Craig v. Northwestern Pacific Indemnity Co.

Filed 9/29/06 Craig v. Northwestern Pacific Indemnity Co. CA2/8

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION EIGHT

APPEAL from a judgment of the Superior Court of Los Angeles County, Edward C. Simpson, Judge. Affirmed.

Law Offices of Robert A. Brown and Robert A. Brown for Plaintiffs and Appellants.

Law Office of Henry B. La Torraca and Henry B. La Torraca for Defendant and Respondent.

* * * * * *

Appellants Colleen May Craig and Kirby Kratz appeal from an order granting summary judgment in favor of respondent Northwestern Pacific Indemnity Company. We affirm the judgment.

FACTS

Shortly after midnight on April 14, 2000, appellant Craig was driving on Santa Monica Boulevard in West Los Angeles when, in the process of making a U-turn, Craig’s vehicle collided with one driven by Nicholas Williamson (not a party to this case). Appellant Kratz was the passenger and the owner of the vehicle operated by Williamson. At the time of the collision, Craig had a blood alcohol level of 0.09 percent. After the collision, Craig was cited by the investigating officer for driving under influence and for failing to yield the right of way.

The vehicle driven by Craig was owned by S. Wunderman (not a party to this case) and was insured by respondent. Coverage was extended to Craig as a permissive user of the car. Williamson and Kratz were injured and sued Craig. We will refer to this case as the underlying case.

Respondent retained Michael Dolan & Associates to defend Craig in the underlying case.

By March 28, 2002, Michael Dolan & Associates had settled the bodily injury claim of Williamson^[1] and Kratz’s property damage claim for 100 percent of the vehicle’s total value.^[2] As of the same date, the last demand made on Craig by Kratz to compensate Kratz for her alleged bodily injuries was $22,000.

The underlying case was called for a hearing on March 28, 2002. After attorneys Joseph Mijares, Jr., and Robert A. Brown announced that they were appearing for Kratz, the following transpired: “MR. SABOORIAN: Good morning, Your Honor. Patrick M. Saboorian appearing for defendant Miss Craig [appellant], who is present in court.

MR. DOLAN: Good morning, Your Honor. Michael A. Dolan for defendants Wunderman^[[3]] and Craig.

MR. [sic] FAVAROTE: Cecyl Favarote, Your Honor, F-A-V-A-R-O-T-E, with Pacific Indemnity Insurance Company [respondent].”

After having been invited by the court to state Kratz’s demand, attorney Brown stated that Kratz was demanding $22,000 “to settle the entire case in full.” This was to cover bodily injury in terms of pain and suffering and “medical specials.” Punitive damages were not demanded.

The hearing proceeded: “THE COURT: The demand to settle the case in full is $22,000.

MR. DOLAN: Miss Favarote tells me, Your Honor, that Pacific Indemnity will not make that payment to settle the case.

THE COURT: And they have made an offer in return?

MR. DOLAN: They have made no offer.

THE COURT: All right.

As to the individual defendant, Ms. Craig [appellant], counsel?

MR. SABOORIAN: Your Honor, we would recommend that the carrier resolve this matter for the $22,000 that is being asked for by plaintiff. However, the carrier is refusing the pay [sic] this amount. Because of the financial situation of my client and the fact that I did represent her in the underlying DUI action, I recommended my client settle this matter directly with the plaintiff herself.

MR. BROWN: We do have a settlement, Your Honor, in regard to that, if I could state that on the record.”

Attorney Brown then stated that, under the settlement, Craig would pay Kratz $22,000; Craig would enter into a stipulated judgment in the underlying case for $60,000 for bodily injury damages and $100,000 in punitive damages, for a total judgment of $160,000; Kratz would enter into a covenant not to execute on the judgment and “look solely to [respondent] for payment of that judgment”; and Craig would assign to Kratz all of her rights against respondent, including her bad faith claim. Brown made clear that the payment of $22,000 by Craig was not included in, or credited against, the stipulated judgment.

The substantive part of the hearing concluded as follows: “THE COURT: All right.

Ms. Craig, do you understand the settlement?

MS. CRAIG: Yes, Your Honor.

THE COURT: Do you have any questions?

