Neal v. Farmers Ins. Exchange

• Decision Date: 25 August 1978
• Citation: 582 P.2d 980,148 Cal.Rptr. 389,21 Cal.3d 910
• Court: California Supreme Court
• Parties: , 582 P.2d 980 William NEAL, as Administrator, etc., Plaintiff and Appellant, v. FARMERS INSURANCE EXCHANGE, Defendant and Appellant. L.A. 30775.

Page 389

148 Cal.Rptr. 389

21 Cal.3d 910, 582 P.2d 980

William NEAL, as Administrator, etc., Plaintiff and Appellant, v. FARMERS INSURANCE EXCHANGE, Defendant and Appellant.

L.A. 30775.

Supreme Court of California.

Aug. 25, 1978.

As Modified Sept. 7, 1978.

Rehearing Denied Sept. 27, 1978.

Hagenbaugh & Murphy, Irwin Waldman and Brand L. Cooper, Los Angeles, for defendant and appellant.

Ellis J. Horvitz, Marc J. Poster, James J. Duryea and Timothy J. Hogan, Los Angeles, as amici curiae on behalf of defendant and appellant.

Gage & Cooper, Sanford M. Gage, Beverly Hills, Aitken, Bradshaw & Andres, Wylie A. Aitken, Santa Ana, and Leonard Sacks, Encino, for plaintiff and appellant.

William Camusi, Los Angeles, Stephen L. Odgers, Claremont, Samuel Shore, Los Angeles, Richard C. Mallery, Pomona, and William B. Boone, Santa Rosa, as amici curiae on behalf of plaintiff and appellant.

MANUEL, Justice.

In November of 1973, Mrs. Frances Neal, now deceased, filed this action seeking compensatory and punitive damages for the "bad faith" failure of Farmers Insurance Exchange (Farmers) to pay uninsured motorist benefits to her in accordance with a policy of automobile insurance under the terms of which she was a named insured. Mrs. Neal died during the pendency of the action and the complaint was amended to substitute her husband William Neal, administrator of her estate, as plaintiff. Following trial the jury returned an undifferentiated verdict in favor of plaintiff and against Farmers in the amount of $1,548,211.35. Farmers moved for a new trial, and the trial court entered an order that the motion was granted on the issue of damages only unless plaintiff agreed to a reduction of the verdict to the amount of $749,011.48, in which case the motion was denied. Plaintiff filed a consent to the reduction and judgment was entered accordingly. Farmers appeals from the judgment. Plaintiff has filed a cross-appeal. ¹

On July 13, 1970, Mrs. Neal, while riding as a passenger in an automobile owned by her and her husband William Neal, and operated by the latter, was gravely injured in an intersection accident when their vehicle, while in the process of making a left turn, was struck broadside by a vehicle driven by an uninsured motorist. She spent the following 69 days in the hospital, her condition gradually changing from total paralysis from the neck down (due to fractured neck vertebrae and a damaged spinal cord) to total disability involving serious sensory and motor defects. She remained in the latter condition until her death from cancer early in 1974, or slightly more than a year prior to the trial of the instant action.

At the time of the automobile accident there was in force a policy of automobile insurance issued by Farmers which included a medical payment provision with limits of $5,000 and an uninsured motorist provision with limits of $15,000. A few days after the accident Mr. Neal contacted an attorney, Paul Gergen, a family friend, who undertook to communicate with Farmers in the hope of obtaining early payment under the policy. Some three months later payment of $5,000 was made pursuant to the medical payment coverage. Farmers, however, declined to pay the policy limit of $15,000 under the uninsured motorist coverage, ultimately taking the threefold position (1) that it was entitled, under an express policy provision, to offset the amount paid under the medical payment coverage against any amount due under the uninsured motorist coverage; (2) that the accident resulted Solely from the negligence of Mr. Neal, thus precluding liability on the part of the uninsured motorist; and (3) that contributory negligence on the part of Mr. Neal might be legally imputed to Mrs. Neal.

In January of 1971, Mr. Gergen wrote to Farmers urgently requesting a prompt settlement. In this letter he disclosed that the Neals' son had contracted cancer, that major surgery had taken place, and that heavy medical expenses on this account were imminent. In view of this development he requested that if full payment under the uninsured motorist coverage was not to be forthcoming, then Farmers should accept his alternate proposal that payment of $10,000 be made immediately, reserving the question of the $5,000 offset for future decision by an appropriate tribunal. Four days later Farmers responded to this letter by a telephone call from one of its employees advising Mr. Gergen that Farmers would seek the legal opinion of its attorney. It was not until April 21, almost three months later, that Farmers' attorney reported his conclusions (1) that the law was unclear on the matter of offset, (2) that any negligence on the part of Mr. Neal could not be imputed to Mrs. Neal, and (3) that "at best" the case was "50-50" on liability.

