Sanchez v. Truck Ins. Exchange

• Decision Date: 26 January 1994
• Docket Number: No. H010911,H010911
• Court: California Court of Appeals Court of Appeals
• Parties: Sonia SANCHEZ, Plaintiff and Appellant, v. TRUCK INSURANCE EXCHANGE, Defendant and Respondent.

Page 812

26 Cal.Rptr.2d 812

21 Cal.App.4th 1778

Sonia SANCHEZ, Plaintiff and Appellant, v. TRUCK INSURANCE EXCHANGE, Defendant and Respondent.

No. H010911.

Court of Appeal, Sixth District, California.

Jan. 26, 1994.

As Modified on Denial of Rehearing Feb. 25, 1994.

Review Denied May 12, 1994.

[21 Cal.App.4th 1780] Donald M. Layne, Carmel, for plaintiff and appellant.

Ralph E. Mendell, Campbell, Warburton, Britton, Fitzsimmons & Smith, San Jose, for defendant and respondent.

COTTLE, Presiding Judge.

After Sonia Sanchez obtained a stipulated judgment against L & C Janitorial Service Co. (L & C) and its owner, Cleveland Cadle, she brought a direct action against L & C's insurer, Truck Insurance Exchange (Truck), as authorized by Insurance Code section 11580. ¹ Truck demurred, and the court sustained its demurrer without leave to amend on the ground that the "no action" clause ² in Truck's policy precluded suit against it in cases where the judgment against its insured was entered on less than a full, adversarial trial. For reasons we shall explain, we reverse.

STANDARD OF REVIEW

In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. " 'We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.' [Citation.] ... [W]e give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff. [Citation.]" (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.)

FACTS SET FORTH IN SANCHEZ'S COMPLAINT AND FACTS JUDICIALLY NOTICED (i.e., COURT PROCEEDINGS IN THIS CASE INCLUDED IN JOINT APPENDIX)

Sanchez's complaint incorporated by reference copies of (1) the first amended complaint in the underlying action, (2) the judgment entered therein, and (3) the "Comprehensive Liability Policy" that Truck issued to its insureds.

Sanchez was employed by L & C from March 23, 1989, until December 6, 1989. She was pregnant at the time with her fourth child. Sanchez's husband was employed as a sergeant in the United States Army. Approximately 10 days after Sanchez started work, Edward Cadle, an L & C employee whose father, Cleveland Cadle, owns the company, commenced a course of sexual misconduct which eventually led Sanchez to quit her job. The younger Cadle invited Sanchez to engage in all manner of sexual relations with him, made attempts to kiss her on the neck and elsewhere, and grabbed her breasts, buttocks and pelvic area. Sanchez complained to her supervisors, including Edward Cadle's father, all to no avail. The elder Cadle told her that was his son's way of teasing. He told her Edward did it with all the "girls" and to just ignore it. On December 5, 1989, Edward Cadle called Sanchez at home, told her he knew her husband was away, and that he wanted to make her "feel creamy inside." Sanchez quit work the following morning.

On May 14, 1990, Sanchez filed a complaint in the Monterey County Superior Court against L & C, Edward Cadle, and various Doe defendants. On September 26, 1991, she filed a first amended complaint, adding Cleveland Cadle as a defendant. Sanchez sought damages for wrongful constructive discharge, assault and battery, and negligent supervision. In her complaint, she also alleged that L & C was the alter ego of Cleveland Cadle. The Cadles tendered defense of the lawsuit to their insurer, Truck, but Truck refused to defend or to be involved in any way.

The underlying action came up for jury trial on August 31, 1992. Before beginning jury selection, the parties entered into a proposed settlement which they presented to the court for approval. The court heard the terms of the proposed settlement and specifically found "that said settlement meets the criteria stated in Tech-Bilt, Inc. v. Woodward-Clyde & Associates, (1985) 38 C3d 488 [213 Cal.Rptr. 256, 698 P.2d 159]" and accordingly is "made in good faith."

The judgment decreed that L & C was the alter ego of the elder Cadle, that Sanchez recover from L & C and Cleveland Cadle $250,000, that Sanchez covenanted not to execute on the judgment against Cadle and to defer executing on the judgment against L & C until the direct action against the insurer was resolved. After a reasonable time, if she was unsuccessful against the insurer, she could execute against L & C for no more than $25,000. The judgment further decreed that the action be dismissed with prejudice against Edward Cadle.