MS. CRAIG: No, Your Honor.

THE COURT: Do you agree?

MS. CRAIG: Yes.

THE COURT: Counsel joins?

MR. SABOORIAN: Yes, Your Honor, we’ll join.

THE COURT: All right. We’ll vacate the trial date.” Mr. Dolan was not heard from during this concluding part of the hearing.

It is not disputed that the insurance contract in question contains a clause that gives respondent the right to settle a claim or suit at respondent’s discretion, and provides that respondent is to provide the insured with counsel of respondent’s choice. Appellants do not dispute that respondent was defending Craig through attorney Dolan during the hearing of March 28, 2002, although appellants allege that Dolan’s representation of Craig was not competent.

It is undisputed that Craig paid Kratz $22,000; that Kratz and Craig entered into the stipulated judgment that attorney Brown outlined during the March 28, 2002 hearing; and that Craig assigned to Kratz her rights against respondent. The stipulated judgment was entered on June 14, 2002.

In November 2003, Craig and Kratz filed an action against respondent for breach of the insurance contract, bad faith and breach of respondent’s statutory duty to pay the (stipulated) judgment. The attorneys who appeared on the complaint were Saboorian (for Craig) and Brown (for Kratz).

After filing its answer to the complaint, respondent moved for summary judgment. Respondent relied in significant part on Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 731 (Hamilton), which holds that “[w]here, as here, the insured, without the insurer’s agreement, stipulates to a judgment against it in excess of both the policy limits and the previously rejected settlement offer, and the stipulated judgment is coupled with a covenant not to execute, the agreed judgment cannot fairly be attributed to the insurer’s conduct, even if the insurer’s refusal to settle within the policy limits was unreasonable.” The trial court relied on this holding in granting the motion for summary judgment.

DISCUSSION

1. Respondent Did Not Consent To Settle Kratz’s Claim

Appellants contend that respondent did not object during the hearing of March 28, 2002, “to the terms and conditions of the settlement“ concluded between Kratz and Craig, which included the stipulated judgment and the covenant not to execute on that judgment. The thrust of this contention is that respondent approved the “settlement,” which included the stipulated judgment, that Brown and Saboorian negotiated, respectively, for Kratz and Craig, and that respondent is therefore required to satisfy the stipulated judgment.

This is an unrealistic, and erroneous, view of the March 28, 2002 hearing.

First, it was made clear during this hearing that: (1) respondent rejected Kratz’s demand of $22,000, (2) respondent declined to make any counter offer, which meant (3) that respondent was offering Kratz nothing.

Given these facts, it is unnecessary for us to consider respondent’s claim that Kratz’s demand was rejected because Kratz’s medical bills were excessive and were supported by the opinion of a physician for “routinely diagnosing“ whiplash injuries. Even if these claims were germane, we would disregard them because they are not supported by a citation to the record. “Statements of facts not supported by references to the record may be disregarded as a violation of rule 14(a)(1)(C) of the California Rules of Court.” (Yeboah v. Progeny Ventures, Inc. (2005) 128 Cal.App.4th 443, 451.)

The fact is that respondent flatly rejected, and did not approve, the demand made by Kratz.

Second, attorney Dolan clearly stated that respondent was making “no offer.” This confirms that respondent did not agree, or approve, the settlement proposed by Kratz.

Third, the “settlement” that was placed on the record was between attorneys for Kratz and attorney Saboorian, who also appeared for appellant Craig at this hearing. As Saboorian explained, he had represented Craig in the DUI case. This evidently gave him the status of a “personal” attorney, retained by Craig and not respondent, who was not guided by respondent’s judgment about Kratz’s demand. Thus, Saboorian was not required to take into consideration the factors that caused respondent to reject Kratz’s demand.

Since respondent was offering Kratz nothing, it is unrealistic to contend that respondent’s “failure to object” to the Kratz-Craig settlement negotiated by Brown and Saboorian meant that respondent agreed with, and supported, that settlement. The fact that Dolan said nothing when, at the end of the hearing, Saboorian “joined” in the “settlement” is explained by the fact that Dolan had nothing to do with this “settlement” and therefore concluded that he had no reason to say anything. While it might have been better if Dolan had expressly objected to the “settlement” negotiated by Brown and Saboorian, Dolan’s silence is understandable and does not indicate that respondent approved of the “settlement” that Saboorian concluded with Kratz’s attorneys.

