Northwestern Mut. Ins. Co. v. Farmers' Ins. Group

• Decision Date: 23 January 1978
• Citation: 143 Cal.Rptr. 415,76 Cal.App.3d 1031
• Court: California Court of Appeals Court of Appeals
• Parties: NORTHWESTERN MUTUAL INSURANCE COMPANY, Plaintiff and Respondent, v. FARMERS INSURANCE GROUP et al., Defendants and Appellants. * Civ. 17755.

Page 415

143 Cal.Rptr. 415

76 Cal.App.3d 1031

NORTHWESTERN MUTUAL INSURANCE COMPANY, Plaintiff and Respondent, v. FARMERS INSURANCE GROUP et al., Defendants and Appellants. ^*

Civ. 17755.

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

Jan. 23, 1978.

Hearing Denied March 23, 1978.

[76 Cal.App.3d 1036] Moore, Graves & Madory and Thomas B. Cummings, Tustin, for defendants and appellants.

Donald S. Gillespie and Marshall Miles, San Bernardino, for plaintiff and respondent.

OPINION

KAUFMAN, Associate Justice.

This appeal presents two questions apparently not heretofore confronted by the appellate courts of this state: (1) whether a permissive user of an automobile who is an insured under the omnibus clause of the vehicle owner's liability insurance policy has a right of action against the owner's insurer for its bad faith refusal to effect settlement within its policy limits, and (2) if so, whether the permissive user's automobile liability insurer, whose coverage constitutes excess insurance, may recover from the owner's insurer, whose coverage constitutes the primary insurance, the amount the excess insurer was required to pay on a judgment against the permissive user as a result of the primary insurer's bad faith refusal to settle. We conclude both questions are properly answered affirmatively.

Plaintiff Northwestern Mutual Insurance Company will be referred to as plaintiff or Northwestern. Defendants Farmers Insurance Group, Farmers Insurance Exchange and Mid-Century Insurance Company are related and will be collectively referred to as defendants or Farmers.

Barnett Kessler, apparently a resident of Utah, was the owner of a 1958 Chevrolet pickup truck. He loaned the pickup truck to his adult son, Robert Kessler, for a trip to Southern California. On June 29, 1963, at a speed of about 90 miles per hour, on a straight road and while the left passing lane was clear, the pickup rear-ended a Coors Beer truck about eight miles east of Baker, California. The four occupants of the pickup were ejected and killed. In addition to Robert Kessler, they were Russell Kessler, another adult son of the vehicle's owner, Larry Kessler, the 9 or 10-year-old son of the vehicle's owner, and Ronald Eberhart, a 15-year-old friend of the Kessler family.

Because all four occupants of the pickup truck were ejected from the vehicle, it was difficult to determine who was the driver. Some evidence indicated Robert Kessler was the driver. Other evidence, particularly his state of partial undress and the nature of his injuries, suggested Robert Kessler was not driving at the time of the accident. Utterances of Larry Kessler prior to his death, overheard by the ambulance attendants, tended to eliminate Russell Kessler and Larry himself as the driver. The remaining possibility was that Ronald Eberhart was driving, and he had suffered some injuries consistent with that premise. However, he was only 15 years old and unlicensed to drive. Moreover, Larry Kessler's words referred to the driver as "the man," making it somewhat unlikely the reference was to 15-year-old Ronald Eberhart.

The identity of the driver was significant primarily because there was evidence that Robert Kessler had a blood alcohol level of .8. This, in turn, was significant because, although their status was in question, both Larry Kessler and Ronald Eberhart may well have been guests in the vehicle. Brown v. Merlo, 8 Cal.3d 855, 106 Cal.Rptr. 388, 506 P.2d 212, which declared California's automobile guest statute unconstitutional, had not yet been decided, and the guest statute (former Veh.Code, § 17158) was in effect. If Larry Kessler and Ronald Eberhart were guests, therefore, no recovery on account of their deaths could be had except upon proof that the driver was intoxicated or guilty of wilful misconduct.

Defendants were the automobile liability insurer of Barnett Kessler, the owner of the pickup truck. Their policy described the pickup truck as an owned vehicle and, under Insurance Code section 11580.9(d) ¹ constituted the primary insurance. The policy limits were $10,000 for injury to or death of one person and $20,000 for injury or death arising out of one accident. An omnibus clause extended coverage to a permissive user of the pickup as an additional insured. ²

Plaintiff was Robert Kessler's insurer. Its policy provided liability limits of $25,000 for injury to or death of one person and $50,000 for injury or death arising out of one accident. If Robert Kessler was driving the pickup truck at the time of the accident, he was covered under the provisions of plaintiff's policy, but under Insurance Code section 11580.9(d) (see fn. 1, ante ), plaintiff's policy constituted excess insurance. ³

In separate suits the heirs of Ronald Eberhart and Larry Kessler instituted wrongful death actions against Barnett Kessler and the estates of Robert Kessler and Russell Kessler. As the primary insurer Farmers undertook the defense of all defendants in the wrongful death cases.

