Moradi-Shalal v. Fireman's Fund Ins. Companies

• Decision Date: 18 August 1988
• Docket Number: MORADI-SHALA,P,No. 32222,32222
• Citation: 758 P.2d 58,250 Cal.Rptr. 116,46 Cal. 3d 287
• Court: California Supreme Court
• Parties: , 758 P.2d 58, 57 USLW 2138 Parvanehlaintiff and Appellant, v. FIREMAN'S FUND INSURANCE COMPANIES, Defendant and Respondent. L.A.

Page 116

250 Cal.Rptr. 116

46 Cal.3d 287, 758 P.2d 58, 57 USLW 2138

Parvaneh MORADI-SHALAL, Plaintiff and Appellant, v.FIREMAN'S FUND INSURANCE COMPANIES, Defendant and Respondent.

L.A. No. 32222.

Supreme Court of California In Bank.

Aug. 18, 1988.

Rehearing Denied Oct. 13, 1988.

Olan & Friedman, Linda P. Horner, Bennet Olan, Reish & Luftman and Richard A. Love, Los Angeles, for plaintiff and appellant.

Gage, Mazursky, Schwartz, Angelo & Kussman, Sanford M. Gage, Michael H. Whitehill, Beverly Hills, Harvey R. Levine, San Diego, Arne Werchick, Sausalito, Wylie A. Aitken, Santa Ana, Glen T. Bashore, North Fork, Victoria De Goff, Berkeley, Douglas deVries, Sacramento, John Gardenal, San Francisco, Ian Herzog, Los Angeles, Peter Hinton, Walnut Creek, Leonard Sacks, Encino, and Robert Steinberg as amici curiae, on behalf of plaintiff and appellant.

Haight, Dickson, Brown & Bonesteel, Roy G. Weatherup and David F. Peterson, Santa Monica, for defendant and respondent.

Latham & Watkins, Donald P. Newell, Milton A. Miller, Los Angeles, Horvitz, Levy & Amerian, Ellis J. Horvitz, Peter Abrahams, Sharon Munson Swanson, Michael Robert Tyler, Encino, Parkinson, Wolf, Lazar & Leo, Richard B. Wolf, Michael W. Connally, Robert M. Blake, Gilbert, Kelly, Crowley & Jennett, William D. Jennett, Patrick A. Mesisca, Jr. and Michael I.D. Mercy, Los Angeles, as amici curiae, on behalf of defendant and respondent.

LUCAS, Chief Justice.

We initially granted review in this case to attempt to resolve some of the widespread confusion that has arisen regarding the application of our opinion in Royal Globe Ins. Co. v. Superior Court(1979)23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329.In Royal Globe, the court held that Insurance Code section 790.03, subdivision (h)(a provision of the Unfair Practices Act, Ins.Code, § 790 et seq.), created a private cause of action against insurers who commit the unfair practices enumerated in that provision.(All further statutory references are to the Insurance Code unless otherwise indicated.)Among the issues raised and argued by counsel and amici curiae, however, is the more basic question whether we should reconsider our holding in Royal Globe.¹

In light of certain developments occurring subsequent to Royal Globe which call into question its continued validity, we have found it appropriate to reexamine that decision.As will appear, we have concluded that the Royal Globe court incorrectly evaluated the legislative intent underlying the passage of section 790.03, subdivision (h), and that accordingly Royal Globe should be overruled.We also have concluded, however, that our holding in that regard should be prospective only, that is, applicable only to cases filed after the date our opinion herein becomes final.As for cases pending prior to that time, including the present case, the Royal Globe rule shall apply, as construed in part VI of this opinion.

I.THE FACTS

In this case, plaintiff settled her personal injury suit for damages against defendant's insured, and that suit was dismissed with prejudice.Her subsequent complaint against defendant insurer for violations of section 790.03, subdivisions (h)(2), (3), and (5), ² alleged the following facts:

In July 1983, plaintiff was injured in an automobile accident in which a vehicle driven negligently by defendant's insured struck her vehicle.In April 1984, plaintiff's attorneys wrote to defendant, submitting evidence of damages incurred by plaintiff as a result of the accident, and requesting settlement of the claim against its insured.On June 6, 1984, having received no acknowledgement or response to their letter, plaintiff's attorneys again wrote defendant requesting settlement of the claim and notifying it that plaintiff was reserving her rights of action against defendant under Royal Globe.Plaintiff sued the insured on June 21, 1984.In September, five months after her first communication to defendant, plaintiff settled the action against the insured.(According to the representations of counsel at oral argument, the settlement amount was $1,800 less than plaintiff's original demand.)Plaintiff's action against the insured was dismissed with prejudice.