2. The Stipulated Judgment Is Not Enforceable Either for the Purposes of Insurance Code Section 11580, Subdivision (b)(2)^[4] or the Bad Faith Action

It is not disputed that respondent did not deny coverage and that it provided Craig a defense. “Because of the high risk of fraud and collusion, a stipulated judgment has ordinarily been deemed unenforceable, whether under Ins.C. 11580(b)(2) [citation] or on an assigned bad faith cause of action [citations], unless the insurer has wrongfully denied coverage or refused to provide a defense and the judgment is found to be in good faith. (Pruyn v. Agricultural Ins. Co. (1995) 36 C.A.4th 500, 518; [citations].)” (2 Witkin, Summary of Cal. Law (10th ed. 2005) Insurance, § 305, p. 480.) “[W]hen the insurer is defending its insured, and the insured settles with a plaintiff without the insurer’s consent or participation, and the settlement contains a covenant by the plaintiff not to execute in exchange for an assignment of the insured’s policy rights against the insurer, the insurer has no obligation to pay. In essence, coverage is forfeited.” (Travelers Casualty & Surety Co. v. Superior Court (2005) 126 Cal.App.4th 1131, 1141.)

We disagree that respondent was required to provide a defense that Craig, or attorneys consulted by Craig, deem to be competent. Undoubtedly, it is possible to imagine a case where counsel retained by the insurer is so lacking that, as a practical matter, the insured has no defense at all. This is not such a case. Dolan’s failure to object during Craig’s deposition to the question whether she had been convicted of drunk driving, cited as evidence that Dolan was not competent, does not mean that Dolan was not competent, or that respondent had effectively not furnished Craig with defense counsel.

The problem posed by a stipulated judgment with a covenant not to execute is that such an arrangement “brings with it a high potential for fraud or collusion. ‘With no personal exposure the insured has no incentive to contest liability or damages. To the contrary, the insured’s best interests are served by agreeing to damages in any amount as long as the agreement requires the insured will not be personally responsible for those damages.’ [Citation.] Given the accuracy of these observations, a stipulated judgment should only bind an insurer under circumstances which protect against the potential for fraud and collusion.” (Pruyn v. Agricultural Ins. Co., supra, 36 Cal.App.4th 500, 518.) It is only when the insured has been abandoned by its liability insurer that the insured is “free to make the best settlement possible with the third party claimant, including a stipulated judgment with a covenant not to execute. Provided that such settlement is not unreasonable and is free from fraud or collusion, the insurer will be bound thereby.” (Id. at p. 515.) As the California Supreme Court has summed it up, “[a] line of appellate decisions, leading to the decision below in this case, has found that settlements reached without the consent or participation of the defending insurer, and incorporating a covenant not to execute or similar device, are entitled to no weight in a later action against the insurer for failure to settle.” (Hamilton, supra, 27 Cal.4th 718, 726.)

Appellants, citing Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775 (Isaacson), contend that since Craig actually paid $22,000 in settling the case, appellants may pursue a bad faith action against respondent.

“In Isaacson, the California Insurance Guarantee Association (CIGA), having assumed the defense of a medical malpractice action in place of an insolvent liability insurer, refused the claimant’s settlement demand of $500,000 (CIGA’s statutory liability limit). Ultimately, CIGA agreed to pay $400,000, and the insureds contributed $100,000 to conclude the settlement. The insureds then sued CIGA for reimbursement of the $100,000 payment. ([Isaacson, supra, 44 Cal.3d] at pp. 782-783.)

We held that CIGA, like a private insurer, had a duty to accept a reasonable settlement demand, limited in CIGA’s case to demands under the statutory ceiling. (Isaacson, supra, 44 Cal.3d at p. 792.) If the Isaacson plaintiffs were able to prove that CIGA breached that duty in refusing the claimant’s $500,000 demand, we further explained, ‘they could then proceed to prove damages, based on the amount of the settlement they entered into.’ (Id. at p. 793.) The settlement, however, created no presumption that the demand was reasonable (id. at pp. 793-794), and absent such a presumption we found the evidence insufficient to show CIGA’s breach (id. at p. 794).” (Hamilton, supra, 27 Cal.4th at pp. 730-731.)

