Schlauch v. Hartford Accident & Indemnity Co.

Decision Date06 September 1983
Citation194 Cal.Rptr. 658,146 Cal.App.3d 926
CourtCalifornia Court of Appeals Court of Appeals
PartiesGary Alan SCHLAUCH, Plaintiff and Appellant, v. HARTFORD ACCIDENT AND INDEMNITY COMPANY, Defendant and Respondent. Civ. 21719.

Friedman, Collard, Poswall & Thompson, Allan J. Owen, Sacramento, for plaintiff and appellant.

Meadows, Dorris, Stryker & Salentine, John F. Meadows and J. Mark Foley, San Francisco, for defendant and respondent.

SPARKS, Associate Justice.

In this case of first impression, we hold that the decision in Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329, is retroactive. We further hold that a claimant who settles with some tortfeasors and then recovers a net judgment of zero against other insured tortfeasors is not precluded by that judgment from bringing a bad faith suit against the breaching insurance carrier. Finally, we also hold that although a subsequent tender of the policy does not cure an earlier bad faith breach, it does serve to mitigate damages.

Plaintiff Gary Alan Schlauch appeals from a judgment of dismissal entered after the trial court sustained without leave to amend the demurrer of defendant The Hartford Accident & Indemnity Company (Hartford). Plaintiff had sought recovery for the alleged bad faith of Hartford in investigating and settling a claim against its insureds who were defendants in a prior personal injury action brought by plaintiff. It appeared that plaintiff had recovered a net judgment of zero dollars against Hartford's insureds in his personal injury action. It further appeared that the facts which were alleged to have constituted bad faith occurred before the Supreme Court's decision in Royal Globe. The trial court sustained

Hartford's demurrer on the grounds that a net judgment of zero dollars precludes a bad faith action against an insurer as a matter of law, and that the Royal Globe decision should not be applied to conduct which took place before its effective date. For reasons we shall explain, we reverse and remand for further proceedings.


Since this appeal follows the sustaining of a demurrer we must accept as true the properly pleaded allegations of plaintiff's first amended complaint. (Thompson v. County of Alameda (1980) 27 Cal.3d 741, 746, 167 Cal.Rptr. 70, 614 P.2d 728; Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 572, 108 Cal.Rptr. 480, 510 P.2d 1032; see generally, 3 Witkin, Cal.Procedure (2d ed. 1971) Pleading, § 800, p. 2413.) For a first cause of action plaintiff alleged that during October 1978 Hartford had in effect a homeowner's insurance policy for $100,000 issued to Robert W. Boal and his wife Lillian as named insureds. The policy, by its definitional terms, also included their son Bruce as an insured. On October 27, 1978, Bruce Boal held a Halloween party at his parents' house which was attended by plaintiff as well as Kenneth J. Ripper, Jr., and Charles Joseph Sagadin. The Boals, it is alleged, knew plaintiff, Ripper and Sagadin were minors, but nevertheless negligently served alcohol to them knowing they would become, or were already, intoxicated. The Boals then allowed the minors to leave the party knowing they would operate a motor vehicle while intoxicated. Plaintiff, Ripper and Sagadin were involved in a single car accident later that evening when the vehicle overturned and all three minors suffered severe personal injuries due to the negligence of the Boals. As a result of those injuries, plaintiff became a permanent quadriplegic.

On November 15, 1978, 18 days after the accident, Ripper filed personal injury actions against the Boals and other parties. 1 On December 15, 1978, less than two months after the accident, the three minors made a joint demand upon Hartford for the full amount of the policy limits in the amount of $100,000. Plaintiff alleges that although liability was clear and the damages were far in excess of the policy limits, Hartford failed and refused to tender the policy limits. Thereafter, Hartford filed an interpleader action on July 2, 1980, tendered the full policy and attempted to obtain a stay of the personal injury action against the Boals, which was denied.

Plaintiff pursued his personal injury action against the Boals, and obtained a jury verdict of $1,249,136. That amount was less than plaintiff had received in settlement from other defendants, and a net verdict was entered in plaintiff's favor for zero dollars plus costs. 2

As a second cause of action plaintiff alleged that Hartford had engaged in the following unfair claims settlement practices: (1) misrepresenting the pertinent facts or insurance policy provisions to the claimants (Ins.Code, § 790.03, subd. (h)(1); (2) failing to acknowledge and act reasonably promptly upon communication with respect to claims (Ins.Code, § 790.03, subd. (h)(2)); (3) failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under a policy; (Ins.Code, § 790.03, subd. (h)(3); (4) failing to confirm or deny coverage within a reasonable time of a claim (Ins.Code, § 790.03, subd. (h)(4); and (5) not attempting in good faith to effectuate prompt, fair and equitable settlement (Ins.Code, § 790.03, subd. (h)(5)).