Thereafter, plaintiff brought suit against defendant under Royal Globe, based on its alleged refusal to promptly and fairly settle her claim against the insured.In her first amended complaint against defendantplaintiff alleged defendant"did not acknowledge or act upon [her attorneys'] communication, did not promptly investigate or process the claim, and did not attempt in good faith to effectuate a prompt, fair, and equitable settlement of the claim, in which liability was reasonably clear."She sought compensatory damages according to proof and $750,000 in punitive damages.The trial court sustained defendant's general demurrer without leave to amend, based on its conclusion that the absence of a final judgment in the underlying action precluded a Royal Globe action against defendant.

The Court of Appeal reversed, 201 Cal.App.3d 1122, 226 Cal.Rptr. 333, holding that settlement coupled with a dismissal with prejudice was a sufficient conclusion of the underlying action to support a subsequent Royal Globe action against defendant.In part VI hereof, we review the correctness of that holding within the constraints of Royal Globe.First, however, we reconsider the validity of the Royal Globe holding itself.

II.THE ROYAL GLOBE DECISION

In Royal Globe, a bare majority of the court held that under section 790.03, subdivisions (h)(5) and (14), ³ a private litigant could bring an action to impose civil liability on an insurer for engaging in unfair claims settlement practices.(23 Cal.3d at pp. 885-888, 153 Cal.Rptr. 842, 592 P.2d 329.)The court further held (id., at pp. 888-890, 153 Cal.Rptr. 842, 592 P.2d 329) that such an action could be brought against the insurer by either the insured or a third partyclaimant, that is, "an individual who is injured by the alleged negligence of an insured"(id., at p. 884, 153 Cal.Rptr. 842, 592 P.2d 329).The court ruled that subdivisions (h)(5) and (14) imposed on the insurer a duty owed directly to the third partyclaimant, separate from the duty owed to the insured.(Id., at p. 890, 153 Cal.Rptr. 842, 592 P.2d 329.)To support its holding, the court relied primarily on section 790.09, which provides that cease and desist orders issued by the Insurance Commissioner under the Unfair Practices Act shall not "relieve or absolve" an insurer from any "civil liability or criminal penalty under the laws of this State arising out of the methods, acts or practices found unfair or deceptive."(Id., at pp. 885-886, 153 Cal.Rptr. 842, 592 P.2d 329.)

In addition, the Royal Globe court interpreted the foregoing provisions as conferring on the injured claimant a cause of action arising from a single instance of unfair conduct, so that a plaintiff did not have to prove that the insurer committed the acts prohibited by the statute as a general business practice.Despite the fact that section 790.03, subdivision (h), proscribes "[k]nowingly committing or performing with such frequency as to indicate a general business practice" the various specified unfair claims-settlement practices, the Royal Globe majority held that "a single violation knowingly committed is a sufficient basis for such an action."(Id., at p. 891, 153 Cal.Rptr. 842, 592 P.2d 329.)

The Royal Globe court concluded by holding that the plaintiff may not sue both the insured and the insurer in the same action, and that the suit against the insurer must be "postponed until the liability of the insured is first determined...."(Id., at pp. 891-892, 153 Cal.Rptr. 842, 592 P.2d 329.)The court observed that any damages suffered by the injured party as a result of the insurer's misconduct "may best be determined after the conclusion of the action by the third partyclaimant against the insured."(Id., at p. 892, 153 Cal.Rptr. 842, 592 P.2d 329.)

Justice Richardson's dissent (joined by Justices Clark and Manuel) disputed most of the majority's conclusions.In the dissent's view, nothing in the language of sections 790.03 or 790.09 either created or authorized a private action by anyone against the insurer for bad faith refusal to settle a claim.The dissent pointed out that if the Legislature truly had intended to grant third partyclaimants a private cause of action against an insurer for failing to settle claims against the insured, "then surely much more direct and precise language would have been selected" than the language of section 790.09 to the effect that administrative proceedings under the act would not "relieve or absolve" an insurer from civil liability "under the laws of this State."(Id., at p. 896, 153 Cal.Rptr. 842, 592 P.2d 329.)As the dissent noted, "one would reasonably have expected that the Legislature simply would have directly imposed such liability in clear, understandable, unmistakable terms, as it has done in numerous other statutes."(Ibid.)The dissent observed that an amicus curiae brief submitted in Royal Globe by the California Insurance Commissioner, and containing the available legislative history, supported the view that the framers of the act"had no intent to create a private cause of action."(23 Cal.3d at p. 897, 153 Cal.Rptr. 842, 592 P.2d 329.)

The dissent also pointed out that the majority's creation of a cause of action in favor of the third partyclaimant was contrary to our then recent unanimous opinion in Murphy v. Allstate Ins. Co.(1976)17 Cal.3d 937, 941, 132 Cal.Rptr. 424, 553 P.2d 584, holding that the insurer's duty to settle runs solely to the insured and not to the injured third party.( Royal Globe, supra, 23 Cal.3d at pp. 892-893, 153 Cal.Rptr. 842, 592 P.2d 329.)As Justice Richardson explained, "California has consistently held that the duty to settle runs to the insured.Section 790.03, subdivision (h), creates...