Palmer v. Financial Indem. Co.

• Decision Date: 24 April 1963
• Court: California Court of Appeals Court of Appeals
• Parties: Georgia Gail PALMER, Plaintiff, Cross-Defendant and Respondent, v. FINANCIAL INDEMNITY COMPANY, Defendant, Cross-Complainant, Appellant and Respondent, Traders & General Insurance Company, Cross-Defendant and Appellant. Civ. 20344.

Page 204

30 Cal.Rptr. 204

215 Cal.App.2d 419

Georgia Gail PALMER, Plaintiff, Cross-Defendant and Respondent, v. FINANCIAL INDEMNITY COMPANY, Defendant, Cross-Complainant, Appellant and Respondent, Traders & General Insurance Company, Cross-Defendant and Appellant.

Civ. 20344.

District Court of Appeal, First District, Division 1, California.

April 24, 1963.

Theodore Tamba, San Francisco, for appellant Financial Indemnity Co.

Partridge, O'Connell, Partridge & Fall, San Francisco, for Georgia Gail Palmer.

John P. Whitney, San Jose, for Traders & Gen. Ins. Co.

MOLINARI, Justice.

The plaintiff, Georgia Gail Palmer, ¹ brought an action in the trial court against Financial Indemnity Company, a corporation, ² alleging bad faith based upon a refusal to settle a personal injury and property damage insurance claim. Financial cross-complained against Palmer and Traders & General Insurance Co., a corporation, ³ the insurance carrier for Palmer, asking that any liability be prorated in accordance with the respective policies of the companies. Traders counterclaimed against Financial seeking judgment in its favor if it should be determined that Palmer was not entitled to the indemnity claimed. The judgment ⁴ went against Financial on its cross-complaint and in favor of Financial on Traders' counter-claim. Financial appeals from the judgment in favor of Palmer on her complaint and in favor of Traders on the cross-complaint. Traders seeks to uphold the judgment in favor of Palmer, but appeals that portion of the judgment declaring Palmer to be the real party in interest in order to protect its rights, should this court hold that Palmer is not the real party in interest.

The Record

On November 7, 1954, Palmer was driving an automobile owned by one Frances Allen with the consent and permission of the latter. Palmer was involved in a collision with an automobile in which Chaumcey and Doris McKeever were riding. Both McKeevers suffered personal injuries and there was damage to their automobile. At the time of the collision, there was in force and effect a policy of liability insurance issued by Financial and insuring Allen and others driving her automobile with her consent and permission. This policy had liability limits of $5,000 for personal injuries to each person, $10,000 for each accident, and $5,000 for property damage. At the same time, there was in force a policy of liability insurance issued by Traders, insuring Palmer and covering the latter's automobile. This policy had limits of $10,000 for personal injuries to each person, $20,000 for personal injuries in each accident, and $5,000 for property damage.

Both policies contained the standard 'other insurance' provision to the effect that while the insurer agrees to cover the insured while driving a 'substitute automobile,' if the insured is covered under any other policy covering the automobile which he is driving, then the insurance policy issued to such driver shall be 'excess insurance.' There is no dispute in the present case that under the facts the coverage afforded by Financial is primary and that by Traders is secondary. ⁵

On the day following the accident, Financial employed J. Roy Moneypenny to investigate the accident and undertake settlement negotiations with the McKeevers. Moneypenny contacted Mr. McKeever whose demand for settlement was $10,000 for the personal injuries to himself and his wife, and $1,000 for the property damage. Mr. McKeever testified at the trial that he gave no breakdown to Moneypenny as to the respective claims of himself and his wife, but that they were willing to give general releases for the amounts so demanded. Moneypenny, on the other hand, testified that Mr. McKeever's demand was for $5,000 for each of the spouses plus $1,000 property damage. The said demand was communicated to Financial by Moneypenny who was authorized to reject it. Moneypenny then made a counteroffer to settle all claims for $6,000 in exchange for a general release. It appears that Financial was apprised of the fact that Mrs. McKeever's injuries were serious while those of her husband were comparatively minor.

