Merritt v. Reserve Ins. Co.

• Decision Date: 29 October 1973
• Citation: 34 Cal.App.3d 858,110 Cal.Rptr. 511
• Parties: Dewey MERRITT, Plaintiff, Respondent and Cross-Appellant, v. RESERVE INSURANCE COMPANY, a corporation, Defendant, Appellant and Cross-Respondent. Civ. 39703.
• Court: California Court of Appeals Court of Appeals

Page 511

110 Cal.Rptr. 511

34 Cal.App.3d 858

Dewey MERRITT, Plaintiff, Respondent and Cross-Appellant, v. RESERVE INSURANCE COMPANY, a corporation, Defendant, Appellant and Cross-Respondent.

Civ. 39703.

Court of Appeal, Second District, Division 2, California.

Oct. 29, 1973.

Rehearing Denied Nov. 28, 1973.

Hearing Denied Jan. 24, 1974.

Lascher & Rader by Edward L. Lascher, Ventura, for defendant, appellant and cross-respondent.

Magana & Cathcart, William M. Thon, Ellis J. Horvitz, and Arthur E. Schwimmer, Los Angeles, for plaintiff, respondent and cross-appellant.

FLEMING, Associate Justice.

In 1961 a truck driven by Merritt and owned by Sterling Transit collided with a truck driven by Bernal and owned by J. A. Stafford Co., a California corporation. Merritt sued Bernal and Stafford Co. for personal injuries, and Sterling Transit sued them for property damages. In 1964 judgment was obtained by Merritt for $434,000 and by Sterling Transit for $21,000, and this judgment was affirmed on appeal in 1965.

Reserve Insurance Company, the liability insurance carrier for Stafford Co., paid $100,000 to Merritt, the full amount of its personal injury coverage, and paid $21,000 to Sterling Transit. There remained unsatisfied $334,000 of Merritt's judgment against Stafford Co. and Bernal. Stafford Co., in exchange for a covenant not to execute against it on the unsatisfied judgment, paid Merritt $20,000 and assigned to him its claims for damages as an assured against Reserve Insurance and the latter's agents. As Stafford Co.'s assignee Merritt then filed the present suit in 1966 on Stafford Co.'s claims for damages against its carrier, Reserve, for the latter's bad faith and negligent defense of Stafford Co. against Merritt's action for personal injuries. In 1966 the superior court ordered judgment on the pleadings in favor of Reserve on the count for negligent defense, but denied judgment on the bad faith count. The cause went to trial in 1971 on the bad faith count, and the jury returned a verdict of $499,000 against Reserve in favor of Stafford Co.'s assignee. Reserve has appealed the judgment and the order denying its motion for judgment notwithstanding the verdict; and Stafford Co.'s assignee, Merritt, has appealed the judgment in favor of Reserve on the count for negligent defense. ¹

The Pleading of Bad Faith.

The pertinent allegations of the count charging Reserve with bad faith defense of the case of Merritt v. Stafford Co. are:

'XIII

'In connection with the case of Merritt vs. Stafford . . . defendants (Reserve) . . . undertook the defense of said action on behalf of J. A. Stafford Trucking Co. and Salvador Bernal and took complete charge and control of the litigation in said action. Said defendants employed counsel to defend said action . . . and the counsel thus selected and appointed . . . acted for and on behalf of and as the agent and representative for defendants and each of them.

'XIV

'Defendants, and each of them, did not act in the best interests of J. A. Stafford Co. and Salvador Bernal and did not exercise the good faith required of them by the law in handling of the defense of J. A. Stafford Co. and Salvador Bernal in the case of Merritt vs. Stafford . . . in that said defendants failed to properly investigate and prepare for said litigation; failed to properly undertake, initiate, entertain or pursue discussions with plaintiff (Merritt) for the disposition and settlement of said case at any stage of the proceeding prior to judgment; repeatedly and erroneously misled J. A. Stafford Trucking Co. into a false sense of security and resulting inaction by assuring it that its interests and the interests of its employee, Salvador Bernal, were being adequately protected; and failed to properly protect the interests of J. A. Stafford Trucking and Salvador Bernal in the trial, appeal and satisfaction of said action.'

History of First Suit.

On 3 August 1960 Reserve Insurance issued an automobile liability insurance policy to Stafford Co., which provides personal injury coverage of $100,000 for each person and $300,000 for each accident, and property damage coverage of $25,000. The policy bound Reserve to pay to the limits of its coverage any sums the insured should become legally obligated to pay as damages and to defend any suit seeking damages against the insured. The policy authorized Reserve to investigate, negotiate, and settle any claim or suit against the insured as it deemed expedient.

