Murphy v. Allstate Ins. Co.

Decision Date07 September 1976
Citation132 Cal.Rptr. 424,553 P.2d 584,17 Cal.3d 937
CourtCalifornia Supreme Court
Parties, 553 P.2d 584 Laurie Irene MURPHY, Plaintiff and Appellant, v. ALLSTATE INSURANCE COMPANY, Defendant and Respondent. L.A. 30571.
[553 P.2d 585] David R. Sherer, San Diego and Ned Good, Los Angeles, for plaintiff and appellant

Ruston & Nance, Ruston, Nance, McCormick & Dicaro, San Diego, Patrick A. McCormick, Jr., San Diego, and Ellis J. Horvitz, Encino, for defendant and respondent.

CLARK, Justice.

Having received only partial satisfaction of her judgment against the insured tort-feasor, plaintiff seeks the balance from the The complaint alleges plaintiff sued Pollard--insured by Allstate Insurance Company--for wrongful death of her nine-year-old son. Allstate rejected settlement demands of.$23,500 and $25,000, the latter being the maximum coverage provided by Pollard's policy. Plaintiff thereafter received a verdict of $85,000, but on motion for new trial, accepted a reduction in judgment to $42,000.

[553 P.2d 586] insurer for refusing settlement within policy limits. However, there being no allegation the insured assigned his cause of action for breach of the covenant to settle, the trial court granted judgment on the pleadings in favor of the insurer, and plaintiff appeals. We affirm the judgment.

Subsequent to entry of judgment, Allstate advised it would pay the policy limit of $25,000 and, if that were rejected, would appeal. The offer was rejected, and Allstate appealed contending the award was excessive. 1 As Allstate posted no bond on appeal, plaintiff obtained writ of execution ordering immediate payment by Pollard of the judgment plus interest. In supplemental proceedings pursuant to Code of Civil Procedure section 717, Allstate denied obligation owing to either Pollard or to plaintiff.

Plaintiff brought the present action against Allstate alleging breach of the duty of good faith to its insured by having refused to settle within policy limits. There is no allegation Pollard has assigned any cause of action.

In her first cause of action, plaintiff seeks recovery under Insurance Code section 11580, subdivision (b)(2) authorizing direct action against the insurance company by a judgment creditor. In her second, plaintiff alleges direct action is permitted by Code of Civil Procedure section 720 by creditors' suit. Allstate moved for judgment on the pleadings, first on the ground there is no allegation Pollard assigned to plaintiff his cause of action for failure to settle and, secondly that Allstate is not indebted to Pollard within the meaning of section 720. 2 The motion was granted.

THE DUTY TO SETTLE

This court has observed that '(i)n every contract there is an implied covenant of good faith and fair dealing that neither party will do anything which will injure the right of the other to receive the benefits of the agreement' (Brown v. Superior Court (1949) 34 Cal.2d 559, 564, 212 P.2d 878, 881), that this principle is applicable to insurance policies, and that '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' (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 659, 328 P.2d 198, 201).

More specifically, the insurer must settle within policy limits when there is substantial likelihood of recovery in excess of those limits. (Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, 16, 123 Cal.Rptr. 288, 538 P.2d 744; Crisci v. Security Ins. Co. (1967)66 Cal.2d 425, 430, 58 Cal.Rptr. 13, 426 P.2d 173.)

The duty to settle is implied in law to protect the insured from exposure to liability in excess of coverage as a result of the insurer's gamble--on which only the insured might lose. (See Shapero v. Allstate Insurance Co. (1971) 14 Cal.App.3d 433, 92 Cal.Rptr. 244.)

The insurer's duty to settle does not directly benefit the injured claimant. In fact, he usually benefits from the duty's breach. Instead of receiving an award near policy limits, he stands to obtain judgment exceeding policy coverage. For instance, in the present case plaintiff has already received an amount equal to her highest settlement demand, holding an unsatisfied judgment for an additional $17,500.

The insurer's duty to settle--running to the insured and not to the injured claimant--is also demonstrated by Shapero v. Allstate Insurance Co., supra, 14 Cal.App.3d 433, 92 Cal.Rptr. 244. The insured died leaving no asset other than the insurance policy. Thus, a judgment in excess of policy limits presenting no risk to the insured or to his heirs, the insurer had no duty to settle within policy limits.