Having received the foregoing attorney's opinion, Farmers then offered to settle the case by payment of an additional $5,000. Mr. Gergen rejected this offer in a letter dated May 1, 1971, in which he set forth at length the evidence indicating negligence on the part of the uninsured motorist ² and repeated the offer of settlement previously made by him. When Farmers did not respond to this letter within 10 days, he again wrote, this time withdrawing all previous offers of settlement and stating that if full payment of $15,000 were not received in his office within 10 days he would "institute arbitration proceedings requesting what I consider to be realistic damages in the sum of $500,000." Farmers did not respond to this letter.

The case was thereupon turned over by Mr. Gergen to Mr. Aitken, one of plaintiff's present attorneys. A demand for arbitration was made in August 1971, but due to unavailability of the arbitrator agreed upon, the hearing was not set until April of the following year. A continuance was granted at Mr. Aitken's request, and the next available date was February 16, 1973. The proceedings commenced on the latter date and in April of the same year the arbitrator rendered his decision in favor of Mrs. Neal on the issue of liability, reserving his decision on the question of offset. At Mr. Aitken's request Farmers then paid the first $10,000, and six months later, when the arbitrator issued his decision on the offset question in favor of Mrs. Neal, the final $5,000 was paid.

The instant action, seeking compensatory and punitive damages for Farmers' "bad faith" refusal to enter into a prompt settlement, was filed on November 8, 1973. At trial plaintiff proved compensatory damages in the amount of $9,573.65 comprising $3,588.50 in costs and finance charges on a second deed of trust loan on the Neals' residence and $5,985.15 in legal fees and other costs incurred in the arbitration proceeding. ³ It was also shown that as of December 31, 1974, defendant Farmers had gross assets of some $765 million, net assets of approximately $211 million, and a 1974 net income of nearly $45 million. As indicated above, the jury returned a verdict, with no differentiation between compensatory and punitive damages, in the amount of $1,528,211.35, which was subsequently reduced to the amount of $749,011.48 by plaintiff's remittitur in response to the granting of a conditional order granting a new trial on the ground of excessive damages. (Code Civ.Proc., § 662.5, subd. (b).)

FARMERS' APPEAL

In Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032, we made it clear that the duty of an insurer to accept reasonable settlements of third party claims Against its insured (See Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173; Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 328 P.2d 198), is but one aspect of its obligation, imposed by law, to act fairly and in good faith in discharging its contractual responsibilities to its insured. Another aspect of that obligation, we pointed out, is the duty of the insurer to act fairly and in good faith in handling submitted By its insured, which we characterized as "a duty not to withhold unreasonably payments due under a policy." (9 Cal.3d at p. 573, 108 Cal.Rptr. at p. 485, 510 P.2d at p. 1037.) Thus, we held, when an insurer "fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing." (Id. at p. 574, 108 Cal.Rptr. at p. 485, 510 P.2d at p. 1037.) It is an asserted breach of the latter duty which forms the basis of this litigation and upon which the challenged judgment rests.

We can deal briefly with Farmers' first contention that there was no substantial evidence that it had breached the aforesaid duty. Suffice it to say that the substantial record herein, which we have summarized only in broad outline above, contains abundant evidence, a good deal of it conflicting, on the subject of defendant's conduct and motives. While some of that evidence was to the effect that Farmers did no more here than assert its legal position reasonably and in good faith, the jury herein clearly concluded to the contrary. It did so on the basis of evidence of undeniable substantially to the effect that Farmers knew at an early date certainly no later than its receipt of Mr. Gergen's letter dated May 1, 1971 that it had no colorable defense to plaintiff's claim under the uninsured motorist provisions of its policy and that the only genuine issue was that of the availability of an offset for the $5,000 paid by it under the medical payment provisions; ⁴ that Mr. Gergen's offer to settle for an additional $10,000, reserving the offset question for later decision by an appropriate tribunal, was wholly reasonable and should in good faith have been promptly accepted; and that Farmers' subsequent refusal to accept the offer constituted a breach of its obligation to deal fairly and in good faith with its insured by...