On the evening of 20 February 1961 a southbound truck owned by Sterling Transit and driven by Merritt collided on Highway 99 near Merced with the rear of Stafford Co.'s southbound truck driven by Bernal, and as a result of the collision Merritt suffered severe and permanent personal injuries. Shortly after the accident, both Reserve, the insurance carrier for Stafford Co., and Transport Indemnity, the insurance carrier for Sterling Transit, undertook separate investigations of the accident.

Reserve obtained a statement from Robert Cox, who said he was driving southbound on Highway 99 in the slow lane about 125 feet behind Stafford Co.'s truck; that Merritt's truck had been following him at sixty miles per hour, had passed him on the left, had then 'whipped' back into the slow lane and collided with the rear of Stafford Co.'s truck; that Merritt's truck had flipped over, and Cox had pulled the injured Merritt from the cab of his truck. Reserve also secured a statement from Stafford Co.'s driver, Bernal, who said he was traveling at 45 miles an hour when he was struck in the rear by Merritt's truck; that he had recently checked his tail lights, and they were functioning at the time of the accident. Reserve's investigators examined Stafford Co.'s vehicle, checked with the highway patrol officer who handled the accident, obtained a copy of the California Highway Patrol accident report, and attempted without success to talk to the injured Merritt. Reserve's Fresno adjuster reported: 'It is obvious, from the statements of Bernal, the witness, Cox, and the investigation of the highway patrol, this is a case of non-liability on the part of your insured's driver.'

Transport Indemnity's investigation on behalf of Sterling Transit, the owner of Merritt's truck, covered much the same ground. But its investigation also included a number of photographs of the Stafford Co. vehicle as well as an inspection by an electrical engineer of the condition of the lights on the Stafford Co. vehicle.

In June 1961, four months after the accident, Merritt filed suit against Stafford Co. and Bernal for $400,000 damages for personal injuries, and Sterling Transit sued for $24,000 property damages to its vehicle. Stafford Co. forwarded the complaint to Reserve, and the latter then advised Stafford Co. by registered mail that '(t)he amount of damages requested in this suit is $400,000 which is in excess of the limits of coverage provided under your policy with Reserve Insurance Company. This is to advise you, therefore, that you may at your option retain legal counsel to represent your interests in the excess amount.' The letter also informed Stafford Co. that Reserve had employed the law firm of Hecker, Dunford & Kenealy to represent Stafford Co. in the defense of the suit. Reserve forwarded its file on the accident to the defending law firm, and that firm concluded from its study of the file that although serious personal injuries were involved, the case was one of non-liability. Thereafter, throughout the course of its employment the firm of Hecker, Dunford & Kenealy consistently and repeatedly advised the carrier that the case was one of non-liability. A chronological representation of this advice follows:

14 July 1961 Letter, Hecker, Dunford & Kenealy to Reserve: The case is 'an absolute case of nonliability.' This advice was consistent with that previously given Reserve by its Fresno adjuster and with information contained in the California Highway Patrol accident report, which attributed responsibility for the accident to an improper lane change by Merritt.

19 November 1962 Letter, Hecker, Dunford & Kenealy to Reserve: This is 'a case of virtually no liability, and one that certainly should be successfully defended.'

28 January 1963 Letter, Hecker, Dunford & Kenealy to Reserve: '(T)his (is) a case of nonliability.'

1 April 1963 Letter, Hecker, Dunford & Kenealy to Reserve: 'This is a nonliability case in which the plaintiff collided with the rear of our truck. . . . We continue to believe that this is a case of absolute nonliability.'

27 May 1963 Letter, Hecker, Dunford & Kenealy to Reserve: This is 'a case of absolutely no liability.'

5 June 1963 Letter, Hecker, Dunford & Kenealy to Reserve: 'We now of nothing on which he (plaintiff) can base a case.'

23 October 1963 Letter, Hecker, Dunford & Kenealy to Reserve: 'This is a case of questionable liability.' Plaintiff's chance of winning 'is too remote to even place a settlement evaluation.'

30 January 1964 Letter, Hecker, Dunford & Kenealy to Reserve: '(T)his case will be successfully defended.'

Dunford, the firm's attorney who ultimately tried the case, knew that Reserve's personal injury liability under its policy was limited to $100,000 for each person and $300,000 for each accident. However, from time to time, Dunford was assured by J. A. Stafford, the president of Stafford Co., that the latter had taken out an excess policy of liability insurance in an unknown amount. Dunford at various times described the limit of Stafford Co.'s personal injury liability insurance as $100,000, $300,000, $500,000, or unknown. Up to the time of the second trial in 1971 J. A. Stafford continued to insist in the existence of an excess policy, but he never identified or produced such a policy for Reserve.

Prior to the trial Dunford told Stafford there was nothing to worry about; there was no need to settle; it was not necessary for Stafford to be personally present at the trial....