When the carrier does breach its duty to settle, the insured has been allowed to recover excess award over policy limits (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d 654, 659, 328 P.2d 198), economic loss (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173), physical impairment (Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, 113 Cal.Rptr. 711, 521 P.2d 1103), emotional distress (Silberg v. California Life Ins. Co., supra; Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032; Crisci v. Security Ins. Co., supra), and punitive damage (Silberg v. California Life Ins. Co., supra). 3

The insured may assign his cause of action for breach of the duty to settle without consent of the insurance carrier, even when the policy provisions provide the contrary. (Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d at pp. 661--662, 328 P.2d 198.) However, part of the damage arises from the personal tort aspect of the bad faith cause of action. (Crisci v. Security Ins. Co., supra, 66 Cal.2d at p. 433, 58 Cal.Rptr. 13, 426 P.2d 173.) And because a purely personal tort cause of action is not assignable in California, it must be concluded that damage for emotional distress is not assignable. (See Reichert v. General Insurance Company of America (1968) 68 Cal.2d 822, 834, 69 Cal.Rptr. 321, 442 P.2d 377; 7 Cal.Jur.3d, Assignments, § 5 at pp. 12--13.) The same is true of a claim for punitive damage. (People v. Superior Court (1973) 9 Cal.3d 283, 287, 107 Cal.Rptr. 192, 507 P.2d 1400; Dugar v. Happy Tiger Records, Inc. (1974) 41 Cal.App.3d 811, 819, 116 Cal.Rptr. 412; see French v. Orange County Inv. Corp. (1932) 125 Cal.App. 587, 591, 13 P.2d 1046.)

In Purcell v. Colonial Ins. Co. (1971) 20 Cal.App.3d 807, 814, 97 Cal.Rptr. 874, an insured assigned his cause of action for breach of the duty to settle, the assignee suing on the assignment. Subsequently, the insured sued for mental distress. The second action was held to violate the rule against splitting a cause of action. (See City of San Jose v. Superior Court (1974) 12 Cal.3d 447, 464, 115 Cal.Rptr. 797, 525 P.2d 701.) The court suggested the insured should have brought a single action in his own name for all damage, agreeing to pay part of the recovery to the assignee.

INSURANCE CODE SECTION 11580, SUBDIVISION (b)(2)

Insurance Code section 11580 lists provisions to be included in every liability insurance policy issued or delivered in this state. 4 , Subdivision (b), subpart (1) provides insolvency or bankruptcy of the insured will not release the insurer from payment, and subpart (2) of the subdivision permits the judgment creditor of the insured to maintain an action 'against the insurer on the policy and subject to its terms and limitations . . . to recover on the judgment.'

Subpart (2) makes the judgment creditor a third party beneficiary of the insurance contract between the insurer and the insured. (Interinsurance Exch. of Auto. Club of So. Cal. v. Savior (1975) 51 Cal.App. 691, 694, 124 Cal.Rptr. 239; Johnson v. Holmes Tuttle Lincoln-Merc. (1958) 160 Cal.App.2d 290, 296--298, 325 P.2d 193; Olds v. General Acc. Fire Etc. Corp. (1945) 67 Cal.App.2d 812, 824, 155 P.2d 676; see Barrera v. State Farm Mut. Automobile Ins. Co. (1969) 71 Cal.2d 659, 670--673, 79 Cal.Rptr. 106, 456 P.2d 674.)

A third party beneficiary may enforce a contract expressly made for his benefit. (Civ.Code, § 1559.) And although the contract may not have been made to benefit him alone, he may enforce those promises directly made for him. (See Hartman Ranch Co. v. Associated Oil Co. (1937) 10 Cal.2d 232, 73 P.2d 1163; Johnson v. Holmes Tuttle Lincoln-Merc., supra, 160 Cal.App.2d 290, 297, 325 P.2d 193; Le Ballister v. Redwood Theatres, Inc. (1934) 1 Cal.App.2d 447, 36 P.2d 827; Miles v. Miles (1926) 77 Cal.App. 219, 228, 246 P. 143.)

The injured claimant's rights under the statute may extend beyond third party beneficiary principles. In Barrera v. State Farm Mut. Automobile Ins. Co., supra, 71 Cal.2d 659, 670, 79 Cal.Rptr. 106, 456 P.2d 674 et seq. this court held that Insurance Code section 11580 must be read in light of the Financial Responsibility Law and that its underlying policy providing benefits to injured parties may not be limited by third party beneficiary law. On the basis of that policy, it was held that in an action by the injured claimant, misrepresentations by the insured do not constitute a defense for an insurer who failed to promptly investigate insurability. (Cf. Shapiro v. Republic Indem. Co. of America (1959) 52 Cal.2d 437, 440, 341 P.2d 289.)

However, while the implied covenant of good faith and fair dealing has become a contract 'term' within the meaning of section 11580, neither third party beneficiary doctrine nor the Financial Responsibility Law warrant granting the injured claimant the right to recover from the insurer for breach of the duty to settle.

A third party should not be permitted to enforce covenants made not for his benefit, but rather for others. He is not a contracting party; his right to performance is predicated on the contracting parties' intent to benefit him. (Lucas v. Hamm (1961) 56 Cal.2d 583, 590--591, 15 Cal.Rptr. 821, 364...

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