The plaintiffs in the wrongful death cases offered to settle for $3,500 in each case but those offers apparently did not find their way to defendants' file. Subsequently, however, the plaintiffs' offers to settle each case for $4,500 were rejected by defendants. Defendants offered only $1,000 in each case on a take-it-or-leave-it basis. Nor did they inform plaintiff of the settlement proposals.

The wrongful death actions were consolidated and proceeded to jury trial. At the close of the plaintiffs' opening statement, a motion for nonsuit by the estate of Russell Kessler was granted. Upon trial the jury impliedly found Robert Kessler was the driver of the pickup and rendered verdicts against his estate in the amount of $30,000 in the Eberhart case and $20,000 in the Larry Kessler case. Judgments were entered accordingly. Defendants paid $10,000 on each judgment. Plaintiff satisfied the balance of each judgment: $20,505.13 in the Eberhart case and $10,235.22 in the Larry Kessler case.

Plaintiff then instituted this action to recover the $30,740.35 it was required to pay on the judgments alleging its loss resulted from defendants' bad faith failure to accept reasonable offers of settlement within their policy limits. ⁴ After a non-jury trial, the court found and concluded that Robert Kessler was an insured under defendants' policy, that defendants had breached their good faith duty to accept reasonable settlement offers within their policy limits, that plaintiff's payments on the judgments in the amount of $30,740.35 were necessitated thereby, that plaintiff was not contributorily negligent in the premises, that plaintiff, as excess insurer of Robert Kessler, was subrogated to his rights under defendants' policy of insurance and that plaintiff was entitled to recover its loss from defendants. Judgment was entered accordingly, and defendants appeal.

Broadly speaking, there are two prongs to defendants' appeal. First, they contend that a permissive user's insurer may not and should not recover from the vehicle owner's insurer amounts the former has been required to pay because of the bad faith failure of the latter to effect settlement within its policy limits. Second, they contend that, even if such recovery is permissible in a proper case, plaintiff should not have prevailed in the case at bench because defendants did not unreasonably refuse to settle and because plaintiff itself was guilty of inequitable or contributorily negligent conduct.

We turn first to the question whether plaintiff's recovery is legally permissible. Apparently no California appellate court has passed on the question. Courts in other jurisdictions, however, have approved recovery by an excess insurer against the primary insurer for bad faith failure to settle. (Valentine v. Aetna Ins. Co., 9 Cir., 564 F.2d 292; Peter v. Travelers Insurance Company, D.C., 375 F.Supp. 1347; Estate of Penn v. Amalgamated General Agencies, 148 N.J.Super. 419, 372 A.2d 1124 (1977); American Fidelity & Cas. Co. v. All American Bus Lines, 8 Cir., 190 F.2d 234; American Fidelity & Cas. Co. v. All American Bus Lines, 8 Cir., 179 F.2d 7; see Continental Casualty Co. v. Reserve Ins. Co., 307 Minn. 5, 238 N.W.2d 862 (1976); cf. Home Insurance Co. v. Royal Indemnity Co., 68 Misc.2d 737, 327 N.Y.S.2d 745.) The legal theory upon which recovery has been allowed is that upon payment of the insured's liability to the injured claimant, the excess insurer is equitably subrogated to the rights of the insured against the primary insurer, including his right of action for bad faith failure to settle. (E. g., Valentine v. Aetna Ins. Co., supra, 564 F.2d at pp. 296-297; Peter v. Travelers Insurance Company, supra, 375 F.Supp. at pp. 1349-1350.) The doctrine of equitable subrogation is, of course, well recognized in California (see, e. g., Offer v. Superior Court, 194 Cal. 114, 118, 228 P. 11; Meyers v. Bank of America, etc., Ass'n, 11 Cal.2d 92, 77 P.2d 1084; Patent Scaffolding Co. v. William Simpson Constr. Co., 256 Cal.App.2d 506, 509-510, 64 Cal.Rptr. 187, and numerous cases there cited; 7 Witkin, Summary of Cal.Law (8th ed.) Equity, § 124, et seq., p. 5342, et seq.; 3 Witkin, Cal.Procedure (2d ed.) Pleading, § 101, pp. 1776-1777) and has been applied between insurers in other circumstances (see Continental Cas. Co. v. Zurich Ins. Co., 57 Cal.2d 27, 37, 17 Cal.Rptr. 12, 366 P.2d 455; Aetna Cas. & Surety Co. v. Certain Underwriters, 56 Cal.App.3d 791, 801, 129 Cal.Rptr. 47; Fireman's, etc., Co. v. State Comp., etc., Fund, 93 Cal.App.2d 408, 412-413, 209 P.2d 55).

Defendants point out that it is a prerequisite to equitable subrogation that the subrogor (estate of Robert Kessler) had an assignable right of action against the obligor (defendants). (Patent Scaffolding Co. v. William Simpson Constr. Co., supra, 256 Cal.App.2d at p. 509, 64 Cal.Rptr. 187.) They contend that the estate of Robert Kessler, to whose rights plaintiff claims to be...