During the course of his negotiations with the McKeevers, Moneypenny had several conversations with a Mr. King who was claims superintendent for Traders. Moneypenny testified that he advised King of the $11,000 demand, of the serious nature of Mrs. McKeever's injuries, and of the probability that Traders' coverage might be exposed under the excess coverage clause. Moneypenny also testified that he was told by Traders that it had no interest in the matter. The content of the communications between King and Moneypenny is in dispute. Whereas, Moneypenny testified that King flatly refused to contribute towards any settlement, this was denied by King who testified that he requested Moneypenny to keep him informed and to supply him with the separate demands of each claimant, but that this information was never supplied. It appears that a separate investigation was conducted by Traders whereby it became aware of the seriousness of Mrs. McKeever's injuries and of the possibility that a verdict of from $15,000 to $20,000 could result if the case went to trial. King reported to his home office and was authorized to contribute to the settlement if it were determined that Mrs. McKeever's claim was in excess of $5,000. King testified that Moneypenny told him that he felt that he could settle the claims of both the McKeevers for something between $8,000 and $9,000, that Financial would contribute $5,000 towards such settlement, and that the balance was solicited from Traders. Moneypenny offered McKeever $7,500 for a full release, but this offer was refused. Thereafter, and on February 2, 1955, Moneypenny settled the case with the McKeevers by paying $7,500 in exchange for a covenant not to levy execution against its insured, Allen. This payment was not allocated by Financial as between the respective claims of the McKeevers.

On January 20, 1955, the McKeevers filed an action for personal injuries and property damage against Palmer. The defense of the action was tendered Financial by Palmer and was rejected. Traders thereupon undertook to defend Palmer. Palmer then brought the instant action against Financial alleging bad faith in Financial's refusal to settle with the McKeevers within its own policy limits. Financial answered and cross-complained against Palmer and Traders asserting that Palmer had no claim against it because she had in fact been defended by Traders and seeking a determination that Financial was only liable for a pro-rata share of the liability to the McKeevers based upon the respective limits of the two policies. Traders counterclaimed, seeking a declaration that if Palmer were not found to be the real party in interest, then it should be held to be the real party in interest. During the pendency of the present action and prior to trial Palmer and traders entered into an agreement designated 'Agreement and Receipt for Loan.' By the terms of this agreement Traders agreed to loan Palmer $8,500 for the sole and express purpose of paying the McKeevers said sum in exchange for a full release and dismissal of their action. Palmer therein agreed that she would bring an action against Financial for the recovery of said sum of $8,500, that if said sum was recovered she would pay it to Traders in repayment of said loan, but that if no recovery was obtained, then she would not be obligated to repay the loan. Palmer thereafter settled with the McKeevers for said amount in exchange for a release.

The trial court rendered its judgment in favor of Palmer and against Financial in the sum of $8,500. The court found that Financial had a duty under its policy to indemnify Palmer against the claim of the McKeevers in an amount not to exceed $5,000 for each of them for their personal injuries 'unless defendant * * * in bad faith refused to settle such claims within in policy limits'; and further found that Financial did act in bad faith in undertaking to settle the claims of the McKeevers and refusing to protect Palmer by including her in a release of said claims and by intentionally excluding her from a covenant not to execute in favor of Financial and its insured, Allen, when a release of Palmer was available within the limits of Financial's policy. The trial court also found that Palmer was forced to appear and answer the complaint of the McKeevers and was exposed to liability to them; and found that had there been an exercise of good faith on the part of Financial in the defense, negotiations and settlement of said claims, the said liability would not have existed. Additional findings were made by the court below that the 'Agreement and Receipt for Loan' was valid; ⁶ that Traders' financial interest in the action was limited to the extent therein provided; and that Palmer was the real party in interest.

Did Financial Act in Bad Faith?

It is now well established in California that a policy of public liability insurance by which the insurer is required to defend an action on a claim covered by such policy, and is authorized to compromise the same within policy limits, imposes upon the insurer the obligation to exercise good faith in considering an offer of compromise within those limits. (Davy v. Public National Ins. Co., 181 Cal.App.2d 387, 394, 5 Cal.Rptr. 488; Hodges v. Standard Accident Ins. Co., 198 Cal.App.2d 564, 571, 18 Cal.Rptr. 17; Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 659-661, 328 P.2d 198, 68 A.L.R.2d 883; Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d 652, 659, 320 P.2d 140; Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 682, 319 P.2d 69, 66 A.L.R.2d 1202.) This liability is predicated upon bad faith, and not upon negligence. (Brown, p. 683, 319 P.2d p. 71; Ivy, 156 Cal.App.2d p. 659, 320 P.2d p. 145.) Accordingly, in the application of the bad faith test the cases in this state have evolved and developed the...