court agreed that such liability does not attach if the insurer's denial of coverage was made in good faith. As we explain, however, nearly 20 years ago, in Comunale v. Traders & Gen. Ins. Co. (1958), 50 Cal.2d 654, 328 P.2d 198, our court rejected an identical contention proffered by an insurer who, like the instant defendant, failed to accept a settlement offer because of doubts as to policy coverage. No decision in the intervening years has questioned the vitality of the Comunale holding or reasoning; nor has defendant presented any sound basis for departing from that authority.

On February 26, 1963, plaintiff Muriel Johansen and her husband suffered injuries in an automobile accident caused by the negligence of Gary Dearing, the minor son of Joyce Dearing. At the time of the accident, an insurance policy issued by defendant California State Automobile Inter-Insurance Bureau (insurer) covered the Dearings, affording policy limits of $10,000 for bodily injury for each person, $20,000 for each occurrence and $5,000 for property damage.

On December 27, 1963, Ms. Johansen sued the Dearings for personal injuries and property damage stemming from the accident. Although the insurer maintained that the policy did not provide coverage, it agreed to assume the defense of the Dearings but reserved its right to litigate the coverage issue. On May 1, 1964, the insurer, seeking to obtain a judicial determination as to whether the policy afforded coverage, instituted a declaratory relief action naming Ms. Johansen and the Dearings as defendants.

On December 10, 1964, Ms. Johansen, plaintiff in the third party suit, offered to settle her claim for $10,000, the full amount of the policy. Although defendant conceded the virtual certainty of a judgment against the Dearings in excess of the policy limits, it refused to adjust the matter, stating that it would only be willing to offer the policy limits if it were judicially determined that the policy did in fact provide coverage. ¹

Despite defendant's efforts to expedite the declaratory relief action, the personal injury action ultimately went to judgment first, resulting in an award against the Dearings of $33,889.30, a sum far in excess of the insurance policy limits. In the declaratory relief action, although the trial court initially ruled in favor of defendant on the coverage issue, that determination was subsequently reversed on appeal. (California State Auto. Assn. Inter-Ins. Bureau v. Dearing, supra, 259 Cal.App.2d 717, 66 Cal.Rptr. 852.) Thus, a final judgment holding that the policy did extend coverage to the Dearings was entered only on September 5, 1968, over four years after the initial filing of the action.

The insurer subsequently paid Ms. Johansen $19,692.19. Since interest on the judgment in the personal injury suit accounted for $8,302.89 of this sum, an outstanding judgment of $22,500 remained against Gary Dearing. Thereafter, Gary Dearing assigned his rights against the insurer to Ms. Johansen in exchange for her promise to release him from personal liability on the outstanding judgment. Ms. Johansen then, as assignee of Gary Dearing, commenced the instant action against the insurer to collect the unpaid portion of her judgment.

The trial court, sitting without a jury, rendered judgment in favor of defendant insurer, concluding, in essence, that the insurer's liability could only be predicated upon a finding that its denial of coverage emanated from bad faith, and that in this instance the insurer entertained a bona fide belief that coverage did not exist. ²

In analyzing this case, we note at the outset that the rights at issue here are those of Gary Dearing, the insured; plaintiff Johansen comes before us only as his assignee. ³ Thus, our inquiry necessarily focuses on the nature of the relationship between the defendant insurer and its insured, Dearing, and the nature and scope of the resulting obligations.

In Comunale v. Traders & Gen. Ins. Co., supra, 50 Cal.2d 654, 658, 328 P.2d 198, 200, this court, in a unanimous decision, held that '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,' and that this principle is 'applicable to policies of insurance.' The implied covenant of good faith and fair dealing imposes a duty on the insurer to settle a claim against its insured within policy limits whenever there is a substantial likelihood of a recovery in excess of those limits. (Id., at p. 659, 328 P.2d 198.)

In Comunale, two pedestrians (the Comunales) were struck and injured by a truck driven by Percy Sloan. At the time of the accident, 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. When the Comunales filed suit against Sloan, defendant insurer refused to assume his defense; during the course of the litigation it rejected the Comunales' offer to settle their claims for $4,000, maintaining that the accident did not fall within the policy's coverage. The action proceeded to trial and resulted in a judgment of $26,250 against Sloan.

In a subsequent action the court determined that the policy did in fact cover the accident; the Comunales recovered $11,250 from the insurer, the amount of the judgment which fell within the insurance policy limits. Sloan then assigned his rights against the defendant insurer to Comunale who sued the insurer to recover the unpaid portion of his judgment. This court held that the defendant insurer had breached its implied covenant of good faith and fair dealing when, despite the great risk of a recovery in excess of policy limits, it failed to compromise the claim against the insured. We held the insurer liable for the entire amount of the judgment against its insured.

Defendant asserts, however, the the Comunale principle does not apply to an insurer whose refusal to settle stems from a bona fide belief that the policy does not provide its insured coverage. In Comunale, the insurer asserted a virtually identical claim: 'It is not claimed the settlement offer was unreasonable in view of the extent of the injuries and the prohibility that (the insured) would be found liable, and (the insurer's) only reason for refusing to settle was its claim that the accident was not covered by the policy.' (Id. at p. 658, 328 P.2d at p. 200.) This court nevertheless held the insurer liable for the excess judgment against its insured, stating: '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.' (Emphasis added.) (Id. at p. 660, 328 P.2d at p. 202.) ⁴ Accordingly, contrary to the defendant's suggestion, an insurer's 'good faith,' though erroneous, belief in noncoverage affords no defense to liability flowing from the insurer's refusal to accept a reasonable settlement offer. ⁵

Under the standards articulated by the controlling decisions of this court we cannot...