As a third cause of action plaintiff alleged that the acts complained of were done unreasonably, outrageously and with the intention of inflicting severe emotional distress on plaintiff. He sought general, special and punitive damages in all three causes of action.

The trial court sustained Hartford's demurrer and plaintiff appeals from the subsequent order dismissing his action.


Initially we emphasize that plaintiff disclaims any attempt to state a cause of action under the common law obligation to settle imposed upon an insurer by the contractual duty of good faith and fair dealing. Such a disclaimer is quite proper. "Case law has established the proposition that an insured who has suffered damages in excess of an insurance policy as a consequence of an insurer's bad faith failure to settle a claim may sue the insurer for breach of contract." (Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883, 890, 162 Cal.Rptr. 115.) Under settled principles, however, the insurer's duty to settle runs to the insured and not to the injured claimant. Consequently Hartford owed no common law duty to plaintiff. (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 940-941, 132 Cal.Rptr. 424, 553 P.2d 584.) Although the insured may assign his cause of action against the insurer for its breach of the duty to settle (Comunale v. Traders General Ins. Co. (1958) 50 Cal.2d 654, 661-662, 328 P.2d 198), he cannot assign the personal tort aspect of that bad faith cause of action because that aspect is not assignable in California. (Murphy v. Allstate Ins. Co., supra, 17 Cal.3d at p. 942, 132 Cal.Rptr. 424, 553 P.2d 584.) Consequently, to the extent that plaintiff seeks damages against Hartford for emotional distress and punitive damage those damages could not have been predicated upon an assignment by the insureds. Moreover, the net zero judgment meant that the Boals did not suffer any legal detriment or damage and hence had no present cause of action to assign to plaintiff. (Critz v. Farmers Ins. Group (1964) 230 Cal.App.2d 788, 41 Cal.Rptr. 401.) 3 Accordingly, we are concerned here with the first amended complaint only insofar as it alleges a cause of action under the decision in Royal Globe.


Insurance Code section 790.03, subdivision (h), the claims settlement provision of California's Unfair Practices Act (Ins.Code, § 790 et seq.) lists a number of unfair settlement practices which constitute unfair methods of competition or unfair and deceptive acts or practices in the business of insurance. 4 In Royal Globe, the Supreme Court considered whether a private litigant (i.e., one not a party to the insurance contract) may bring an action against an insurer to impose civil liability for violations of section 790.03, or whether the Insurance Commissioner has the sole authority to enforce its terms. The court held that such a third party claimant may sue an insurer for violating section 790.03, subdivision (h). 5 (23 Cal.3d at p. 884, 153 Cal.Rptr. 842, 592 P.2d 329.) The court concluded further that the duty imposed under section 790.03 runs directly to a claimant and is not dependent upon a violation of an insurer's duty to its insured. (Id., at p. 890, 153 Cal.Rptr. 842, 592 P.2d 329.)

We must first consider whether the decision in Royal Globe applies to conduct of an insurance company which occurred before the effective date of the decision since in this case the alleged violations occurred before that date. "Overruling decisions, especially in the tort field, are normally applied retroactively unless there has been great public reliance on the earlier rule, the new rule was nowhere foreshadowed, and it would be unfair to apply the rule retrospectively. [Citations.]" (Busboom v. Superior Court (1980) 113 Cal.App.3d 550, 553, 169 Cal.Rptr. 886; see also Long v. Pinto (1981) 126 Cal.App.3d 946 949, 179 Cal.Rptr. 182.) 6 The resolution of the issue turns primarily upon the extent of the public reliance upon the former rule and the ability of the litigants to foresee the coming change in the law. (Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 193, 98 Cal.Rptr. 837, 491 P.2d 421.)

After applying this standard to the instant case we are convinced that the decision in Royal Globe should be applied to facts which occurred before its effective date. As noted by the Court in Royal Globe, the duties imposed upon an insurer under section 790.03, subdivision (h) were imposed with the addition of that subdivision in 1972. (Royal Globe, supra, 23 Cal.3d at p. 885, 153 Cal.Rptr. 842, 592 P.2d 329.) The decision in Royal Globe was thus merely a change in remedy of enforcing the duty of an insurer, and not a change in...

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