Sanchez then filed her direct action against Truck, alleging that it rejected multiple tenders of defense of the underlying action against L & C's insureds, Cleveland Cadle and L & C, and that now it refuses to pay the judgment which Sanchez obtained.

The policy, which was attached to the complaint, stated that Truck agreed "to pay all damages which the insured becomes legally obligated to pay because of ... bodily injury to any person ... caused by an occurrence to which this insurance applies." The 137th paragraph of the policy read: "VIII. ACTION AGAINST THE COMPANY [p] No action shall lie against the Company under any coverage unless, as a condition precedent thereto, there shall have been full compliance with all the terms of this policy, nor (a) as respects Coverages A, B and B-1 until the amount of the insured's obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the Company...."

On November 10, 1992, Truck demurred to Sanchez's complaint on the ground the "no action" clause in the policy precluded Sanchez's action because the judgment she obtained was not after "actual trial" or by "written agreement" of the insurer. The court sustained the demurrer, and the action was dismissed with prejudice. Sanchez timely appealed.

DISCUSSION

The primary issue on appeal is whether an insurer that refuses to defend its insured can rely on the "no action" clause in its policy to preclude an action under section 11580. We hold that it cannot where a stipulated judgment was obtained against the insured in good faith.

Section 11580 requires every liability policy issued in California to contain a provision that whenever judgment is secured against the insured in an action based upon bodily injury, death, or property damage, for which the insurer is liable, then an action may be brought by the judgment creditor against the insurer to recover on the judgment. It is well settled that a policy provision that is in derogation of or in conflict with the purpose of this statute is invalid. (See e.g., Malmgren v. Southwestern A. Ins. Co. (1927) 201 Cal. 29, 33, 255 P. 512 [policy required as a condition precedent to injured person's right of action that execution on the judgment be returned unsatisfied by reason of bankruptcy or insolvency of the insured], questioned on another ground in State Compensation Ins. Fund v. Bankers Indem. Ins. Co. (1939) 106 F.2d 368, 373; Olds v. General Acc. Fire etc. Corp. (1945) 67 Cal.App.2d 812, 155 P.2d 676 [policy provided for a shorter period to bring suit than that authorized by the applicable statute of limitations].)

Prior to the decision in Rose v. Royal Ins. Co. (1991) 2 Cal.App.4th 709, 3 Cal.Rptr.2d 483, there was no question that a "judgment" within the meaning of section 11580 included both judgments by default and judgments entered after the insured settled the lawsuit and took a covenant not to execute. (See e.g., Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 872, 884-885, 151 Cal.Rptr. 285, 587 P.2d 1098 [default judgment]; Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 228, 236-242, 178 Cal.Rptr. 343, 636 P.2d 32 [insured settled].) Since at least 1968, the rule has been "that where the insurer has repudiated its obligation to defend[,] a defendant in the absence of fraud may, without forfeiture of his right to indemnity, settle with the plaintiff upon the best terms possible, taking a covenant not to execute. Moreover, the giving of such a covenant by plaintiff (the injured party) does not bar his subsequent action directly against the insurer. [Citations.]" (Zander v. Texaco, Inc. (1968) 259 Cal.App.2d 793, 802-803, 66 Cal.Rptr. 561.)

Truck successfully argued in the trial court that the law has now changed because of the decision in Rose v. Royal Ins. Co., supra, 2 Cal.App.4th 709, 3 Cal.Rptr.2d 483. We disagree. In Rose, the insurer, under a reservation of rights, provided its insureds with independent counsel because its interests were in conflict with its insureds' interest (i.e., the insureds wanted to prove that their acts were negligent and therefore insurable while the insurer wanted to prove the acts were intentional and therefore not covered). (See generally, San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 375, 208 Cal.Rptr. 494.) Subsequently, the parties, with the help of the insureds' independent counsel, entered into a consent judgment for over $1 million, which recited that it was "[b]ased upon the negligence" of the insureds.

The judgment creditor then brought a direct action against the insurer. The insurer demurred, arguing that the policy's "no action" clause, which required that the judgment be obtained after "actual trial," precluded the judgment creditor's action. The trial court...