In further analyzing Isaacson, the court in Hamilton went on to point out that when an insured, faced with the insurer’s unreasonable refusal to settle within policy limits and exposed to personal liability “substantially beyond policy limits,” contributes to the settlement, the insured may recover the amount of the contribution to the settlement in an action for bad faith failure to settle. (Hamilton, supra, 27 Cal.4th at p. 731.) “Isaacson does not hold or suggest, however, that an action for breach of the settlement duty may be brought or assigned where the insured has settled without the insurer’s participation for an amount in excess of the policy limits and avoided any actual liability by taking a covenant not to execute.” (Ibid.)

Applying the guidelines provided by Isaacson and Hamilton isolates the critical facts of this case.

First, Craig settled without respondent’s participation in the settlement, which is different from Isaacson, where the carrier participated in the settlement and paid the bulk of the agreed-upon amount. This case is like Hamilton “[w]here, as here, the insured, without the insurer’s agreement, stipulates to a judgment against it in excess of both the policy limits and the previously rejected settlement offer, and the stipulated judgment is coupled with a covenant not to execute, the agreed judgment cannot fairly be attributed to the insurer’s conduct, even if the insurer’s refusal to settle within the policy limits was unreasonable.

The stipulated judgment in this case, therefore, carries no weight in the bad faith action.” (Hamilton, supra, 27 Cal.4th 718, 731, italics added.)

Second, since the policy limit in this case was $300,000, Craig was at no time faced with personal liability beyond policy limits -- not even the stipulated judgment exceeds the limits.^[5]

Third, Craig avoided actual liability under the stipulated judgment by the covenant not to execute.

Fourth, respondent did not deny coverage and did not refuse to provide a defense.

These factors lead to the following conclusions:

(1) Since Craig settled with Kratz without respondent’s agreement, the stipulated judgment cannot be attributed to the insurer’s conduct and therefore that judgment, to paraphrase Hamilton, “carries no weight” in the bad faith action. That the stipulated judgment cannot be attributed to respondent’s conduct is also shown by the circumstances that Craig was never exposed to the danger of personal liability for an excess judgment, and that respondent agreed to provide coverage and a defense. In other words, nothing that respondent did forced Craig into a settlement with Kratz.

(2) Since Craig was never exposed to the danger of personal liability for an excess judgment, and since she settled with Kratz without the participation and approval of respondent, this is not a case like Isaacson where, as noted in Hamilton, the insured may recover the amount of his or her payment from the insurer in an action for bad faith failure to settle.^[6] The critical elements that allow an insured to recover the sum paid to facilitate a settlement are: (a) the coercive effect upon the insured of the threat of personal liability for an excess judgment; (b) the insurer’s participation in the settlement, which, independently from the insured’s desires, indicates that a settlement was warranted. Both of these elements are missing in this case.

The conclusion that Craig cannot recover from respondent the sum of $22,000 that she paid Kratz is also validated by the consideration that, if she recovers $22,000 from respondent, the provision in the contract of insurance that gives respondent the right to settle at respondent’s discretion would have been effectively deleted. Faced with an insurer’s decision not to settle, an insured could impose a settlement on the insurer by paying for the settlement personally, and then recovering that sum from the insurer.

We arrive at our conclusions without reference to the question whether respondent’s decision was reasonable to reject the demand of $22,000. As the court held in Hamilton, supra, 27 Cal.4th at page 731, when the insured stipulates to a judgment without the insurer’s agreement and couples the settlement with a covenant not to execute on the insured, “the agreed judgment cannot fairly be attributed to the insurer’s conduct, even if the insurer’s refusal to settle within the policy limits was unreasonable.”

Whether appellants have a claim against respondent predicated on the allegedly unreasonable refusal to accept the settlement offer of $22,000 is another question. “When, as here, the insurer is providing a defense but merely refuses to settle, the insured has no immediate remedy. A cause of action for bad faith refusal to settle arises only after a judgment has been rendered in excess of the policy limits. (Finkelstein v. 20th Century Ins. Co. (1992) 11 Cal.App.4th 926, 929-930; Doser v. Middlesex Mutual Ins. Co. [(1980)] 101 Cal.App.3d [883,] 891-892; Brown v. Guarantee Ins. Co. (1957) 155 Cal.App.2d 679, 690; but see Camelot by the Bay Condominium Owners’ Assn. v. Scottsdale Ins. Co. (1994) 27 Cal.App.4th 33, 48 [dictum: bad faith may arise even without an excess judgment, though excess judgment is relevant to determination of damages].) If the insurer declines to settle and decides to go to trial and then obtains a judgment below the settlement offer or obtains a complete defense verdict, then the insured would have no cause to complain, and the insurer would have no liability. Until judgment is actually entered, the mere possibility or probability of an excess judgment does not render the refusal to settle actionable.” (Safeco Ins. Co. v. Superior Court (1999) 71 Cal.App.4th 782, 788; see generally Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group) (2005)

12:355-12-359.3, pp. 12B-35 to 12B-37 (rev. #1, 2004).)

Thus, the general rule is that, absent an excess judgment, there can be no bad faith action based on declining a reasonable offer to settle within policy limits. “However, the insurer's refusal to settle may be actionable on some other basis.” (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra,

12:359, p. 12B-36, citing Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 906.) Thus, it has been held to be a question of fact whether bad faith was shown when the insurer intentionally misrepresented its own assessment of the validity of third party claims against its insured, delayed settlement of those claims in bad faith, and caused injury to the business good will of its insured by its actions (Bodenhamer v. Superior Court (1987) 192 Cal.App.3d 1472, 1479) and when the insurer unreasonably rejected a settlement demand but offered less than demanded, and the insured made up the difference. (Hamilton, supra, 27 Cal.4th at p. 731.) Other than stating that respondent refused to settle for $22,000, appellants do not point to any facts from which it might appear that respondent’s refusal to settle was in bad faith.

In short, respondent provided coverage and a defense, the rejected demand was well within policy limits and, as the stipulated judgment shows, there was no risk of an excess judgment. In addition, there are no facts suggesting that respondent’s rejection of the settlement demand, which was within policy limits, was in bad faith.

We also disagree with appellants’ claim that the fact that Craig was exposed to the possibility of punitive damages required respondent to accept the demand for $22,000. If this were so, an insurer would have to settle every case when the insured is exposed to punitive damages. The mere fact that punitive damages are sought does not require the insurer to settle the claim.

Finally, the rules and principles we have discussed in connection with stipulated judgments, and settlements that exclude the insurer, do not depend on proof of actual collusion between the insured and the plaintiff. Those rules and principles are in place because, as a general matter, there is a possibility of collusion; the policy behind the rule should not be confused with the rule itself. Thus, appellants’ claim that there was no showing of collusion in this case is irrelevant.

DISPOSITION

The judgment is affirmed. Respondent is to recover its costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

FLIER, J.

We concur:

RUBIN, Acting P. J.

BOLAND, J.

Publication courtesy of California pro bono legal advice.

Analysis and review provided by La Mesa Property line Lawyers.

^[1] This settlement is reported to have been $6,000.

^[2] This was slightly over $2,500.

^[3] Wunderman was respondent’s insured.

^[4] A liability policy must contain a provision that, “whenever judgment is secured against the insured or the executor or administrator of a deceased insured in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment.” (Ins. Code, § 11580, subd. (b)(2).)

^[5] Respondent would in no event be liable for punitive damages. (Ins. Code, § 533.)

^[6] “Isaacson indicates that when an insured, faced with the insurer’s unreasonable refusal to pay a settlement demand within the policy limits and exposed to potential personal liability substantially beyond the policy limits, actually contributes payment to conclude the settlement (in which the insurer also participates), the insured may recover the amount of his or her payment from the insurer in an action for bad faith failure to settle. In those circumstances, a bad faith action may be brought by the insured, or the claimant as the insured’s assignee, despite the absence of a litigated excess judgment.” (Hamilton, supra, 27 Cal.4th at p. 731.)